Hold Analyst: Zeeshan Maqsood

BSX: EXCITING PIPELINE OF PRODUCTS, SUCCESFUL LAUNCH & EXECUTION IS KEY

Initiating with a HOLD and a $13.25 price target. Boston Scientific develops, manufactures & markets medical devices

for various medical specialities. Boston Scientific has advanced the practice of less-invasive medicine by providing medical

professionals with alternatives to surgery & other risky procedures that have high a risk. We’d like to remind investors that

the core of every business is very important and we feel that investors have forgotten all too quickly about BSXs weak track

record. While the stock is up 130% since Jan. 1 2013 and trades at a premium – even though BSX has multiple exciting

products in its pipeline, and the cardio + rhythm management industry is stabilizing – BSX will have to be firing on all

cylinders going forward to justify the current valuation. We believe the stock is fairly valued relative to its opportunities.

BSXs core market is in trouble. The core business of Boston Scientific has been troubled, specifically the interventional

cardio & cardiac rhythmic management divisions (67% of 2012 sales), which declined -3.6% p.a. from 2010-2012, due to a

significant loss in market share (-1200bps in DES, -500bps in ICDs and -200bps in pacemakers from 09’-13’) and industry-

wide weakness (increased patient selection process, annual pricing erosion due to a higher bargaining power by hospitals,

increased competitors & product performance issues [reference: COURAGE trial for DES and recalls for ICDs]). Abbott &

Medtronic are the leaders in DES & CRM respectively and a turnaround in these divisions, will be driven mostly by innovation

(i.e. Promus Element DES, Synergy DES, S-ICD, LAA & TAVR).

Promising pipeline reminds us of 2005 investor sentiment surrounding TAXUS. BSX has a vast portfolio which will

allow it to enter new & adjacent growth markets (i.e. transcatheter aortic valves, AFib, neuromodulation). We arrive at a 2.3%

organic CC sales growth, driven off a stabilization in the cardiovascular division in 2014, accelerating to 5% growth by 2016

due to successful product launches (contingent on FDA Approvals). Achieving higher than 5% organic CC by 2016 will be

difficult in our model without a blockbuster hit in 1-2 product launches.

Watchman LAA: Treats AFib, awaiting FDA Approval in 2014

Synergy Stent: 3rd generation stent, biodegradable polymer, awaiting FDA approval in 2016, could drive DES

revenue CAGR by 500-1000 bps per annum

Renal Denervation: Unlikely for BSX to launch in the U.S as MDT failed to meet its primary efficacy endpoint

(SYMPLICITY HTN-3)

S-ICD: Large ICD market opportunity ($6.3B), very favourable product (no need for fluoroscopy, and avoids

complications with transvenous leads). However, there is a lack of data pertaining to achieving the same results in

an environment outside of having the ventricular fibrillation induced

Alair: This will significantly grow the endoscopy division (mgmt. guided for $400M sales target by 2017)

Lotus: BSX gained CE Mark in Q4/13 and it is in dialogue with the FDA to finalize plans for US IDE trial

Lots of room to improve margins. Management commented during their latest earnings call that they expect a 500-600bps

operating margin improvement over the next 5-6 years. This is driven by plant network optimization in their COGS, SG&A

improvement and manufacturing cost reductions. Considering BSX posted a 70.7% GM during Q3/2012 and that some of its

competitors are at 75.0%, we modelled out BSX achieving a 73.0% GM by mid-decade (2018). The rest of the 500-600bps

op. margin improvement will be from operational leverage in their SG&A.

We issue a HOLD rating and a 2014 year end price target of $13.25. We arrive at our price target by applying a triangulated

approach that combines a DCF analysis, applies a 15x multiple on our 2017 Cash-EPS and a 3x multiple on our 2014 sales

multiple. We view our multiples as fair, since BSX should trade at a slight discount to STJ, as STJs core divisions performed

better than BSXs over the 2010-2012 time period, yet both arguably have guided for similar revenue growth profiles of 400-

500bps. Our multiples are in-line with other large-cap medical device companies that trade at 3.0x EV/Sales and 16-17x P/E.

