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Tickers in this Article: BSX, MDT, UNIS
Boston Scientific (BSX) reported a net income of $60 million or 4 cents per share in the fourth quarter of 2012, a disappointment from net income of $107 million or 7 cents per share in the year-ago period. However, after considering certain adjustments (other than amortization expense), the adjusted earnings per share (EPS) in the reported quarter came in at 11 cents, up 37.5% year over year and in line with the Zacks Consensus Estimate.

The quarter's adjusted EPS remains within the company's guidance range of 9-12 cents. For the fiscal, the adjusted EPS of 41 cents matched the Zacks Consensus Estimate but was 4 cents down from the previous year's EPS.

Revenues declined 1% year over year (same at constant exchange rate or CER, excluding divested business) to $1.821 billion during the fourth quarter of 2012, exceeding the Zacks Consensus Estimate of $1.760 billion. Reported revenues remained within the company provided guidance range of $1.740-$1.815 billion.

Fiscal 2012 revenues remained at $7.249 billion, ahead of the Zacks Consensus Estimate of $7.187 billion but down 5% (down 3% at CER, excluding the divested business) compared to 2011. The fiscal revenues marginally exceeded the guidance range of $7.168-$7.243 billion.

While revenues derived from the domestic market declined 3% year over year to $924 million, international revenues increased 1% to $796 million (up 3% at CER). The 15% growth (14% at CER) in the Inter-Continental market ($235 million), was to a large extent offset by drop in revenues in both Japan (down 4% to $236 million; up 1% at CER) and EMEA (down 3% to $396 million; down 1% at CER).

Segment Analysis

Boston Scientific derives maximum revenues from Cardiovascular, which comprises Interventional Cardiology and Peripheral Interventions. Sales at these sub-segments were a respective $534 million (down 9% year over year at CER) and $199 million (up 9% at CER), during the quarter.

Global sales of coronary stent system (within Interventional Cardiology) at $333 million declined 12.6% due to a disappointing performance from both drug-eluting stents ("DES") that declined 12.4% to $312 million and bare-metal stents that plunged 16% to $21 million.

The next biggest contributor to Boston Scientific's top line, CRM, continued to disappoint with a 4% (at CER) drop in sales to $457 million during the quarter. Sales from pacemakers and defibrillators both declined 5.2% to $127 million and $330 million, respectively.

Over the recent past the company has been targeting new product launches to revive the sales of the beleaguered Interventional Cardiology and CRM segments. However, the dismal performance of these segments during the reported quarter proved beyond doubt that these measures have not been enough to ride over the challenges currently at play.

Other segments of the company, namely Electrophysiology, Endoscopy, Urology/Women's Health and Neuromodulation, recorded sales of $38 million (up 5% at CER), $329 million (up 10%), $130 million (up 3%) and $104 million (up 14%), respectively.

Margins

The company recorded a 370 basis point (bps) year-over-year rise in gross margin to 67.9%. Adjusted operating margin expanded 178 bps to 18.2% in the quarter, based on a 2.9% increase in selling, general and administrative expenses to $639 million; a 3.9% increase in research and development expenses to $239 million and a 15.2% decline in royalty expense to $28 million.

Balance Sheet

Boston Scientific exited the fiscal with cash and cash equivalents of $207 million, up from $267 million at the end of fiscal 2011 with long-term debt of $4.25 billion. The company generated operating cash flow of $370 million and repurchased 18 million shares during the quarter under the 2011 share repurchase program.

Separately, the company announces the authorization of a new share repurchase program of up to $1 billion. The company also experienced a positive impact from the 7% decline in the share count as a result of the continuous share buyback program.

The company also completed the acquisition of Vessix Vascular that develops percutaneous radiofrequency balloon catheter technology for treatment of hypertension. The acquisition is expected to become a part of the Peripheral Interventions business of the company.

Restructuring Expansion

Boston Scientific announced an expansion of its 2011 restructuring program to strengthen operational efficiencies and support new growth investments.  According to the company, the restructuring program will reduce gross annual pre-tax operating expenses by $100- $115 million in 2013.

Overall in 2013, the initial and expanded restructuring program will reduce gross annual pre-tax operating expenses by approximately $340- $375 million. Boston Scientific plans to invest the savings from this total restructuring program in targeted areas for future growth, including strategic growth initiatives and emerging markets.  The company anticipated the primary activities under these initiatives to be completed by the end of 2013. 

Guidance

Boston Scientific provided its first quarter and fiscal 2013 guidance. For the first quarter, Boston Scientific expects to report adjusted EPS of 7-10 cents on revenue of $1.740-$1.815 billion. The current Zacks Consensus Estimate of 10 cents in EPS is in line with the outlook as well as the consensus revenue estimate of $1.790 billion and falls within the company's guidance.

For the fiscal, the company expects its revenue to remain in the band of $7.168-$7.243 billion with adjusted EPS in the range of 37-43 cents. The Zacks Consensus Estimates for revenue stands at $7.116 billion, below the guided range whereas the consensus EPS estimate of 44 cents remained outside the range provided.

Our Take

The headwinds currently at play for Boston Scientific's CRM segment also had an adverse impact on its peer, St Jude Medical's (STJ) fourth quarter performance that was reported on Jan 23.

The US defibrillator market remains an overhang for Boston Scientific and its peers, St Jude Medical and Medtronic (MDT). The DES business in the US has been witnessing challenges due to pricing pressure, lower procedural volume, lower penetration rates and share losses from the launch of Medtronic's Resolute Integrity stent.

However, to revive its top line, Boston Scientific is focusing on strategic initiatives to drive growth and profitability. These include restructuring initiatives, strengthening its portfolio, targeting suitable acquisitions in areas of unmet medical needs and focus on emerging markets. We are also encouraged by the company's gradually improving topline which is reflected in its strong revenues projection for 2013.

Currently Boston Scientific retains a Zacks #3 Rank (Hold) in the short term. Medical products companies such as Unilife Corporation (UNIS), which carries a Zacks Rank #1 (Strong Buy), is expected to do well.

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