Company Overview: Boston Scientific Corporation (NYSE: BSX) is one of the top players in the interventional cardiology market, which offers coronary stent products. The company is involved in marketing a wide range of portfolio of internally built and self-produced drug-eluting stents, which incorporates, the Promus PREMIER, Promus Element, and Promus Element Plus everolimus-eluting stents. The company has three reportable segments namely (1) Cardiovascular, (2) Rhythm and Neuro, and (3) MedSurg.

BSX Details

Higher Investments & Acquisition Synergies to Aid BSX: Boston Scientific Corporation (NYSE: BSX), established in 1979, is engaged in manufacturing medical devices and products, which are utilized in numerous interventional medical specialties on a global basis. The group has been expanding its business via acquisitions, as well as investing strategically in companies which would strengthen its existing portfolio to maintain the company’s leadership position. In 2019, the company acquired BTG plc., which offers its therapeutic technologies for patients with liver and kidney cancers. This would expand BSX’s interventional oncology portfolio and will aid the company to support physicians in treating challenging diseases with a strengthened commercial infrastructure. However, on December 1, 2020, the company announced that it inked a deal with Stark International Lux S.A.R.L., and SERB SAS, affiliates of SERB, a European specialty pharmaceutical group, to divest its BTG Specialty Pharmaceuticals business for $800 million in cash. The deal is expected to assist the BTG Specialty Pharmaceuticals business to augment its capacity as a fully integrated specialty pharmaceuticals platform. The transaction is expected to close in the 1HFY21, subject to customary closing conditions.

Recently, the company also received FDA’s approval for its WaveWriter Alpha portfolio of Spinal Cord Stimulator (“SCS”) Systems. BSX expects to unveil SCS Systems commercially during the 1HFY21. With the latest regulatory approval, BSX seeks to bolster its Neuromodulation business worldwide. It is worth noting that the Neuromodulation business is a key part of the company’s broader Rhythm and Neuro arm. The company has also seen some key improvements in its Rhythm and Neuro segment in the past few months. In September 2020, BSX entered a deal with an exclusive option to acquire Farapulse, Inc, a privately held company developing a pulsed-field ablation system. The company also announced the acknowledgment of the CE Mark and the following limited-market release of its 4^th generation Vercise Genus Deep Brain Stimulation System in Europe, during the same month. Notably, in June 2020, the company also received a nod from the FDA 510(k) clearance for its LUX-Dx Insertable Cardiac Monitor System.

For the financial year ended on 31 December 2019, total net sales stood at $10.735 million. Gross profit for the company stood at $7,620 million, up from the year-ago figure of $7,011 million. Looking at the past performance, BSX delivered a CAGR growth of ~9.5% in revenues over the period of FY15 to FY19, while net income stood at $4,700 million in 2019, compared to a loss of $239 million reported in 2015.

Past Performance (Source: Company Reports)

Despite multiple challenges in 2019, the company is optimistic about its global team to perform well across its business segments, functions, and regions. The company also strives to deliver high-quality results each quarter and focuses on reducing its overall cost of business. With a robust team and technology pipeline, the company remains confident to deliver its long-term strategy and ability to address evolving customer needs.

3QFY20 Key Financial Highlights: During the quarter, the company reported adjusted earnings per share of 37 cents, which declined 5.1% from the prior corresponding period. Notably, on a GAAP basis, losses came in at 12 cents per share as compared to earnings per share of 9 cents reported in the year-ago period. Although the quarter’s adjusted earnings were down on a year over year basis, the company witnessed robust improvement on a quarter over quarter basis. In 3QFY20, revenues came in at $2.66 billion, down 1.8% year over year and 2.5% at the constant exchange rate. On an organic basis, revenues for the quarter dipped 5.7% year over year. During the quarter, gross margin came in at 67.3%, which contracted 398 basis points (bps) year over year, owing to a rise in the cost of products sold. Selling, general and administrative expenses came in at $984 million, down 2.8% on pcp. Research and development expenses were up 2.9% on year over year in 3QFY20. Adjusted operating margin stood at 18%, down 404 bps year over year.

