Boston Scientific Corporation

Ladies and gentlemen, thank you for standing by and welcome to the Boston Scientific Q2 2019 earnings call. Now, at this time, all participants are on a listen-only mode. Later, we will conduct a question and answer session. The 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 is being recorded. I will now turn the call over to your host, Susan Lisa. Please go ahead.

Thanks, Kevin. Good morning, everyone, and thank you for joining us. We have 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 one hour. Mike will provide strategic and revenue highlights of Q2 2019. Dan will review the financials for the quarter and then provide Q3 2019 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 fluctuation, and organic revenue further excludes the impact of foreign currency fluctuation. We will also be discussing financial performance, including sales, margins, earnings and other Q3 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, Suzy. Good morning, everyone. Boston Scientific continues to grow above market, improve profitability and drive meaningful innovation to address unmet Paget needs, as showcased at our recent Investor Day. In the second quarter, our team delivered a sufficient operational revenue and .3% organic growth, with another quarter of strong balance across our businesses and geographic regions. In addition, we delivered adjusted EPS of 39 cents, which is at the high end of our guidance range, while generating $406 million in adjusted pre-cash flow. We do have clear line of sight to high single-digit organic growth for 2019, and we reiterate our full-year 19 organic revenue growth guidance of 7 to 8 and adjusted EPS of $1.54 to $1.58. We have increased our expected contribution from acquisitions from 110 basis points to $1.440, resulting in operational revenue growth guidance of 8 to 9% for the full year. I'll now detail some of the key aspects of our second quarter results and thoughts on our second half 19 prospects. All growth rates refer to organic sales growth versus the prior year, and less mentioned. So we'll start first with MedSergs. Sales continued on the solid high single-digit performance and increased 7% to 80% organic growth, once you adjust for the one-time mesh recall impact. As endoscopy continues this trend of 8% organic growth quarters, it's fueled by more than a dozen product launches over the past 18 months, such as Spyglass, DS2, Jaguar, and Arise gel. We've also recently launched Arise in the single syringe version to address a broader range of procedure types, including polyps. Inspection prevention sales were also very strongly driven by strong kit sales in the And going forward we look for continued momentum in all these product lines, as well as Axios and improved supply in Orchipod single-use valves. We do remain on track for a year-end launch of Exalt-D single-use duodenoscope, which is used in ERCP procedures. We're very encouraged by physician enthusiasm for this platform, and continue to believe this represents a significant opportunity in 2020 and beyond. Urology and pelvic health grew 15% operationally in the quarter and 6% on an organic basis, despite the two-point organic headwind for the mass withdrawal and customer returns of the mesh treatment of pelvic organ prolapse. This growth was led by mid-teens growth in our core stone franchise, with strong -of-use single-use ureterscope sales across all regions, and particularly strong emerging markets growth. Space or Hydrogel, also delivered in the quarter, is tracking to $100 million for full year 19, which is above our original deal model, as mentioned at our investor day. We also expect acceleration in euro pH sales in the second half of the year from continued -of-view in space or strength, the one-year anniversaries of the acquisitions of NextEra in May and Augmentics in October, and new product launches such as the Taktra implant and Men's Health, where trends have improved, not only fixed our sterilization challenges. Rhythm and Neuro grew 3% in the quarter, which we believe represents above market growth in CRM at 3%, while EP sales grew 9%. Neuromodulation sales were flat year over year, but we continued to build momentum and of note, sequential growth was 7%. While Neuromod's flat year over year sales results slowed from first quarters, which were 9%, we did face a 31% comp in second quarter versus our Q1 comp of 17%. So on an operational basis, Neuromod sales were plus 2% year over year, and reflect excellent brain growth from our precise DBS systems, which offset the weaker spinal cord stimulation results. We continue to see excellent momentum in DBS due to market receptivity to our Cartesia directional lead in the US and Europe, and we anticipate full body MRI labeling for our precise systems in the second half of 19 in the US. In our pain franchise, VertiFlex closed on June 11th, and we're excited to offer the full continuum of care for patients suffering pain, now with an option focused on those diagnosed with moderate lumbar spinal stenosis. VertiFlex remains on track to generate full year 19 sales of 60 million. In SCS, we continue to see some softness in the overall market, and we face tough calls, as we mentioned, due to our WaveRider spinal cord stim system launch in the US early last year. While we continue to be optimistic about the long-term 7% to 10% growth potential of this market, we do expect some continued softness in 2019, given the 21% second half comp. We do expect second half improvement in SCS post our recent WaveRider real-world data presentations at INS, WaveRider software enhancements, and initial release of the combo randomized clinical trial data. Global cardiac rhythm management sales grew 3%, and was led by mid-single digit growth and DFID sales, driven by a Resonate platform and its HeartLogic heart failure alerts, as well as strong emblem SICD sales. Our replacement cycle tailwind also remains on track, and Pacer sales declined low single digits, which is an improvement from recent quarters, but we continue to anticipate a modest Pacer headwind for the full year 2019. EP sales did grow 9% in the quarter, which was led by Goodwill and Directions in Europe, RISME HDX mapping and navigation platform, and LumaPoint software, which was fully launched in the second quarter. As we highlighted and Joe did at our investor day, we remain optimistic about the future for our EP franchise, particularly for the AFib single-shot market and our two platforms with this therapeutic approach. We expect approval for our cryo-based system, PolarX in Europe, year end 2019, would lumenize our RF-based balloon platform following in the first half of 2020. Shifting now to cardiovascular, the group sales were up 8% in the quarter. Peripheral intervention sales increased 8% in the quarter as well, led by the launches of our Vichy Venus Stent in the U.S. and Alluvia DES in Japan, as well as excellent regional growth and interventional oncology, particularly in Asia. Post the June PacoTaxel FDA panel, physicians continue to order Alluvia in line with our commentary and investor day. We do expect within the next few weeks an updated summary and guidance document from the FDA. The Alluvia remains well positioned if the guidance continues to recommend drug looting technologies only for patients at a high risk of reastinosis, which does represent 40 to 60% of the market. And the Alluvia has the potential to achieve higher share in this segment, given its performance in these patient types. For example, in the PURIL trial, 12-month data which demonstrated half the rate at TLR compared with the Alluvia arm had severe calcium, which is 4X the rate of severe calcium in the global pivotal trials of the two leading DCVs. In addition, nearly one-third of the patients had total vessel occlusions

