Stent Recall Dents Boston Scientific

Boston Scientific ( BSX) said it has completed its stent recall, but shares stumbled another 5% Tuesday as Wall Street and investors continued to fear the worst is not yet over for the company.

In a Webcast with doctors Tuesday, the company said that it had completed its recall of Taxus stents, a heart device used to keep arteries open and unclogged after a balloon angioplasty procedure, and had begun restocking hospitals with new units. Last Friday, Boston Scientific announced that it was widening its recall of two different stents, which have been linked to three deaths and more than 40 serious injuries.

But while the company has pulled faulty versions of Taxus from the shelves, it has done so at the expense of its own reputation with doctors and Wall Street. When the first sign of trouble emerged on July 2, Boston Scientific only recalled 200 stents and said manufacturing defect affected two production lots. After closer inspection, the company found the issue was more widespread.

As a result, Prudential Equity Group downgraded the company to neutral from overweight on Tuesday, dropping its price target to $40 from $53, lowering earnings estimates going forward and telling investors the recall gaffe will likely cost it market share in the lucrative stent market.

"This recall is clearly not going as we expected. Initial checks on Friday indicated that doctors would take the recall as fairly routine," said Robert Faulkner, analyst at Prudential, in his downgrade. "As the day wore on yesterday, it became clear that opinion leaders, especially, grew profoundly irritated as the considered the evolution of the recall." (Prudential does not have an investment banking business and Faulkner does not own shares of the company.)

Shares of the company, which have dropped 19.1% since the initial recall was announced on July 2, were off another $1.77 to $34.38 Tuesday.

Prudential is just one of many brokerages that have lowered price targets since the stent recall first broke, but not all of Wall Street is convinced that Taxus will suffer greatly. Wells Fargo Securities reiterated its buy rating on the company while SG Cowen Securities analyst Dhulsini de Zoysa initiated coverage on the company with a buy rating, telling investors that the company's earnings release on July 26 will serve as a reminder of the powerful earnings driver the stent represents. (Both brokerages do and seek to do business with the companies covered in its research reports.)

"The recent sell-off in Boston Scientific shares is overdone," said the analyst. "The stock trades at less than 15 times estimated 2005 earnings per share, a multiple reserved for distressed medical technology names. We see better than 25% upside potential relative to the market in the next year."

The bad news on Taxus is a grave disappointment for Boston Scientific, which was already beginning to dominate the market after only four months, winning 70% market share from rival Johnson & Johnson ( JNJ), which makes the Cypher stent. Both Guidant ( GDT) and Medtronic ( MDT) are working on stents that could hit the market in the coming years.

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