June 10, 2008 - Boston Scientific Corp. (BSX-NYSE) operates under the threat of minimal invasion. The company makes medical supplies used in minimally invasive surgical procedures. Its devices are used to diagnose and treat conditions in a variety of medical fields, including cardiology, gynecology, urology, endoscopy, and neuromodulation. Products include defibrillators, catheters, coronary and ureteral stents, pacemakers, biopsy forceps and needles, and urethral slings. Boston Scientific markets in some 45 countries worldwide, primarily through its own direct sales staff.

Earnings have been on a downhill trail since 2005 when reported eps (earnings per share) were $1.82. Then they came in at 84 cents a share in 2006. Last year, down again, to 38 cents a share. This year analysts think they'll be 55 cents and next year 66 cents. If delivered, that's definitely a reversal of fortune.

What's turning this ship around is cost cutting and new products. While sales have increased a little (up 3.2% in the March ended quarter compared to last year's same quarter), it's the trimming of operations that accounted for much of the 70% improvement in this most recent quarter's profits (17 cents vs. 10 cents). Management gave guidelines last October about the new efficiencies it was working on with an objective of saving $500 million annually. Also helping the bottom line is lower interest payments. With its strong cash flow from operations and asset sales, the company is buying back debt, as much as $621 million in the last quarter. That brings the total debt reduction to $1.3 billion since the end of 2006.

There's increased competition for BSX in the stent field. In the last year, its stent sales fell to $428 million, down 8.5%, mostly hurt by Medtronics recent new offering as well as price erosion. (BSX recently lost a patent dispute with Medtronic on its heart stents used in artery-clearing surgery. That will cost BSX $250 million if it loses the appeal, set for July.) Abbott Labs is about to launch its new stent, Xience, which will only add more competition. It's not all bad news on this one, however. Once launched, Abbott will pay $200 million to Boston.

But BSX isn't resting on its old stents. Two new ones, Taxus Liberte and Promus, are coming out soon. And two new ICD's (implantable cardiovascular defibrillators) were recently approved by the FDA. The approval came about 6 months sooner than expected. This is the first entirely new ICD platform since Boston Scientific bought Guidant in April of 2006.

Buying other companies is definitely part of BSX's growth strategy. It bought SciMed Life Systems and Meadox Medical in 1995. In 1997, it picked up Target Therapeutics. Then in 1998, it was Schneider WW, Guidant in 2006. Last month it bought a small company Cryocor for $17.6 million in cash. Look for more purchases as the company has good cash flow to fund them.

The numbers: Current assets are about 1.5 times current liabilities with $1.74 billion in cash. Debt is 32% of the balance sheet. Net profit margin is 10%. There is no dividend. Market cap is $20.3 billion on 1.496 million shares outstanding. Return on Equity was 3.8% last year with analysts looking for 5% this year and 6% next year.

Taken as a whole story, there's some good and some bad here. BSX has had patent problems, as almost all medical device companies do. They've lost some and won some court battles. They have some tough stent competition with more coming into the market. To counter that, they've got new stent products as well as ICD's. While not a cheap stock (using the forward earnings of 55 cents, the P/E is 24.6), it has traded as high as 39 times earnings in 2007 and 45 times earnings in 2003. There is no norm for this stock as the P/E has fluctuated greatly over the last 10 years.

If the new ICD's get a good reception in the market and the new stents can at least hold BSX's market share, the earnings should continue to grow. But there will be more lawsuits. And if those new devices don't grab market share as expected, then the small uptick recently in the stock will be only that.

- Company Web site: www.bsci.com

- Ted Allrich