Good News at Boston Scientific: What's Next

Flashy moves aren't always the best moves in med-tech. Medtronic (NYSE: MDT  ) shelled out big bucks for Aterial Vascular Engineering, CoreValve, and Ardian, and the first two led to significant patent infringement issues and the third may never lead to a marketable product (renal denervation). I don't want to pick on Medtronic alone, as Hologic, Johnson & Johnson, and Boston Scientific (NYSE: BSX  ) have all made some big deals that went south and squandered shareholder capital.

With that in mind, I like the recent updates from Boston Scientific. Between two clinical trial updates and a small acquisition, Boston Scientific is laying the groundwork for what should be some good incremental revenue and profit growth in the coming years. I don't believe these items are enough to vault the company's stock to the level of great buy, but they are positive developments nevertheless.

Buying peripheral assets from Bayer
Bayer AG  (NASDAQOTH: BAYRY  ) has been one of the last major drug companies to completely move away from the drug-device combo business model, and the company announced on May 15 that it was selling its Interventional Business to Boston Scientific for $415 million. Bayer AG assembled these assets at a total cost of $485 million in 2008 and 2011, but has likely taken them as far as they can.

Boston Scientific is paying about 3.5x sales for assets that should be highly complementary to its existing peripheral intervention business. As the two businesses are both located in the Minneapolis area, operational synergies should be significant and easy to obtain.

Bayer's AngioJet Thrombectomy system (and Fetch aspiration catheter) holds about 40% share of the $200 million peripheral thrombectomy market, a segment growing at a mid-single digit rate. The JetStream Arthrectomy system is the #4 player in the peripheral arthrectomy market, a $350 million market growing at a mid-double digit rate.

At $20 million to $30 million in sales, the JetStream is well behind the market presence of Covidien's ev3/Foxhollow businesses, Cardiovascular Systems, and Spectranetics. The JetStream device has shown good clinical efficacy and the ability to work on soft thrombus and harder calcified lesions, but it has a capital equipment component (an aspiration system) that makes the system a little less appealing.

Covidien had already been losing share in arthrectomy and now Boston Scientific looms larger as a diversified solutions provider with stents, catheters, balloons, and mechanical arthrectomy for the peripheral vasculature. So too for Cardiovascular Systems, where the possibility of the company being bought by a peripheral intervention player lacking mechanical arthrectomy (like Bard or Boston Scientific) had been part of the bull thesis.

Synergy looking solid
As part of the ongoing EuroPCR meeting, Boston Scientific saw additional data presented on its new Synergy bioabsorable stent. In the EVOLVE study the Synergy has continued to demonstrate a very low target lesion revascularization rate of 1.1% (meaning that the area of blockage that needed to be treated stays clear in almost 99% of patients). There have also been no incidents of stent thrombosis at three years (a meaningful risk factor, where the stent becomes clogged).

The EVOLVE study is not the critical study for Boston Scientific right now – that would be the EVOLVE II pivotal U.S. study. It's also worth noting that TLR and stent thrombosis may not be the metrics that move the market. Stents are often used nowadays to relieve pain (there has never been all that much mortality benefit), and a study of Abbott's Absorb stent showed a significant reduction in angina at one-year follow-up versus the Xience stent (16% versus 28%). Getting Synergy on the market in the U.S. (likely a 2015/2016 event) is key for Boston Scientific, as the company plays leapfrog with Abbott and Medtronic in the stent market.

Lotus looks good
Boston Scientific also had an update from the ex-US REPRISE II study of its Lotus transcatheter heart valve. This was a six-month follow-up and patients getting the Lotus showed low leakage rates of 1.1%, with no severe cases. By comparison, Medtronic and Edwards Lifesciences have seen much higher leakage rates (4% at one year for Medtronic, and 17% for Edwards). All-cause mortality was around 8% and the disabling stroke rate was 3.4%-between the rates seen in the Medtronic valve at one-month and one-year follow-up (2.4% and 4.1%) and in the Edwards valve (5% and 10.6%).

These results do support the general idea that the ability to reposition and retrieve the Lotus valve is a meaningful advantage and that the valve design leads to lower leakage rates. That does argue that Lotus can be a competitive product despite a multiyear lead for Edwards and Medtronic, but it is worth remembering that the Lotus will actually be competing against newer, better valves from these companies and there may yet be patent issues that could trip up Boston Scientific.

The bottom line
As said above, these news items don't fundamentally change the Boston Scientific story. If you liked the stock before, these just reaffirm that bullish thesis and if you didn't like the stock they're not enough to shift expected revenue, profits, or cash flow enough to lead to a significantly higher valuation. They're all positive developments for the company, though, and Boston Scientific can certainly use all the positive news it can get.

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Stephen D.

I'm an ex-Wall Street sell-side and buy-side analyst who has spent most of the last 10 years writing on a wide range of industries and investment ideas.

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