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How Can BSX Improve Its Profitability Going Forward?

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Boston Scientific’s 2Q17 profitability

In 2Q17, Boston Scientific registered a gross profit margin of 72.8% of its total sales. That compares to 70.7% in 2Q16. Its gross margin in 1Q17 fell on a YoY (year-over-year) basis due to the negative impact of the Lotus recalls, the EndoChoice fuse system losses, and currency headwinds.

The gross margin growth of 210 basis points in the quarter was driven by a favorable product mix, mainly due to strong sales for the men’s health franchise and Watchman. The decrease in SG&A (selling, general, and administrative) expenses in the quarter and flat R&D (research and development) investments contributed to the rise in gross margin.

The company’s adjusted operating margin also rose 260 basis points in 2Q17. It was mainly driven by strong operating margins in its Rhythm Management segment. The Cardiovascular and MedSurg segments also registered YoY growth in operating margins for the quarter.

Investors can consider the iShares Russell 1000 Growth (IWF) for exposure to Boston Scientific. IWF has ~0.32% of its total holdings in BSX.

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Profitability guidance

Boston Scientific expects to register an adjusted operating margin of 19.0% to 20.0% of total sales in the Rhythm Management segment in fiscal 2017. That compares to its previous guidance of 18.0% to 19.0%. The Cardiovascular and MedSurg segments are expected to register consistent margin growth. The company is accelerating its margin growth despite continued investment in its commercial capabilities and product launches throughout the rest of the year.

Boston Scientific is focused on achieving 6.0% to 8.0% of organic revenues CAGR (compound annual growth rate) for 2018–2020. With its differentiated five-year growth strategy, it aims to achieve 25.0%–26.0% adjusted operating margin growth in 2017 and 28.0% growth in 2020.

Peers Intuitive Surgical (ISRG), Accuray (ARAY), and Medtronic (MDT) reported gross margins of 71.3%, 38.5%, and 68.4%, respectively, in their recent quarters.

Next, we’ll take a look at Boston Scientific’s category leadership strategy.

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