Boston Scientific Corporation



| Boston Scientific Corporation |(BOSTON SCIENTIFIC-NYSE) | $29.55* |

Note: This report contains substantially new information. Subsequent reports will have changes highlighted.

Reason for Report: 1Q18 Earnings Update

Previous Ed.: Feb 12, 2018; 4Q17 Earning Update

Brokers’ Recommendations: Positive: 78.3% (18 firms); Neutral: 21.7% (5); Negative: 0% (0) Prev. Ed.: 16; 5; 0

Brokers’ Target Price: $32.5 (↑$1.3 from the previous report, 21 firms) Brokers’ Avg. Expected Return: 9.8%

*Note: Though dated May 7, 2018, share price and broker material are as of May 4, 2018.

*Note: A Flash update on ‘1Q18 Earnings’ was done on Apr 30, 2018.

Executive Summary

Boston Scientific Corporation (BSX) is a worldwide developer, manufacturer and marketer of medical devices that are used in a broad range of interventional medical specialties. The company has adopted the organic as well as inorganic route for success.

Of the 23 firms currently covering the company, 18 (78.3%) assigned positive ratings while 5 (21.7%) rated it neutral and none (0%) issued a negative rating.

Positive or equivalent outlook (18/23 firms): For majority of the bullish firms, Boston Scientific’s 1Q18 revenues and adjusted earnings per share (EPS) surpassed individual as well as market expectations. The firms believe that the company’s underlying strength across all its businesses has been a key factor driving 1Q18 performance. The firms are upbeat about the company’s impressive performance despite tough comparisons. They believe that strength in Neuromodulation, Urology and Pelvic Health along with implantable cardioverter defibrillator portfolio majorly drove the top line in 1Q18. They are also encouraged by the continued rollout of relatively new products like MRI-safe high-power within CRM, consistently better-than-expected performance of WATCHMAN along with higher-than-estimated synergies from the Symetis acquisition. They believe these developments will be major contributors to the top and bottom-line performance in near term. These firms are also of the opinion that Boston Scientific is on track to achieve its long-term goals highlighted in the FY17 analyst meet.

Further, these firms expect new products to drive revenues and double-digit EPS growth over the next few years.

Neutral or equivalent outlook (5/23 firms): According to majority of the neutral firms, Boston Scientific’s 1Q18 revenues and EPS exceeded estimates and market expectations. These firms are concerned about intensifying ICD and stent market headwinds. Meanwhile, they are encouraged by Boston Scientific’s improving margins and overall segmental growth in 1Q18. In spite of a halt in the sale of LOTUS valve, the company’s cardiovascular segment performed well. However, these firms are concerned about the company not providing any update on the re-launch of LOTUS Edge in Europe and the United States. They also expect the ACURATE platform to take over and replace the LOTUS valves.

The firms with a neutral stance believe that pricing headwinds in Australia and Japan, impact of foreign exchange hedging activities on gross margin and rising research and development expenses, especially in the Structural Heart business, may put pressure on margins in FY18. Also, they remain on the sidelines about the conservative guidance for FY18 EPS and revenues from the Structural Heart business. They are of the opinion that the WATCHMAN and ACURATE devices have the potential to keep driving sales at Structural Heart.

May 7, 2018

Overview

Based in Natick, MA, Boston Scientific Corporation is a manufacturer of medical devices and products used in minimally invasive procedures. These include interventional cardiology, electrophysiology, gastroenterology, pulmonary medicine, interventional radiology, urology, oncology, and vascular surgery. Boston Scientific is the first company to offer physicians and their patients a choice between two distinct drug-eluting stent platforms. In 2012, Boston Scientific acquired Cameron Health, the developer of world's first and only commercially available subcutaneous implantable cardioverter defibrillator, the S-ICD System.

In 2013, Boston Scientific acquired Bard EP, the electrophysiology business of C.R. Bard. The deal, valued at $275 million, is a step forward to strengthen the company’s foothold in the $2.5 billion global electrophysiology market. Bard EP will provide an extensive line of solutions for cardiac catheter ablations and other EP tools for the detection and treatment of abnormal heart beats to Boston Scientific.