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the Alluvia Imperial study, which is a much higher rate than in the DCV studies. Last month we announced the proposed investiture of our bland and drug-loaded bead business to varying medical systems in conjunction with the proposed BTG acquisition. We continue to make progress towards closing BTG in August and look forward to the opportunity to expand our PURIL and interventional oncology portfolio and continue to execute our Category Leadership Strategy. Our interventional cardiology business accelerated from first quarter's 5% growth to 8% organic and 10% operational in the second quarter. There was strong growth across all regions, led by structural heart sales and mid-teens growth and complex PCI products, which is partially offset by DES. Watchmen grew sales ahead of plan, is now in 600 accounts in the U.S. as this important therapy provides patients with atrial fibrillation an alternative to lifelong oral anticoagulants. We successfully launched our national -to-patient TV campaign in late March and are encouraged by the early results. Watchmen Flex transitioned from limited market release to full launch in Europe, and physicians are very pleased by the 95% plus rates of implant success and seal and no device embolization. We're targeting a mid-2020 launch in the U.S. for Flex. We also remain on track to launch Watchmen in Japan in third quarter with reimbursements and continue to advance the clinical evidence surrounding Watchmen as we begin enrollment in the option trial in the U.S. for atrial fibrillation patients post-ablation. Accurate Tavrovalve Memento continues in the second quarter with 30% growth and is now available in over 40 countries. And importantly, the U.S. IDE for Accurate NEO2 was initiated, and we recently began enrollment of the 600-patient study in the second quarter. Unfortunately in Europe, we now do expect a mid-2020 launch for Accurate NEO2, as we have chosen to advise our approach and consolidate our regulatory submissions with fewer notified bodies due to challenges in the regulatory environment with a shift to European medical device regulation, or known as MBR. The Lotus Edge controlled launches is going extremely well. Positive physician feedback highlights the benefit of complete control and drama-free Tavr. We are in pace to open the 150 accounts in the first 12 months that we cited in Investor Day, and we are very confident that our launch approach will position both Lotus Edge and our entire structural art portfolio for long-term leadership in the substantial market. We see a significant opportunity in the high-risk labeling we have today, and we're actively enrolling for our U.S. Reprize IV clinical trial to expand the indication to intermediate-risk patients. And finally, the Sentinel Cerebral Embolic Protection Device continues to enjoy strong growth rates as supply scales up. We're now in over 400 accounts globally, and we believe that protected Tavr with Sentinel is the emerging standard of care, and we expect momentum to continue as we launch new accounts and we anniversary the Sentinel acquisition this month. So the combined strength of Watchman, Accurate, Lotus Edge, and Sentinel position as well to deliver our guidance for $700-725 million in structural art revenue in 2019. For the close, once again, I'd like to share again my enthusiasm for our outlook in 2019 and beyond. And as conveyed at our Investor Day, we believe that Boston Scientific continues to be uniquely positioned to drive shareholder value due to our differentiated long-term growth profile, meaningful opportunity to improve operating margins, and track record of delivering double-digit adjusted EPS growth while also improving our ability to deploy accounts. I want to thank our employees once again for their winning spirit and commitment to advancing science for life. So Dan will now provide a detailed review of our financial.

