In 2006, Boston Scientific "won" the bidding war for Guidant. Deemed the "second-worst merger in history," the $27 billion deal has haunted Boston Scientific ever since. Last year, Boston Scientific settled a lawsuit filed by Johnson & Johnson (JNJ - Get Report) for $600 million. Johnson & Johnson was seeking more than $7 billion in damages from Guidant, saying the company breached its merger agreement.
The headaches started the day the deal was done. Guidant was the target of lawsuits and government investigations related to problems with its medical devices. Between 2006 and 2012, Boston Scientific took total write-downs of $9 billion. In 2012, the company wrote off another $3.6 billion from the Guidant acquisition.
And if that wasn't enough, there were approximately 35,000 lawsuits against Guidant to be settled. By March of this year, Boston Scientific has settled about 10,000 lawsuits and has reserved about $1.9 billion for rest of the litigation.
Oh, and then there was some nasty transfer pricing litigation between Guidant and the Internal Revenue Service. Boston Scientific plans to shell out $275 million to settle that beef. The litigation was another headache courtesy of the Guidant deal. If the settlement is approved, the company is slated to make payments over the next 12 to 24 months. The IRS was seeking $1.2 billion.
Despite all these problems, Boston Scientific has been able to put the past behind it and move ahead.
Towards the end of July, the company reported second-quarter fiscal 2016 earnings of 27 cents per share, in line with the consensus estimate. Revenue rose 15.4% to $2.13 billion, vs. the $2.04 billion estimate. Management guided to a range between $1.07 and $1.11. The company also said it sees revenue between $8.27 billion and $8.37 billion, which is about $150 million more than expected.
Second-quarter gross margin was 70.7%, 130 basis points below expectations. Management blamed a write-down on old inventory and higher expenses related to the hedging of the Japanese yen. Despite the disappointing gross margins, operating margins came in at 23.4%, in line with estimates.
Boston Scientific saw growth across all its product lines. The cardiovascular segment was up 13% to $837 million. Rhythm management was up 4% to $537 million, and MedSurg rose 29% to $752 million.
With the stock up 50% in a year, investors have figured out that Boston Scientific is back in a big way. If the company can continue its top-line revenue growth and improve its margins, I think investors will reward it with a higher multiple.
Right now, at about $24, the stock is trading at 22 times fiscal 2016 estimates of $1.09 in earnings per share, and only 19 times next year's estimate of $1.24 per share. But the consensus 2017 revenue growth estimate of just 6% looks low and could be revised higher after the company reports the third quarter in October.
Fiscal 2016 revenue rose 11% in the first quarter and another 15% in the second quarter. If the trend keeps up, Boston Scientific should have at least 10.5% to 11% revenue growth this year, so a 6% growth number for next year is looking pretty conservative.
If Wall Street raises fiscal 2017 estimates, I think the stock should be able to get to $30 pretty easily.