Bard EP will be integrated into Boston Scientific’s existing electrophysiology business under its Rhythm Management unit. Boston Scientific expects to enhance its product portfolio and accelerate revenue growth through the takeover.

In 2014, Boston Scientific purchased the Interventional business of Bayer AG. The acquisition enhances the ability of Boston Scientific to offer physicians and healthcare systems a more complete portfolio of solutions to treat challenging vascular conditions.

In 2015, Boston Scientific completed the buyout of male urology portfolio of the American Medical Systems (AMS) which included the men’s health and prostate health businesses, from Endo International plc. The company integrated the AMS male urology portfolio with previously named Urology and Women’s Health business, and the joint businesses together were renamed as Urology and Pelvic Health.

In 2016, Boston Scientific acquired EndoChoice Holdings, Inc. EndoChoice focuses on the development and commercialization of pathology services, infection control products and single-use devices for treating a variety of gastrointestinal (GI) conditions.

In 2017, Boston Scientific acquired Symetis SA, a privately-held Swiss structural heart company focused on minimally-invasive transcatheter aortic valve replacement (TAVR) devices along with Apama Medical Inc. Notably, Apama is a privately-held company developing the Apama Radiofrequency single-shot Balloon Catheter System for treating atrial fibrillation.

The firms identified the following factors while evaluating the investment merits of Boston Scientific Corporation.

|Key Positive Arguments |Key Negative Arguments |

|Boston Scientific is a leading player in the Cardiovascular and Rhythym |Boston Scientific failed to generate positive growth in its global pacemaker|

|Management market. The company recently gained FDA approval for the |sales, on back of a weak performance in the United States market. |

|conditional use of advanced Resonate family of ICD and CRT-D systems in MRI.|The company faces tough competition from players such as Abbott |

|Based on a strong cash balance, Boston Scientific has targeted suitable |Laboratories, Johnson & Johnson and Medtronic, among others. |

|acquisitions to diversify into areas with high growth potential. Moreover, |Firms fear that the company might be adversely affected if management fails |

|the company aims for debt reduction. |to execute on cost cutting initiatives or if any one of its key pipeline |

|A few firms believe that Boston Scientific’s strong pipeline is boosting the|products face regulatory setbacks. |

|top line and diversifying some of its sluggish end markets. | |

|Having established a strong foothold in the United States and Europe, Boston| |

|Scientific is looking at establishing its presence in the emerging and | |

|under-penetrated markets of Brazil, India and China, which offer strong | |

|growth potential. | |

|Boston Scientific expects foreign exchange to contribute around $200-$225 | |

|million to FY18 revenues. | |

Additional information is available online at .

Note: The company’s fiscal year references coincide with the calendar year.

May 7, 2018

Long-Term Growth

Boston Scientific plans to re-align its international business to enable it to penetrate emerging economies, including those with a prospective healthcare sector. The company expects to introduce new products and strengthen its sales organization in emerging markets such as Brazil, China and India. Although the company is a leading player in the DES and implantable cardioverter defibrillator (ICD) market, these businesses were witnessing several challenges including pricing pressure, intense competition and slower market growth, for past few quarters. Keeping this in mind, the company has adopted ‘priority growth initiatives’. Based on this, it planned to target non-DES and non-CRM areas that promise growth.

In the recent past, Boston Scientific presented an overview of its continued business momentum and long-term growth strategies. During FY17, Boston Scientific outlined a sustained growth plan focused on new markets expansion and strengthening of product lines across all business segments. The company particularly plans to launch products in high-growth adjacent markets that may possibly reap an incremental $13 billion in market opportunity by 2020. This apart, plans to diversify the portfolio and shift from low-growth markets to moderate and high growth markets is in the cards. Per Boston Scientific, solid execution of this strategy will help the company reach a worth of $50 billion in the global medical device markets by 2020 from the present $40 billion.

The bullish firms are of the opinion that Boston Scientific is on track to achieve operating margin of around 28% by 2020.

