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The market backdrop is moving in the medtech company’s favour
Thursday 26 Nov 2020 Author: Steven Frazer

Medical science has come on leaps and bounds over the decades, yet heart disease and related conditions continue to kill thousands every year. More than a quarter of all deaths in Britain are from heart and circulatory diseases, according to data from the British Heart Foundation, or nearly 170,000 deaths each year.

Heart disease killed more people in the US in 2018 than anything else, and the cost of living with these conditions is soaring. Statista data estimates that the cost of coronary heart disease, for example, will rise from $190 billion in 2015 to $365 billion by 2030.

Against this backcloth, there are a lot of reasons why Boston Scientific is an enticing stock for investors. There’s the company’s line of specialist tools for healthcare workers, a portfolio of implantable medical devices like pacemakers and stents, and a catalogue of simple-yet-critical healthcare staples like catheters and embolic protection devices, which reduce complications and cut down blockages during heart procedures.

The company has also identified new high-growth markets, such as prostate health and therapeutic oncology, and Parkinson’s to target for future growth, and it is fast gaining traction in many emerging markets, such as China, India, and Malaysia, all far earlier in the medtech adoption curve.

Founded on the philosophy of improving patient outcomes, Boston Scientific has been developing innovative devices for years, helping to reduce the need for heavy trauma procedures like open heart surgery.

WHY THE STOCK FLATLINED

The stock has largely flatlined since its recovery from the March pandemic sell-off as thousands of elective procedures were put on ice as healthcare resources were diverted to coronavirus-fighting.

According to one analyst, the NHS waiting list for non-emergency procedures currently stands at 7.2 million after the swathe of postponements.

This situation in many parts of the world hurt sales for Boston Scientific, particularly as one-off consumables demand dried up. But elective procedures do not mean optional; these might be non-urgent, but they remain necessary for patients, especially in areas like heart disease and cancer.

BUYING OVERSEAS-LISTED SHARES

Boston Scientific’s shares trade on the New York Stock Exchange and should be available to UK investors via most investment platforms.

Anyone buying the shares through an ISA or dealing account will need to complete a W-8BEN form which is standard practice for investing in US stocks. There might also be foreign exchange charges to consider on your investment platform.

REASONS TO BE OPTIMISTIC

With the resumption of non-emergency medical procedures as lockdown eases, medical technology is one of the sectors expected to recover fastest, with revenues ramping up quickly from pent-up demand – faster even than in travel and construction.

Boston Scientific will be in a box-seat to rally as the long waiting lists for these necessary procedures start to be addressed.

While Boston Scientific will post a decline in revenue and earnings this year, the company could see a return to strong earnings growth between 2021 and 2023, as the company’s past investments in research and development and new product design start paying off.

HIGHER PROFIT MARGINS

The company has already made great strides in improving profitability, pushing net margins from 16.9% in 2015 to 21% in 2019. While we expect a hit on margins in 2020, the margins will likely rebound to over 20% levels next year, according to Refinitiv consensus data, and go close to 22% in 2022.

Acquisitions are also likely to play their part in bolstering growth down the line too, which could inflate forecasts further. Boston Scientific was the company that bought out the UK’s minimally invasive device manufacturer BTG for $4.2 billion in 2019.

Yes, the pent-up demand we have talked about for elective procedures could take longer to unwind that analysts think, making recovery through 2021 slower than currently expected.

There are also considerable borrowings to consider – around $10 billion worth. Yet that represents a debt-to-equity ratio of 0.3, which should be comfortably managed given free cash flow of nearly $1 billion is anticipated even in this most testing of years. Next year analysts see close on $2 billion of free cash flow.

The stock trades on a price to earnings (PE) multiple of 29.2, falling to 23.3 in 2022. Or put it another way, Boston Scientific is now trading at 23.8 times 2021 free cash flow. Nudge that multiple to 25 on 2022 free cash flow of around $2.5 billion and it implies at least 30% upside over the coming 12 months or so.

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