Boston Scientific warns of $40 million hit from coronavirus outbreak

Medical device maker Boston Scientific Corp. said Wednesday that it expects to lose as much as $40 million of revenue in China in the first quarter, as the Chinese health care system focuses on stopping the spread of coronavirus cases.

Boston Scientific, which has major operations in the Twin Cities, is one of the many U.S. health care suppliers that make devices in China and sell devices for Chinese patients, and the first major med-tech company to reveal a broad potential effect from the 2019 coronavirus. The outbreak began in Wuhan, China, and has infected more than 24,500 people globally, most of whom are in China.

"As our team reflects on what is going on there, it is pretty clear that the vast majority of health care resources in China are focused on diagnosing, treating and preventing the spread of coronavirus and that all other procedures are at risk of being delayed," Chief Financial Officer Dan Brennan told Boston Scientific investors Wednesday morning.

Overall, Boston Scientific narrowly missed fourth-quarter revenue expectations, but its adjusted earnings of 46 cents per share beat analysts' consensus estimates by 2 cents. Its shares closed at $42.62, off less than 1% for the day.

Boston Scientific sold about $500 million in devices in China last year, representing 20% growth. In the first quarter of 2020, sales are projected to decline between $10 million and $40 million compared with prior trends, but then pick up again in the second quarter, Boston Scientific executives said. In addition to cutting or delaying the number of surgeries in China requiring medical devices, the coronavirus outbreak is disrupting Boston Scientific's manufacturing operations in China, executives said.

Asked whether Boston Scientific has already seen coronavirus-related revenue declines in January and February, Brennan was noncommittal: "Everyone sees the stuff on the news," he said. "It's just, the number of medical-device procedures in Q1 is not going to be what was expected 90 or 180 days ago. Certainly we are planning to see an impact in that business in Q1."

The maker of heart devices and medical scopes, which announced a preview of some quarterly results in January, said Wednesday that it generated $2.9 billion in sales during the fourth quarter of 2019, representing organic growth of 7.3%. The company had previously said it expected at least 8% growth.

Every division showed organic-sales growth in the just-completed quarter except for the cardiac-rhythm segment, which saw a nearly 3% decline compared with the same period last year, to $473 million in sales. Cardiac-rhythm devices, like pacemakers and implantable defibrillators, monitor and regulate the heartbeat.

Jefferies analyst Raj Denhoy said cardiac-rhythm devices are challenging for med-tech companies, because while the devices are widely used, they are not as profitable as they once were. In the fourth quarter of 2019, Boston Scientific increased its total share of the cardiac-rhythm device market, yet total sales of $473 million represented a nearly 3% decline compared with the same quarter last year.

After years of defying gravity, Boston Scientific executives said Wednesday that cardiac-rhythm management (CRM) device sales are likely to fall into line with the rest of the industry.

"The last couple of years, Boston has been able to grow faster than the CRM market," particularly in sales of implantable defibrillators, Denhoy said. "What they acknowledged [Wednesday] is that they can't run faster than the market for a period of time here, and so their growth is really going to mirror this flat-to-down [trend] of the broader CRM segment. That's a concern because it's 20% of this company's revenue."

The outperformance in earnings stemmed mainly from a tax benefit. Brennan said the company's effective tax rate during the quarter was unexpectedly low, at 4.5%. A Jan. 14 news release previewing the earnings call mentioned a "significant" tax benefit was recognized during the quarter related to "an intra-entity transfer of intellectual property."

Analysts at SVB Leerink said Wednesday that they continue to stand behind the stock. The firm noted several product launches in 2020 that will drive new revenue, including the Exalt-D duodenoscope, a single-use device that is intended to replace durable scopes that may transmit microbes between patients because they are difficult to wash between uses.

Looking ahead, Boston Scientific expects organic revenue growth of 5% to 7% in the first quarter of 2020, which would have been 6% to 7.5% without the effect of the coronavirus. Revenue growth was 6.3% in the same quarter last year.

The company projects first-quarter 2020 adjusted diluted earnings per share in a range of 37 to 40 cents per share, compared with 36 cents of EPS a year ago.

For the full year 2020, Boston Scientific is projecting organic-revenue growth between 6.5% and 8.5%, and adjusted EPS in a range from $1.74 to $1.79 per share.

That guidance includes the Q1 coronavirus effect, but contemplates a return to normal surgical volumes for the rest of the year.

In 2019, Boston Scientific's $10.7 billion in revenue represented 7.3% organic growth and translated to $1.58 in adjusted EPS.

Joe Carlson • 612-673-4779