This global restructuring plan includes the strengthening of global infrastructure through evolving global real estate and workplaces, developing global commercial and technical competencies, enhancing manufacturing and distribution expertise in certain regions, plus continuing the implementation of the plant network optimization (PNO) strategy. These activities are scheduled to be complete by 2018-end. The company expects the program to reduce gross annual pre-tax operating expenses by approximately $115–$150 million by the end of 2020. Boston Scientific also hopes to reinvest a portion of the savings from the program in strategic growth initiatives.

With multiple new product launches on the horizon and on further rooms for margin improvement, one of the bullish firms believes that the possibility of delivering sustainable mid-single digit revenue and double-digit EPS growth over the next few years is high. This makes Boston Scientific one of the most attractive opportunities in large cap medical device companies.

According to a firm, Boston Scientific is gaining prominence with the potential to deliver promising revenues over the next 4-5 years from four new technologies — MRI-safe high-power devices, WATCHMAN LAAC along with synergies from the Symetis acquisition, which closed in 2Q17. Additionally, the American Medical Systems' (AMS) Men's Health and Prostate Health portfolios are likely to fortify the company’s market position.

May 7, 2018

Target Price/Valuation

|Rating Distribution |

|Positive |78.3% |

|Neutral |21.7% |

|Negative |0.00% |

|Avg. Target Price |$32.5↑ |

|Maximum Target |$36.00 |

|Minimum Target |$28.00 |

|No. of analysts with Target Price/Total |21/23 |

|Upside from current |9.8% |

|Maximum upside from current |21.6% |

|Maximum Downside from current |5.4% |

Risks to the target price include share loss, significant pricing pressures, product recalls and the possibility of disappointing financial results.

Recent Events

On Apr 25, 2018, Boston Scientific reported 1Q18 results. Highlights are as follows:

➢ Boston Scientific reported adjusted EPS of 33 cents in 1Q18, up 13.8% year over year (y/y).

➢ The company reported net sales of $2.38 billion in 1Q18, up 10.1% y/y on reported basis and 6.2% on an operational basis (at constant exchange rate or CER).

➢ The company updated its guidance for full-year 2018. The company also provided its guidance for 2Q18.

Other News

On Apr 24, 2018, Boston Scientific announced encouraging data supporting the safety and efficacy of the recently FDA-approved VERCISE deep brain stimulation (DBS) System for controlling the symptoms of advanced, levodopa-responsive Parkinson's disease in the United States.

On Apr 16, 2018, Boston Scientific announced the acquisition of privately-held women's health company nVision Medical Corporation. nVision developed the first and only device cleared by the FDA to collect cells from fallopian tubes, offering a potential platform for early diagnosis of ovarian cancer.

On Apr 3, 2018, Boston Scientific announced the acquisition of Securus Medical Group, a privately-held company that has developed a thermal monitoring system for the continuous measurement of esophageal temperature. Boston Scientific has been an investor in Securus since 2016, and the transaction price for the remaining stake consists of $40 million in cash up-front, as well as up to $10 million in contingent payments based on regulatory achievements and commercial milestones.

Revenues

Boston Scientific reported net sales of $2.38 billion in 1Q18, up 10.1% y/y on a reported basis and 6.2% on an operational basis (at constant exchange rate or CER). Organic revenue growth (excluding the impact of changes in foreign currency exchange rates and sales from the acquisitions of EndoChoice Holdings and Symetis SA) was 5.2% y/y. Reported revenues exceeded the company-provided guidance of $2.320-$2.350 billion.

Geographically, in 1Q18, the company achieved 4.8% operational growth in the United States (same organically), up 10% in Europe, Middle East and Africa region (up 5.7%); up 5.8% in the Asia Pacific region (same), up 9.5% in Latin America and Canada (up 8.6%) and up 17.2% in the emerging markets (up 16.7%).

Outlook: Boston Scientific has provided an updated guidance for FY18. The company projects current-year revenues in the range of $9.750-$9.900 billion, an increase from the earlier-provided range of $9.650-$9.800 billion (annualized growth of 8-10% on a reported basis and 5-7% on an organic basis (at CER and including contribution of approximately 40 bps from Symetis). For 2Q18, the company estimates revenues in the band of $2.450-$2.500 billion.

SEGMENTS

Effective Jan 1, 2013, Boston Scientific made some changes in its reporting segments in order to reorganize its business from geographic and regional to fully operationalized global business units. As a result, the company currently has three new global reportable segments consisting of Cardiovascular, Rhythm Management and MedSurg.

