Boston Scientific's Road To Recovery Longer Than Expected

Boston Scientific Corp. (BSX) indicated Thursday that the road to improvement remains long.

The company's soft financial forecasts and fresh restructuring plans shows it's going to take time and patience from investors to overcome challenges that include slow growth, sliding product prices and competitive pressure in its top heart-device markets.

When Chief Executive Ray Elliott joined last year, investors and analysts hoped his decade running a tight ship at orthopedic device-maker Zimmer Holdings Inc. (ZMH) boded well for improved financial performance. It may, but the process isn't happening as fast as hoped.

"Boston Scientific is a big ship, and it won't be turned in a quarter or two. But it will turn and when it does, everyone will notice," Elliott said Thursday during a conference call.

In the meantime, he made clear 2010 is a rebuilding year and part of a two-year corporate overhaul that includes laying off 1,000 to 1,300 workers, reorganizing businesses and resetting the management team.

Signs of a long road ahead weighed on the Natick, Mass., company's stock price Thursday. It recently fell 84 cents, or 10%, to $7.45 and touched the lowest level since March.

"While we had expected a quicker turnaround, it is now apparent that mending the company will require more time and resources," said Deutsche Bank analyst Tao Levy, who downgraded Boston Scientific to hold from buy.

The company released a bevy of news late Wednesday that kept executives and analysts busy on Thursday's conference call for about two-and-a-half hours. The news included a fourth-quarter loss pegged to huge payments to Johnson & Johnson (JNJ) to resolve patent fights, restructuring plans and 2010 guidance.

The company's earnings forecasts can be hard to measure due to unusual items and adjustments. But its sales-guidance midpoint missed Wall Street's forecast, and analysts said earnings fell short as well. Lazard Capital Markets analyst Sean Lavin called guidance "extremely weak."

Boston Scientific has been under pressure for years after spending $28.4 billion on Guidant Corp. in 2006, only to see that company's market for heart-rhythm devices grow more slowly than expected.

Boston Scientific now gets roughly half its sales from heart-rhythm devices and tiny stents that prop open heart arteries. The stent market is at best moving sideways, analyst Phil Nalbone of Wedbush Morgan Securities said, while Boston Scientific continues to estimate the implantable defibrillator market will grow about 4% globally and 2% in the U.S. per year.

To offset that sluggishness, the company needs to ramp up other parts of the business, which is part of the restructuring focus. The company created a Urology and Women's Health division, for example, that will "significantly increase investment" to pursue solutions for unmet needs.

While investors wait for results, 2010 will entail some challenges for top businesses. On the heart-rhythm side, the company disclosed it fired some sales staffers and managers for disciplinary reasons, and that resulting defections to rival St. Jude Medical Inc. (STJ) could contribute to $100 million in lost sales this year.

The two companies traded barbs over this point Thursday, putting on display the competitive nature of an $11 billion, slow-growing global market with three big participants, including Medtronic Inc. (MDT). This competition is also having an impact on product prices.

Declining prices have been a pronounced issue in the also tightly competitive market for drug-coated stents, which use medication to fight off scar tissue that could re-close heart arteries.

It's a complex business where Boston Scientific sells both home-grown stents plus devices made by Abbott Laboratories (ABT). When it sells more Abbott-made devices at the expense of home-grown stents, profitability suffers. This effect is expected to pressure gross margins until the company launches a home-grown stent in the U.S. and Japan in 2012 to replace the Abbott-made device.

Hurt by a recent study that benefited Abbott stents at the expense of Boston Scientific's Taxus devices, the shift to an unfavorable sales mix has happened "a lot more rapidly and a lot more profoundly than people thought," Wedbush's Nalbone said. Boston Scientific has attacked that study's reliability because it was based in one health-care center.

During all this, the company remains in flux.

"You have to wait another year to see what this company might be capable of in terms of growth and profitability," Nalbone said.

-By Jon Kamp, Dow Jones Newswires; 617-654-6728; [e-mail]