FARAPULSE And Critical Acquisitions Set To Propel Revenue And Margins

Key Takeaways

• Accelerated adoption of FARAPULSE PFA system and strategic acquisitions bolster Boston Scientific's revenue growth and enhance its product portfolio and market reach.
  
• Expanding international revenues through launches in Asia-Pacific and organic growth projections show strong momentum, underpinned by innovative offerings in Endoscopy and Neuromodulation units.
  
• Boston Scientific faces challenges with FARAPULSE growth sustainability, diversification risks, and potential profitability and integration issues from acquisitions.

Catalysts

Develops, manufactures, and markets medical devices for use in various interventional medical specialties worldwide.

• A rapid and sustained adoption of the transformative FARAPULSE PFA system, driven by commercial execution, robust supply, and positive real-world outcomes, as well as increased AF ablation volumes supported by the efficiency of the FARAPULSE workflow, expected to ramp up revenue and strengthen the EP business unit. This adoption is bolstered by evidence of over 20,000 patients treated with FARAPULSE, demonstrating the safety, efficacy, and reproducibility, which could lead to a higher future uptake, positively impacting revenue growth.
  
• The planned launch of the larger size ACURATE Prime valve in late '24 and the expectations for the launch of FARAPULSE in Japan in the second half of the year, along with the recent approval in China for FARAPULSE and AGENT drug-coated balloon, are expected to contribute to operational sales growth especially in the Asia-Pacific region, thereby driving higher international revenues.
  
• The acquisitions including the recent investment in Acotec Scientific Holdings Limited and the acquisitions of Apollo Endosurgery and Relievant Medsystems are expected to bolster Boston Scientific’s portfolio and drive organic growth. The expected closing of acquisitions such as Axonics and Silk Road Medical in the second half of 2024, subject to customary closing conditions, could fuel revenue growth through expanded product lines and market reach.
  
• The innovative portfolio in the Endoscopy and Neuromodulation units, highlighted by above-market growth in biliary franchise and the pain franchise, along with strong double-digit operational growth in Peripheral Intervention sales, showcases potential for revenue acceleration in these segments, increasing overall company margins through innovative, high-demand products.
  
• Guiding to organic growth of 13% to 15% for the third quarter and raising full year guidance from 10%-12% to 13%-14% reflects strong momentum across Boston Scientific’s broad portfolio, especially in the EP business unit. The planned steady cadence of clinical evidence generation to maintain PFA leadership, including the launch of new products like the NAVIGATE-PF study of the FARAWAVE software module and the FARAWAVE Nav-enabled catheter, and the superiority data from the ADVENT trial signifies potential for sustained earnings growth.

Assumptions

• Analysts are assuming Boston Scientific's revenue will grow by 10.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.0% today to 18.0% in 3 years time.
• Analysts expect earnings to reach $3.7 billion (and earnings per share of $2.51) by about August 2027, up from $1.8 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $3.9 billion in earnings, and the most bearish expecting $2.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 42.1x on those 2027 earnings, down from 58.8x today. This future PE is greater than the current PE for the US Medical Equipment industry at 34.9x.
• Analysts expect the number of shares outstanding to grow by 0.57% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.46%, as per the Simply Wall St company report.

Risks

• Concerns over the sustainability of FARAPULSE’s rapid growth as Boston Scientific scales its operations, potentially impacting revenue growth and operating margins if growth normalizes or competition intensifies.
  
• The high investment in capital equipment for FARAPULSE, which may initially dilute gross margins until manufacturing scale and absorption improve, potentially affecting short-term profitability.
  
• Possible reliance on a few high-growth products like FARAPULSE and WATCHMAN, which could expose Boston Scientific to market or technological shifts that impact revenue diversification.
  
• Regulatory and reimbursement risks, particularly with the awaited approval for concomitant use of FARAPULSE and WATCHMAN, which may influence future revenue prospects and earnings growth if decisions do not favor Boston Scientific.
  
• Execution risks related to integrating and realizing the projected benefits from recent acquisitions such as Silk Road Medical and Axonics, which could impact expected revenue synergies and net margins if integration challenges occur.

Valuation

• The analysts have a consensus price target of $87.1 for Boston Scientific based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $100.0, and the most bearish reporting a price target of just $78.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $20.7 billion, earnings will come to $3.7 billion, and it would be trading on a PE ratio of 42.1x, assuming you use a discount rate of 6.5%.
  
• Given the current share price of $72.96, the analyst's price target of $87.1 is 16.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.