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Morningstar | Boston Scientific Outpaces Market Again in 2Q; No Change to Our FVE

Narrow-moat Boston Scientific posted strong second-quarter performance that was consistent with our expectations. Our slight adjustments to our model weren’t enough to move the needle and we’re leaving our fair value estimate unchanged. Boston displayed broad-based strength across most of its segments, which generally grew in the high single digits organically year over year.  We continue to project above-market topline growth from Boston, along with roughly 500 basis points of operating margin improvement through 2022.

We like how Boston has been pushing into areas where patients are typically undertreated.  While this is a common strategy among cardiac device makers, we recognize that Boston is quite savvy about selecting technologies and targets to go after.  For example, prior 2013 the firm had missed out the electrophysiology market that had been growing in the teens.  This market taps into a large and growing patient pool—roughly 34 million atrial fibrillation patients worldwide. Additionally, vigilant surveillance by practitioners along with better diagnostic tools should translate into long-term growth in patients.  Favorable clinical data behind AF ablation and hospitals concerned with readmittance offer conditions conducive to sustainable long-term growth in this market. Since 2013, Boston has made concerted investments in this area and has since delivered 15% annual growth, on average.  Boston’s recent acquisition of a cryoablation technology to round out its portfolio bolsters the firm’s strong position.

Similarly, Boston’s launch of its new WaveWriter neuromodulation technology has delivered strong double-digit growth in second quarter.  Spinal cord stimulation has recently seen a burst of innovation and we expect Boston to be right in the mix.  Fortunately, a recent ruling over intellectual property doesn’t seem like it will hamper Boston’s ability to commercialize its WaveWriter platform.

The main area of weakness at Boston remains the cardiac rhythm management segment. While we don’t expect this mature market to grow much beyond mid-single digits, we have been watching it carefully mainly because Medtronic has been aggressively approaching hospitals with risk-sharing contracts for its CRM systems. We think Medtronic’s strategy holds potential to shift the basis of competition and insulate its devices from the full brunt of competitive product launches. We recognize that Boston is currently competing without a full suite of resynchronization devices, which could explain the anemic growth. But, we suspect Medtronic’s risk-sharing contracts may also be a material factor.