Thanks, Mike. Second quarter consolidated revenue of ,000,000 represents .6% reported revenue growth and 8% growth on an operational basis, which excludes the impact of foreign currency fluctuations. Our reported revenue reflects a $57 million headwind from foreign exchange, slightly unfavorable to the $45-50 million headwind expected at the time of guidance. Sales from the Nextera, Claret, Augmentics, and Vertiflex acquisitions contributed 170 basis points, slightly higher than the 140 basis points expected at the time of guidance, which did not include the Vertiflex acquisition. As a reminder, the operational Nextera contribution only represents one month, as the acquisition is considered organic as of May 1 this year. The resulting organic growth of .3% in the second quarter compared to our guidance range of 6% to 7% was driven by balanced top-line performance across multiple businesses and regions, as Mike has already detailed. Q2 adjusted earnings per share of 39 cents was down 4% versus prior year, up 12% excluding the Q2 2018 net tax benefit of 6 cents and at the high end of our guidance range. Earnings were driven by solid P&L metrics and also reflect a one-cent discrete tax benefit in the quarter. The FX impact on adjusted EPS was immaterial as expected at the time of guidance. Adjusted gross margin for the second quarter was .1% at the low end of our guidance range of 72% to 73%, but represents an 80 basis point improvement over prior year, driven by standard cost improvements, reduced staff, and FX. Adjusted SGA expenses were $936 million, or .6% of sales in the quarter, at the midpoint of our range, and up 90 basis points year over year as we continue to fund initiatives related to recent acquisitions and focus on key commercial launches. Adjusted research and development expenses were $273 million in the second quarter, or .4% of sales at the low end of our guidance range and flat year over year. Royalty expense was .6% of sales, also relatively flat over the prior year. As a result, Q2 2019 adjusted operating margin achieved the midpoint of guidance at 25.5%. We continue to reiterate our full year adjusted operating margin guidance of 26 to 26.5%, which represents a 50 to 100 basis point improvement over the 2018 rate of 25.5%. Now I'll move below the line to interest and other expense. Adjusted interest expense for the quarter was $66 million compared to $57 million in Q2 of last year. Our average interest rate was .7% in the quarter, slightly higher than the .6% in Q2 of last year. Adjusted other expense was $10 million in the quarter, and primarily includes dilution from our equity method investments and transactional foreign exchange losses, including hedging costs. Our tax rate for the second quarter was a negative .9% on a gap basis and .8% on an adjusted basis. Below our guidance range of approximately 11% for the quarter due to a $19 million net discrete tax benefit. This Q2 benefit will be reflected in our updated full year 2019 tax rate, which I will discuss shortly, with no additional benefit expected in the third or fourth quarter of this year. Adjusted free cash flow for the quarter was $406 million compared to $558 million in Q2 of last year. In the quarter, we used cash primarily to fund the closing of the acquisition of VertiFlex. We continue to expect full year 2019 cash flow to be $2.2 billion. We continue to work to resolve fully the mesh litigation with over 95% of all known claims now settled or in the final stages of settlement, including additional settlements reached in Q2. Our total legal reserve, of which mesh is included, was $604 million as of June 30, 2019. This is a decrease of nearly $100 million versus March 31, and includes an additional $15 million reserve for legal fees. While the anticipated cost to litigate has increased due to various judicial orders and is reflected in the incremental $15 million reserve, importantly, the known claim count remains flat at $53,000, as does the anticipated amount required for settlement. Therefore, we continue to anticipate full year payments into the Qualified Settlement Fund to total $250 million, which will then resolve substantially all significant existing contingencies related to mesh. As a reminder, this liability is released from our balance sheet as payments are made out of the Qualified Settlement Fund to plaintiffs. During the quarter, we made cash payments of $50 million into the Qualified Settlement Fund, which leaves approximately $200 million to fund for the remainder of the year. Capital expenditures for the second quarter were $91 million. We continue to expect capital expenditures to be in the range of $375 to $400 million for the year as we build capacity, integrate acquisitions, and position the company for continued growth. We ended Q2 with ,000,000 fully diluted weighted average shares outstanding. And now I'll walk through guidance for Q3 and full year 2019. As a reminder, the guidance I'm providing does not include the proposed BTG acquisition since it is not yet closed. For the full year, we expect 2019 reported revenue growth to be in the range of approximately 7 to 8%. We are reiterating our prior guidance of -over-year organic growth of 7 to 8%, now with an additional 140 basis point operational contribution expected from the next era, Claret, AugmentX, and VertiFlex acquisitions. As discussed in Q1, our first half 2019 average organic growth rate of .3% implies a second half 2019 acceleration of organic revenue, and we remain comfortable with this outlook as Mike discussed given multiple anticipated key product launches, continued momentum in our core, the anniversary of 2018 acquisitions was thus turned organic in the second half, and the normalization of selling days in the first half versus the second half of the year. And while we expect foreign exchange to be a 170 to $180 million headwind to revenue for the full year, we continue to expect FX to be neutral to earnings per share for the year due to our currency hedging program. There's also no change to our expectations for adjusted gross margin as a percentage of sales to be in the range of 72 to 73% for the full year. We will continue to execute our ongoing standard cost reductions and also expect a positive full year FX impact to adjust the gross margin of 60 basis points. Similarly, we continue to expect full year adjusted SG&A to be in the range of 34.5 to 35% of sales, a 40 to 90 basis point improvement versus full year 2018. There's also no change to expectations for the full year adjusted R&D spend to be in a range of 10.5 to 11%. As a result, we expect to achieve 2019 adjusted operating margin in a range of 26 to 26.5%, unchanged from prior guidance and up 50 to 100 basis points versus 2018, consistent with the improvement goals we outlined last September and reiterated at last month's investor day. Due to the discrete tax benefit within the second quarter, we now expect our full year 2019 adjusted tax rate to be approximately 9%. This is based on an operational tax rate of approximately 11%, slightly more than 100 basis points of benefit from the accounting standard for stock compensation, and nearly 100 basis points from the discrete tax benefit in the quarter, which will not impact our tax rate outlook beyond 2019. We expect below the line expenses, which include interest payments, dilution from our venture capital and costs associated with our hedging program, to be approximately $325 to $350 million for the year and includes the make-hole call exercised in the first quarter. We expect a fully diluted weighted average share count of approximately ,000,000 shares for Q3 and ,000,000 shares for the full year 2019. Note that interest expense related to the proposed BTG acquisition is currently excluded from adjusted results, and we will provide updated guidance after we close the transaction. We are reiterating our full year 2019 adjusted earnings per share range of $1.54 to $1.58. Although we received a one-cent discrete tax benefit this quarter, we expect this to be largely offset by the divestiture of our embolic beads business to vary upon the close of BTG. As a reminder, we're also offsetting the residual one-cent impact on the mesh withdrawal. This $1.54 to $1.58 range represents 10 to 13% adjusted earnings growth, excluding the 2018 net tax of $0.77 in the base. On a gap basis, we expect earnings per share to be in a range of $0.94 to $0.98. Now turning to Q3, we expect reported revenue growth to be in a range of approximately 8 to 10%. This represents -over-year organic growth in a range of 7.5 to 9%, with an additional 180 basis points operational growth contribution from Claret, Augmentics, and Vertiflex. Note that the Claret acquisition is included in organic guidance as of August. We expect the foreign exchange impact on Q3 revenue to be a $30 to $35 million headwind. For the third quarter, adjusted earnings per share is expected to be in a range of $0.37 to $0.39 per share, representing 7 to 13% growth, and we do not expect any adjusted earnings per share impact from FX. Gap EPS for the third quarter is expected to be in a range of $0.23 to $0.25 per share. Please check our investor relations website for Q2 2019 financial and operational highlights, which outlines Q2 results as well as Q2 and full year 2019 guidance, including P&L line item guidance. With that, I'll turn it back over to Suzy, who will moderate the Q&A.

