Outcome Capital MedTech Market Movers: Boston Scientific – Corporate Update

By: Derrick Holmes and Thomas F. Busby

Boston Scientific (NYSE: BSX) is staying true to Portfolio expansion strategy with recent M&A announcements and earnings report:

– Cardiology segment driving key growth and revenue contribution for BSX

– While many in the medtech industry are struggling, BSX’s strategic M&A is enabling continued growth and market share expansion

– Recent endoscopy/medsurg and electrophysiology/cardiology tuck-in acquisitions provide portfolio depth and amplify market presence

As COVID fades into the rearview mirror,  an anticipated return to pre-pandemic procedure volumes has the medical technology industry poised to capture pent up demand for new technologies. And, while medtech performance YTD (-13.69* as of 8/16/22) has lagged that of the S&P500, Boston Scientific (BSX) has outperformed the broader market on a relative basis YTD by around 8% (as of 8/16/22). Further, BSX reported earnings before market open on Wednesday, July 27th topping analyst estimates with a welcoming 4.76% surprise to the upside. BSX has shown consistent performance and continues to outpace the growth of their key competitors; with Abbott & Medtronic among those mentioned in last years’ reported 10-k.

Mike Mahoney, Chairman & CEO of Boston Scientific comments on the accomplishments: “We continue to grow faster than our peers in most of our businesses and regions. Second quarter adjusted EPS of $0.44 grew 9.6% versus prior year, again, exceeding the guidance range of $0.41 to $0.43”

While public markets face scrutiny and largely bearish sentiment as macroeconomic factors weigh heavily on inventors’ minds, large strategics such as BSX have remained steadfast and on course with strategic initiatives, proving to be beneficial for shareholders.

Q2 consolidated revenue came in at $3.24 billion with net sales up 5.4% on a reported y/y basis. Operational revenue grew 9.6% y/y upon consideration for the negative impacts associated with foreign currency fluctuations. This negative impact stems from BSX’s large international dependence and a strengthening U.S. dollar. Furthermore, BSX posted y/y organic growth of 6.6%, with recent acquisitions & divestures responsible for 3% of y/y operational growth: exceeding the high end of managements guidance.

“Our top priority for capital allocation remains high-quality tuck-in M&A, and we’ll continue to assess opportunities in conjunction with our financial goals.” – Dan Brennan, Executive VP & CFO, Boston Scientific

Inorganic growth strategies remain a staple for BSX, with 11 acquisitions and over $9 billion of invested capital allocated to M&A activities since the beginning of 2019. Earlier this week, BSX announced the acquisition of Obsidio, Inc., further solidifying tuck-in M&A as a cornerstone strategy for portfolio development. Obsidio recently obtained FDA approval for their Gel Embolic Material (GEM) technology used for the embolization of blood vessels. Obsidio’s differentiated technology provides novel solutions for the treatment of hemorrhages, cancer, and other debilitating conditions. This acquisition will strengthen BXS’s interventional oncology and embolization portfolio, a strategic initiative the company drew attention to in their 2021 annual report. Another recent and noteworthy transaction was the acquisition of Baylis Medical. The deal took place earlier this February and closed for $1.75 billion. Baylis’ innovative technology allow for safe and efficient access to the left side of the heart for WATCHMAN implants, helping drive procedure volume and utilization. WATCHMAN has been a bedrock product for BSX, providing for $250 million in revenue this past quarter alone.

As it pertains to BSX’s business segmentation and performance, Cardiology accounts for just over 60% of reported net sales. The Cardiovascular segment has recoded y/y net sales growth of 6% and 10.8% on a reported and operational basis, respectively. In addition to WATCHMAN, another bright spot for BSX’s cardiovascular portfolio has been their Interventional Cardiology Therapies business. The business reported Q2 revenue of $574 million and is the largest contributor to the company’s Cardiology segment, responsible for 28% of net sales. BSX’s MedSurg division accounted for the remaining 40% of the company’s aggregate net sales. MedSurg was credited with $1,248 million of the company’s $3,244 million of net reported sales for the quarter. Within the MedSurg portfolio, Endoscopy has been a notable business with reported net sales of $560 million and y/y organic growth around 6%. Performance of the company’s endoscopy business is due in part to increasing utilization of their Exalt Model D single use Duodenoscope. In addition, BSX is expected to close on an agreement to purchase the majority stake of M.I. Tech Co, Ltd. for approximately $230 million in the second half of 2022. This transaction is expected to broaden the company’s stent offerings and stimulate growth in their endoscopy business.

Adjusted gross margins for the second quarter were in line with management expectations coming in at 70.4%.  Management guidance expects full year adjusted gross margins to be slightly below 70.8%, indicating a slight compression in margins for the second half of the year due to inflationary pressures on direct materials, freight, and labor costs, as well as inefficiencies in manufacturing due to material availability. In parallel, the federal reserve recently announced its second consecutive 75bps rate hike in an attempt to reel in runaway inflation. This move raises the federal funds rate to a range of 2.25% – 2.50%.

“As the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases while we assess how our cumulative policy adjustments are affecting the economy and inflation.” – Jerome Powell, Chair of the U.S. Federal Reserve

Management commented on the leverage of the company, stating it will remain unchanged for the foreseeable future. This signals confidence in the company’s ability to generate sustainable growth through operational efficiencies and effective utilization of the company’s assets, alleviating any investor concerns related to the source and quality of expected growth. Year to date, BSX shareholders have benefited from management’s ability to provide distinct competitive advantages and favorable long-term market positioning through the execution of strategic opportunities.

*Measured as the S&P Health Care Equipment Index – Used as a comparison for relative performance in BSX 2021 annual report.

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