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Boston Scientific, St. Jude: Medical Winners & Losers

Boston Scientific is finally having its day in the medical technology sector.

NEW YORK (

TheStreet

) -- For a change,

Boston Scientific

(BSX) - Get Boston Scientific Corporation Report

isn't the dog in the medical technology stock sector. In fact, it's the best performing stock in the sector that is experiencing a minor selloff on Wednesday.

An after-hours earnings report on Tuesday put to rest concerns about BSX never recovering from its defibrillator recall, and more cautious comments from

St. Jude Medical

(STJ)

in its Wednesday morning earnings report, have turned the tables among med tech stock plays.

Last quarter, even after beating expectations, Boston Scientific fell in trading, and competitor

Medtronic

(MDT) - Get Medtronic Plc Report

is down 7% over the past three months. By contrast,

St. Jude Medical

(STJ)

TheStreet Recommends

is up close to 9% over the past three months. Yet it's shares of St. Jude Medical that are falling on Wednesday.

When BSX last reported it also doubled the consensus estimate, as it did on Tuesday night, but it released last quarter's earnings amid a weak backdrop for global health care. A little confidence has been restored, and the market seems to be saying: it's not getting any worse, even if it's yet to get much better. Last quarter led to lowered expectations for Boston Scientific and Medtronic, and maybe now, investors are taking their finger off the panic button.

That may explain why St. Jude sold off even after beating and raising on Wednesday. The low-end of St. Jude's revenue guidance was $6 million below the Street consensus. That difference might be splitting hairs as a trigger to sell, so it's more likely to be the fact that expectations in the med tech sector were highest for St. Jude, leading to pressure on it shares.

Consider that the Boston Scientific recovery in the CRM market is expected to hurt

Medtronic

(MDT) - Get Medtronic Plc Report

, the last of the big three in the CRM market scheduled to report, but Medtronic shares are not feeling the pain. When BSX last quarter reported a stabilization in its CRM market losses, the market assumed that it was taking share back from Medtronic. Tuesday's results confirmed that market dynamic, but Medtronic's 3-month decline since the last earnings season had already taken into account the BSX and St. Jude gains in market share.

The real story on Wednesday is Boston Scientific, the med tech dog, finally having its day. Continued earnings improvement and stabilization of business in key markets is in the least allowing BSX to rally up from the share price doldrums, even if the macro environment remains challenging. Boston Scientific shares are surging on Wednesday, up by a double digit percentage gain at mid-day, with trading bullishly heavy -- BSX share trading was already 5 million shares above its average day before the mid-day mark on Wednesday. St. Jude shares were recently down by 3%.

"Defibrillator sales were at the top of management's range, and the tone of management on the call was different. It was a little more focused and investors are trained to pick that up," said BMO Capital Markets analyst Joanne Wuensch of the BSX rally. "That's how management of stocks dig out," the analyst added.

It wasn't just the stabilization of the CRM business from Boston Scientific, but an earnings outperformance engineered by much lower expenses that becomes more important in a tougher (i.e. cost conscious) medical technology operating environment.

The slowdown in the CRM market, which St. Jude attributed to macroeconomic factors, isn't an issue that Boston Scientific has completely dealt with either. CRM market sales were down quarter over quarter, though ahead of the consensus estimate by $7 million. Maybe most importantly, BSX sees CRM sales stabilizing at 26% market share at year-end, 1% higher than previous guidance from the company.

BSX Drug stent market sales were also down, though again ahead of the consensus estimate by $4 million.

Neuromodulation is an example of a BSX market that is showing encouraging signs but that faces a tougher macro operating environment, too.

Neuromodulation recovered from being a trouble spot in the previous quarter earnings to 9% growth in this quarter. The launch of four new products in the neuromodulation market this year helped to drive growth. However, as BSX noted on its conference call, the company is seeing softness in elective procedures and neuromodulation revenues could be at risk if the trend persists.

At a broader level, analysts pointed to pricing pressure as an issue that will linger even as BSX continues on recovery road.

Boston Scientific's global drug stent market share of 37% is the top position, and analysts cited the success of its Promus Element product in the EMEA region as a positive. Wachovia estimated that Promus Element is "off to a good start" with $59 million in 3Q revenues and comprising 35% of BSX's stent mix. Overall, though, the drug eluting stent (DES) market volume growth has been hurt by pricing declines, and pressures will persist in this market, according to Wachovia analyst Larry Biegelsen.

In fact, BSX has been such a dog that simply stabilizing its business is being seen by the market that it's ready to focus on the pipeline of new products to drive future earnings growth.

Analysts are upping their earnings estimates based on the expense management in evidence in the big BSX beat this quarter -- at 12 cents, or double the consensus estimate. BMO Capital upped its fourth quarter EPS target to 11 cents for BSX. Wachovia Securities has also moved BSX earnings for the next quarter up to 11 cents. Wachovia has upped its full year 2011 EPS target from 36 cents to 44 cents. BMO Capital Markets hasn't changed its 2011 EPS outlook for Boston Scientific; it was already more bullish, expecting 2011 EPS of 49 cents, which represents the high end of current BSX estimates.

The focus for investors after giving Boston Scientific a bump on Wednesday will be its upcoming investor day in November. As Joanne Wuensch, analyst at BMO Capital Markets noted in her BSX earnings post-mortem, "When asked about the weak performance, management candidly explained that in the pacemaker market, which is likely delivering a flat growth rate to begin with, they are losing share, having not launched new technology in years. New products in the pipeline are expected to create an opportunity in time. The company plans to launch its wireless pacemaker platform in Europe in the second half of 2011 and in the US in late-2011 or early-2012."

In fact, Rick Wise, an analyst at Leerink Swann is predicting that the investor day will lead to another rally in BSX shares. "The CRM recovery continues to progress at a faster than anticipated pace.... We believe the company's upcoming Analyst Meeting on Nov. 19th will likely serve as a major positive catalyst, highlighting the breadth of BSX's turnaround initiatives and the its new product pipeline (largely unknown to the Street)."

BMO Capital' Wuensch, noted that a clear focus for BSX management is on the non-defibrillator and non-DES businesses as it increases its R&D investments. "While new product launches have been slow but steady, restructuring initiatives and improved operations are expected to speed the process," the analyst wrote.

The upcoming investor day should be a catalyst for BSX shares in the opinion of BMO Capital's Wuensch. "It depends on what they say, but across the entire new product line the street is in the dark," the analyst said. That means the worst case scenario is a benign impact on BSX shares after the analyst day, and more likely, a positive catalyst.

At the time of the defibrillator recall, the BMO analyst was wondering if locusts would next descend on BSX. It seems that the type of biblical plague fears that have dogged BSX are finally lifting. If the med tech sector outlook remains uncertain, it's at least no longer apocalyptic for Boston Scientific.

-- Written by Eric Rosenbaum from New York.

RELATED STORIES:

>>Boston Scientific: Don't Call it a Comeback

>>Boston Scientific: the Calm Before the Locusts

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