Boston Scientific Pricing Spineometer: 5 of 5 Vertebrae

Boston Scientific, a global medical technology company, had a strongly positive Q1 2024. Revenue rose 14% to $3.9 billion and earnings before interest and taxes rose 22 % to $674 million over the same period last year.

A review of Boston Scientific’s 24 April earnings call and associated financial reports provided insight regarding the importance of pricing on performance.

Pricing was not mentioned in their earnings call. Margins were briefly mentioned by Dan Brennan, CFO of Boston Scientific in reference to a slow erosion of gross margins of around a couple hundred basis points over the course of five years. Elsewhere, we learned that “neuromodulation sales grew 10% operationally and declined 1% organically versus first quarter ’23.” This might be due to price erosion coupled with sales quantity growth, but sales mix and new products could also have contributed to these results.

Front and center of the earnings call were discussions of new product development and product launches. Mike Mahoney, Chairman and CEO of Boston Scientific began with, “Our first quarter results surpassed our expectations, fueled by our innovative portfolio, including the nearly 90 new products we launched globally in 2023.” Specific products mentioned included FARAPULSE, AGENT, Watchman, and WaveWriter. These serve practices in cardiology, urology, endoscopy, peripheral intervention, and neuromodulation.

The managerial focus is within expectations. In Chapter 1 of my textbook, Pricing Strategy, I provided a case study regarding the introduction of drug-eluting stents in 2003 and their price. Boston Scientific was highly impacted by this offering and still operates in this market. Though the technology and value proposition has evolved greatly, the pricing questions have remained the same.

Given the operations of Boston Scientific, we hold the following expectations regarding the required pricing capability.

1. Industry benchmarks would suggest Boston Scientific should employ 30 to 150 pricing professionals.
2. New product development (NPD) lifecycles stretching over several years for high-revenue offerings imply a need for a structured pricing engagement. Early in the NPD effort, studies of the Economic Value to the Customer (EVC) are useful for estimating the launch price and total addressable market (TAM). Later in the NPD effort, about a year before launch, more detail would be necessary for updating the launch price, as things may have changed, and identifying a more accurate launch price based on market research. See our white paper on Pricing and New Product Development. This engagement implies a need for value modelers and pricing market researchers to either be on the team or frequently contracted.
3. With a large customer and product set, pricing analytics would be useful for defining expectations and setting pricing guidelines for price negotiations.
4. Global operations in North America, Latin America, Europe, Middle East, Africa, and Asia Pacific imply a need for pricing resources to be globally distributed both to inform the average price capture expectations and the commercial policies in guiding pricing negotiations.
5. Boston Scientific frequently engages in corporate acquisitions and divestments. Each of these significant business decisions requires a strong understanding of the price potential of the offerings within a portfolio to estimate the value of the line of business. As such, Boston Scientific would benefit from assigning some pricing experts to work on the merger and acquisition team.
6. Being in the healthcare industry, Boston Scientific should have economists working on Health Economics and Outcomes Research to quantify the value propositions. At Boston Scientific, the value propositions focus on safety, clinical efficacy, ease of use, and efficiency. Each of these propositions should be quantified for presentation to healthcare administrators and relevant decision-makers.
7. Input cost adjustments, industry dynamics, competition, and customer dynamics all increase the demand for annual price adjustments and relevant studies.
8. Discount and rebate policy, price erosion versus annual price increases, and even sales incentive alignment to profits would be part of the purview of a strong pricing capability at Boston Scientific.
9. From a price structure perspective, Boston sells both durable and consumable goods, it has a broad product lineup that may include Good-Better-Best versioning, bundling is likely to be an issue as well, and with the value of healthcare data for improving medical outcomes, subscription pricing too would be common. Considering there are 10 fundamental price structures each with unique market segmentation, competitive, and costing requirements, we would hope someone within the broader Boston Scientific team is an expert in business model definitions and price structures.
10. Then we have issues of regulatory Medicare codes in the U.S. and other regulatory issues that impact pricing decisions in each country served.

This list of requirements implies that Boston Scientific should be operating at the upper end of the spectrum.

Research into the investment by Boston Scientific in pricing yielded very encouraging results.

1. The pricing team size was identified to be near or above the upper range of expectations. Pricing experts can be found globally including those located in the States, Brazil, Malaysia, Portugal, Spain, Italy, and even the Nordic countries.
2. Team members held titles of analyst, lead, partner, manager, director, and even vice president. In fact, Boston Scientific had more than one Vice President of Health Economics and Market Access.
3. Responsibilities spanned most of the Value-Based Pricing framework described in Pricing Done Right. Starting with the customer-facing edge and working our way to corporate strategy, we found professionals working on contract and tender pricing, then commercial pricing, health economics, market access, and pricing strategy. (Health Economics and Market Access, HEMA, is understood to have similar responsibilities as HEOR in other companies.)
4. We did not identify individuals working in every area listed above,

Given the importance and capability of pricing at Boston Scientific as indicated in financial reports, management statements, and our pricing team research, and given their performance, we have come to the following conclusion as of June 2024.

Boston Scientific Pricing Spineometer: 5 out of 5 Vertebrae. We did not identify individuals working in every area identified as potentially beneficial and we suspect there are organizational challenges and gaps, but believe this is a fair measurement given the publicly available data.

BSX (Boston Scientific Corporation) rose from 60 the day prior to their earnings call to 72 one week later. FY 2023 revenue of $14.2 billion with a 16% operating margin and P/E ratio near 95.

For FY 2023, a 1% improvement in price would yield a 6% improvement in operating profits holding all else constant at Boston Scientific.