Boston Scientific Wants to be a Rock Star. But First, It Needs Some Stars.

2/3/11Follow @xconomy

Boston Scientific (NYSE:BSX) has been talking the talk of late. But its walk the past few years can be best described as a limp.

There’s no mistaking the company’s new-found bravado as CEO Ray Elliott, who succeeded Jim Tobin in 2009, attempts to infuse the company with some of the energy that made his previous tenure at Zimmer Holdings so effective.

During Boston Scientific’s investor meeting in November, its first in years, the Natick, MA-based company played Van Halen’s “Right Now” and Jesus Jones’ “Right Here, Right Now” over the loudspeakers.

At JP Morgan’s annual healthcare conference in January, Boston Scientific titled its presentation “Our Pipeline is no BS(X).”

Boston Scientific has made aggressive predictions about future profit growth and acquired several companies over the past few months, including Sadra Medical, Atritech, and Asthmatx.

But judging from the company’s fiscal 2010 earnings, released late Monday afternoon, Boston Scientific has a long way to go before it proves to anyone it’s a rock star. Annual sales fell five percent to $7.8 billion from $8.2 billion in 2009. The company’s core cardiac rhythm management and cardiovascular businesses dropped 10 and eight percent respectively.

The good news is that Boston Scientific posted top line growth in endoscopy, women’s health, and neuromodulation. But those businesses combined account for not quite a quarter of the company’s annual revenue.

But that’s the past. In Boston Scientific’s eyes, the future is extraordinarily bright. At the investor meeting, the company told analysts it can generate 11 to 12 percent compound annual earnings growth over the next four years, through a combination of cost cuts, strategic acquisitions, and modest top line growth of two to four percent a year.

Analysts were, shall we say, a little skeptical.

“We question how Boston can acquire growth assets and invest to maintain leadership positions with a depressed balance sheet vs. peers and a stated objective to maintain absolute levels of [research and development] spend,” David Lewis, an analyst with Morgan Stanley, wrote in a research report. “Competition for attractive growth assets is likely to be intense, and competitors continue to invest heavily in internal development programs.”

Boston Scientific’s pipeline of products also failed to impress.

“BSX talked up the opportunity in several cardiovascular, neuromodulation, and general surgery markets, but we believe it is sorely lacking in near-term products that can move the needle vs. the competition,” Matthew Dodds of Citigroup wrote. “BSX has made some effort to build out its pipeline with the recent deals for Asthmatx and Sadra, but both deals will take a while to have an impact and the internal programs had little to highlight in the way of clinical [trials].”

Nevertheless, Boston Scientific has inched forward over the past two months, trading around $7.14, about 11 percent higher than early November. But that bump seems to reflect more of a belief that Boston Scientific stock had finally reached a bottom and has nowhere to go but up.

“Among the most disappointing names of not just the past five years but the past decade, BSX hasn’t been able to get anything right in the new millennium,” the blog Whopper Investments said. “It seems twice a year a value investor will come in, announce the company is undervalued and make an investment, and then quietly exit his investment at a loss in a year or two.”

“However, Ray Elliott, the company’s CEO, has been on the job less than two years and made huge gains in his previous stint at Zimmer,” the blog said. “The company could finally be on the verge of a turnaround. Shares seem reasonably priced.”

Another sign of Boston Scientific’s potential upside: famed hedge fund investor John Paulson of Paulson & Co. continues to hold BSX shares despite absorbing big losses in recent years.

I’m not a famed hedge fund investor, but to me the situation seems relative simple. Boston Scientific needs to grow top line sales again, and not just from acquisitions.

The company needs to prove to Wall Street it can accomplish the most basic goal of any business: that it can make and sell innovative products that people actually buy.

Otherwise, investors will see the wannabe rock star as nothing more than a karaoke barfly.


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