Optimism about Synergy stent launch pushes Boston Sci stock up 9%, despite quarterly loss

Boston Scientific's Synergy stent--Courtesy of Boston Scientific

Boston Scientific ($BSX) said during its Q3 earnings call that it is going to charge a premium for its Synergy drug-eluting stent in the U.S., as it seeks to capitalize on becoming the first company to earn FDA approval for a (partially) bioresorable stent.

The Synergy's polymer coating starts to get absorbed by the body following the completion of the elution of the drug everolimus, which takes three months, but its platinum chromium body and stent struts do not dissolve away from within the coronary artery.

Boston Scientific CEO Michael Mahoney talked about the U.S. product launch extensively, saying, "From a pricing point of view, clearly, many hospitals would desire no price premium. We don't believe that's warranted, based on the acute performance of the stent and also the experience that we've seen in Europe, and we also have a terrific alternative for hospitals with our Promus Premier. So, it's our job to prove the unique benefits of the platform that justify the premium. We've done that in Europe, and that will be our plans as well in the U.S."

He said the device represents more 30% of the company's drug-eluting stent revenue in Europe, and more than half in its top ten markets. Mahoney expects similarly strong results in the U.S., but noted that the devices has "a slower ramp than traditional DES launches, as there's a contracting element to it and it's a premium product."

In addition, Boston Scientific is excited about a post-approval "short DAPT" study, because many patients spontaneously discontinue dual antiplatelet drug therapy, to the concern of the FDA and medical community, said chief medical officer Dr. Keith Dawkins.

Optimism about the Synergy stent helped push Boston Scientific's stock price up 9.3% since the earnings announcement, despite word of a $198 million quarterly loss, compared with a profit of $43 million a year earlier. The company has lost $97 million so far in 2015. Quarterly sales were $1.88 billion, up 2% as reported and 9% when excluding divestitures and exchange rate fluctuations.

The quarterly loss was driven by $457 million in litigation-related charges as a result of an increased transvaginal surgical mesh product liability reserve. "Although the pace of newly filed claims has slowed overtime, our known claim count is now in excess of 30,000 and we now have reached conditional settlement agreements with certain plaintiffs' counsel throughout 2015 to resolve over 6,000 cases and claims. Our total legal reserve, of which mesh is included, was $1.559 billion as of September 30, 2015, and we believe it reflects our best estimate of what is probable and estimable," said Chief Financial Officer Daniel Brennan.

Also of concern to Wall Street is declining growth in the company's cardiac rhythm management franchise of implantable defibrillators and pacemakers; quarterly revenues fell $29 million year-over-year to $451 million. The weakness was particularly apparent in the U.S., while the company said its European unit delivered low to mid-single digit growth.

"The company's outlook for CRM remains tepid, as a poor replacement cycle and competitive launches (mostly from MDT) will hurt into 2016," wrote Jefferies equity analyst Raj Denhoy.

But the main story from the solid earnings call (liability issues aside) is enhanced faith in Boston Scientific's management on Wall Street. Overall, "Boston posted an in-line 3Q in terms of revenues, but the progress on margins was tangible," Denhoy wrote.

"Given the company's recent consistency in delivering EPS (earnings per share) in-line or better than expectations--now 12 consecutive quarters--and an upcoming slew of new product launches across its businesses, we are increasingly confident that BSX can continue to deliver and execute on if not exceed its long-term goals." Leerink's Danielle Antalffy wrote.

Indeed, most Boston Scientific devices had a strong quarter. Structural heart revenue (consisting of the Watchman to prevent stroke and Lotus TAVR) is expected to deliver at the high end of the $75 million to $100 million annual revenue goal the Mahoney said. The company is anticipating publication of a study that will demonstrate that the Watchman can save the healthcare system money over the long-run.

Growth in neuromodulation was also strong at 11% on a constant currency basis, led by the Precision Spectra spinal cord simulation device. "Another big part of our strategy in Neuromod's is expanding beyond pain. We've been investing for a number of years in our deep brain stimulation platform, and I said in my prepared comments, we have a primary sell DBS launch called Vercise that we're really excited about," Mahoney said.

The device recently earned a CE mark to treat Parkinson's disease (PD), primary and secondary dystonia, and essential tremor. The company is enrolling patients in its U.S. clinical trial.

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