Boston Scientific Corporation

Ladies and gentlemen, thank you for standing by, and welcome to the Boston Scientific Q1 2019 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. If you should require offline assistance, you may depress star, then zero. As a reminder, today's call has been recorded. I will now turn the call over to your host, Susan Lisa. Please go ahead.

Thank you, Kevin. Good morning, everyone. Thanks for joining us. With me on today's call are Mike Mahoney, Chairman and Chief Executive Officer, and Dan Brennan, Executive Vice President and Chief Financial Officer. We issued a press release earlier this morning announcing our Q1 2019 results, which included reconciliations of the non-GAP measures used in the release. We posted a copy of that release as well as reconciliations of the non-GAP measures used in today's call to the Investor Relations section of our website under the heading Financials and Filings. The duration of this morning's call will be approximately an hour. Mike will provide strategic and revenue highlights of Q1-19. Dan will review the financials for the quarter and then provide Q2-19 and full year 2019 guidance. And then we'll take your questions. During today's Q&A session, Mike and Dan will be joined by our Chief Medical Officers, Dr. Ian Meredith and Dr. Ken Stein. Before we begin, I'd like to remind everyone that on the call, operational revenue excludes the impact of foreign currency fluctuations, and organic revenue further excludes the impact of certain acquisitions, including Nextera, Claret and Augmentix in the relevant periods for which there are no prior period-related net sales. Also of note, this call contains forward-looking statements within the meaning of federal securities laws, which may be identified by words like anticipate, expect, believe, estimate, and other similar words. They include, among other things, statements about our growth and market share, new product approvals and launches, clinical trials, cost savings and growth opportunities, Our cash flow and expected use, our financial performance, including sales, margins, earnings, and other Q2 and full-year 2019 guidance, as well as our tax rates, R&D spend, and other expenses. Actual results may differ materially from those discussed in the forward-looking statements. Factors that may cause such differences include those described in the risk factors section of our most recent 10-K and subsequent 10-Qs filed with the SEC. These statements speak only as of today's date, and we disclaim any intention or obligation to update them. At this point, I'll turn it over to Mike for his comments.

Thank you, Susie. Good morning, everyone. Boston Scientific continues to grow above market, improve our profitability, and invest for the long term to address unmet patient needs and deliver differentiated financial performance. In the first quarter, our team delivered 7.8% operational revenue growth and 6.3% organic growth, with another quarter of balance across our businesses and geographic regions. In addition, we leveraged our first quarter revenue growth to deliver 7% adjusted EPS growth to $0.35, within our guidance range, despite a one-cent charge related to the mesh market withdrawal, while generating $437 million in adjusted free cash flow. We have high visibility to high single-digit organic growth for 2019, even with recent unforeseen regulatory headwinds this year related to pacotaxel, transvaginal mesh, and sterilization in men's health. While we work diligently to offset these issues, the cumulative effect makes delivering on the high-end we're beating our original full year 19 revenue guidance of 7% to 8.5% organic growth, a lower probability. As a result, we're lowering the top end of our growth guidance range by 50 basis points, and our full year 2019 operational revenue growth guidance is now 8% to 9%, and organic revenue growth guidance is now 7% to 8%. We're pulling up the bottom of our full year adjusted EPS guidance from a range of $1.53 to $1.58, to a range of $1.54 to $1.58, which represents a 10% to 13% year-on-year growth, excluding the benefit of the 2018 IRS settlement. With this 2019 growth outlook, we're excited for the rest of the year and our plans to build upon our global strengths and drive sustainable long-term revenue gains, double-digit EPS growth, and to continue our momentum in 2020 and beyond. Although we're proud of our results this quarter, we're disappointed that our first quarter operational growth of 7.8 and organic of 6.3 were 70 basis points below our guidance range, or approximately 15 million shortfall, with 5 million of that related to the mesh. I'll briefly address where we had some revenue softness in the quarter versus our plans, as well as our plans to accelerate growth from here. First, although our PI business had strong growth this quarter at 11% organic, We did feel the impact of the Paclitaxel concerns, particularly in the second half of the first quarter after the release of the FDA's advisory letter. While the Alluvia launch in Japan remains on track, we do expect slower adoption of Alluvia to persist in the U.S. and Europe in second quarter and potentially throughout the second half. The June FDA Advisory Committee panel meeting will be a key next data point and will continue our dialogue with FDA on Alluvia's unique design characteristics which include controlled local release of low-dose paclitaxel from a safe and proven polymer, as well as clinical superiority data. However, we are assuming ongoing headwinds and cut in