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WIKI ANALYSIS
Boston Scientific (NYSE: BSX) makes cardiology products such as drug-eluting stents and pacemakers, which each respectively accounting for 21% and 16% of total revenues. Drug-coated stents are used to prop up coronary arteries to help prevent heart attacks, but their effectiveness have been questioned after they were linked to a risk of blood clots, as well as competition from Abbott's newly launched stent Xience.[1]
Boston Scientific also makes Endosurgery and Neuromodulation products. The Endosurgery group includes esophageal, gastric, and duodenal intervention products; colorectal, pancreatico-biliary, and pulmonary intervention devices; and products for urinary tract intervention and bladder disease, prostate intervention, pelvic floor reconstruction and urinary incontinence, gynecology, and oncology. The Neuromodulation group comprises Precision Spinal Cord Stimulation system for the treatment of chronic pain of the lower back and legs, and HiResolution 90K Cochlear Implant system to restore hearing to the profoundly deaf. Boston Scientific Corporation markets its products through direct sales force, and a network of distributors and dealers.
Ultimately, Boston Scientific's continued success will depend heavily on how well it manages to maintain its market share in the face of increasingly tougher competition and its serious quality-control issues, while continuing to invest in its strong development pipeline so that it will be able to compete in the next generation of medical devices.
Corporate Overview
Boston Scientific was founded in 1979 with the purchase of Medi-tech Inc., a "research and development company focused on developing alternatives to traditional surgery." In two and a half decades, Boston has grown from revenues of $2 million to $8.3 billion, becoming a world leader in the field of medical devices for interventional medicine. More recently, in 2006 Boston Scientific successfully completed its $28 billion acquisition of Guidant Inc., marking its entry into the cardiac rhythm management (CRM) field.
As of 2007, coronary drug-eluting stents (DES) and cardiac rhythm management (CRM) devices--pacemakers and implantable cardioverter-defibrillators (ICDs)--are Boston Scientific's primary products, each respectively accounting for 21% and 16% of overall revenues.
Business Segments
Coronary Stents
Currently, there are two types of coronary stents: bare metal and drug eluting. Coronary stents are used to treat coronary cardiac disease by increasing the artery’s diameter in order to restore normal blood flow. Essentially, both stents perform the same function, but a bit differently. A drug eluting stent (DES) is coated with a drug that allows it to prevent plaque and scar tissue build up around the stent, which makes it more effective than the bare metal stent.
Because of increased coronary heart disease (CHD), stents are being used more often. CHD is the leading cause of death in the Western world, not to mention a major cause of death throughout the entire world. Stents are being used in a majority of patients with CHD for operations such as coronary artery bypass surgery. Operations such as bypass surgery have attributed to the increased use of coronary stents, and leave the DES market open for a lot of growth for years to come.
Cardiac Rhythm Management (CRM) Devices
The cardiac rhythm management area of devices can essentially be divided into two categories: pacemakers and implantable defibrillators. Guidant (now Boston Scientific's CRM business) offers both such devices.
Pacemakers are implantable devices that are designed to regulate the beating of the heart by artificially stimulating it when the body's own natural mechanisms are not making it beat fast enough. Implantable cardioverter-defibrillators (ICDs) are similar to pacemakers in that they too act to stimulate the beating of the heart, the difference being that they are primarily meant to treat ventricular fibrillation (loss of coordination between the chambers of the heart), which often results from the ventricles (lower chambers of the heart) beating too quickly--in a sense ICDs perform the opposite function of a pacemaker. Both devices are intended as treatment for those who are at risk for cardiac death due to heart failure.
Business Growth
In the third quarter of 2008, Boston Scientific loss narrowed to $62 million, compared to a loss of $272 million a year ago. Total sales dropped by 3.4 % to $1.98 billion and margins slipped to 66.9% from 71.9%, due to poor sales of drug-coated stents after they were linked to blood clots.[1]
The company has been burdened by its $8 billion in debt, largely the result of the company's $27 billion acquisition of Guidant.
Market Penetration
Market penetration for a medical device is the percentage of the total population that is using any brand of the device. When a new medical device is introduced, the initial growth is primarily due to the increase in the number of patients that use the device. Once the device becomes standard and the majority of patients that require it use it, the market becomes saturated and growth will slow.
Boston Scientific's Taxus drug-eluting stent (DES) drove a 24% growth in the company's overall revenues since its launch in 2001 until 2005. The market penetration of coronary stents is expected to be slow for the next few years due to the following factors:
- Loss of consumer and physician confidence due to uncertainty about the potential for increased risk of clot formation (late stent thrombosis) after use of DES.
- A March 2006 clinical trial questioned the efficacy of bare metal stents in reducing rates of death and heart attack (myocardial infarction) compared with medical therapy alone.
- Results of a clinical trial by competitor Abbott showed that Abbott's Xience V stent may be clinically superior.
- Coronary stents are already the choice method of treatment for most cases of coronary artery shrinkage--patients with more complex problems are still treated by bypass surgery, and so the already high penetration rate (~80%) will not increase unless stents are shown to be at least as effective in these patients.
On the cardiac side, the market for pacemakers, at $3.3 billion, has been mature for a while. On the other hand, the market for higher-powered or more sensitive implantable cardioverter defibrillators (ICD), such as Guidant's product, has grown at a 28% average annual rate from 2001 until 2007. More recently, however, the market has slowed and sales have been declining. Although this may be due to recent concerns about product safety, some analysts believe that the market for ICDs has matured as well and will no longer show rapid growth in terms of new patients.
