Is Boston Scientific's Turnaround the Start of a Health Care Surge?

In the wake of Boston Scientific's comeback from slumping revenues, key device leaders such as St. Jude Medical and Medtronic have plenty of room to run for investors.

Feb 6, 2014 at 6:30PM

It's been an up-and-down year for the health care sector as the patent cliff has slammed big pharma's top names with declining sales, particularly among former top sellers in the industry. The medical device industry has been no stranger to tough times since the recession lifted, as tight competition and slimmer hospital budgets have put pressure on major device companies.

However, in the wake of Boston Scientific's (NYSE:BSX) recent earnings report coming on the heels of last year's stock surge for several leading med tech firms, is the medical device industry the biggest player in health care? Let's take a look at Boston Scientific's recent earnings report and dive into what's ahead for this rebounding sector.

Is the CRM slump finally over?
For cardiac device makers like Boston Scientific, the cardiac rhythm management, or CRM, industry has been the bane to revenue growth as of late, as products such as pacemakers have lost traction across developed markets in the U.S. and Europe. However, the company has made a push in this area recently, and in the fourth quarter, Boston Scientific posted a 2% gain in CRM revenue. It's an encouraging sign, especially after the company showed signs of life in the CRM niche in its third quarter, and although Boston Scientific's CRM revenue fell 1% for the full year, the industry's looking up in the future as device firms embrace innovation to counter competition and stricter health care budgets.

Boston Scientific is not the only firm in the CRM industry that's pushing back against the recent downturn in revenue. St. Jude Medical (NYSE:STJ) also posted a gain in this industry in the fourth quarter, growing its own total CRM sales by 3%. St. Jude and Boston Scientific both rely heavily on this industry for their total sales -- it's Boston's second largest by revenue and St. Jude's largest -- so a turnaround in the long term here is key.

While both companies have continued to struggle to grow their interventional cardiology departments -- Boston saw revenue in its interventional cardiology unit drop 8% for the quarter, the leading factor behind its overall revenue fall -- investors need to keep a close eye on whether or not these two firms and other leaders in the cardiac device market can maintain the optimistic CRM results. If so, the trend will complement their recent growth initiatives, such as a new push into emerging markets, perfectly to continue the big stock run-up that industry observers watched last year.

Growth areas to watch
Boston Scientific has slowly pushed into more innovative technologies that haven't yet replaced interventional cardiology and CRM on its sales pecking order, but they're performing strongly, nonetheless. The company's neuromodulation business has been a strong gainer over the recent past, and it performed up to expectations again with a 32% revenue gain in the fourth quarter.

While the business's growth partly can be attributed to its small size, Boston Scientific investors have reason to put their faith behind neurotech devices. Stryker's (NYSE:SYK) neurotechnology business, more than twice the size of Boston's in terms of revenue, posted a 7% gain in the fourth quarter en route to strong full-year sales. It has become an integral part of Stryker's growth, and it is a division for Boston investors to keep a close eye on in the coming year. Rival Medtronic's (NYSE:MDT) own neuromodulation division, one of the largest in the medical device industry, has also done well, posting a 6% revenue gain in its most recent quarter. Medtronic will announce its quarterly results later this month, so keep an eye on it to see if the company's neurotech business can keep the good times rolling.

Additionally, Boston Scientific has found significant traction in the overseas market. The company's emerging market's sales in the fourth quarter picked up by 14% year over year. Such revenue now makes up 9% of the company's overall sales, and emerging market growth will be big for Boston as it tries to reach its 2014 first quarter guidance of between 2% and 5% revenue growth.

Device leaders launching a comeback
Boston Scientific investors certainly haven't been disappointed by this stock's astronomical surge over the past year, but the company's fourth-quarter results show that its jump is no mirage. If Boston Scientific and other leading cardiac device makers can keep the CRM rebound going while growing promising businesses such as neurotechnology along with atrial fibrillation and others, medical device investors won't be disappointed with this industry's results.

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Dan Carroll has no position in any stocks mentioned. The Motley Fool owns shares of Medtronic. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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