Boston Scientific's (BSX) Q3 Earnings In Line, Guides Up

Boston Scientific Corporation (NYSE:BSX) posted adjusted earnings per share (EPS) (after considering certain one-time adjustments other than amortization expense) of 18 cents in the third quarter of 2016, up 12.5% from the year-ago quarter.

However, considering amortized expense adjustments, the quarter’s adjusted EPS came in at 27 cents, up 12.5% from the year-ago adjusted number. The quarter’s number remained on par with the Zacks Consensus Estimate and the upper end of the company's adjusted EPS guidance range of 25–27 cents.

Without these adjustments, the company reported earnings of 17 cents per share, a significant improvement compared to a loss of 15 cents a year ago.

Revenues in Detail

Revenues in the third quarter were up 11.5% year over year on a reported basis and up 10% on an operational basis (at constant exchange rate or CER) to $2.11 billion. The figure cruised past the company’s guidance of $2.035–$2.085 billion as well as the Zacks Consensus Estimate of $2.07 billion.

BOSTON SCIENTIF Price, Consensus and EPS Surprise

BOSTON SCIENTIF Price, Consensus and EPS Surprise | BOSTON SCIENTIF Quote

Organic revenue growth in the third quarter (excluding the impact of changes in foreign currency exchange rates and sales from the acquisitions of the American Medical Systems (AMS) male urology portfolio in the year-ago quarter) was 9% year over year.

Geographically, in the third quarter, the company achieved 11% growth in the U.S. (up 11% operational and up 9% organic), 6% growth in Europe (up 7% and up 5%), 20% in the Asia, Middle East and Africa (AMEA) region (up 12%; same) and 10% in the emerging markets (up 19%; same), all at CER.

Segment Analysis

Boston Scientific currently has three global reportable segments: Cardiovascular, Rhythm Management and MedSurg.

The company generates maximum revenues from Cardiovascular, which comprises Interventional Cardiology and Peripheral Interventions. Sales in these sub-segments were $568 million (up 13% year over year at CER) and $257 million (up 11%), respectively, during the third quarter.

The second largest contributor to Boston Scientific’s top line was Rhythm Management, which includes Cardiac Rhythm Management (CRM) and Electrophysiology. CRM reflected a 3% year-over-year increase in sales to $467 million at CER in the reported quarter.

Worldwide sales from pacemakers (within CRM) increased 24.8% to $156 million, while defibrillators were down 4.6% to $326 million.

Electrophysiology sales went up 5% year over year at CER to $60 million.

Other segments like Endoscopy, Urology and Pelvic Health and Neuromodulation (coming under the MedSurg broader group) recorded sales of $367 million (up 9% at CER), $248 million (up 26%) and $138 million (up 12%), respectively.

Margins

Gross margin expanded 33 basis points (bps) year over year to 71.9% despite a more than 10% increase in cost of product sold. Adjusted operating margin expanded 290 bps to 23.1% in the reported quarter. During the quarter, selling, general and administrative expenses went up 5.9% to $772 million, while research and development expenses increased 4.9% to $232 million. Royalty expense increased 17.6% to $20 million.

Balance Sheet

Boston Scientific exited the third quarter of 2016 with cash and cash equivalents of $237 million, significantly down from $438 million at the end of the second quarter. At the end of the third quarter, the company had total long-term debt of $5.42 billion, a marginal reduction from $5.68 billion at the end of the second quarter.

Guidance

Boston Scientific has provided its fourth-quarter guidance with an update to its earlier provided full-year 2016 forecast. The company raised its outlook for 2016 revenues to the range of $8.34–$8.39 billion (annualized growth of 11% to 12% on reported basis and growth of 12% on operational basis) from the earlier provided band of $8.27–$8.37 billion. The current Zacks Consensus Estimate for revenues is $8.30 billion, falling within but close to the lower end of the guidance range.

Adjusted EPS guidance for 2016 has also been narrowed to the range of $1.09−$1.11 from the earlier projection of $1.07−$1.11. The Zacks Consensus Estimate of $1.10 falls within the guidance range.

For the fourth quarter of 2016, adjusted earnings are expected in the band of 27–29 cents per share on revenues of $2.14–$2.19 billion. The Zacks Consensus Estimate for EPS stands at 29 cents, while that for revenues is $2.15 billion.

Our Take

Amid challenging economic conditions, a competitive environment and severe currency headwinds, Boston Scientific posted a mixed third-quarter 2016, with earnings in line with the Zacks Consensus Estimate and revenues ahead of the mark. While foreign exchange headwinds continue to pose challenges, we are concerned with the still sluggish defibrillator performance within the company’s core CRM segment.

Nevertheless, Boston Scientific is leaving no stone unturned to strengthen its core businesses and invest in new technologies and global markets, which accounted for the sales upside across all its geographies in the third quarter. Moreover, we are encouraged with the company gaining a number of approvals for its products, both in the domestic market and outside.

Among recent launches, ones worth mentioning are Resolution 360 Hemoclip (used in endoscopic procedures of the upper and lower gastrointestinal (GI) tract); the U.S. Food and Drug Administration (FDA) approval for the EMBLEM MRI Subcutaneous Implantable Defibrillator (S-ICD) System, as well as magnetic resonance (MR) conditional labeling for all previously implanted EMBLEM S-ICD Systems and the CE Mark for the LOTUS Edge Valve System, the company's next-generation transcatheter aortic valve replacement (TAVR) technology. We are also looking forward to the company’s latest decision to buy EndoChoice Holdings for $210 million.

Zacks Rank & Key Picks

Boston Scientific currently has a Zacks Rank #2 (Buy). Some other top-ranked stocks in the broader medical space include GW Pharmaceuticals plc (NASDAQ:GWPH) , Quidel Corp. (NASDAQ:QDEL) and Baxter International Inc. (NYSE:BAX) .

GW Pharmaceuticals sports a Zacks Rank #1 (Strong Buy), while Quidel and Baxter carry a Zacks Rank #2. You can seethe complete list of today’s Zacks #1 Rank stocks here.

GW Pharmaceuticals surged 70.3% year to date compared to the S&P 500’s 4.85% over the same period. The company’s four-quarter average earnings surprise is 41.7%.

Quidel rallied 23.8% in the past one year, higher than the S&P 500’s 3.74%. Over the next five years, the stock is estimated to record an earnings growth rate of 20%, higher than the industry average of 15.1%.

Baxter’s shares soared 28.86% year to date. Over the next five years, the stock is expected to see 12.3% earnings growth. It has a trailing four-quarter average earnings surprise of 30.55%.

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