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Morningstar | Boston Scientific Posts Solid First Quarter, and We're Holding Steady on Our Fair Value Estimate

Despite lagging consensus estimates, Boston Scientific’s first-quarter results generally met our expectations, and our fair value estimate remains unchanged. While foreign exchange headwinds were stronger than we’d anticipated, Boston’s quarterly 7.8% operational revenue growth was consistent with the 8% we’ve estimated for the year. The firm kept a tight grip on expenses, and profitability was further boosted by a settlement payment from Edwards Lifesciences. With several key new product launches on deck, we remain confident in Boston’s narrow moat.

We were pleased to see Boston received FDA approval on its Lotus Edge TAVR (Transcatheter aortic valve replacement) product April 23, which we hadn’t expected until fall. With the initial domestic Lotus launch underway, we anticipate strong interest in trying the product, especially considering its unique mechanical deployment device and the ability to reposition the valve. Whether the firm can permanently capture market share remains an open question, but we expect it can carve out a niche position, especially for certain complex patients. With a third TAVR competitor entering the U.S. market, more pressure is on Abbott’s Portico device, which isn’t likely to launch until early 2020. Considering the track record and clinical data behind Edwards’ Sapien and Medtronic’s CoreValve, along with the differentiation of Lotus, we’re pessimistic that Portico can become more than a peripheral competitor.

It’s not clear whether recent unfavorable analysis of paclitaxel-coated balloons is a temporary damper on DCB (Drug-coated balloon) usage or something more permanent. Considering paclitaxel coatings have been used on balloons and stents for years with seemingly few problems, this clinical data is somewhat startling. Nevertheless, the DCB market leaders--Medtronic’s INPACT Admiral and Becton’s Lutonix--are also coated with paclitaxel. Practitioner response will likely affect the entire category, not just Boston’s Eluvia.

A couple of other issues in the first quarter caught our attention and underscore our view that Boston’s ability to innovate puts the firm in a strong competitive position. Although rival Medtronic has yet to report its most recent quarterly performance, Boston has certainly outperformed Abbott on several counts. First, Boston racked up 7% quarterly growth in its spinal cord stimulation product line. We recognized this is slower than the market, which typically grows in the low double digits to mid-teens. However, Boston is coming off last year’s stellar performance with the roll out of WaveWriter that translated into nearly 23% growth year over year. Conversely, Abbott saw its neuromodulation business decline 7% in constant currency during the first quarter. The dismal performance is partially a reflection of departures from Abbott’s salesforce, but we think the effect has been exacerbated by the waning of Abbott’s neuromod product cycle. Abbott management indicated two new pain management systems should launch in late 2019 or early 2020, which would be the earliest we’d expect the current situation to change. Boston is already bracing for that competition as it gathers more data on WaveWriter and works on improving product performance in the second half of 2019.

Second, Boston’s cardiac rhythm management business grew at a respectable 2.6% in the first quarter. Considering how mature the traditional CRM market has become, growth in the low- to mid-single-digit range is solid. We think the performance suggests a high level of execution by the salesforce on Boston’s traditional ICD and CRT-D product lines, along with continued adoption of the S-ICD. Again, Boston’s solid results stand in contrast with the 5% constant currency decline that Abbott saw in its CRM business, which was driven by a 12% decline in the U.S. market. We’re eager to see how Medtronic’s CRM business fared, and in particular, whether its push for risk-based contracting with its TYRX envelope and ensuing product pull-through has offered a degree of insulation from its competitors.