However, Boston Scientific also records revenues from the following sub segments – Interventional Cardiology, Peripheral Interventions, Cardiac Rhythm Management, Electrophysiology, Endoscopy, Urology/Women's Health, and Neuromodulation.

A. Cardiovascular

The company generates maximum revenues from Cardiovascular, which comprises Interventional Cardiology and Peripheral Interventions. Cardiovascular sales in 1Q18 were up 9.5% (up 5.2% at CER) to $933 million.

Interventional Cardiology (other than Coronary stents)

In addition to coronary stent systems, the Interventional Cardiology business markets a broad line of products including balloon catheters, rotational atherectomy systems, guide wires, guide catheters, embolic protection devices, and diagnostic catheters used in percutaneous transluminal coronary angioplasty (PTCA) procedures, as well as intravascular ultrasound (IVUS) imaging system.

The Interventional Cardiology (IC) segment helped the company maintain impressive growth in 1Q18. Sales at the division grew 9.3% (4.8% at CER) to $645 million in 1Q18 despite the LOTUS recall in Europe. IC growth worldwide was led by strength in Structural Heart and complex PCI portfolio. However, the upside was partially offset by weak performance by the drug-eluting stents.

Moreover, the company will continue to develop and invest in its SYNERGY platform with various new portfolio enhancements in the cards to boost the performance of DES platform in the United States and Europe.

Revenues from the PCI portfolio grew double digits in 1Q18. Moreover, in a bid to widen the complex PCI portfolio, the company launched four products in 2H17. IC performance was driven by the Structural Heart business, which includes the LOTUS aortic valve and WATCHMAN Left Atrial Appendage Closure device.

Importantly, Boston Scientific’s LOTUS remediation work is in progress. The company continues to expect LOTUS Edge to return to the European market in 2019, reflecting a delay from the earlier scheduled launch in 1Q18). It also intends to launch the same in the United States in FY19. Moreover, Boston Scientific is looking forward to leveraging on its existing LOTUS infrastructure to enhance the ACURATE neo AS Valve system through better field support, geographic expansion and next generation products. The company plans to invest in the United States and Japan trials as well.

In this regard, the company witnessed solid demand for the ACURATE neo Transapical Aortic Valve System in 1Q18. Further, the company expects reimbursement approval for the same in France in FY20. Moreover, the company plans to introduce ACURATE neo2 in the European market in 2H18. Notably, the company expects to initiate enrollment in its U.S. IDE for ACURATE in 2H18.

Accordingly, for FY18, Boston Scientific anticipates revenues from WATCHMAN and ACURATE TAVR products to contribute roughly $400 million to the top line.

The WATCHMAN program saw a strong 1Q18. WATCHMAN has been used in more than 50,000 implants worldwide. Moreover, on the back of increased utilization and geographical expansion, the company expects continued growth in this platform.

Effective Oct 1, 2017, Medicare reimbursement rates increased by an average of 10.6% for DRG 274 to which 93% of WATCHMAN implants fall under. This marks an important development for the company as United States is one of the largest and vital markets for WATCHMAN. The company also received the approval for private insurance reimbursement of the WATCHMAN LAAC device in Australia. Boston Scientific will continue to innovate and develop products in this line. In this regard, Boston Scientific expects to begin enrollment under the PINNACLE FLX IDE trial for the technologically advanced WATCHMAN FLX in 2Q18. Further, during 1Q18, Boston Scientific presented positive results from the Japan SALUTE trial. The company is on track for a mid-2019 Japan approval for WATCHMAN.

Recent Developments

On Jan 24, 2018, Boston Scientific announced a major investment in Santa Rosa, CA-based Millipede, Inc., to augment its position in the field of mitral regurgitation (MR). Millipede is the developer of IRIS Transcatheter Annuloplasty Ring System for the treatment of severe MR. Per the terms of the agreement, Boston Scientific has purchased a portion of Millipede for $90 million. The company has also kept an option to acquire the remaining shares of Millipede at any point of time prior to the completion of a first-in-human clinical study that meets certain parameters. Also, Millipede has the option to compel Boston Scientific to purchase its remaining shares upon closure of the clinical study. The full buyout of Millipede needs additional $325 million payment from Boston Scientific and a further $125 million will be paid upon achievement of a commercial milestone.