Clinical trials
Clinical trials of medical devices are extremely important to the future sales of the device. Clinical trials are not only required for FDA approval, but also can affect the perception held by patients and physicians of the effectiveness and safety of the device. This in turn affects both market penetration (the overall percentage of patients using the device) and market share (the overall percentage of device-users that buy Boston Scientific's particular device).
Recently, Abbott Labs conducted a clinical trial that showed that their drug-eluting stent, Xience V, was significantly superior to Boston's flagship Taxus. As a result, analysts expect Taxus to lose significant market share to Abbott's Xience V.
Product diversification and innovation
Product diversification becomes increasingly important for Boston Scientific as the markets for its current products mature. As such, Boston's recent acquisition of Guidant is an important step towards continued Boston's continued diversification: as of 2007, coronary stents accounted for only 21 percent of Boston's total revenue, as opposed to 43 percent in 2005.
Meanwhile Boston Scientific continues to invest in a number of novel initiatives including the LATITUDE patient management system, which enables physicians to monitor CRM device performance remotely while patients remain in their homes.
In addition, Boston's Endosurgery and Neuromodulation divisions continue to experience double-digit growth. The Neuromodulation division -- formed with Boston's acquisition of Advanced Bionics in 2004 -- is a promising avenue of growth for Boston, and it continues to make strides in its field of neurostimulators, programmable drug pumps and cochlear implants.
Quality control
For implantable medical devices such as coronary stents and cardiac defibrillators, quality control is extremely important to the recipient patient. Boston Scientific has been plagued by quality control issues and has issued safety advisories and recalls for 56% of its total pacemakers. This resulted in sanctions from the Food and Drug Administration (FDA), including two warning letters and a moratorium on the approval of major new products.
There are two major effects to the quality control issues and FDA actions:
- The FDA moratorium could have a major detrimental impact on Boston Scientific's product development pipeline, the continued strength of which is essential to strong performance in the future.
- Patients and physicians have lost confidence in the quality and reliability of Boston's products and--especially given the scale of Guidant's recalls and safety advisories--in pacemaker and pacemaker-like devices in general. These have played a significant part in the declining market share and market penetration experienced by Boston since the news.
Comparison to Competitors
Competition in the advanced medical devices industry is limited by two factors:
- Competitors have similarly high costs in development and manufacturing, and thus it is difficult for a company to gain a large advantage by cutting costs.
- Competitors all have large enough capacity that meeting demand is not an issue.
Thus, the main factor that will affect the performance of Boston Scientific and its competitors is its ability to capture market share through improving the technology and performance of its devices. In this sense, Boston Scientific compares favorably to its competitors, as it has strong pipelines in both its core DES and CRM businesses, and it continues to innovate in other fields. In the CRM business, its main competitors include Medtronic (MDT) and St. Jude Medical (STJ).
Boston's heavy dependence on coronary stents leaves it vulnerable to the prospect of two new competitors, and recent studies which suggest that stents are not as useful as they were thought to be. As such, last year was especially important for Boston Scientific, as it saw the successful acquisition of Guidant, a major provider in the area of cardiovascular medical products. With this merger, Boston Scientific now has a new venue of growth that will take it away from its traditional dependence on the coronary stent market. However, Guidant has been plagued with quality issues in the past, and the ability of Boston to deal with these and its own pre-existing problems, will play a major role in the performance of the company.
However, what matters most is how well Boston's technology performs when compared with that of its competitors, specifically in clinical trials.
Boston’s products will have to compete with those of its competitors in clinical trials. A study conducted by Abbott Labs found that Abbott’s new product Xience V was more effective than Boston Scientific’s Taxus. Medtronic has also introduced a new entry into the DES market, Endeavor.
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Revenue (in billions of USD) |
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Total Revenue |
$61.10 |
$48.42 |
$38.95 |
$25.91 |
$24.20 |
$22.40 |
$19.35 |
$18.63 |
$14.77 |
$12.69 |
$8.36 |
$3.17 |
|
Gross Profit |
$43.34 |
$37.18 |
$27.04 |
$14.49 |
$18.06 |
$16.09 |
$13.13 |
$14.38 |
$12.22 |
$8.29 |
$6.02 |
$2.84 |
|
Revenue Growth from 2006 |
14.57% |
0.10% |
10.94% |
15.30% |
6.90% |
10.07% |
12.12% |
18.75% |
3.53% |
19.78% |
6.85% |
18.21% |
|
Income |
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Net Income |
$10.58 |
$8.14 |
$11.95 |
$3.61 |
$3.28 |
$4.62 |
$2.17 |
$2.95 |
$3.17 |
-$1.47 |
-$0.50 |
$0.64 |
|
Net Profit Margin |
17.31% |
17.05% |
16.79% |
13.92% |
13.54% |
20.61% |
14.12% |
15.85% |
21.43% |
-11.61% |
-5.92% |
20.12% |
|
Operating Income |
$13.28 |
$9.28 |
$6.78 |
$4.58 |
$3.37 |
$6.46 |
$3.53 |
$3.88 |
$3.98 |
-$1.22 |
-$0.01 |
$0.78 |
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Return on Average Equity |
25.60% |
12.06% |
14.43% |
22.66% |
18.33% |
28.09% |
19.15% |
23.96% |
17.19% |
-22.17% |
-3.26% |
10.05% |
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Other |
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Employees |
119,200 |
86,600 |
98,200 |
68,000 |
59,800 |
50,527 |
42,000 |
40,600 |
17,500 |
55,000 |
27,500 |
4,300 |
References
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