Thanks, Dan. Kevin, let's open it up for the next 30, 35 minutes or so. In order to enable us to take as many questions as possible, please limit yourself to one question and one related follow-up. Kevin, please go ahead.

Thank you. Ladies and gentlemen, if you wish to ask a question, please press star, then one on your touch-tone phone. You will hear a tone indicating that you are in Q. You may remove yourself from Q at any time by pressing the pound key. Once again, star, then one. First question is from the line of David Lewis, Morgan Stanley. Just go ahead.

Good morning. Thanks for taking the question. Just thinking about the back half of the year, Mike and Daniel, to deliver an eight-ish like number for the third quarter, momentum needs to improve in the third quarter, kind of at a similar rate as it did in the second quarter. So what drives that confidence? How much is predicated on business recovery versus selling days or certain deals going organic? And then I had a quick follow-up.

Sure. Good morning, David. Thanks for the question. Yes. So I'm really pleased. Essentially, we're executing in line with what our annual plan was or is. We knew that the second half required acceleration versus the first half, and that was well thought out, and we gave our full year guidance as we updated that. So we're essentially in line with our plans, reiterating our full year, -8% organic outlook, which does imply, obviously, acceleration in the third quarter and fourth quarter. And it's pretty straightforward how we're going to deliver that. The first two are more mechanical, the first one being we have one less selling day in the first half. And the second half, we have one more selling day. And another more mechanical solution is some of our acquisitions become organic, Nextera, Augmanics, and Clarets. So those are kind of more the mechanical ones that certainly help accelerate the growth in the second half. But importantly, in terms of the actual business, pleased to see that with the acceleration of the team, all of our businesses continue to grow faster than their peer group, and we have a lot of momentum. Specifically in the regions, we're seeing Japan return to growth in the second quarter, and we expect strong acceleration from our team in Japan based on the anniversary of price cuts that have recently occurred, new product launches with Alluvia, which is building momentum in Japan, and also the recent news of reimbursement and approval for Watchmen, which we anticipate selling in September. So on a regional basis, we expect Asia to continue to accelerate. The U.S. and Europe continue to perform strong, and emerging markets continue to have a lot of momentum. And beyond that, just the impact of our full year launches. You'll see greater acceleration of Lotus Edge, which we're very pleased with the initial results over the second quarter, acceleration of our VT Sten, the Watchmen Flex approval in Europe, and as well as Sentinel enhanced supply. And I would say broadly on supply, our team has a rematch job of just executing our supply requirements. So we're very good positioned with supply across the company, momentum across our businesses, new product launches that impact the second half more greatly, as well as the mechanical pieces of additional day selling and the operational to organic. So all that gives us a lot of confidence in the third quarter and the implied fourth quarter guidance that you can derive from that.

All right, Mike, very helpful and very, very clear. Just one quick follow up on Lotus. Thanks for the feedback on center traction and the number of centers. Give us any sense of average center penetration from a case basis. Should we still expect this rollout to be controlled through the end of 2019 and did Sentinel, frankly, with Sentinel capacity still an issue here in the second quarter? Thanks so much.

Yeah, so Sentinel, we don't have, we do not have the supply constraints within Sentinel that we had called for the first half of the year. So the ops team's done a great job with that. And so you'll start to see more Sentinel usage in Europe in combination with Accurate and Lotus. So the European team has been more constrained. So you'll start to see some enhancements and growth in Europe with Sentinel and opening more centers in the US. I think Sentinel will be a strong second half story for us. Just anecdotally, I was at a couple of cases last week, a couple of live cases we saw with our TAVR valve, which performed very well with Sentinel. Also Sentinel being used with some competitive valves in low risk patients and pretty shocking to see the amount of debris that some of these physicians receive. So I think physicians are becoming very comfortable once they use Sentinel in terms of its ease of use as well as the impact from that. So a lot of focus there. Lotus really pleased with essentially delivering per our commitment. The 150 accounts that we expect to open, we're on track to deliver that. We're not going to provide kind of shared data or usage data by account. But I would say, you know, we've been a long time coming to bring this to market. And anecdotally, I would say doctors are pleasantly surprised by the unique features that it delivers. The control use of the device, the ability to reposition and the elimination of the PBL is delivering on its promise. And, you know, given the investment that we've made, the time that it's taken, we're really focused on quality, strong patient outcomes and proctoring. And we're in this for the long run with two valves and going to deliver as planned our financial commitment and the rollout of Lotus.

