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Stock of the Day (Archive)
Jul 07, 1998
Boston Scientific: Stent Maker Pumps Up
Medical device maker Boston Scientific (NYSE:BSX - news) jumped 4 points Monday as investors anticipate the launch of a
new coronary stent, called Nir. FDA approval is expected any day now. The company has also made a couple of significant
acquisitions in the past month. The stocks of many stent makers have come under pressure by short sellers in recent months,
but Monday's gain for Boston Scientific puts the stock right back at its all-time high.
Coronary stents are tiny mesh tubes made of stainless steel used by heart surgeons to prop open the weak inner walls of
diseased arteries. They are often used in conjunction with balloon angioplasty to prevent restinosis (the re-narrowing of artery
walls) after the clogged arteries are treated. Stents are one of the hottest new medical devices in years, and they carry hefty
profit margins. The aging population, longer life-spans and adoption of a Western lifestyle by many developing countries
promise a robust market for such products as far as the eye can see.
The fast-growing coronary stent market is highly competitive, though, populated with heavyweight competitors like Johnson &
Johnson (NYSE:JNJ - news) , Guidant (NYSE:GDT - news) , and this year's hot newcomer Arterial Vascular (Nasdaq:AVEI
- news) . This competition is expected to pressure margins, but since Boston Scientific is the one with the latest and greatest
product it should enjoy better pricing leverage.
It is also the case that BSX has a diverse lineup of vascular and non-vascular products beyond stents, including balloon
catheters, grafts and other products used in minimally-invasive surgery. Last month BSX bolstered its balloon catheter business
by purchasing the Schneider unit from Pfizer. Schneider brings with it about $350 million in sales and key patents on
rapid-exchange balloons. This acquisition combined with the anticipated launch of the Nir stent is expected to vault Boston
Scientific into the leading position for the minimally-invasive vascular products market.
The Nir is already approved for use in Europe. In addition to imminent approval in the U.S., a launch in Japan is expected later
this year. The new stent is expected to boost revenues to $2.2 billion this year and over $3 billion next, compared to $1.87
billion in 1997. The analyst consensus is for earnings of $1.91 per share this year and $2.49 next.
With the stock currently at $78, Boston Scientific is trading at 41 times '98 earnings estimates and 31 times '99 estimates. That
P/E is quite a premium to the expected growth rate of 24% over the next five years. To some extent this reflects the huge profit
margins in the stent business, not to mention the compelling long-term prospects for cardiovascular products. Several of its
peers are also trading at P/E-to-growth (PEG) ratios of 2 or more.
One issue where Boston Scientific doesn't match up so well is all the debt incurred to pay for acquisitions. The company is still
working out the details to finance the $2.1 billion price tag on Schneider. Nonetheless, Boston Scientific's spate of acquisitions
puts it in a leadership role for the angioplasty market and other minimally-invasive procedures, both in the near-term and
potentially down the road. Last week the company announced a deal to buy CardioGene Therapeutics, a private
development-stage biotech firm specializing in gene therapy for cardiovascular disease. CardioGene is developing or studying
gene-based treatments that offer the potential for such things as delivering genetic materials to specific tissue sites and growing
new blood vessels.
Of course, the promise of this research is rather distant for investors to count on. The immediate future rides on FDA approval
of the Nir stent, initial market demand for the new product, and the ability of Boston Scientific to meet that demand. The
company has been running production full-bore to limit the potential for inventory shortages, so timely FDA approval and a
strong initial reception are critical.
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