Lady Luck may shine on Boston Scientific in 2013 if rival’s fortune goes down in flames

It’s not great when a company needs a rival to have a major disaster in order to see the upside, but when you are Boston Scientific (NYSE: BSX), it may be welcome news indeed.

That is the queer situation Boston Scientific finds itself in at the close of a tough year.  Or at least that is how Citi analyst Matthew Dodds is envisioning 2013 for the Massachusetts medical device maker if one of its close rivals — St. Jude Medical (NYSE: STJ) — is forced to pull a defibrillator lead from the market.

To back up a little, St. Jude Medical makes the Durata defibrillator lead with a special coating that the company strongly believes makes it much less likely to suffer from a defect that led to the recall of a previous family of ICD leads called Riata. In those leads, wires ended up tearing through their insulation and endangered the patient.  Many fear that Durata is very similar in design to the recalled leads although St. Jude has fought the notion.

Until recently, some analysts believed that Durata would prove safe over the long term. But a recent U.S. Food and Drug Administration inspection report in which the agency basically said Durata’s design validation process is inadequate has rekindled fears and St. Jude’s stock tumbled on the news.

In in his research report Monday, Dodds writes that the “risk of the Durata being removed from the market by mid-2013 is very high.”  Such a withdrawal would cost St. Jude Medial dearly; Dodds estimates that it, along with losses in the ICD generator and pacemaker markets, would take away $1.27 from St. Jude’s earnings per share in 2013.

Who will benefit from St. Jude Medical’s likely market share losses in 2013? Dodds gives the prize to Boston Scientific and adds icing on the cake with an upgrade of the company’s stock to “buy” from “neutral.”

“We estimate that BSX would capture 41 percent ($338 million) of STJ’s lost sales. …,” Dodds said in his note to institutional investors.

That will add 14 cents to Boston Scientific’s earnings per share.

But the bounty won’t be limited to Boston Scientific alone as hospitals and physicians will also move to Medtronic, St. Jude’s in-state rival, to make up the shortfall. Dodds estimates Medtronic will gain 29 percent or $238 million while other players would capture 25 percent or $205 million and 4 percent or $36 million “would be lost by the market” with Durata’s exit.

Dodds has said that the Street is more sanguine about the future of St. Jude Medical’s Durata than they should be, and it looks like at least one analyst is making an about face, according to the StreetInsider. Larry Biegelsen, analyst with Wells Fargo, wrote this when the FDA issued its negative inspection report on St. Jude’s Sylmar, California plant where ICD leads are made:

Although we expected the noise level around STJ’s Riata/Durata ICD leads to subside, we were clearly wrong. Over the past month or so, the noise level has actually increased, culminating in the release of a very concerning FDA 483 inspection letter after the close yesterday [Nov. 20]. We think the issues raised in the FDA 483 inspection letter are likely to heighten physicians’ concerns about Durata because the letter highlights flaws in the design verification and validation methods for the lead.


[Photo Credit: Victory White from Big Stock Photo]

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