Boston Scientific Blowup (News) August 6, 1999

Boston Scientific Blowup

August 6, 1999

Medical devices maker Boston Scientific (NYSE: BSX) lost ground today after the company said it is voluntarily recalling its Rotablator RotaLink Advancer and RotaLink Plus rotational atherectomy systems, which accounted for a total of $60 million in sales through the first six months of the year. As a consequence, the company told analysts during a conference call that its second-half earnings will come in less than expected, leading to full-year earnings in the $1.01 per share neighborhood. That tidbit of news didn't go over real well on the Street, which had been expecting earnings of $1.11 per share.

So, just what in the heck is a rotational atherectomy system? Like many of Boston Scientific's products, the Rotablator is a medical device used by interventional cardiologists to open up clogged arteries. The product works by using a spinning catheter to clear plaque from an artery without damaging the vessel wall, much like a plumber using a electric rooter to clear a clogged sink or bathtub pipe.

The problem with the system being recalled is with the advancer, which is the air turbine device responsible for spinning the catheter. The brake on the advancer is not properly securing the guide wire used to guide the catheter through the artery, creating a safety issue. Seeing as most patients do not want to have the plaque in their arteries replaced with a plastic catheter, making sure the device is connected properly is rather important.

For shareholders, the recall sparks some psychological worries about the company's products, especially considering Boston Scientific's Nir on Ranger with Sox stent was called back last October due to a leakage in the balloon used to deploy the stent. The company refiled the proper paperwork with the FDA last week to get that product back on the market as soon as possible, but the recall ruined any chance that Boston Scientific had of capitalizing on the stent's popularity and gaining market share in the fast-paced and intensely competitive stent area.

Many observers are no doubt wondering if the same scenario is set to repeat itself with the recall of the Rotablator, which was evidently selling well with mid-teens percent growth estimated during the most recent quarter. Then again, the products in question only represented about 4% of the company's total first half sales of $1.43 billion. Extending estimated 15% sequential sales growth through Q3 and Q4 could mean that the recall will lop off $80 million or so from the previous second half sales estimate of $1.54 billion, or a bit more than 5% of total revenues.

Whether the sales growth slowdown and the uncertainties raised by the recall should translate into the nearly $2.4 billion reduction in the company's market capitalization witnessed this morning is a question investors need to answer. Judging from the company's line-up of cardiovascular products and the recent addition of former Biogen (Nasdaq: BGEN) executive James Tobin as the firm's new CEO, medically inclined investors may want to poke around at the company's internals before filing away the chart for Boston Scientific.

By Brian Graney (TMF Panic)

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