Boston Scientific

February 3rd 2014

28%

26%

18%

11%

7%

6%

2%

Interventional Cardiology

CRM

Endoscopy

Peripheral Interventions

Urology / Women's Health

Neuromodulation

Electrophysiology

Key D ata F Y12 F Y13E F Y14E F Y15E

Sales 7,250 7,142 7,447 7,741

EBITDA 1,648 1,662 1,803 1,964

EPS 0.42 0.44 0.51 0.63

EPS-Concensus 0.52 0.63

EPS-Cash 0.66 0.70 0.78 0.90

P/E 32.6x 30.8x 26.5x 21.6x

P/E-Cash EPS 20.4x 19.3x 17.3x 15.1x

T rading D ata

Date:

Last Price: US$ 13.53

52-wk range

M arket cap. US$17.5bn

Shares o/s 1,340m

Free float 99%

Avg. daily vo lume ('M ) 10,969

Beta 1.1

Next Earnings Date 4-Feb-14

Feb, 2 2014

US$ 7.07-14.08

Revenue Divisions (2013E)

Price Performance Chart (Normalized at 100)

100

120

140

160

180

200

220

240

260

12/31/2012 3/31/2013 6/30/2013 9/30/2013 12/31/2013

BSX S&P 500 MDT STJ

Model Summary2010 2011 2012 Q1 Q2 Q3 Q4 2013 2014 2015 2016 2017 2018 10 - 15 C A GR 13 - 18 C A GR

C ard iovascular D ivision 3 ,2 71 3 ,2 2 5 2 ,9 53 6 9 6 719 6 6 7 6 9 5 2 ,78 4 2 ,8 6 1 2 ,9 4 2 3 ,0 9 2 3 ,2 52 3 ,4 0 3 - 2 .1% 4 .1%

Intervent ional Cardiology 2,602 2,494 2,179 505 520 472 502 2,006 2,028 2,060 2,157 2,260 2,352 - 4 .6 % 3 .2 %

Coronary Stents 1,671 1,620 1,364 310 304 277 308 1,206 1,200 1,207 1,278 1,355 1,420 - 6 .3 % 3 .3 %

Other Intervent ional Cardiology 931 874 816 195 216 195 194 800 828 853 879 905 932 - 1.7% 3 .1%

Peripheral Intervent ions 669 731 774 191 199 195 193 778 832 882 935 992 1051 5.7% 6 .2 %

R hyt hm M anagement 2 ,3 2 7 2 ,2 3 5 2 ,0 55 513 511 4 9 8 50 4 2 ,0 2 6 2 ,170 2 ,2 3 7 2 ,3 0 3 2 ,3 72 2 ,4 4 4 - 0 .8 % 3 .8 %

CRM 2,180 2,088 1,908 478 475 464 450 1,867 1,866 1,915 1,962 2,011 2,061 - 2 .6 % 2 .0 %

Electrophysiology 147 147 147 35 36 34 55 160 303 322 341 361 383 17.0 % 19 .1%

M edSurg 1,8 6 4 2 ,0 2 1 2 ,119 516 56 0 56 8 59 9 2 ,2 4 3 2 ,4 17 2 ,56 3 2 ,717 2 ,8 8 1 3 ,0 55 6 .6 % 6 .4 %

Endoscopy 1,079 1,187 1,252 309 325 322 339 1,295 1,386 1,455 1,528 1,604 1,684 6 .2 % 5.4 %

Urology / Women's Health 481 498 500 118 124 131 156 529 557 586 616 646 676 4 .0 % 5.0 %

Neuromodulat ion 304 336 367 89 111 115 104 419 474 522 574 631 694 11.4 % 10 .6 %

Sales 78 0 2 74 8 1 712 7 172 5 179 0 173 3 179 8 70 54 74 4 7 774 1 8 113 8 50 5 8 9 0 3 - 0 .2 % 4 .8 %

∆YoY Growth -4.1% -4.7% -1.0% 5.6% 4.0% 4.8% 4.8% 4.7%

Gross margin 67.3% 65.7% 67.8% 67.2% 70.8% 70.7% 70.5% 69.8% 70.6% 71.0% 71.5% 72.3% 73.0%

