Buy, Sell or Hold: Is Boston Scientific Poised for a Turnaround?

Investors in Boston Scientific (NYSE: BSX) have been through the wringer in recent years.

The medical device maker hit its peak back in 2004, reaching highs near $44. Since then the company is down over 82% and has been hovering under $10 for years.

So how did shares of Boston Scientific fall so hard?

Much of the blame can be traced back to the company's ill-conceived 2006 plan to become the leading player in the medical device industry by outbidding Johnson & Johnson (NYSE: JNJ) for Guidant Corp to the tune of $27.3 billion.

It's a deal Fortunemagazine described at the time as the second-worst takeover deal ever.

But the problems didn't stop there. Boston Scientific ran into all types of issues with the quality of not only Guidant products, but its own as well.

This led to a string of product recalls, patient lawsuits, run-ins with the FDA and a share price that could never seem to find a bottom.

But now, with its new CEO, Michael Mahoney -- who has a cautious but optimistic view for Boston Scientific -- there just may be enough new catalysts to turn the company around.

Here's the deal...

Listening for the Next Heart Beat

At present, Boston Scientific receives roughly 60% of its revenues from its Interventional Cardiology and Cardiac Rhythm Management units.

Competition in this space from the likes of Abbott Laboratories (NYSE: ABT), Medtronic (NYSE: MDT), St. Jude Medical (NYSE: STJ), and Johnson & Johnson has been nothing less than fierce.

For Boston Scientific, this has led to falling margins and declining market share. In 2008 revenues were $8.2 billion. In 2012 revenues were roughly $7.3 billion.

One issue that has plagued Boston Scientific was that it didn't have any new or innovative products coming to market. That was the driving force behind the company's recent purchase of Cameron Health in 2011. With Cameron Health integrated into the fold, Boston Scientific will now be moving into the subcutaneous implantable cardioverter-defibrillator (S-ICD) market.

The FDA approved S-ICDs have an advantage over the more common ICDs in that they don't require a "lead' to connect the device to the heart. Currently the product is in limited release as Boston Scientific hopes to build a better track record and as doctors get more comfortable in the use of S-ICDs.

But Boston Scientific hasn't stopped there. It is continuing to build its business as it purchases companies with promising technology.

Recently the company acquired Bridgepoint Medical, which has a proprietary, catheter-based system to treat coronary chronic total occlusions and Rhythmia Medical, a company developing a next-generation mapping, visualization and navigation system for the treatment of cardiac arrhythmias.

Two years ago Boston Scientific also purchased Atritech and its latest technology, called the Watchman, designed to prevent strokes in patients with erratic heartbeats.

This device has been slightly controversial and the FDA had requested additional testing. After some controversy with the amount of data to be released by Boston Scientific, the company disclosed some key findings and is hoping to get FDA approved. - even though there are some detractors.

Boston Scientific believes that once approved the Watchman could reach sales of $500 million within five years. This will make a small-but-nice impact to revenues and will add more diversity to its product line.

As CEO Mahoney explained recently, "We continued to enhance our growth portfolio, expand in the emerging markets, and implement operational changes to improve our execution and sharpen our customer focus. I am confident we are taking the critical steps that are needed to return our company to long-term growth."

The message for investors is that he is not sitting on his hands, but is looking for future growth.

"Taking a Scalpel to Costs" & "Growth in Emerging Markets"

Now, let's take a look at the other two items on his list and see how Boston Scientific fares there.

Boston Scientific is expanding its program (initiated in 2011) and reducing costs. Unfortunately this will result in further job cuts as it looks to eliminate 900 to 1,000 positions globally.

The end result will be an anticipated reduction of pre-tax operating expenses of $340 million to $375 million a year by the end of 2013. Part of the savings will be used to pay the new 2.3% medical device excise tax gifted upon us by the implementation of Obamacare. The rest will be used toward future growth and expansion into emerging markets.

According to a report by Transparency Market Research, "the global market for interventional cardiology devices was calculated at$15.8 billionin 2011 and is expected to grow at a compound annual growth rate (CAGR) of 6.8% from 2012 to 2018 reaching an estimated valued of $25.2 billionin 2018."

In Boston Scientific's most recently reported quarter, total revenue in Brazil, Russia, India and China also grew by 35%. But that is just the beginning. The company is motivated to further penetrate these emerging markets and sees growth accelerating globally.

More specifically Boston Scientific sees growth through the sales of its latest and most innovative stents. According to the World Health Organization, cardiovascular disease is the number one cause of death globally, and by WHO's estimation deaths will reach 23.3 million people per year by 2030.

So as the size of the pie grows with an aging population as well as expanding waistlines, the potential for growth in Boston Scientific's lagging key products does seem to have some wind in its sails - as morbid as that sounds.

The Price is Beating Fast

In terms of the company's share price, Boston Scientific has seen a significant increase. Year-to-date the stock price has increased 36% from $5.73 to the current price (as of this writing) of $7.69. This leads me to wonder whether the news of what I laid out above has been already priced into the market.

The turnaround story seems legit and the potential is there for a return to much higher stock prices. However I'm not quite convinced. I'd like to see a bit more news from the company regarding sales, how it fares with the FDA approvals, a stronger balance sheet and perhaps some consistent quarters of positive earnings per share before I plunk down the money to be a shareholder.

Admittedly, I may see this ship sail without me, but those that have the temperament for holding a turnaround story in their portfolios should consider Boston Scientific.

If you have held Boston Scientific through the difficult times, you should probably be a little excited to see that the company is trying to reinvigorate its business. The company does have a nice crop of new products, continues to streamline its operations and is making a push into new markets. Your patience for HOLDING is likely to be rewarded.

[Editor's Note: If you have a stock you would like to see us analyze in a future issue, leave us a note in the comments below and we'll add it to our list.]

About the Author: David Mamos brings nearly 15 years of analytical experience to the table with a background ranging from big-picture fundamental analysis to highly technical trading decisions. He began his career working as a financial advisor with Royal Alliance in 2001 and helped clients with portfolio management as well as buy-sell decisions before transitioning to the development, implementation and execution of trading strategies for aggressive investors.

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