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Time for Truth Arrives for Boston Scientific

The company will update analysts on its financial guidance and stent-recall efforts Wednesday.

Updated from 1:18 p.m. EDT

There was a time just a few months ago when some analysts tempered their enthusiasm for

Boston Scientific

(BSX) - Get Boston Scientific Corporation Report

simply because its highflying stock was out of sync with their predictions for earnings and sales growth.

On Wednesday, this handful of neutral analysts -- along with the bigger buy-the-stock fan club -- will get a better idea when, or if, the company's stock might get back to those lofty heights of the mid-$40s. That's because company executives will provide not only financial guidance for the third quarter but also details on the three-pronged recall of Boston Scientific's Taxus drug-coated arterial stent, the product that is driving the company's growth.

On Wall Street, the consensus view for the quarter ending Sept. 30 is a profit of $414 million, or 48 cents a share, on sales of $1.48 billion, according to Thomson First Call. For the same period last year, Boston Scientific earned $132 million, or 32 cents a share, on revenue of $876 million.

Judging from recent Wall Street reports, the recall hasn't done much to change the investment community's long-term view, because there isn't much neutrality about Boston Scientific. According to Thomson First Call, Boston Scientific has earned 23 buy recommendations and seven neutral ratings. In June, before the recalls were announced, it had 23 buy ratings and six neutral recommendations. And since the recalls took place, only one investment banking firm cut its rating from buy to hold.

The stock is still down from the mid-$40s. Since the first of three recall announcements on July 2, the stock is off about 17%, trading between $35.20 and $36 Tuesday. The stock dipped as low as $31.25 in early August, but it has rebounded modestly, thanks to some recent good news from the Food and Drug Administration. The FDA approved new products to help patients with kidney disease and with heart bypass surgery, and it also said the Taxus stent shelf life could be extended to nine months from six months.

"We view this decision by the FDA as confirmation of the competitive advantage of the Taxus stent," said John P. Calcagnini of CIBC World Markets, in a recent report to clients. "This is probably a good sign with regard to the ongoing commercial status of the Taxus stent," he said. He kept his sector outperformer rating on Boston Scientific and maintained his 12-to-18-month price target of $57. Calcagnini noted that the only other drug-coated stent, Cypher, made by

Johnson & Johnson

(JNJ) - Get Johnson & Johnson Report

, has a six-month shelf life.

Two other medical device giants,


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, are developing drug-coated stents, but both companies have experienced delays in developing their products.

Stents are inserted into arteries to enhance blood flow and reduce the risk of an artery becoming blocked by plaque. A blocked artery increases the risk of a heart attack. The wire-mesh tube stents are inserted into arteries after the plaque-reducing procedure known as angioplasty. Stents reduce the rate of reclogging in the arteries. The drug-coated stents periodically release a chemical, making them more successful in reducing reclogging than their predecessor products, which are known as bare metal stents.

Sales of Boston Scientific's Taxus were growing at a healthy pace when the company announced its first recall on July 2. The recall affected only 200 Taxus stents, but the problem was linked to one death and 18 serious injuries with Taxus. Meanwhile, two deaths and 25 serious injuries were linked to a bare metal stent.

On July 16, the recall was expanded to cover 85,000 Taxus stents and 11,000 bare metal devices. And on Aug. 5, the company said it was recalling another 3,000 Taxus stents.

After the July 16 recall, Thomas Weisel Partners began polling interventional cardiologists to determine the impact of the recall not only on the company's immediate sales but also on its long-term reputation. The investment banking firm found that loyal Taxus users hadn't changed practice patterns dramatically and that most doctors don't believe the recalls indicate some long-term risk of the product, and that J&J's Cypher hadn't made huge inroads.

"The largest hurdle for Boston Scientific is restoration of confidence in

the safety of Taxus and management's credibility," said Lynn Pieper, a medical devices analyst for Thomas Weisel Partners, in an Aug. 9 research report.

Pieper said the disruption in Taxus usage could run two to four months, adding that the impact may be most felt among loyal Taxus users who might now be less inclined to try Taxus. "Johnson & Johnson's inability to fully capitalize on Boston Scientific's recall situation also helps Boston Scientific," Pieper added. "Feedback from large

medical centers, particularly in the Midwest, indicates that although Cypher's supply has improved, it is still difficult to get adequate inventory for many

stent sizes."

Cypher had a considerable head start on Taxus in the U.S. Cypher reached the market in April 2003; Taxus became available in March 2004. But J&J immediately ran into production problems, meaning demand among doctors was well ahead of the company's supply. Judging from Pieper's report and other Wall Street comments, J&J still hasn't solved the matter to the medical community's satisfaction.

The survey also found that nearly one-fourth of respondents "indicated a meaningful decrease" in the use of Taxus; some said they would shift all their stent business to Cypher. "The general consensus, however, was that most clinicians would continue to use Taxus with caution in the near term, increasing use when they felt that the product was safe, and would not be associated with

a future recall," the survey said. Most respondents (51%) said they would still use Taxus but would be "more cautious for the near term."

Pieper, who has an outperform rating on Boston Scientific, concluded that "recall aside, Taxus' pros outweigh

its cons." As for Cypher, "our contacts concur it is a very good stent with solid long-term safety and efficacy data," Pieper said. "However, deliverability concerns will continue to limit use." (Pieper doesn't own shares; Thomas Weisel Partners doesn't have an investment banking relationship with Boston Scientific.)

In a related matter, Boston Scientific said Tuesday that the latest results from a study tracking the progress of Taxus usage support the safety findings of previous clinical trials and illustrate that Taxus is "widely utilized" by doctors in treating difficult lesions and cases, especially in diabetic patients.

The results involving 1,907 European patients tested at 118 medical centers were presented Tuesday at the European Society of Cardiology's annual meeting in Munich, Germany.

In the overall patient population of European data, the company reported a 7.1% cardiac adverse event rate (cardiac death, heart attack or a need for a repeat procedure} and a rate of 4.2% for repeat procedures.

For diabetic patients, the cardiac adverse event rate was 8.9% and the need for repeat procedures was 5%.

"The data is even more encouraging considering that more than half the patients enrolled had highly complex lesions," said Michel Darnaud, president of Boston Scientific Europe.