half our alluvial revenue expectations for 2019 to reflect the current landscape. In uroPH, we plan to overcome some of the recent headwinds. We delivered a decent quarter for our urology public health business at 14% operational and 5% organic growth, despite two unanticipated events. In the first quarter, we're impacted by an unexpected Illinois state-mandated shutdown of a third-party sterilizer used for our men's health product lines. Fortunately, the U.S. situation has been resolved, and we did receive FDA approval in late March to conduct sterilization of these products at our own henhouse facilities. But we do expect softness and global supply during the second quarter, and we will return to full supply by the end of the second quarter. Regarding transvaginal mesh, For public organ prolapse, last week news will result in a full year 19 negative impact of $30 million to global revenue and a $0.02 charge to adjust the DPS. A portion of this was booked in first quarter, including the $5 million sales reserve and related inventory write-offs for nearly a penny impact to adjust the DPS. The mesh market withdrawal represents a 30 basis point drag to both first quarter and full year 19 organic growth. And lastly, we did see some softness in our U.S. SCS business versus our internal plans. Global Neuromod delivered a strong quarter with 12% organic growth, and we believe SCS remains a very strong and under-penetrated market in the second half of this year. We're excited to release new clinical data on Waverider and launch additional enhancements to both SCS and DBS platforms. But I'll provide some additional highlights in the quarter and our full 19 outlook. So regionally, we delivered strong and balanced operational growth with Asia Pac up 10, Europe up 8, and the U.S. up 7. Emerging markets revenue grew 22% operationally, led once again by strong China growth. We also delivered balanced organic growth across all our businesses, 7% in both med-surg and cardiovascular, 6% in rhythm and neuro. Turning to some of the businesses, we delivered 8% organic growth in endoscopy, which is broad-based and fueled by infection prevention performance, as well as excellent results in our biliary portfolio, driven by the Axio stent and the recent launch of Spyglass Digital 2. In addition, the quarter reflects strong early launch results from Arise Gel, a key component of our endoluminal surgery portfolio, and our new Jagwire Revolution Guidewire. And for the balance of the year, we expect continued strength in endoscopy sales due to the ongoing ramp of these new product launches, as well as the OrcaPod single-use valve. Importantly, we remain on track for a year-end 2019 launch of our EXALT-D single-use duodenoscope, which is used in ERCP procedures. We believe that EXALT-D can help meet a significant unmet need for hospitals and patients. And two weeks ago, the U.S. FDA issued a safety communication regarding scope reprocessing. Preliminary results of the FDA report indicated higher than expected levels of contamination, up to 5.4% of samples, tested positive for organisms of high concern, such as E. coli and multi-drug resistant pathogens. The FDA also stated that there continues to be a need for improvement of the safety of reprocessed duodenoscopes, and noted that in addition to its March 18 warning letters to reusable scope manufacturers, the agency continues to encourage the development of new technology and design features. The Exalt Model D single-use scope has been designed to address this exact issue by eliminating scope disinfection challenges completely. This platform represents a significant opportunity in 20 and beyond. As mentioned, urology and public health grew 14% operationally and 5% organically in first quarter and reflects an approximate 200 basis point negative impact from mesh sales reserves recorded in first quarter. And Lithiview led sales in our CoreStone portfolio And importantly, the urology acquisitions of Augmentix and Nextera are both executing the plan. Resume results were reinforced by publication of four-year trial data with a low 4.4% surgical retreatment rate and no newer adverse events noted between years three and four, as well as initiation of a resume-specific TPT code for physician reimbursement on January 1st. As mentioned, we expect software uroPH revenue in second quarter given the menthol sterilization impact and the remaining 25 million expected negative revenue impact in Q2 through Q4 through the global removal of mesh products for pelvic organ prolapse. However, we do expect UROPH revenue growth to be accretive to the company average in second half and full year 19 as core growth remains robust, the menthol sterilization matters resolved, and recent acquisitions of Nextera and Augmentix anniversary and become organic as of May and October, respectively. Rhythm and neuro grew 6% in the quarter, led by 12% growth in neuromod, 10 in EP, and 3 in cardiac rhythm management, which are all organic. The 12% neuromodulation revenue growth was driven by continued gains in the U.S. by our Waverider spinal cord stimulation and Versace deep brain stimulation platforms. Global SES sales were up 7% as Waverider's unique ability to offer combination waveform therapies both with paresthesia and subperception, continues to resonate with physicians and patients. And we look forward to improved growth with upcoming new product enhancements and a presentation of updated one-year real-world data on Waverider at INS later this quarter. And in DBS, we anticipate continued