SG&A % of sales 32.9% 32.6% 34.6% 35.5% 35.9% 37.2% 36.5% 36.3% 36.1% 35.9% 35.7% 35.6% 35.4%

R&D % of sales 12.0% 11.7% 12.3% 11.6% 12.3% 12.5% 12.5% 12.2% 12.2% 12.0% 11.9% 11.7% 11.5%

Operat ing margin 13.5% 13.6% 13.3% 11.9% 14.4% 13.5% 14.0% 13.4% 14.5% 16.1% 17.2% 18.4% 19.9%

EPS 0 .4 1 0 .4 4 0 .4 2 0 .10 0 .12 0 .10 0 .12 0 .4 4 0 .51 0 .6 3 0 .73 0 .8 5 1.0 0 8 .8 % 17.9 %

Cash-EPS 0 .6 9 0 .6 7 0 .6 6 0 .16 0 .18 0 .17 0 .19 0 .70 0 .78 0 .9 0 1.0 1 1.15 1.3 1 5.5% 13 .3 %

∆YoY Growth - 2 .8 % - 0 .8 % 6 .0 % 11.1% 14 .8 % 12 .9 % 13 .7% 14 .0 %

Valuation Methodology

We give each methodology an equal weight, in arriving at our end of year 2014 PT of $13.25

We apply a 15x multiple on 2017 Cash-EPS ($1.15), which is the mid-point of where Medtronic & St-June’s trades. We don’t feel a premium multiple should

be paid just yet, due to BSXs weak track record; however, BSX does have better growth prospects from 2014-2018 in growing overall FCF compared to both

of its peers due to its margin expansion story.

We view our multiples as fair, in light of 5% organic CC revenue growth from 2016 onwards (higher than Medtronic’s by 200-250bps & St Jude’s by 100bps)

and we would re-rate BSX at a higher multiple upon execution of its product pipeline and achieving its margin improvement goals

It seems like the market is already pricing in most of the operational upside in its forecast, as BSX trades at a 28% premium to Medtronic on an EV/EBITDA

2015 basis and a 8.2% premium to St-June’s, yet trades on a discount to both on an EV/Sales basis, suggesting that sell-side’s forecasts may not be taking

into account a significant margin improvement (explains the multiple differences in-between EV to sales and EV to EBITDA)

In our DCF scenario, the most significant assumption is our WACC & Exit EBITDA Multiples. We calculated our WACC using the companies cost of debt

after tax for 2012 (5.2%) & cost of equity (9.4%). For our Exit EBITDA multiple, there would be few large buyers who could buy BSX due to anti-competition

laws, and we feel a premium would not be likely. Also current market multiples are quite elevated. We choose a 9.3x EV/EBITDA exit multiple which is an

average valuation of the 3 large cap MedTech Cardiovascular players from 2005-2013, and does not reflect a takeout premium.

Exhibit: Valuation Methodology – Averages & Comparables Table

Valuation Summary

We arrive at a $13.25 price target using a triangulated approach, which combines a DCF analysis, a 15x Cash P/E multiple on our 2017 EPS and a 3x EV/Sales

on 2014. The company’s current 2014 P/E of 17.34x is a 2 point premium over its peers, shows that investors are anticipating a successful turnaround story for

BSX. A failure of BSX to turnaround its core or to achieve margin improvement, would result in a multiple de-rating.

Rating Rationale

Boston Scientific has recently lost substantial market share against its peers and has a poor track record with one of the worst mergers in history lingering in

investor’s minds. The company faces a troubled core market, but could achieve significant operational efficiencies as well as bring in new innovative devices

(i.e. Synergy Stent & S-ICD) that could bring top-line growth to 5% by 2016. BSX has also diversified its revenue base, whereby Endoscopy, Urology/Women’s

Health & Neuromodulation, Electrophysiology will contribute to 45-55% of BSXs growth from 2015-2018. We believe strongly in BSXs turnaround story, but

feel that the market has priced in already a lot of future top & bottom-line improvements.

Risk Summary

Inability for cardiovascular or rhythm management division to stabilize: BSX has lost significant market share in both these segments and operates at a

lower operating margin than its peers. Further recalls as well as pricing pressure will have a large downside effect on these divisions. A failure to improve the

operational front, in the face of the new medical device excise tax, will also bode negatively for BSX.

