Majestic Research

Reuters

Boston Scientific brand damage concerns linger

By Debra Sherman
Published: April 16, 2010

CHICAGO, April 16 (Reuters) - The damage that Boston Scientific Corp’s reputation suffered among doctors and patients from the month-long sales suspension of its implantable heart defibrillators could undercut its ability to regain market share over the longer term.

The company announced late on Thursday that U.S. regulators would let it immediately resume distribution of most of its ICD devices.

The news boosted Boston Scientific shares 3.8 percent to $7.41 in afternoon New York Stock Exchange trade. The stock had lost as much as 12.6 percent when the sales suspension was first announced last month.

While Wall Street’s response on Friday suggested that the issue had been put to rest, Lazard Capital Markets analyst Sean Lavin disagreed. In a note to clients, he predicted that “there will be long-term share impact.”

Boston Scientific competes with Medtronic Inc and St. Jude Medical Inc in the market for ICDs, small battery-powered device that deliver a jolt of electricity to correct a dangerously fast heart beat. The device is implanted in the chest with wire leads threaded to the heart.

Philip Legendy, an analyst with Majestic Research, said his recent survey of 70 electrophysiologists—physicians who implant the devices—suggests significant damage to the reputation of the brand.

According to Legendy, 52 percent of respondents said they would be less likely to use Boston Scientific devices in the future because of the issue.

Asked whether they anticipated a change in the use of Boston Scientific’s pacemakers, about 30 percent of respondents indicated they would decrease or discontinue their use.

“Perception is very powerful, and although perception may not be reality, many referral doctors have the perception that there is an intrinsic problem at Boston Scientific. Therefore they are uncomfortable with products from Boston Scientific at the present time,” said one respondent.

‘DROPPED FROM THE CONTRACT’

Another respondent said: “They will be dropped from the contract at my institution and used only if specifically requested by referring doctors or patients.”

Bernstein analyst Derrick Sung said his recent survey of 50 electrophysiologists showed that about half of the respondents indicated that the ICD issue diminished their perception of Boston Scientific’s product quality.

“For customers who were already questioning whether the latest recall was indicative of a broader quality problem within the company, the additional missed filings will serve to solidify this point of view,” Sung said in a research note.

Analysts see St. Jude Medical, the No. 3 maker of ICDs, as the biggest beneficiary of Boston Scientific’s woes. Medtronic, the world’s largest ICD manufacturer with about 50 percent market share, would gain less.

Sung forecast 4 to 5 points of ongoing incremental share loss for Boston Scientific in the U.S. ICD market in addition to 1 to 2 points of Boston Scientific pacemaker share loss.

Mike Weinstein, an analyst with JPMorgan, said his model now calls for St. Jude to report 2010 earnings per share of $2.80 on revenue of $5.1 billion, up from a previous earnings forecast of $2.77.

St. Jude will be the first of the three ICD makers to report first-quarter earnings when it posts results next Wednesday.

Dr. Dwight Reynolds, Chief of the Cardiovascular Section at the University of Oklahoma College of Medicine, said that he does not believe Boston Scientific’s last ICD problem would hurt its brand and that the profession should take comfort in the fact that regulators have these issues on the front burner.

“I got the sense from the people I talked to (at Boston Scientific) that they were embarrassed by this whole thing and that they are getting their good practices back in order,” said Reynolds, who acknowledged that he does not often use Boston Scientific devices. (Reporting by Debra Sherman, editing by Michele Gershberg and Gerald E. McCormick)