Boston Scientific Beats Street Expectations, Buys Back Shares, and Eyes China Expansion

7/28/11Follow @arleneweintraub

Today Natick, MA-based Boston Scientific (NYSE: BSX) announced second-quarter sales of $1.975 billion and earnings excluding special items of $0.17 a share, which beat analyst expectations by nearly a dime. Sales of its neuromodulation devices were up 16 percent, and the company reported sales increases in many of its product lines. It also said the recent introduction of its new drug-eluting stent, Ion, has gone well. To cap it all off, Boston Scientific announced its intention to repurchase $1 billion of its common shares—a classic sign of optimism, and a common tactic companies use to boost their stock price.

But much of the focus on the earnings call with analysts was on news the company announced yesterday: It’s greatly expanding its presence in China. Boston Scientific said it would invest $150 million in China over the next five years, and it expects to expand its employee base there from 200 to 1,200 as it builds out a fully staffed manufacturing presence. The company also intends to invest in R&D, with the goal of developing innovative devices designed for the China healthcare system.

Boston Scientific’s outgoing CEO Ray Elliott said during the call that the China expansion would help bring the company’s products into a market that’s still largely untapped when it comes to less-invasive cardiac devices such as stents. What’s more, Elliott said, “Longer term, the products we develop in China may ultimately reach other markets.”

During the question-and-answer session with analysts, Morgan Stanley analyst David Lewis asked what the return on investment might be with the China program, and how the initiative differed from previous emerging-market strategies the company had initiated. “It’s additive,” responded Boston Scientific chief financial officer Jeffrey Capello. “We enjoy over 20 percent growth in India and China, and we see it as a situation in which we’re just getting started.” He noted that the buildout would take four to five years, but that investors could start seeing an upside from the initiative as early as next year.

In the shorter term, Boston Scientific expects to capitalize on a surprise announcement from stent rival Johnson & Johnson. On June 16, J&J (NYSE: JNJ) announced it would exit the stent business that it’s credited for creating, and it will stop marketing its flagship drug-coated Cypher stent by the end of the year in the face of declining sales. “It’s a rare opportunity, and frankly a rare gift,” Elliott said during today’s analyst call. Some analysts predict Boston Scientific will grab 30 percent of the market for Cypher, Elliott noted. The J&J product is expected to bring in about $400 million in sales this year. Cypher was once a $2.6-billion-a-year blockbuster, but it faltered as competition and safety concerns mounted. Elliott wouldn’t make any specific market share predictions, except to say “We believe we can capture the lion’s share of that business.”

Boston Scientific boosted its full-year sales and earnings forecast. It now expects sales of at least $7.675 billion and earnings per share, excluding certain expenses, of at least 58 cents. (In 2010, the company earned 69 cents a share, excluding certain costs, on sales of $7.8 billion.)

Investors seemed pleasantly surprised by the company’s performance in what has otherwise been a difficult year. On May 11, the company’s shares fell 10 percent on news that Elliott would resign at year end, just two years after he joined the company to engineer a turnaround. Boston Scientific has yet to name a replacement.

RBC Capital Markets analyst Glenn Novarro asked a question that was likely on everyone’s minds today: Is Elliott leaving because there’s something amiss with the turnaround? Or is it going so well that he felt confident others could carry on without him? “There is no shoe to drop,” Elliott responded. “I’m doing what I came here to do.” He expressed optimism that the company could continue to execute its turnaround plan after his departure. “It’s not my plan—it’s their plan.”

During his prepared comments during the call, Elliott focused largely on new contracts and pipeline advances the company chalked up during the quarter. At one point, he boldly stated, “Innovation is alive and well at Boston Scientific.”

Investors may take a while to come around to that idea, but they’re clearly hoping this quarter signals the start of the turnabout in Boston Scientific’s fortunes: Shares were up 10 percent in morning trading to $7.39.

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