Boston Scientific (BSX)

Boston Scientific has been digesting an acquisition of epic proportions from over a year ago. Many may recall BSX’s successful cash and stock bid for Guidant in 2007, as they came in and scooped the company away from a rival medical equipment maker. The resulting acquisition was one of the largest in financial history, topping $20 billion, and basically leaving BSX’s balance sheet with a significant multi-billion dollar “goodwill” asset, a huge float of 1.5 billion shares, and a healthy dose of acquisition-related debt. Current debt levels for the combined company are just over $8 billion in long-term debt, roughly equivalent to their annual revenues.

As this acquisition is digested, BSX has the opportunity for balance sheet improvement as well as an avenue to build important margin improvements to their currently anemic bottom line. Current estimates from analysts are for the company to earn between 50 and 60 cents per share next year, and a similar amount into 2009. We see marginal opportunity for improvement of their cost to carry the $8 billion in debt they’ve built up, given current low interest rates. The capital markets may provide some cost savings if the debt were to be renegotiated or rolled over, however improvements might be minor in the scheme of earnings.

Boston Scientific has been digesting an acquisition of epic proportions from over a year ago. Many may recall BSX’s successful cash and stock bid for Guidant in 2007, as they came in and scooped the company away from a rival medical equipment maker. The resulting acquisition was one of the largest in financial history, topping $20 billion, and basically leaving BSX’s balance sheet with a significant multi-billion dollar “goodwill” asset, a huge float of 1.5 billion shares, and a healthy dose of acquisition-related debt. Current debt levels for the combined company are just over $8 billion in long-term debt, roughly equivalent to their annual revenues.

As this acquisition is digested, BSX has the opportunity for balance sheet improvement as well as an avenue to build important margin improvements to their currently anemic bottom line. Current estimates from analysts are for the company to earn between 50 and 60 cents per share next year, and a similar amount into 2009. We see marginal opportunity for improvement of their cost to carry the $8 billion in debt they’ve built up, given current low interest rates. The capital markets may provide some cost savings if the debt were to be renegotiated or rolled over, however improvements might be minor in the scheme of earnings.

Strong guidance through FDA troubles and quality issues indicate that these admittedly major problems will be resolved without much damage caused, restoring investor confidence.

Diversification: Boston Scientific continues to reduce its dependence on the volatile DES market with the strategic purchase of Guidant, and continued investment its neuromodulation and endosurgery divisions.

Boston Scientific has a strong development pipeline for both its DES and CRM businesses, and any one of the technologies it is developing could recapture all of the market share that it might lose in the interim.

Bigger opportunity for BSX likely resides in its new “Liberte” stent, which received a preliminary approval letter in mid-March from the FDA. BSX Management expects a more formal approval of this stent system in the near future. BSX already offers two platforms of drug eluting stents, including the TAXUS stent and the Promus product, known as the “XIENCE” from Abbott Labs. Promus is a private-labeled stent system manufactured by Abbott Labs (ABT) and distributed by Boston Scientific, which is coated with a different drug than the TAXUS system. BSX is the only company with two separate stent platforms in the market.