Boston Scientific's Road To Recovery Longer Than Expected
February 11 2010 - 4:10PM
Dow Jones News
Boston Scientific Corp. (BSX) indicated Thursday that the road
to improvement remains long.
The company's soft financial forecasts and fresh restructuring
plans shows it's going to take time and patience from investors to
overcome challenges that include slow growth, sliding product
prices and competitive pressure in its top heart-device
markets.
When Chief Executive Ray Elliott joined last year, investors and
analysts hoped his decade running a tight ship at orthopedic
device-maker Zimmer Holdings Inc. (ZMH) boded well for improved
financial performance. It may, but the process isn't happening as
fast as hoped.
"Boston Scientific is a big ship, and it won't be turned in a
quarter or two. But it will turn and when it does, everyone will
notice," Elliott said Thursday during a conference call.
In the meantime, he made clear 2010 is a rebuilding year and
part of a two-year corporate overhaul that includes laying off
1,000 to 1,300 workers, reorganizing businesses and resetting the
management team.
Signs of a long road ahead weighed on the Natick, Mass.,
company's stock price Thursday. It recently fell 84 cents, or 10%,
to $7.45 and touched the lowest level since March.
"While we had expected a quicker turnaround, it is now apparent
that mending the company will require more time and resources,"
said Deutsche Bank analyst Tao Levy, who downgraded Boston
Scientific to hold from buy.
The company released a bevy of news late Wednesday that kept
executives and analysts busy on Thursday's conference call for
about two-and-a-half hours. The news included a fourth-quarter loss
pegged to huge payments to Johnson & Johnson (JNJ) to resolve
patent fights, restructuring plans and 2010 guidance.
The company's earnings forecasts can be hard to measure due to
unusual items and adjustments. But its sales-guidance midpoint
missed Wall Street's forecast, and analysts said earnings fell
short as well. Lazard Capital Markets analyst Sean Lavin called
guidance "extremely weak."
Boston Scientific has been under pressure for years after
spending $28.4 billion on Guidant Corp. in 2006, only to see that
company's market for heart-rhythm devices grow more slowly than
expected.
Boston Scientific now gets roughly half its sales from
heart-rhythm devices and tiny stents that prop open heart arteries.
The stent market is at best moving sideways, analyst Phil Nalbone
of Wedbush Morgan Securities said, while Boston Scientific
continues to estimate the implantable defibrillator market will
grow about 4% globally and 2% in the U.S. per year.
To offset that sluggishness, the company needs to ramp up other
parts of the business, which is part of the restructuring focus.
The company created a Urology and Women's Health division, for
example, that will "significantly increase investment" to pursue
solutions for unmet needs.
While investors wait for results, 2010 will entail some
challenges for top businesses. On the heart-rhythm side, the
company disclosed it fired some sales staffers and managers for
disciplinary reasons, and that resulting defections to rival St.
Jude Medical Inc. (STJ) could contribute to $100 million in lost
sales this year.
The two companies traded barbs over this point Thursday, putting
on display the competitive nature of an $11 billion, slow-growing
global market with three big participants, including Medtronic Inc.
(MDT). This competition is also having an impact on product
prices.
Declining prices have been a pronounced issue in the also
tightly competitive market for drug-coated stents, which use
medication to fight off scar tissue that could re-close heart
arteries.
It's a complex business where Boston Scientific sells both
home-grown stents plus devices made by Abbott Laboratories (ABT).
When it sells more Abbott-made devices at the expense of home-grown
stents, profitability suffers. This effect is expected to pressure
gross margins until the company launches a home-grown stent in the
U.S. and Japan in 2012 to replace the Abbott-made device.
Hurt by a recent study that benefited Abbott stents at the
expense of Boston Scientific's Taxus devices, the shift to an
unfavorable sales mix has happened "a lot more rapidly and a lot
more profoundly than people thought," Wedbush's Nalbone said.
Boston Scientific has attacked that study's reliability because it
was based in one health-care center.
During all this, the company remains in flux.
"You have to wait another year to see what this company might be
capable of in terms of growth and profitability," Nalbone said.
-By Jon Kamp, Dow Jones Newswires; 617-654-6728;
jon.kamp@dowjones.com
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