Boston Scientific (BSX +1.25%) develops and manufactures an extensive portfolio of medical devices for both patients and doctors. It sells over 13,000 products across 120 countries treating over 30 million people per year, with an emphasis on less invasive technologies. Boston Scientific generates over $10 billion in annual revenue that is derived 55% within the United States and 45% from international markets. Its key products categories are focused on the following broad medical segments: cardiovascular (i.e. stents and pacemakers), endoscopy (i.e. digestive treatments), urological (i.e. prostate and kidney diseases), neuromodulation (i.e. chronic pain management), and peripherals (i.e. vein and artery devices).
The pandemic has been tough on many medical device makers. Stay-at-home orders and social distancing have meant fewer in-person office visits and delayed procedures. But once the public health crisis subsides, I think that Boston Scientific is poised to explode -- making this a great time to consider initiating a position.
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Worrisome issues are receding -- creating an investment opportunity
COVID-19 restrictions on voluntary medical procedures was a significant setback for Boston Scientific in 2020. Organic revenues dropped 11% versus 2019. But with the advent of a worldwide vaccine program, the company is confident in its ability to return to the high single digit revenue growth produced in prior years. Earnings per share (EPS) are targeted to grow in the low to mid double digits annually after the impact of COVID-19. Off a 2019 base of $1.59 per share, a 10% increase would produce normalized earnings of $1.75 per share in 2021. That represents a 20 times price-to-earnings (P/E) ratio off its current stock price of $36 per share. That number is significantly less than the mid 20 times ratio of its key competitors such as Medtronic (MDT +0.62%), Baxter International (BAX +0.10%), Stryker (SYK +0.36%), and Thermo Fisher Scientific (TMO +0.17%), as well as below the S&P 500 market multiple. If Boston Scientific could maintain that 10% earnings growth rate into 2022 it would translate into approximately $1.90 per share in earnings. Achieving the low end 23 times P/E multiple comparable to its peer group translates into a $44 stock price, representing about a 20% gain from current levels.
A second receding factor is the lingering market overreaction to the Nov. 17 announcement that Boston Scientific decided to discontinue its Lotus aortic valve replacement product due to manufacturing challenges and implantation complexities. Despite Lotus only accounting for slightly over 1% of total company wide revenue, the market sliced almost 10% off its stock price. The stock is still down 5% from that date, versus the Health Care Select Sector SPDR Fund, an overall healthcare exchange traded fund, which has produced a positive 5% return over the same period. The company took pains to emphasize this was a one-off proactive decision rather than a sign of other problems within its product portfolio. The market is slowly growing comfortable with that view, but the stock still remains down over 16% from its 52-week high of $42 per share reached last September. Meanwhile, the overall stock market continues to hit record highs.
Aggressive steps to augment post-pandemic growth
Rather than being solely dependent on a post COVID-19 rebound in traditional sales and earnings, Boston Scientific is pursuing additional measures to build its long term shareholder value. Primary among them is dozens of new product launches targeted at its faster growing market segments. This is a result of an almost $1 billion investment in research and development programs over the past several years. The company also maintains an active venture capital portfolio that currently totals over $500 million in stakes spread across 40 embryonic companies. That investment provides ready access to promising treatments and devices that could potentially emerge from those start-up enterprises. Moreover, the company is strongly committed to enhancing its digital footprint to create operating efficiencies and reduced costs in product ordering, clinical trials and patient support.
Financially, Boston Scientific has a strong track record of accretive acquisitions to expand its product reach. The largest was its August 2019 acquisition of BTG plc for $4.2 billion. That deal bought them an entry into oncology therapeutics, along with a portfolio of products for vein disorders. The company has indicated that it remains open to further bolt-on transactions. Just today, Boston Scientific announced it would acquire a private heart monitoring company called Preventice Solutions for an upfront cash payment of $925 million, and up to an additional $300 million in potential milestones.
Lastly, they continue to exhibit strong cash generation ability, combined with reasonable debt leverage (debt to EBITDA is approaching 2.5x by the end of 2021) and $1.7 billion of existing cash on the balance sheet. This has allowed them to opportunistically repurchase their own stock to the tune of $530 million alone in Q4 2020. The company also just announced a renewed repurchase authorization program totaling up to $1 billion to be spent over the next two years.
The pandemic has definitely clouded the long-term outlook of the stock, but Boston Scientific has tactfully handled its down months and is hopeful for a turnaround. Taking together all of the above, I believe that Boston Scientific is an attractive long-term investment option among large caps in the competitive healthcare sector.