precise momentum as we roll off the Cartesia directional lead in the U.S. and expect MRI labeling in the second half. Global cardiac rhythm management sales grew above market at 3% organic, led by mid-single-digit growth in DFib sales against a double-digit comparison, reflecting ongoing uptake of our Resonate platform and its HeartLogic heart failure alert, as well as strong growth of Emblem SICD. Our device replacement cycle is also tracking to expectations, and we're now the number two global shared player in the high-voltage market. Pacer sales did decline mid-single digits, which is a significant improvement compared to 2018 trends, which were low double-digit declines. We anticipate a modest Pacer headwind for full year 2019. And importantly, we aim to more than offset this with continued global presentation of our DFIB portfolio in both CRTD and ICD, resulting in another year of above-market worldwide CRM growth. EP sales grew 10% organic in the quarter, led by the Rhythmia HDX mapping and navigation platform, as well as uptake of our DirectSense catheter in Europe and enthusiasm for Rhythmia's LumaPoint software. In the AFib single-shot market, we are excited about the progress made by both our cryo and RF balloon programs. We're working to secure CE mark approval for these technologies and begin US IDE enrollments by year-end 2019, pending completion of program deliverables and discussions with FDA. And last month, we presented a compelling APAMA data set, Efficient 1, demonstrating excellent balloon performance, no adverse events, and attractive procedure times. Turning to cardiovascular group, they grew 7% organic in first quarter 19. Peripheral interventions grew 11% organic in the quarter, led by the Alluvia DES launch in the U.S. and double-digit growth in interventional oncology and arterial. We're also excited about the anticipated upcoming FD approval and launch of the Vici Vinita stent, which comes from the Vinita acquisition of last August. And despite the pack of taxable headwind, we also expect our PI business will deliver full year 19 or granite growth that's well accreted to the company's overall growth rate. To update you on the BTG acquisition, we remain on track for mid-year closing, having received shareholder approval in February and and we're excited for the opportunity to expand our PI and interventional oncology portfolio. Last week, BTG reported results for the first 12 months, ended March 31st. Oncology and vascular sales grew 15% to 17% in line with BTG's guidance. Spec pharma sales grew double digits ahead of guidance, and royalty revenue was broadly flat versus the prior year period, reflecting the launch of U.S. generic competition for Cytiga. Our interventional cardiology business grew 6% operationally and 5% organically in the quarter. Growth in Q1 was led by strong structural art results and mid-teens growth in complex PCI products, offset by softness and drug-looning stents. We expect overall interventional cardiology growth to accelerate from first quarter on due to strong growth in complex coronary products, easing DES comps, the launch of PROMUS Elite, and U.S. approval of LotusEdge, and the continued momentum in structural heart with our broader portfolio capabilities and scale. Watchman had another excellent quarter as we continued to increase utilization and to expand Watchman's international footprint. We're pleased with the March European launch of NextGen Watchman Flex. We also received Japan approval of Watchman during the quarter. So we remain on track for reimbursement approval and commercial launch in Japan during the third quarter for Watchman. Our accurate TAVR valve platform is the fastest growing valve in Europe and delivered nearly 30% growth in the quarter. We plan to begin enrollment in our US IDE for accurate NEO2 around mid-year with similar European launch timing. We also began a controlled commercial launch of Lotus Edge in Europe late in first quarter and also enrolling patients in the Reprise 4 intermediate risk study and also received FDA approval last night for Lotus. We will begin a controlled U.S. launch immediately, and we believe Lotus Edge is a differentiated valve that will be sought after by physicians and operators, both as a workhorse valve, as well as a valve that can be counted on to provide superior outcomes in complex cases, such as heavy calcified native valves and bicuspid valves. And finally, the Sentinel Cerebral Embolic Protection Device continues to build excellent momentum. We're now in more than 200 accounts with Sentinel, where usage rates exceed 60%, We believe that protected TAVR is an emerging standard of care. So the combined strength of Watchman, Accurate, Lotus Edge, and Sentinel position as well to deliver on our guidance for $700 to $725 million in structural art revenue in 2019. To the close, I'd like to share again my enthusiasm for our outlook in 2019 and beyond. We believe that Boston Scientific continues to be uniquely positioned to drive shareholder value due to our long-term growth profile, meaningful opportunity to improve margins, track record of recording double-digit adjusted EPS growth, and our improving ability to deploy capital. So we're looking forward to discussing this outlook and our exciting technology pipeline at our Investor Day, which will be June 26th in New York. So I really want to thank again our employees once again for their winning spirit and their ongoing commitment to advancing science for life. And Dan will now provide a detailed review of our financials.