Written by Jihad Jhaveri – Head of Process
The late 1970s was an exciting time for the fledgling medical device industry in the US. With low levels of regulation, leading physicians were generally the gatekeepers of the industry – designing and manufacturing unique medical devices for specific patient needs. They were assisted by small inventor-led medical device companies such as Medi-tech, Boston Scientific’s predecessor.
Medi-tech pioneered the development of steerable and balloon cardiac catheters that enabled complex, risky operations (ie surgery to remove blood clots) to be replaced by minimally invasive, safer procedures.
The FDA began codifying regulations for the industry in 1976, creating a three-class, risk-based classification system for all medical devices. Registration for class three products (life sustaining) became increasingly onerous, necessitating more rigour (and costs) in product development, testing, manufacturing and post-launch monitoring. This dramatically increased the barriers to entry into the medical sector. It also shifted the balance of power away from physicians and entrepreneurial inventors, towards innovative and better funded companies like Boston Scientific, who have subsequently enjoyed rapid organic growth augmented by continuous acquisitions. We explore their key divisions and standout product innovation.
Entrenched in highly concentrated, growing niche markets
Today, Boston Scientific focusses on three broad disciplines within medical technology: (i) cardiovascular, (ii) neurology and rhythm, and (iii) medical surgery. Their research and development (R&D) spend is consistently higher than comparative companies ($1 billion per year). This scale, together with their efficacy – particularly in transferring technology across disciplines – is a competitive advantage (below left), allowing the business to enjoy sustained high margins.
In general, the markets in which Boston Scientific competes are characterised by:
• very high levels of manufacturer concentration due to limited competition, indicated by the top three market shares in the right chart below;
• low levels of adoption, which means large scope for growth; and
• US-dominated sales, which is a function of more generous medical insurance payments for cutting-edge medical devices in that region. They have, however, seen rapid sales growth in emerging markets in recent years.
Much like other successful medical technology companies over the last few years, Boston Scientific has succeeded in outsourcing meaningful parts of its manufacturing process. This has enabled greater focus on capital allocation and human resource development, resulting in good returns.
Curbing cardiovascular disease
As indicated in the right chart below, the cardiovascular portfolio is Boston Scientific’s largest segment. Products developed here are primarily used for diagnosing and treating coronary disease and structural heart conditions.
Peripheral interventions develop minimally invasive treatments for vascular diseases and cancer, including:
• drug-eluting vascular stent systems that treat peripheral artery disease by way of an inserted stent1 that slowly releases therapeutic drugs; and
• the highly targeted TheraSphere cancer treatment involving the infusion of millions of radioactive micro glass spheres directly into tumour feeding arteries.
Within interventional cardiology, structural heart therapies are a rapidly growing niche segment in which Boston Scientific has a large market share. This represents a very meaningful part of their overall profits. Success in this area has historically created opportunities to cross-sell other cardiology and rhythm management products. Structural heart therapy products include:
• The WATCHMAN FLX™ (below left) device is designed to close the left atrial appendage (LAA) of the heart in patients who are at risk of a stroke. Ninety per cent of stroke-causing blood clots in affected patients emit from the LAA and Boston Scientific’s FDA approved WATCHMAN system delivers an implant to this section of the heart, permanently closing it off to prevent clots from escaping. This lifesaving procedure is performed under general anaesthetic, where the implant is delivered through a catheter inserted in the upper leg, that expands into shape and anchors at the site.
• Transcatheter aortic valve replacement (below centre) is a minimally invasive heart procedure that replaces a narrowed aortic valve without the need for open heart surgery. A compressed artificial valve is implanted and expands into shape at the site, opening the area to help enable healthy blood flow from the heart to the rest of the body.
1A small mesh tube.