Overall, the bullish firms are encouraged by growth in Interventional Cardiology business on strength in complex percutaneous coronary intervention portfolio along with solid uptake of WATCHMAN. They believe that weakness in drug-eluting stents sales in the United States may affect growth in the IC business.

Peripheral Interventions (PI): The peripheral interventions business markets devices used in peripheral vascular stenting and percutaneous transluminal angioplasty (PTA) procedures. These are required to treat peripheral diseases (diseases which appear in blood vessels other than in the heart and biliary tree). This product line includes balloon catheters, stents, sheaths, wires and vena cava filters. This segment also sells products designed to treat patients with non-vascular diseases. The non-vascular suite of products includes biliary stents, drainage catheters and micro-puncture sets designed to treat, diagnose and ease various forms of benign and malignant tumors.

Sales at this segment totaled $288 million in 1Q18, up 10.1% y/y (6% at CER) led by higher sales of Drug-Eluting Eluvia Stents and Ranger Balloon in Europe. Geographically, the company saw strength in Asia as well. Boston Scientific’s Atherectomy Jetstream platform also performed well in 1Q18. The company is on track for a 1H19-launch of Drug-Eluting Eluvia Stents and a 1H20-launch of Drug-Coated Ranger Balloon in the United States. Also, the company aims at launching Ranger drug coated balloon (DCB) as the longest DCB available in the United States and Japan. Moreover, the company is planning to present data from Eluvia pivotal trial IMPERIAL in 2H18.

B. Rhythm and Neuro - The second largest contributor to Boston Scientific’s top line was Rhythm and Neuro, which includes Cardiac Rhythm Management (CRM), Electrophysiology and Neuromodulation. Worldwide sales at this segment increased 10.2% to $736 million in 1Q18 (6.4% at CER).

1. CRM

The CRM segment comprises implantable cardioverter defibrillator (ICD), cardiac resynchronization therapy defibrillators (CRT-Ds) and pacemakers.

Total CRM sales rose 6.5% y/y (up 2.4% at CER) to $493 million in 1Q18 largely on double-digit growth in defibrillator business.

The defibrillator business was up on considerable contributions from the Subcutaneous Implantable Defibrillator (S-ICD). Also in 1Q18, the company witnessed double-digit growth with the EMBLEM S-ICD and promising uptake of the latest RESONATE platform in Europe and the United States. The platform offers compatibility with the first and only validated heart failure predictive diagnostic in HeartLogic. Management is encouraged by the strong early adoption of this particular platform in Europe as patients can benefit from the programming right at implantation, given the superior longevity of the product.

However, Brady pacing sales declined slightly as the company faced tough comparisons along with launch of a few competitive products. Further, management expects this softness to continue in the rest of FY18. However, the company received encouraging response for the advanced Resonate family of implantable cardioverter defibrillator (ICD) and cardiac resynchronization therapy defibrillator (CRT-D) systems featuring the HeartLogic Heart Failure Diagnostic which were launched in September 2017. Notably, these devices are FDA-approved for conditional use in a magnetic resonance imaging (MRI) environment and help physicians improve heart failure (HF) management through personalized care. Leveraging on the strength in the CRT-D and ICD portfolio, management expects global CRM business to see above-market growth in FY18.

The bullish firms are encouraged by the sequential rise in CRM business globally on the back of strength in Boston Scientific’s high-voltage platform.

2. Electrophysiology (EP)

This division develops less-invasive medical technologies to diagnose and treat rate and rhythm disorders of the heart. The product portfolio includes steerable radiofrequency (RF) ablation catheters, generators, intracardiac ultrasound catheters, diagnostic catheters, delivery sheaths, and other accessories.

