Boston Scientific (BSX) Stock: Strong, Diversified Growth Profile

If you want sustained growth in a med-tech investment, be prepared to pay up for it. Med-tech stocks valuations have reinflated, and if you want to own multiyear revenue growth in the high single-digits (or better), be prepared to pay a high-single-digit multiple on 2023 revenue (or higher) – in fact, in several cases, the multiple on ’23 revenue is pretty close to the expected three-year compound revenue growth rate.

In that context, then, Boston Scientific’s (NYSE:BSX) 5.6x forward multiple isn’t so bad next to an expected growth rate over 7% I will note that this entire space is trading above its valuation norms (in more normal times 4.5x would be pretty fair for BSX stock), and that is a risk, but I do like the fact that Boston Scientific has multiple drivers of above-average growth that should carry the company for several years.

Mixed Results Haven’t Dented Analyst Enthusiasm

Boston Scientific’s fourth quarter results were actually fairly mixed, but that hasn’t really dented enthusiasm for the shares, as the company continues to offer a strong growth profile relative to its closest peers and management’s guidance for FY’23 was supportive for both top-line growth and margin expansion.

Revenue rose about 7% in company-reported organic terms, a slight beat versus sell-side expectations. Growth was strong across much of the business, with the Cardiology up almost 10% (beating by 2%), Peripheral Interventions up about 9% (a slight miss), Endoscopy up 7% (a slight beat), Urology up 12% (a 5% beat), and Neuromodulation up 5% (a 4% beat).

Gross margin fell 40bp yoy to 70.5% in adjusted terms, missing by 60bp as the company continues to see input cost pressures. Adjusted operating income rose 2%, missing by 6%, with margin down 50bp to 25.7% (missing by 150bp).

Management was confident about operating margin improvement potential in FY’23 (and beyond), and that seemed to clear the path for analysts and investors to focus more on the revenue growth profile. To that end, it’s worth noting that Boston Scientific’s growth was quite a bit higher than the 3% growth at Abbott (ABT) (med-tech excluding diabetes) and the 4% med-tech growth at Johnson & Johnson (JNJ), though Stryker (SYK) (far less of a head-to-head comp) did manage 13% growth in the quarter.

A Healthy List Of Drivers For 2023 … And Beyond

I don’t have many concerns that Boston Scientific will meet or beat the 6.5% year-over-year growth expectations in place now for FY’23. While staffing shortages are still a headwind to normalizing procedure volumes back to pre-pandemic levels, the situation is improving.

Boston Scientific is also benefiting from healthy pricing; absent the slow-growing cardiac rhythm management and drug-eluting coronary stent businesses, pricing would be flat-to-up versus the more typical low single-digit year-over-year pressure. Some of this pricing is from device companies pushing hard on pricing to offset inflationary pressures, but Boston Scientific is also benefiting from a growing skew toward higher-growth markets where there’s more differentiation versus older therapeutic options and less pricing sensitivity.

Looking at more specific drivers, Watchman grew 22% in the fourth quarter and looks poised for strong ongoing growth. The business is already annualizing over $1B/year in revenue, but the market may only be about 10% penetrated and the product has over 90% share in its market. With the upcoming launch of the TruSteer steering sheath, procedure efficiency should improve, making it even more appealing to clinicians.

Ablation should also remain a healthy growth opportunity. Electrophysiology was up 25% in the quarter, and the company is selling all of the Farapulse catheters and systems in Europe that it can make (with demand outstripping the company’s ability to supply). Once available in the U.S., I believe Farapulse could double the company’s share of the U.S. ablation market (to around 15%) by 2027 or 2028, driving around $600M/year in incremental revenue.

I also see good ongoing growth opportunities in the structural heart business, with the ACURATE (sic) neo2 aortic valve coming to the U.S. in 2024. I’ll be curious to see how the Sentinel embolic protection device fares after the PROTECTED TAVR study missed its primary endpoint (reducing the incidence of stroke from 2.9% to 2.3%, but with a p-value of 0.30); the device is used in around 20% of procedures, and it did at least show a stat-significant reduction in debilitating strokes.

Beyond these highlights, I also see good ongoing growth opportunities in urology (the LithoVue Elite single-use ureteroscope), peripheral (drug-eluting products), and endoscopy, particularly with the acquisition of Apollo offering complementary assets at familiar points of sales calls.

The Outlook

My own expectations for Boston Scientific over the next three years aren’t too much different than the Street, with over 7% revenue growth (on a CAGR basis), around 250bp of operating margin improvement, and significant free cash flow growth. Longer term, I don’t expect revenue growth to decelerate all that much, as the company executes on its plan to shift more and more of its revenue mix towards high-growth (7%-plus annual growth) products and markets, while I expect free cash flow margins to hit 20% in five years.

As I suggested in the open, valuation is more challenging now. The stock isn’t cheap on discounted cash flow, but that’s broadly true for the space. Likewise, the shares are richly-valued compared to what the market has typically paid for this level of growth and EBITDA margin, but with the entire sector pretty much back to a historical premium versus the S&P 500, that’s not a surprise either.

The Bottom Line

The best I can say about Boston Scientific’s valuation is that it’s not out of line with the space today and you could argue that on a relative basis it’s actually undervalued and should trade at least above $52.50. I realize that’s not going to be compelling for value-driven investors, and that’s okay – this isn’t a value stock. I think there’s an argument that it does offer growth at a reasonable price, though, and on that basis it may be worth a look from investors with a more liberal or flexible view on valuation and how much to pay for growth.