Boston Scientific shares could soon be scooped up by an acquirer. And even if they're not, the Marlborough, Mass.-based medical device maker's stock is on a roll.
Should you go along for the ride? I see four reasons you should. (I have no financial interest in the securities mentioned in this post).
The acquirer could be medical device rival, Stryker. On June 11, the Wall Street Journal reported that medical device marker Boston Scientific had received a takeover approach from Kalamazoo, Mich.-based Stryker – a $65 billion (June 11 stock market capitalization) maker of “hip and knee replacements, endoscopy systems, operating room equipment, embolic coils, and spinal devices.”
Trading in both stocks was halted, leaving Boston Scientific’s stock market capitalization at around $47.4 billion, 7.4% above its stock market value on June 8. Even if this deal does not go through, it could attract other bidders.
Stryker and Boston Scientific declined to comment.
Founded in 1979, Boston Scientific “produces less-invasive medical devices that are inserted into the human body through small openings or cuts. It manufactures products for use in angioplasty, blood clot filtration, cardiac rhythm management, catheter-directed ultrasound imaging, upper gastrointestinal tract tests, and treatment of incontinence.”
Ironically, up until the report of a possible Stryker deal, one of the most important moments in Boston Scientific’s history was its 2006 acquisition of Indianapolis, Ind.-based medical device maker Guidant. In early January 2006, Boston Scientific outbid Johnson & Johnson by $9 a share to clinch the deal for Guidant.
This was a famously bad deal. According to the Wall Street Journal, between 2006 and 2012, Boston Scientific took $9 billion in write-downs, mostly related to the Guidant acquisition, and its stock lost nearly 85% of its value — from $32.30 before the announcement to about $5 in July 2010. In February 2015, Boston Scientific paid $600 million to J&J, which sued Guidant for $7 billion in damages for allegedly breaching its merger deal with J&J.
And that’s not all. In May 2018, 60 Minutes reported that Boston Scientific had been the target of at least 48,000 lawsuits from over 100,000 women alleging that the plastic strip inflicts on its vaginal mesh devices causes serious pain and injury.
In a statement, Boston Scientific said that nearly 1 million women have been “successfully treated” with the mesh and that the plastic is safe.
Nevertheless, Boston Scientific shareholders who bought at its low point have been rewarded – its shares soared 540% from that July 2010 low through June 11 – but that day’s $32 a share was still 29% below its all-time high of $45 on May 31, 2004.
Despite these problems, I see four reasons why Boston Scientific stock could rise.
1. A deal with Stryker would open up attractive markets
Let's say Boston Scientific merged with Stryker — would the combined company be better off? To analyze that question, I looked at whether it passes the four tests for successful acquisitions about which I wrote in my 2017 book, Disciplined Growth Strategies.
The deal passes the first test. How so?
Boston Scientific competes in several large, fast-growing markets such as the coronary stents and pacemakers. The stent market is expected to grow at a 7.6% annual rate to $10.31 billion in 2022, according to Market Research Engine. Grand View Research expects the pacemaker market to reach $10.3 billion by 2025, growing at a 7.2% compound annual growth rate.
2. The combined company could gain market share
Boston Scientific and Stryker have very little overlap in their product lines. While Stryker makes and sells parts for knee and hip replacements, Boston Scientific's products include stents and pacemakers.
But there is some overlap – they both make spinal cord stimulators, which are implantable devices used to treat chronic pain.
A deal could allow the two companies to reduce their overhead costs and compete with Medtronic, a leading medical device maker with a $117.3 billion market capitalization.
Debbie S. Wang, Morningstar Senior Equity Analyst, believes that this deal would help Stryker sell more. As she wrote,
The potential combination would allow Stryker access to the faster-growing areas of cardiovascular, structural heart, and neuromodulation. Generally, there are more targets in the cardiac markets and pools of undertreated patients, and it is also typically easier to conduct clinical trials that demonstrate the value of those innovations, compared with [the mature] orthopedic markets [in which Stryker competes].
3. Takeover price is likely to be higher than current Boston Scientific value
As for the final two questions, it’s too early to know whether Stryker could justify the price premium it pays to control Boston Scientific or whether Stryker can integrate Boston Scientific smoothly.
But regardless of those answers, for a deal to close, the price will need to rise. Boston Scientific's stock traded up 7.4% on the deal rumors, but unless the offer is at least 30% above its recent market value, it won't close according to JP Morgan analyst Robert Marcus.
4. Boston Scientific CEO has been presiding over rapid stock price growth
What if a deal does not go through? Its new CEO seems to be doing a nice job of boosting its stock.
Since Michael Mahoney became CEO in November 2012, Boston Scientific has been on a roll. In the five years ending June 11, its stock has risen a whopping 271%, its revenues have grown at a 4.5% annual rate to about $9 billion in 2017, and it has become profitable – 2017 net income was $100 million – a razor thin net profit margin of 1.1%.
Recent growth and profitability have accelerated. Its first quarter 2018, revenues were up 10.1% to $2.38 billion — $40 million above the Zacks Consensus Estimate. Its adjusted EPS popped 13.8% to 33 cents -- beating by two cents the Zacks Consensus Estimate.
Risk averse investors might take a chance that the deal falls through and other suitors do not emerge. If that happens, the stock is likely to fall back — creating a more attractive entry point.