Revenues at this division improved 17.2% y/y to $75 million (up 11.5% at CER) in 1Q18. The upside was driven by higher uptake of the new RHYTHMIA HDx platform. Management continues to roll out the HDx platform in Europe and recently launched it in the United States and Japan. Overall, the company continues to expand the toolkit that supports RHYTHMIA HDx, providing ablation technologies that match the excellence of its Mapping System and adding tools that expand the reach and utility of RHYTHMIA HDx in different procedures. In this context, the company expects the full-fledged commercialization of DirectSense technology in Europe and the United States in 2018 followed by a successful initial launch in Europe. The company also looks to boost its catheter portfolio with the complete launch of IntellaNav MiFi ablation catheter in the near term.

Recent News

On Mar 20, 2018, Boston Scientific announced favorable real-world data from the TRUE-HD study at the annual congress of the European Heart Rhythm Association (EHRA). The observational, prospective, non-randomized study — TRUE-HD study — covered 572 patients suitable for cardiac mapping and ablation for treating arrhythmia. However, the patients diagnosed with de novo atrial fibrillation were not enrolled under the study. Notably, the TRUE-HD study evaluated the acute success and safety for the mapping and ablation of various clinical arrhythmias. Per the company, the study results displayed the safety and efficacy of RHYTHMIA Mapping System when used with INTELLAMAP ORION Mapping Catheter for mapping and supporting the treatment of different types of arrhythmias. Also, it included the cases where ablation of atrial fibrillation based on other techniques was a failure. RHYTHMIA Mapping System is a catheter-based 3D cardiac mapping and navigation solution used for diagnosing and treating different types of arrhythmias.

3. Neuromodulation

Within this business, Boston Scientific markets the Precision Spinal Cord Stimulation (SCS) system for the management of chronic pain.

Revenues from Neuromodulation improved 19.3% y/y to $169 million (up 17.2% at CER) in 1Q18 led by several product launches, including the WaveWriter Spinal Cord Stim system and Vercise Deep Brain Stimulation (DBS) platforms, in the United States. Per management, WaveWriter SCS System is the only platform approved by the FDA to simultaneously provide a paresthesia-based and sub-perception therapy for patients suffering from chronic pain. Further, the company witnessed solid contributions from the key geographical regions.

Management expects the growth momentum to continue along with a planned launch of the next generation DBS platform with directional lead in 2H18.

The bullish firms also believe that recent launches of WaveWriter SCS System and Vercise DBS may continue to drive sales at the Neuromodulation business in the near term.

C. MedSurg – The MedSurg segment includes Endoscopy, Urology and Pelvic Health and Neuromodulation businesses. In 1Q18, revenues at the segment improved 10.9% (7.4% at CER) to $711 million. The MedSurg business delivered organic growth of 7.4% in 1Q18.

Endoscopy

This division develops and manufactures devices to treat a variety of digestive diseases, including those affecting the oesophagus, stomach, liver, pancreas, duodenum and colon. Revenues at this division improved 10.2% y/y (6.2% at CER) to $418 million in 1Q18 buoyed by strength in pathology and infection prevention performance, solid uptake of SpyGlass DS visualization platform, Axios Stent and continued option of Resolution 360 hemostasis. Further, the company launched its endoluminal surgery portfolio, including the Orise platform, ahead of the planned date.

During 1Q18, Boston Scientific broadened its Endoscopy portfolio with the buyout of a privately-held company — EMcision, Limited — with presence in the U.K. and Canada. Although the financial terms of the deal have been kept under wraps, the company expects the deal to prove accretive to earnings post 2018. Post-acquisition, Boston Scientific’s Endoscopy portfolio will include EMcision’s FDA approved and CE Marked Habib EndoHPB probe. Notably, Habib EndoHPB probe is an innovative endoscopic bipolar radiofrequency device that coagulates tissue in the gastrointestinal (GI) tract. Moreover, the Habib EndoHPB probe aids in the treatment and palliative care of patients diagnosed with pancreaticobiliary cancer. The company also witnessed organic revenue growth of 6.2% at the segment.

Meanwhile, management seems to be upbeat about the company’s steadily growing traction in the ambulatory surgery center market on the back of differentiated offerings in gastrointestinal pathology and infection prevention.