Rejected pipeline: One of BSX major growth markets (renal denervation) is unlikely to pass post-SYMPLICITY HYN-3 trial results. Any further trials that

fail to meet its primary efficacy (i.e. Synergy Stent, Lotus transcatheter valve, Alair) will result in a slower revenue growth opportunity and likely a de-rating

of the stock.

Failure to execute on future products: Any products that fail to attract buyers due to a competitor’s superior product, would also diminish BSXs growth

prospects and would result in a multiple de-rating from current levels.

P / E Valuation F2017E EV / Sales Valuation F2014 DCF Weighted

Earnings Per Share (Cash) $1.15 Sales 2014 ($ MM) 7,447 Price-Target

Multiple 15.0 x Multiple 3.0 x Exi t EBITDA Multiple 9.3 x

$17.26 Enterprise Value ($ MM) $22,341 Top-l ine growth 4.5%

Discounted at 8.5% Net Debt ($ MM) $4,750 WACC 8.5%

Equity Value ($ MM) $17,591 Op. Margin Improvement 600 bps

Equity Value Per Share US$ $13.51 Equity Value Per Share US$ $12.92 Equity Value Per Share US$ $13.33 $13.25

February 3rd 2014

Boston Scientific

2

2005-2013 Valuation Averages 2009-2013 Valuation Averages Relative Valuation to S&P 500 (P/E)

P/E EV/EBITDA EV/Sales P/E EV/EBITDA EV/Sales 2005-2013 2009-2013

BSX 17.38x 8.40x 2.46x BSX 16.15x 7.67x 2.02x BSX 17.22x 13.60x

STJ 16.00x 10.13x 3.23x STJ 12.69x 8.32x 2.75x S&P 500 15.95x 13.10x

MDT 14.21x 9.45x 3.53x MDT 11.31x 7.69x 2.93x Premium 8.0% 3.8%Avg. 15.86x 9.33x 3.07x Avg. 13.38x 7.90x 2.57x

M arket D vd EV/ EB IT D A

M edical D evices P rice ($ ) C ap ($ B ) Yld 2014 ₁ 2015 ₂ 2014 2015 2015 R OE D / E

C ardio vascular

BOSTON SCIENTIFIC 13.53 18.1 0.0% 17.34x 15.10x 2.93x 2.81x 11.32x -2.5% 64.7%

M EDTRONIC 56.56 56.5 1.9% 14.80x 13.77x 3.30x 3.19x 8.81x 21.2% 65.5%

ST JUDE M EDICAL 60.73 17.7 1.6% 15.28x 14.14x 3.50x 3.35x 10.46x 17.0% 81.3%

Gro up A verage 15.81x 14.34x 3.25x 3.12x 10.20x 11.9% 70.5%

D iversif ied

ABBOTT LABORATORIES 36.66 56.7 1.5% 16.64x 14.84x 2.49x 2.36x 9.32x 5.8% 34.7%

ALLERGAN 114.60 34.1 0.2% 21.00x 18.89x 4.87x 4.47x 11.81x 17.1% 35.0%

BAXTER INTERNATIONAL 68.30 37.1 2.8% 13.31x 12.47x 2.64x 2.57x 9.18x 29.3% 117.0%

BECTON DICKINSON 108.12 21.0 1.8% 17.42x 15.93x 2.66x 2.55x 9.23x 28.2% 78.7%

Gro up A verage 17.09x 15.53x 3.16x 2.99x 9.89x 20.1% 66.4%

Ortho pedic

STRYKER 77.60 29.4 1.4% 16.55x 15.14x 2.94x 2.79x 9.81x 11.4% 30.3%

ZIM M ER HOLDINGS 93.97 16.1 0.9% 15.14x 13.85x 3.32x 3.19x 8.25x 12.5% 26.6%

Gro up A verage 15.85x 14.49x 3.13x 2.99x 9.03x 12.0% 28.4%

₁,₂ All es t imates are concensus excep t fo r BSXs EPS 2014 & 2015, as we use our internal es t imates fo r ex-cash EPS

P / E EV/ Sales

Source: Bloomberg