Thank you. Next question is from the line of Bob Hopkins, Bank of America. Please go ahead.

Great. Thank you and good morning. So two product related questions, if okay. First on spinal cord stimulation. I was wondering if you could give us a sense for the growth rate of that business in the second quarter and then just broadly any additional thoughts you have on underlying market growth trends in spinal cord stimulation here in 2019. Thank you.

Morning, Bob. Thanks for the question. Just high level before I get right to your question. That one thing we're happy about is the Neuromod team has continued to diversify that business. So we'll always be led by our spinal cord stimulation question in a second. But our international growth is becoming more significant. The team in Europe is doing an excellent job with both SES and DBS. And then we diversified with our RF platform and our VertiFlex. So that gives us multiple product categories and more multiple regions that are contributing on the SES market itself. So for BSE standpoint, candidly we faced some brutal comps, which is good from last year. We had a 31 percent comp in Neuromod in second quarter 18. We did see sequential growth in the franchise within SES in the U.S. from first quarter to second quarter. So that's encouraging. And our team has amplified significantly more their patient awareness activities and other kind of fundamentals that we may have gotten away from a little bit in 18 because the volume was so strong it really wasn't needed. So, you know, in our view, this is a, we call it a upper single digit growth market. We stick with that based on the unmet patient need that we see, the lack of alternatives and significant survey work that we've done. So we have seen less volume in the first half of 2019. And we expect that to improve slightly in the second half. And then we believe we'll continue to grow faster than market. So when we look at our guidance for the second half of 19, we obviously are conservative and thoughtful about what our SES projections are. So I think that's kind of tapered view is built into our guidance. But we have a lot of confidence in the long term growth outlook of the market and the portfolio that we have.

Okay, great. And then I'm sorry if I missed it, but it was there a specific spinal cord. I'm just curious as to growth rate of the spinal cord stem, awesome scientific business in the second quarter, if you're willing to provide that. And my second question was just quickly on peripheral and pacl-taxel. Just curious as to what happened to pacl-taxel sales in kind of Q2 versus Q1. Is there any noticeable change there?

Yeah, so just specifically your question, US SES did decline in the second quarter, kind of upper single digits. And the OUS was up. And so again, that was we suffered there against the significant comp and some volume softness. So we saw sequential growth in the quarter, but the US SES did decline upper single digits. Pacl-taxel, really nothing new since Jeff outlined that in Vesterday. We expect to hear from the FDA on their guidance document in August. And we think as long as the guidance document is kind of written in line with the commentary at the panel, then we believe alluvial will be a nice growth driver for us, clearly in Japan and also in the US. So really nothing changed from Mervis' comment at Vesterday.

Thank you. Next question is from the line of Vijay Kumar, Evercore. Please go ahead.

Hey guys, thanks for taking my question. Now a couple of quick guidance questions. The first one is fairly simple. The days in back and back half, Mike or Dan, is that split equally between 3Q and 4Q, or is that more 3Q weighted?

It just rolls in over the two quarters. I wouldn't point to one month or one particular quarter. It just rolls over the back half.

Understood. And just on that, the EPS guidance, Dan, you know, tax rate a tad below. I'm assuming this is being offset by higher op expense. And I think I heard you mention support commercial launches maybe highlight a couple of where the spend is going. And BTG, given the August close, any changes in the $2 to $3 contribution for this fiscal or does the map change? Thank you.

Yes, I'll hit the BTG one first. Can't comment on that, obviously, just based on the UK rules until that deal actually closes, which we say should be sometime in August. Relative to SG&A, you think of the launches that we have. You have Lotus. We're gearing up for Watchmen in Japan. We have Alluvia going in Japan. We have other momentum in ENDO and some of the MedSurg franchises. And then one of the other things in SG&A in the quarter is if you look at the Neuromod P&L, you know, it's deleveraged. And because of the growth, again, Mike detailed that very nicely in terms of the 31 percent comp from last year. So we're not making any fundamental changes to that business because we think that's a fantastic market, 7 to 10 percent, as we've said. So that has a little bit of impact in the quarter that that P&L is deleveraged. We're fine with that because we're going to keep that engine going for the long term. But that's probably the key reasons, the launches and a little bit of a deleveraged Neuromod P&L in the quarter.

Thank you. Next question is from the line of Joanne Winch, BMO Capital Markets. Please go ahead.

Good morning, everybody, and thank you for taking the question. I'd like to just hit upon acquisitions. Last year, you announced 10 in 2018, one so far in 2019. What are you thinking in regards to continued capital deployment in this area?