Recent News

On Mar 5, 2018, Boston Scientific announced plans to broaden the Endoscopy portfolio with the buyout of a privately-held company — EMcision, Limited — with presence in the U.K. and Canada. Although the financial terms of the deal have been kept under wraps, the company expects the deal to prove accretive to earnings post 2018. Post-acquisition, Boston Scientific’s Endoscopy portfolio will include EMcision’s FDA approved and CE Marked Habib EndoHPB probe. Notably, Habib EndoHPB probe is an innovative endoscopic bipolar radiofrequency device that coagulates tissue in the gastrointestinal (GI) tract. Moreover, the Habib EndoHPB probe aids in the treatment and palliative care of patients diagnosed with pancreaticobiliary cancer.

2. Urology and Pelvic Health

This division develops and manufactures devices to treat various urological and gynecological disorders. Revenues totaled $293 million in 1Q18, up 11.8% on a y/y basis (9.2% at CER). This was led by increased sales of LithoVue and single-usage digital ureteroscope along with strength in products for men's health, benign prostatic hyperplasia (BPH) and core stones. Management had earlier introduced LithoVue, which provides single-use digital visualization and navigation capabilities to diagnose and treat stones and other conditions of the kidney ureter. Further, the company witnessed solid contributions from emerging markets along with increased uptake of Greenlight therapy for BPH.

During 1Q18, Boston Scientific entered into an agreement to buy Minnesota-based NxThera for a deal value of up to $406 million. Recently, the company announced the successful completion of this buyout.

Recent News

On Mar 21, 2018, Boston Scientific announced an agreement to buy Minnesota-based NxThera for a deal value of up to $406 million. Privately-held NxThera is the developer and marketer of the Rezum system in the United States and Europe. The transaction consists of an upfront payment of $306 million in cash and up to an additional $100 million in potential commercial milestone payments over the next four years. Notably, the company has an existing minority investment in NxThera which is expected to result in a net upfront payment of approximately $240 million on closing and milestone fees of nearly $85 million. Post the deal’s closure, the buyout of NxThera is expected to remain immaterial to Boston Scientific’s adjusted EPS through 2020 and be only accretive afterward. The consolidation is likely to be dilutive or less beneficial on a reported basis due to amortization and transaction and integration costs.

Margins

Boston Scientific reported gross margin of 71.8% in 1Q18, up 190 bps on a y/y basis on a 3.4% rise in cost of products sold. According to the company, adjusted operating margin expanded 240 bps on a year-over-year basis to 23.9%.

The company reported selling, general and administrative (SG&A) expenses of $860 million in 1Q18, up 8.3% y/y. However, adjusted SG&A expenses of $846 million (35.5% of sales) contracted 60 bps from 1Q17.

Research & development (R&D) expenses in 1Q18 rose 11.1% to $261 million. Adjusted R&D expenses accounted for $254 million or 10.7% of sales in 1Q18, roughly flat y/y. Royalty expenses inched up 5.9% to $18 million in 1Q18.

Outlook

Boston Scientific forecasts adjusted gross margin for FY18 at around 72% of sales, assuming a negative foreign exchange impact of 120 bps.

The company expects FY17 adjusted SG&A expenses in the range of 34.5-35% of sales. Adjusted R&D expenses are projected in the band of 10-11%. Royalty rate is expected to be nominally lower than 1% of FY18 sales.

Earnings per Share

Boston Scientific posted adjusted earnings per share (EPS) of 33 cents in 1Q18, up 13.8% from 1Q17. Adjusted EPS also exceeded the company's guided range of 30-32 cents.

Without adjustments, the company reported EPS of 21 cents, in line with the 1Q17 figure.

Outlook: Boston Scientific updated its FY18 adjusted EPS guidance. Adjusted EPS is now estimated in the range of $1.37-$1.41 as compared with the previous range of $1.35-$1.39.

The company also provided its 2Q18 financial outlook. Adjusted EPS is projected in the band of 33-35 cents.

May 7, 2018

|Analyst |Sweta Jaiswal |

|Copy Editor |Parijat Sen |

|Content Ed. |Urmimala Biswas |

|No. of brokers reported/Total |21/23 |

|brokers | |

|Reason for Update |1Q18 Earnings Update |

|QCA |Urmimala Biswas |

|Lead Analyst |Urmimala Biswas |

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May 7, 2018

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