3QFY20 Revenues Highlight (Source: Company Reports)

Revenues By Geography: During the quarter, revenues from the United States dropped 4.2% year over year on a reported basis and came in at $1,496 million. Revenues inched up slightly 0.8% in Europe, Middle East, and Africa region on a reported basis. Revenues from the Asia Pacific zone and Latin America and Canada went down 2.6% and 24.3%, respectively, year over year on a reported basis. Revenue from emerging markets declined 10.3% on pcp.

Revenues By Geography (Source: Company Reports)

Segment-wise Analysis: The company generates the highest revenues from Cardiovascular. Sales from its sub-segments, namely Interventional Cardiology stood at $586 million, down 16.8% year over year on an organic basis. Whereas sales from Peripheral Interventions stood at $416 million, up 2% on pcp in 3QFY20. The company’s Rhythm and Neuro business comprise Cardiac Rhythm Management (CRM), Electrophysiology and Neuromodulation, which decreased 3.7% year-over-year on an organic basis and came in at $465 million during the quarter. Sales from Electrophysiology stood at $76 million, down 7.5% year over year, organically. Neuromodulation sales dropped 3% from the prior corresponding period on an organic basis and came in at $216 million.

Segment-wise Break-up (Source: Company Reports)

Balance Sheet & Liquidity Position: The company exited the quarter with cash and cash equivalents of $2,022 million, and long-term debt of $9,325 million. Adjusted free cash flow came in at $870 million in 3QFY20, whereas operating cash flow came in at $643 million. EBITDA Margin for 3QFY20 stood at 25%, higher than the industry median of 15.9%. Current ratio came in at 1.87x in 3QFY20, higher than the previous corresponding figure of 1.14x. Debt to equity ratio for the same time span stood at 0.6x, lower than the prior corresponding period of 1.12x.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 41.55% of the total shareholding. The Vanguard Group, Inc. and BlackRock Institutional Trust Company, N.A. holds the maximum interests in the company at 7.82% and 4.82%, respectively.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Risks: Although BSX’s long-term business fundamentals look promising, the ongoing economic doldrums in the wake of the global coronavirus outbreak is instigating a decline in the company's revenues. Further, the doubts regarding the duration and impact of the coronavirus pandemic on the company’s overall business have constrained BSX to suspend its earlier-issued FY20 financial guidance. BSX’s leveraged balance sheet also poses risks with total debt of $9,325 million and a cash balance of $2,022 million as of September 30, 2020. This indicates that the company needs to be more focused on the cash flow generation front. Furthermore, high debt may limit growth and any further increase in borrowings might worsen its risk profile.

Outlook: Going forward, the company’s higher investments in virtual physician education, remote clinical support and digital sales enablement amid the pandemic are expected to aid its top-line growth. Additionally, beginning from the month of June, China, Australia, New Zealand, and Korea all witnessed growth on a year over year basis.  Further, six countries in Europe, Middle East, Africa also reverted back to growth in the same month. With steady moderation of country-wise lockdown limitations and subsequent to the recovery in international trade, BSX’s international business is likely to witness higher growth, going forward.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

P/E Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock of BSX closed at $35.130 with a market capitalization of ~$50.3 billion as on 16 December 2020. The stock is currently trading slightly above the average of its 52-week low and high level. The stock went up ~28.9% in the last nine-month period. On a technical analysis front, the stock has a support level of ~$33.02 and a resistance level of ~$38.71. Considering the above factors, we have valued the stock using a P/E multiple based illustrative relative valuation method and arrived at a target price with an upside of lower double-digit (in % terms). For the purpose, we have taken peers like we have taken the peer group - Medtronic PLC (NYSE: MDT), Abbott Laboratories (NYSE: ABT), and Edwards Lifesciences Corp (NYSE: EW), to name a few. Hence, we recommend a “Buy” rating on the stock at the closing price of $35.130, up by 1.33% on 16 December 2020.

BSX Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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