Boston Scientifics' (BSX) journey over the past 12 months has displayed its poise as a market leader. On the heels of its $28 billion acquisition of Guidant Corporation earlier this year, Boston Scientific inherited pacemaker and defibrillator recalls. Recent headlines questioned the safety of its drug-eluting stents, linking them to the cause of blood clots in cardiac patients. Last month, Boston Scientific hit a 52-week low of $14.43, the decline driven by fear and negative investor sentiment. While the crowd may flee, investors seeking value must look to the fundamentals that reside beyond the noise of today.

What had happened during the merger? Who won?
When I last wrote about this stock, Boston Scientific had just trumped Johnson & Johnson's (JNJ) offer with a $27.2 billion dollar offer for Guidant. At the time of the acquisition, Guidant was the #2 cardiac rhythm management (CRM) market share leader behind Minneapolis-based Medtronic Inc (MDT). Guidant's CRM products focus on cardiovascular disease, the number one cause of death in the United States. Since Guidant had already accepted the Johnson & Johnson offer, it had to pay a termination fee of $705 million to break the contract before accepting the Boston Scientific offer.

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Why did Boston Scientific do it?
Boston Scientific had 9 billion reasons to break into the $9 billion global CRM market. Acquiring Guidant gives Boston Scientific a hedge against sales fluctuations in its primary coronary stent business. The acquisition also gives Boston Scientific more leverage, as it continues to duel with JNJ and future market participants including Medtronic and Abbott Labs for coronary stent market leadership.

Abbott Labs (ABT), the maker of prescription pharmaceuticals, nutritional products and diagnostic equipment, actually purchased Guidant's $1 billion a year revenue-generating vascular intervention and endovascular business prior to the Boston Scientific acquisition. Abbott paid $4.1 billion for Guidant's technology. Abbott agreed however to share the drug-eluting technology it gained from Guidant with Boston Scientific. The additional drug eluting technology compliments Boston Scientifics' current #1 product, its TAXUS Express Paclitaxel-Eluting Coronary Stent system. Abbott Labs made headlines of its own on Monday, November 6th with the announcement of its acquisition of prescription cardiovascular and respiratory drug maker Kos Pharmaceuticals (KOSP).

By The Numbers
On a forward basis, Boston Scientific has a low price to earnings growth (PEG) ratio of 1.01 with a forward price to earnings ratio of 20 and estimated earnings per share growth rate of 20%. Medtronic Inc and Johnson & Johnson weigh in with higher PEG's of 1.42 and 1.81, respectively.

The lower Boston Scientific PEG ratio suggests that its expected annual growth rate exceeds the expectations for both Medtronic Inc and Johnson & Johnson. Boston Scientific reported an increase in net sales of 34% for the third quarter ending September 30th over the year ago period, the increase primarily driven by sales from its CRM business. Since the Guidant acquisition, CRM and Cardiac Surgery have contributed $965 million,or 17% of its worldwide revenues, to BSX through September 30th.


Hype Over Bite

The recent headlines concerning the possibility of blood clots forming in conjunction with the use of the Taxus stent appears to have more hype than bite. In late October, the Cardiovascular Research Foundation confirmed that the Taxus stent is safe and effective. Along with a virtual monopoly on drug-coated stents between itself and Johnson & Johnson for the immediate future, Boston Scientific also has demographics on its side.

With a well-documented aging U.S. population and a fast-graying Japanese population on the horizon, demand for Boston Scientifics' minimally invasive life saving and life extending products are more than likely to benefit future patients and fall in-line with management's bright expectations. With a diverse and innovative product line in place to combat competition and an uncanny ability to move beyond negative news, Boston Scientific is very likely trading at a discount in comparison to where it will be in the years to come.

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