Hi, Joanne. Thanks for the question. So, you know, we'll be closing our most strategic one, BTG, within the next, you know, in August here is what we're aiming for, which will be great. And we've spent longer than we thought, given the B divestiture, but the team's ready to deliver on that significant cost synergies and makes us the category leader in interventional ecology, fills in products, won't go through all that. But we're excited about that acquisition. You know, in 19, you've seen us really do one deal, the SPAR, the Vertiflex acquisition. So our pace of acquisitions certainly slowed down with one acquisition through, you know, almost end of July here. And so we do have capacity to do a couple more tuck-in or ranted acquisitions in 19 if we wanted to. And some of the valuations are quite high. And we do have a very prolific, I would say, VC portfolio that you'll see us acquire companies from that portfolio over the coming two years. But really to be determined whether we do any more acquisitions this year or potentially, you know, one or two at the most tuck-in acquisitions. So you'll see significant, significantly less volume in 2019 versus 18. And then we'll have additional capacity once we continue to deliver as planned as outlined in yesterday. Well, nice capacity in 2020 for more tuck-in acquisitions if the strategy works and the financials make sense for us.

And then on a specific product, the Exalt Model D single-use Duana No Scope, you submitted it to you on April in the FDA. Can you give us an update on the timing of that and how we should think about, you know, just your endoscopy business in general?

So with that, so the endoscopy business in general is kind of firing in all cylinders. They have a significant number of product launches throughout 2019 that they're executing on. And the supply chain team continues to deliver against, you know, the requirements there. So we have a lot of confidence that quite frankly, ENDO will accelerate growth in the second half of 2019 versus the first half. On the Duana No Scope, the team makes ongoing progress there. And we continue to put this in our physician's hands and they continue to test the product through clinical trials that we're doing. But we do expect approval of this product and launching it by the year end. So you'll see some impact of Exalt, the Duana No Scope in the fourth quarter, which also is another reason for our second half acceleration. So I would say it's on track. The endo business in particular is executing at a high level, hitting the cadence of product launches, and the Duana No Scope is kind of on track per our discussions at Ambassador Day.

Thank you. Next question is from the line of Larry Beegleson, Wells Fargo. Please go ahead.

Good morning. Thanks for taking the question. One product question, one guidance question. So, Mike, on Watchman Japan, do you have reimbursement yet? And, you know, what is the rate there, you know, compared to the U.S.? And how are you thinking about the trajectory in Japan? And then I have one follow-up.

Yes, we just were pleased with that. We just got text like at 2 in the morning last night on Watchman reimbursement approval. And I'll let Dr. Stein talk a little bit about the clinical indications in a second. But just the economics look good. It's quite frankly a little bit better than we anticipated. The reimbursement will be in the U.S. dollar conversion and the $13 million range for Japan reimbursement. And we'll start our launch, call it the mid-September time period. So you'll see a nice benefit from that in the fourth quarter. And

Dr. Stein, do you have any comments? Yeah, thanks, Mike. Hey, Larry. Again, as Mike said, right now we have PMDA approval and now NHLW approval for reimbursement in Japan, tracking to launch in September. Just sort of putting it all together, the guidelines for use are very similar to what we see in the United States. And we're very pleased by it.

Thank you very much. And then, Mike, what gets you to the high end versus the low end of the guidance range for organic growth in 2019? Thanks for taking the questions, guys.

This guy's Salmore. I think it's really – I'm really pleased. We just did the STRAT plan. And I would say the team is executing really per our commitments for the year. This was the schedule for the acceleration of the S&F, given the days and the portfolio cadence that we have. You know, I think in terms of within that range, the structural hard business is a nice lever there with Watchman. Now there's Japan approval with Watchman. The continued momentum with Lotus, Sentinel and Accurate. So I think that's a pretty good size swing factor in terms of our overall – within the range there. And then I think that Japan and Asia – I would say Asia broadly is doing extremely well. You have excellent China growth, so we need to see that momentum sustained, which it has for a number of years. The Japan getting back to healthy growth is a big lift for us in Asia Pacific. So I think those are a couple. And then you just have pretty strong – with the exception of EP, where we're growing slower than market and we have some exciting new launches coming in Europe on single shot and hopefully in the U.S., our direct – our MiFi DirectSense Therapeutic Catheter launch to expect EP to get healthier in 2020. So with the exception of that business in 19, there's a lot of momentum across them. And so I think it's that ongoing momentum, the – kind of the swing points of the – our execution of structural hard, which is kind of on plan. And I would say the Asia growth in particular is meaningful for us.

Thank you. Next question is from the line of Josh Jennings of Cowen. Please go ahead.

Hi. Good morning. Thanks for taking the questions. Mike, I just had a quick follow-up on the FDA PacoTaxel panel and their upcoming recommendations. Are you guys internally assuming that there will be a label change detailing a mortality signal with PacoTaxel code devices? And if you are, why wouldn't that potentially be more impactful to the market?

Dr. Meredith, if you're able to hear the question or answer that one, that would be helpful.

Thanks, Mike. I didn't hear that. So I think the 24-hour summary from the FDA gives us some guidance as to what the likely outcome of the next guidance statement would be. As you know, the panel unanimously agreed that there were short-term benefits of the PacoTaxel code of devices that outweighed these risks that we actually saw in the four USIDE trials, which there were methodological reasons why that mortality signal might have been that clear. And the other thing that's very important here is that the panel couldn't describe a class effect to PacoTaxel devices. And alluvia, of course, was not included in that analysis. It behaves far more like a drug-eluting stent than a DCV in terms of the delivery mechanism and the targeted and focal way it's actually delivered. So we feel that the panel guidance thus far actually points to a fairly reasonable outcome from the next statement. So I suspect that it will bode well for alluvia.

