3 Key Things You Need to Watch With Boston Scientific

Medical device maker Boston Scientific (NYS: BSX) hasn't had a lot to celebrate recently. The company's recent quarterly report didn't perform up to expectations, and with its stock down more than 9% over the past month, Boston Scientific has some work to do to catch up with its industry peers. The right risk can reap rewards, however, and just because this company is hurting doesn't mean you shouldn't give it a good, long look. But in order to understand whether you should add this stock to your portfolio, you'll have to watch three key things that Boston Scientific will need to achieve to succeed.

Turn it around
Boston Scientific's two largest divisions by sales are in interventional cardiology and cardiac rhythm management, respectively, which make up around 50% of total sales. Unfortunately for the company, these two branches have also been performing rather poorly as of late. In the last quarter, interventional cardiology sales declined by 20%, while CRM revenues fell 8%. The company's drop in annualized quarterly revenue can be attributed to just these divisions. Guidance for the fourth quarter doesn't help, as the company expects a further drop in CRM revenues.

Boston Scientific needs to turn around these divisions' fortunes, but it won't be easy. CRM in particular has taken some hits around the industry recently. Medical tech rival St Jude Medical (NYS: STJ) similarly posted CRM decline in the most recent quarter, and markets in both the U.S. and internationally are stumbling.

It's pretty gloomy for Boston Scientific, but all's not lost just yet here. The company did recently score positive results for a heart device clinical trial that showed decreased patient death or inappropriate therapy with Boston Scientific's devices, and offered optimism for the company's stakes in the CRM and interventional cardiology departments. It's a good step toward maintaining and growing Boston Scientific's presence in treating advanced heart disease.

The company will have to beat out its own maladies and the industry at large in these areas, however. It's thus doubly critical that Boston Scientific is able to diversify its own revenue sources in case the CRM and interventional cardiology markets can't recover.

Time to innovate
Only one division outside CRM and interventional cardiology raked in more than $200 million for Boston Scientific's latest quarter: endoscopy, which managed a 4% gain in year-over-year sales. In order for this company to compensate for declining revenues (Boston Scientific hasn't posted overall revenue growth in any quarter this year), it needs to open up to the spirit of innovation. If Boston Scientific can't diversify its own revenue sources, it's doomed.

New CEO Michael Mahoney understands this fact well in good news for investors. Mahoney set a goal of revenue growth in 2013 despite industry observers betting otherwise, claiming, "we're absolutely a turn-around story." He's personally targeted innovation as a key driver for growth.

But how will the company achieve this innovation? It's made a lot of pricey acquisitions in its history, many of which have ended up as costly writedowns. Boston Scientific has expanded into asthma products and treatments for blocked arteries, and growth in smaller company segments such as neuromodulation -- which posted 5% year-over-year sales growth last quarter -- could provide some answers.

In order to innovate, however, it certainly would be nice if Boston Scientific could translate one of its acquisitions into good results.

Make them count
In the past five years alone, Boston Scientific has purchased 15 companies -- fifteen. For a company that's struggled recently and hasn't had the best track record with acquisitions, it's hard to justify all of these moves. For Boston Scientific to succeed, it must either translate some of these purchases into real results or cut back on its oversized spending spree.

I'm actually quite high on Boston Scientific's latest acquisition; the company purchased renal denervation device maker Vessix Vascular for up to $425 million. The deal brings the company into direct competition with Medtronic (NYS: MDT) , Covidien (NYS: COV) , and other medical device rivals in a growing hypertension market, and with no renal denervation devices currently approved in the United States, Boston Scientific could be poised to make a major splash.

But even this deal has its fair share of question marks. Apart from Boston Scientific arriving late to the game -- Medtronic hopes for approval from the Food and Drug Administration for its competing product in 2014, while Boston Scientific merely hopes to start clinical trials by then -- the high cost of the deal, if Vessix meets all milestones, will rank it among the 10 costliest medical device deals of 2012 so far. It could still be worth it if Boston Scientific makes this work, but it's nonetheless a steep price to pay.

Keep watching
If Boston Scientific nails these three areas, the company will be back on solid footing. CEO Mahoney's prediction of revenue growth in 2013 may be too optimistic, but it's not an impossible goal despite analyst predictions otherwise. However, with the medical device excise tax scheduled to land next year and the medical device industry struggling as a whole in Europe, macroeconomics will also be weighing on Boston Scientific's plans. Turning around the CRM and interventional cardiology divisions will help this company in the short run, but for long-term investors, improved innovation and making acquisitions pay off could just make Boston Scientific the turnaround story to ignite your portfolio.

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The article 3 Key Things You Need to Watch With Boston Scientific originally appeared on Fool.com.

Fool contributor Dan Carroll has no positions in the stocks mentioned above. The Motley Fool owns shares of Medtronic and St. Jude Medical. Motley Fool newsletter services recommend Covidien. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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