Device tax, sluggish sales weigh on Boston Scientific, analysts say

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Analysts at Fitch Ratings affirmed a BBB- rating on Boston Scientific (NYSE:BSX), predicting that cost-control efforts and new product launches won’t be enough to make up for sluggish sales and the effect of the 2.3% medical device tax.

"The healthcare reform-related 2.3% excise tax on U.S. device sales, which was implemented in January 2013, is expected to pressure margins by approximately 1 percentage point," according to Fitch.

Efforts to reduce costs and add higher-margin devices "will help to mitigate this risk," the analysts wrote, but "will not entirely offset the Affordable Care Act’s (ACA’s) 2.3% U.S. sales tax."

The global rating agency predicted "consistently solid" free cash flow for the next 12 months, but warned that relatively flat sales and industry-wide headwinds would keep the Boston Scientific’s margins modest.

Fitch’s Issuer Default Ratings (IDRs) define "an entity’s relative vulnerability to default on financial obligations," indirectly suggesting a company’s likelihood to resort to bankruptcy or other measures. A BBB rating indicates "that expectations of default risk are currently low. The capacity for payment of financial commitments is considered adequate but adverse business or economic conditions are more likely to impair this capacity," according to Fitch.

The rating was based on 5 key "drivers," including a boost from expectations of ongoing operational stability and setbacks from ongoing pricing pressures in cardiac rhythm management and drug-eluting stents as well as Boston Scientific’s "litigation profile."

Fitch analysts added that CRM and interventional cardiology revenues were likely to remain soft in the near future, but that Boston Scientific’s other businesses should generate single-digit growth in the near term.

"Fitch forecasts that BSX will continue to generate consistently solid [free cash flow], owing to fairly durable margins, relatively dependable revenue and manageable [capital expenditure] requirements," according to the report. "The company is expected to maintain adequate liquidity through revolver availability and access to the capital markets."

The analysts predicted that Boston Scientific will suffer sluggish growth during the next 12 months as the medical device giant faces pressures that are weighing down the entire industry, including European austerity measures and pricing pressures from hospitals amid a changing paradigm in healthcare.

BSX shares were down 0.5% to $9.56 as of about 11:15 a.m. today.

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