Thanks for that. And just one follow-up, actually, with Dr. Meredith on Lotus Edge. Can you help us understand how you're marketing the pacemaker rate? Clearly there are a lot of positive metrics to put on the table for some of your physician customers. But I think at TVT we saw a Lotus Edge combined cohort of 33 patients down in the low double-digit pacemaker rate of 30 days. Is that the rate you guys are putting forward to physician customers? And then I think you did do a 50 patient. You needed 50 patients to get the FDA approval with Edge. Are we ever going to see that data or how is that going to be brought forward? Thanks for taking the questions.

Okay, thanks. So I'll answer the second one first and then come back to the first part of your question. So as you know, there was a nested registry. The focus of the 50 patient nested registry was related to the pin pull issue to show that that actually didn't occur. We've decided to continue enrollment in that study, and that study is ongoing so that we will ultimately have a significant data set where we can actually assess the pacemaker rate. We believe the pacemaker rate will be competitive and in that order of magnitude that you mentioned before from both the Reprise Edge and the PHMSE studies where we had that cohort of patients with a 12% pacemaker rate. So that study is, the nested registry is ongoing and we'll report out probably when we have 150 patients in that study. And along with that, we'll have Reprise for another ISRs which will give us a clearer indication of the pacemaker rate. Thus far, that's how we're assessing the pacemaker rate and the data that we have from that Reprise Edge and PHMSE studies suggest that we will have a competitive pacemaker rate along with all the other advantages that you alluded to, the lowest best in class PVL and full repositionability, no need for a valve in valve.

Thank you. Next question is from the line of Matt Taylor, UBS. Please go ahead.

Hi, thank you for taking the question. I just want to ask one on the European regulatory environment. You mentioned the delay to one of your programs there. Do you think this is something that's going to be kind of a chronic issue? Could you characterize it a little bit more in terms of the additional timelines or costs that you could incur with other EU programs?

Yeah, so I think the MDR process is certainly adding some resource requirements for Boston Scientific and others. We think in the long run, this would be good for Europe, but clearly in the short run, it's a huge investment from us and other companies to provide the request that the MDR process is requiring. So I think in the near term, it's more of a financial expense item and resource allocation. I think longer term, in terms of our internal processes and capabilities, we're certainly equipped to do it. I think it might have a greater impact on some of the smaller companies than the larger companies. Now, specific to the Accurate NEO 2 piece, the good news there is we've initiated our U.S. IDE clinical trials. We're on schedule to bring that second ballot to the U.S. market per our investor day. We are seeing a delay of, we think likely, six months, 12 months in Europe. For our Accurate NEO 2, obviously it won't impact our existing Accurate and our symbolic protection capabilities there. But essentially what we've tried to do is consolidate our regulatory submissions with fewer notified bodies in Europe. And in doing that, we think we'll have better long term performance working with fewer regulatory notified bodies, and it'll help with future Accurate portfolio expansion and approval timelines. So there's not a product question with a specific ballot. It's more us down selecting on the number of agencies that we're working with. The number of agencies in Europe, given the number of them and the new MDR requirements, it's quite a challenge for them as well. And so we think working with a few of them and following that process will be best served by the scientific. But we think in the near term, obviously, there's some expense challenges and some minor delays in Europe with products.

Okay, very clear. And then emerging market growth continues to be really strong. Is there anything to call out there? And how long can you keep up this kind of 20% operational growth?

Yeah, we've been doing it for quite a while. And the good news is it's across a number of countries. So China clearly is the largest catalyst there. And the benefit there is we used to be primarily a Japanese company in Asia. And now we're much more diversified with strength in Australia, the Korean team, and the ongoing growth of China. But China is really the key driver for us in the emerging markets. And so much of it's kind of our playbook of bringing all of our portfolio to China rather than just regular descent, which is what it was historically. Our PI business is growing exceptionally well in China, as is our complex coronary business and our watchman business. And ENDO and Euro and other divisions are scaling up there. So I think it's an ongoing diversification of our portfolio, getting our products approved there. So we expect continued momentum in China so we don't see a slowdown in the second half in China or the emerging markets. Also, our team in Latin America continues, despite the challenges that market continues to grow, well above market and nice profitable rates. And we're seeing nice growth in certainly in the Middle East, Africa and in the ASEAN countries. So there's quite a stew within the emerging markets, but China is the biggest driver of

it. Thank you. Our next question is from the line of Chris Baskwale, Guggenheim. Please go ahead.

Mike, I just want to understand your comments on the FDA's updated guidance document coming out of the panel and maybe Dr. Merida can chime in here too. Do you expect them to recommend that Paclitaxel products only be used in high-risk patients? It wasn't clear if you were saying that that was something you thought would actually take place.

Do you want me to take that, Mike?

Sure.

Yeah. So we don't want to speculate on what the FDA's position will actually be. I was trying to draw from the statements that came from the 24-hour summary. In that 24-hour summary, the panel agreed, the FDA panel agreed that we should continue to approve devices for 12 months to follow up with clinical data to assess the safety and efficacy. And it is very likely that there will be a need for longer-term data to fully understand that signal. I think the fact that there was no clear class effect actually established and there is clear benefit, and Mike alluded to the TLR differences we saw with the Louvier at both one and two years, that it's very likely that there will be continued use of Paclitaxel as a prevention for estenosis. Obviously, it's easy to suggest that it will be therefore high-risk patients. But I think one of the important comments that came out of this was that it should be up to the physician and the patient to decide who is appropriate for that treatment.

