Boston Scientific Turnaround Complete, CEO Mahoney Says

Boston Scientific Corp., the second-biggest maker of heart-rhythm devices, is on pace to increase annual sales for the first time since 2009, marking the end of a downturn that saw net losses in seven of the past eight years.

While the market for products such as defibrillators and drug-coated stents used to prop open clogged heart arteries are flat or shrinking, Boston Scientific’s sales rose 5.5 percent and 9.1 percent, respectively, the company reported. Seven of its eight product categories topped the market growth rate in the quarter, Chief Executive Officer Michael Mahoney said.

“We definitely have turned the company’s performance around, and we’ve done it faster and stronger then we talked about,” Mahoney said yesterday in an interview. “One thing that’s unique from an investor standpoint is we have the ability to increase our operating income substantially in the years ahead.”

Cost-cutting initiatives helped boost operating margins to 20.5 percent in the quarter, with the goal of reaching 25 percent, Mahoney said. Better profit margins combined with increased sales will lead to significant earnings per share growth, he said.

The company raised its annual earnings forecast yesterday to 81 cents per share to 83 cents per share excluding one-time items, from 79 cents to 83 cents. Net income was $43 million, or 3 cents a share, after a loss of $5 million a year earlier, Boston Scientific said in a statement. Revenue increased to $1.85 billion from $1.74 billion.

‘All Cylinders’

“The company looks to be firing on all cylinders with strength from new product launches driving share gains across its drug-eluting stent and cardiac rhythm management businesses,” said Derrick Sung, an analyst at Sanford C. Bernstein in New York. “We see Boston Scientific as uniquely positioned as one of the few large cap med-tech companies to have a significant organic margin expansion opportunity.”

The company is facing legal risks that cloud its future, said Raj Denhoy, an analyst at Jefferies LLC. The biggest issue is a lawsuit with Johnson & Johnson over Boston Scientific’s acquisition of Guidant Corp. J&J claims Guidant improperly shared information with outside companies during negotiations before the $25 billion purchase was announced in 2005.

The trial is set to begin on Nov. 20, and Boston Scientific may be liable for $5 billion or more, Denhoy said.

Mahoney said Boston Scientific is focused on its hospital customers and doesn’t need any major acquisitions to remain competitive. The company strives to be the preferred provider in specific categories, such as cardiovascular products, rather than providing everything across the board, he said.

Different Approach

The approach runs contrary to the company’s biggest competitors, including Medtronic Inc. and J&J. The rivals have conducted major acquisitions to add to their offerings and “bundle” products, giving hospitals greater discounts in exchange for additional sales volume. Mahoney said he hasn’t seen evidence that hospitals want bundled products.

“Big and broad doesn’t translate into execution and fast,” Mahoney said. “We want to be nimble and the leader in certain product categories. It’s the strategy we’re playing and it’s working.”

Boston Scientific, which just moved its headquarters to Marlborough, Massachusetts, rose 2.4 percent to $12.32 at the close yesterday in New York. The shares have risen less than 1 percent in the past year.

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