Dive Brief:

• A Johnson & Johnson acquisition of Boston Scientific would be a “good fit” that would accelerate medtech growth, according to analysts at Needham.
• New J&J CEO Joaquin Duato has adopted an “aggressive” M&A strategy, particularly for medical devices, and its limited portfolio overlap makes Boston Scientific a potential acquisition target, the analysts said in a note on May 27. They also upgraded their rating of Boston Scientific amid continued growth of the company's Watchman left atrial appendage closure device.
• Needham cut their ratings of rivals Medtronic and Zimmer Biomet, saying they are underperforming peers in a challenging operating environment.

Dive Insight:

Danielle Antalffy, an SVB Leerink analyst, touted the benefits of a potential J&J purchase of Boston Scientific early this year, arguing that while it “would be a huge deal,” it's viable and “makes a ton of sense.” Antalffy’s case rested on the ability for Boston Scientific to fill a clear gap in J&J’s medical device portfolio, namely in cardiovascular disease. 

The Needham analysts expanded on the idea in their note to investors last week. They noted J&J’s cardiovascular unit is currently limited to electrophysiology and neurovascular. Boston Scientific has a smaller presence in electrophysiology, which accounts for about 4% of its sales, and has no exposure to the neurovascular market. 

Should J&J acquire Boston Scientific, it would gain control of a portfolio of cardiovascular products that includes the Watchman device. Since the product is a key growth driver for the company, Abbott's approval for a rival device stirred analyst concern as an electrophysiologist survey found it could claim about one-fifth of the market by 2023.  

The Needham analysts said they are less concerned about the Watchman after seeing Boston Scientific’s first-quarter results. Boston Scientific now reports Watchman sales on a quarterly basis. 

“While management has stated that this is due to a reorganization of its reporting segments rather than a sign of bullishness, we find it hard to believe that they would have chosen to do this if they were concerned about the impact of Abbott's Amulet launch. And we note that Watchman sales grew by 33% in 1Q22 despite it being the second quarter of the Amulet launch,” the analysts wrote.

The analysts expect Boston Scientific to sustain high-single-digit organic growth even if Watchman faces headwinds. Other products such as the single-use endoscopes EXALT-D and EXALT-B and the aortic valve system Acurate neo2 are potential growth drivers for the company as well.

If acquired, the Boston Scientific portfolio could add up to 150 basis points to J&J’s organic medtech growth, according to the analysts.

Needham upgraded Boston Scientific's rating to "buy" from "hold" on the same day as they downgraded Medtronic and Zimmer. The analysts cut Medtronic's rating to ''hold'' from "buy" after seeing the company miss the consensus estimates for earnings and revenues in its fourth quarter. 

“While we understand that some macro issues are outside of management's control, [Medtronic’s] peers seem to be navigating the same challenging environment more successfully. Medtronic seems to have returned to its old pattern of poor execution and inconsistent results, and this is its third strike in our view, with the first being pipeline challenges (renal denervation and robotics) and the second being the diabetes warning letter,” the analysts wrote. 

The rating cut of Zimmer from "buy" to "hold" reflects the expectation that the company's revenue and earnings growth will continue to lag behind peers. In the note, the analysts state that Zimmer “has been losing share in its hip and knee business, and we're not sure what will reverse this trend.”

The analysts had expected that launches of products including the Rosa robotic surgical assistant would stabilize Zimmer’s market share.