Electric impulses stimulate cardiac and neurological therapies
Boston Scientific is maintaining profitability in the more established, slower growing cardiac rhythm management (CRM) devices segment by its movement away from simply monitoring and managing cardiac issues, towards restoring, repairing and healing. These products (eg pacemakers and implantable fibrillation) monitor the heart and deliver an electric current to treat abnormalities. While the global CRM market is more established and offers less growth than other markets targeted by Boston Scientific, their innovation and differentiation in this area has been impressive. They offer the world’s first minimally invasive subcutaneous implantable defibrillator that provides lifesaving protection against cardiac arrest without the need for a lead to be surgically placed in the heart.
Their fast-growing neuromodulation business designs devices that treat neurological movement disorders (eg Parkinson’s Disease) and manage chronic pain:
• Deep brain stimulation systems (below right) use an implanted device that sends electrical signals to the areas of the brain responsible for body movement, thereby assisting in the regulation of brain activity.
• Spinal cord stimulation systems work similarly. A battery-operated pulse generator is planted under the skin and connected to leads that stimulate nerves in the spinal column. This intercepts pain signals to the brain and replaces them with a tingling sensation (paraesthesia). With today’s high prevalence of chronic illnesses and associated pain, the addressable market for this alternative to drugs and surgery is sizeable.
Less invasive surgery meets lifestyle disease demands
The Medsurg division houses the company’s leading market share positions in gastrointestinal and pulmonary endoscopy and surgical urology. There is strong demand growth for these treatments arising from the increase in lifestyle-related diseases. Ground-breaking technologies include:
• The SpyGlass™ cholongioscopy system is used for visualisation, diagnostic evaluation and therapeutic interventions within the bile ducts. It assists in obtaining biopsy specimens, diagnosing abnormalities and guiding gall stone therapy. Although the SpyGlass™ consoles require a substantial upfront capital investment, the health-related economic benefits (from better surgical outcomes) is leading to strong growth in developed and emerging markets. Additionally, a high level of customer contact (servicing and provision of consumables) results in the cross-selling of other Boston Scientific products.
• Stent (scaffold) systems enable the treatment of pancreatic and biliary diseases (including cancer) and comprise Boston Scientific’s enhanced AXIOS™ stent and delivery system. This is the first catheter and stent system for the treatment of pancreatic pseudocysts, whereby large cysts can be drained into the stomach. This procedure is made possible by way of an oral endoscopy that guides a stent into place via a catheter and allows for a conduit opening to be created in the wall of the stomach. As this is the only stent currently available to bridge two tubular organs, there are exciting new areas of application for this technology being researched. This includes endoscopic gall bladder drainage and even gastric bypasses, which would be a major surgical breakthrough in a large, high growth area of medical treatment.
Furthermore, Boston Scientific currently holds the largest market share in surgical urology and pelvic health. It is an entrenched global leader in the treatment of kidney stones and, through acquisitions and R&D, has built a strong portfolio in the pelvic health arena. Key products include:
• a comprehensive suite of kidney stone management devices (stone laser devices make up the largest portion of revenue);
• the GreenLight Laser System, whereby a thin, flexible fibre carrying current is inserted into the urethra and used to vaporise excess prostate tissue; and
• the single-use LithoVue Ureteroscope, which has significantly disrupted the largely reusable market by increasing surgeon productivity (eliminating the need for time-consuming sterilisation). The success of this repeat-use product is translating into cross-sell opportunities across the surgical portfolio.
Continuous innovation is the guidewire for profitable growth
The continuous medical breakthroughs made by Boston Scientific since the 1970s have enabled complex surgical operations to be replaced by simpler and safer procedures – resulting in better patient health outcomes. The current portfolio enjoys meaningful growth because of the high efficacy of its products and their current low usage rates globally. Niche product segments often originate from specialised medical technology breakthroughs such as those created by Boston Scientific, with only a small group of competitors able to follow. This is evidenced by the very high level of concentration in each of Boston Scientific’s product markets. These dynamics should allow the company to enjoy an extended period of strong growth, with solid returns on investment – ultimately benefiting our clients with global equity exposure.