I think just also, just for specific BSC, when we look at our second half, third quarter guidance and applied fourth quarter guidance, we're assuming growth significantly slower than planned originally for the year. So we've de-risked the Louvier sales quite a bit in our guidance appropriately, but we do see strong uptake in Japan because this issue doesn't seem to be as concerning in Japan. But more importantly, I think it's just within our PI business, the other growth drivers in addition, because there's some questions around what happens with Paclitaxel. We'll know more in the next 45 days. But even if you remove a Louvier topic from the question, you know, the closing of interventional oncology with BGG, the Vanity Stent that we have recently are launching, there's a number of growth drivers within our PI business that will continue to strengthen that. We'll know more in 30 days on the FDA piece.

Thanks. That's helpful. And then just follow up on the Lotus. Reprise 4 has been up and running now for a little while. Can you give us an updated timeline?

We're not expecting a home run all in on Paclitaxel when we give our guidance. That's not the assumption when we give our second half guidance.

Thanks, Mike. And then just quickly on Reprise 4, just any update on the timing of enrollment completion there? When you guys expect that trial to get filled, just want to get a sense for when we could get label expansion and see that data. Thanks.

Okay.

Yeah. So the recruitment in the Reprise 4 trial is going well. And there's a lot of positive patient feedback on the Reprise 4 study and recruitment. It's a single arm study, as you know. And that study should be on track for sort of completion with one year follow up probably early 2020. That's completion of the patients in the study.

Thank you. And our next question is Jason Mills, Canada Court of Genuity. Please go ahead.

Good morning, Mike, Dan and team. Thanks for taking the question. Two product related questions, Mike. First on EP and second on neuromodulation, specifically SDS. EP is a plus grower for you, notwithstanding that the growth has slowed. You talked about new product launches. Is that what will drive growth higher sort of back into the team's range commensurate with the market? And what over the course of the next couple of years do you envision will also augment that business profile? Do you see it as a double digit grower over the longer term? And I'll just ask my second question now, the short one with respect to SDS. Based on your performance and one of the competitors, do you believe that you lost share in the United States SDS market or is the market sort of growing commensurate with what we've seen you report in one other competitor? Thank you.

Yeah, and that's yes. We just don't know yet. We have some nice product enhancers coming to second after the year. If you want to do our two-year growth, Kager, it's 15% or so. Tough comps this year, and we haven't had some of the competitors report yet. So we'll know more in 45 days or so, whether we lost any share or gained share or held share in the quarter. But on EP, Dr. Stein can comment. I think with EP, this is a long-term commitment that we have in this business, given the size of the market and the growth profile and the overlap that we have on the call point capabilities. And so it's really a tale of two cities right now. We have strong growth in Europe, where we have Rhythmia doing extremely well, and our Therapeutic Catheter launch is doing quite well. And so Europe, I would say, is growing above market, and the U.S. is growing below market. And in the U.S., we don't have the portfolio – all the portfolio pieces that Europe has. So I think Europe's a good indicator for us for the future. And beyond Rhythmia, which is doing well, and the DirectSense Therapeutic Catheter, we hope to bring a differentiated triobaloon to the market by the end of the fourth quarter time period. So that'll have a nice impact for us in 2020 in Europe, and we'll start our U.S. trial in the U.S. So I think you'll see Europe continue to grow quite a bit faster than market, second half of this year and in 20. And the U.S. likely will lag until we can get the DirectSense approval in the U.S., which we hope will be in the first half. But once we get that, then the U.S. will grow more effectively. And then once we get the single shots, I think you'll see longer term, we'll be the only company with a full suite of mapping systems, therapeutic catheters, and multiple shots on goal in single shots. So the portfolio will be quite differentiated. It just lags more in the U.S. Dr. Stein, do you have any comments?

Yeah, again, Mike, just to reiterate what you said, the key to our strategy is offering the most rounded, the most comprehensive portfolio of tools that EPs need to treat complex arrhythmias like atrial fibrillation. So, right, it's two different single shot techniques, cryoablation catheter, polar X, and an RF balloon or lumenized catheter. It's also having high density, high mapping, high resolution mapping with arrhythmia, with DirectSense, and then with what's to come, our stable point catheter, which will be unique on the market, having both force and DirectSense. And then in addition to that, things like our acquisition of Securis, which is an infrared monitor for esophageal monitoring and protection during ablation procedures. There's no competitor that's able to offer that kind of a comprehensive portfolio. And then, as Joe and I have talked about at Investors Day and at HRS, the path then to double-digit growth is also moving our product mix from what we've traditionally been in the low-growth segments of electrophysiology into these higher-growth segments like complex mapping, like single shot for atrial fibrillation.

Great. Okay, Kevin, with that, we're going to conclude the call. We thank everyone very much for joining us, and Kevin will now provide the replay details.

Thank you. Ladies and gentlemen, this conference will be available for replay, and that's starting today at 10.30 a.m. Eastern Time. We'll run through August 7th, midnight. You may dial the AT&T Executive Playback number by dialing -475-6701 with the access code 468-663. International callers may dial area code -365-3844 with the access code 468-663. And that does conclude your conference. We do thank you for joining. You may now disconnect.