Boston Scientific Corporation

Ladies and gentlemen, thank you for standing by. Welcome to the Boston Scientific Q3 2019 earnings call. Now, 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 offer and 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 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 Q3 2019 results, which included reconciliations of the non-GAAP measures used in the release. We have posted a copy of that release, as well as reconciliations of the non-GAAP 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 Q319. Dan will review the financials for the quarter and then provide Q419 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, Augmentix, Vertiflex, and BTG, 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 Q4 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 10Qs 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. Mike?

Thank you, Susie. Good morning, everyone. Boston Scientific delivered a very strong third quarter. We continue to grow above market and improve profitability, while we also invest for the long term and deliver meaningful innovation to address unmet patient needs. In the third quarter, our team delivered 14.2% operational and 9.3% organic revenue growth, with another quarter of strong balance across our businesses and geographic regions. In addition, we delivered adjusted EPS of $0.39, which is the high end of our guidance range, while generating $526 million in adjusted pre-cash flow. We're also narrowing our guidance for the full year of 2019 organic revenue growth to approximately 7.5%, and bringing up the bottom end of our adjusted EPS guidance range to $1.55 to $1.58. We've also increased our expected contribution from acquisitions from 140 basis points to 360 basis points, resulting in operational revenue growth guidance of 11% to 11.5% for the full year. I'll now detail some key aspects of our third quarter results and thoughts on our Q4-19 prospects. All growth rates refer to organic sales growth versus the prior year unless otherwise stated. MedCert sales accelerated to 10% organic and 14% operational revenue growth. Endoscopy organic revenue growth of 10% was fueled by the breadth of our portfolio, including multiple launches across several franchises, most notably in infection prevention, therapeutic imaging, biliary, and luminal hemostasis product lines. We also enjoyed double-digit growth across multiple regions. And importantly, we remain on track for a year-end launch of our Exalt-D single-use duodenoscope, and we're encouraged by the FDA's communication in September regarding single-use technologies. We continue to believe that our therapeutic imaging portfolio represents a significant opportunity in 2020 and beyond, with an incremental $2 billion market opportunity by 2024. Urology and pelvic health also grew 10% organically and 19% operationally, and I would say this is particularly impressive as the team offset 150 basis point headwinds to organic growth from the market withdrawal of transvaginal mesh for the treatment of pelvic organ prolapse. Double-digit growth organic cells in uroPH was led by strong momentum in our core stone, where we are uniquely positioned to treat the broadest range of kidney stone cases via our innovative lithovue, lithotripsy, and laser portfolio. Spaceor, which is a hydrogel that temporarily creates space between the prostate and organs at risk during radiotherapy for prostate cancer, contributed 900 basis points of operational revenue growth and went organic in October 1st. SpaceSort continues to deliver excellent results and is tracking 100 million for full year 19. In the quarter, Nextera, which offers a unique, minimally invasive treatment for BPH, also accelerated our growth. We continue to engage with insurers, physicians, and patients to strengthen this exciting platform. Our Rhythm and Neuro team grew 4% in the quarter, which we believe represents above-market growth in CRM at 2%, while EP sales did grow below-market at 7%, and neuromodulation sales grew 8%. So I'll start off with neuromodulation. The neuromodulation sales results of 8% organic and 18% operational growth represents an acceleration versus second quarter, despite a challenging 23% comp in Q3 2018. In our neuromodulation business, we have developed a strong and diversified portfolio in deep brain stimulation and across the continuum of care for pain patients via our complementary platforms in SCS, RF, and VertiFlex. In DBS, our precise platform nearly doubled sales year over year and is consistently gaining global market share and now offers patients full-body MRI labeling along with our differentiated Cartesia directional lead. In our paying franchise, our SCS results, which were down low single digits globally, showed sequential improvement as we were seeing some modest signs of market stabilization. We aim to deliver continued improvement in SCS in fourth quarter with the launch of Waverider software enhancements, and then in 2020 with the release of the combo randomized clinical trial data on Waverider at NANS in January. The VertiFlex platform represents an important therapy for patients with moderate lumbar stenosis. VertiFlex continues to see growing demand and is on track to deliver full-year 2019 sales of $60 million. And overall, we're enjoying strong momentum with our category leadership strategy across our nerve modulation portfolio. Global CRM sales grew 2%, and in DFIP, global sales continue to grow faster than market and we're up low single digits, driven by our Resonate platform and replacements, while SICD sales also continue to grow. Pasture sales declined low single digits in the quarter, which were consistent with second quarter. But we're wrapping up the limited U.S. market release of our new programmer, which should enable an improved implant experience and unique remote service capabilities. So looking ahead, we remain on track to launch LuxDX, which is our implantable cardiac monitor, by mid-year 2020. EP sales grew globally 7%. But importantly, we received U.S. ID approval in late September to begin the clinical trial of our Polarex single-shot cryotherapy. We plan to initiate enrollment before year-end. We're targeting the year-end launch of Polarex in Europe and are excited to enter this large, fast-growing single-shot market with this next-gen cryo platform. Shifting now to cardiovascular, the group sales were up a strong 13%. Peripheral intervention sales increased 8%, led by continued momentum across our arterial, venous, and interventional oncology platforms. The launch of our Vici venous stent is going very well, and global Luvia results were consistent with our previous commentary at TCT in September. On August 19th, we closed the BTG transaction and welcomed the team to Boston Scientific. Sales of legacy BTG interventional grew high single digit in third quarter, We're very pleased with the integration process thus far and expect this business to deliver double-digit growth in 2020. We're focused on adding additional commercial capabilities, initiating product registrations in Europe and Asia, and delivering productivity synergies as previously communicated. Specialty pharma sales declined in the quarter largely due to rebates and timing of product expirations, yet we're slightly above our internal plan as CROFAP continues to do well both clinically and and in maintaining high market share. For the third quarter stub period, which is August 19th through September 30th, all of BTG is reported separately for both sales and operating income as we integrate our operating and reportable segments. Our interventional cardiology business accelerated from 5% in first quarter to 8% in second quarter, and now 15% in third quarter. This represents strong growth across all regions, led by structural heart sales across all product lines. and excellent growth in coronary therapies, up 6% globally. The diversification of our coronary therapies business continues to deliver results, with mid-teens growth across the board in complex PCI products, while our PCI guidance business, which is IVUS and FFR, grew in the mid-20s. Drug-eluting stent sales were down mid-single digits, which is an improvement from first-half trends. And in Europe, we recently launched Synergy Megatron, which is a purpose-built stent for large proximal vessels. With the mid-2020 U.S. launch targeted, Megatron is an important extension of our market-leading synergy platform. With respect to our DES business, I'd like to comment on some recent concerns regarding the potential impact of the ischemia trial, which is scheduled to be presented to AHA on November 16th. You know, we won't know the results from ischemia until then, but we believe the impact will be highly manageable in all scenarios, with a potential future dollar impact ranging from slightly positive to negative $40 million. So I'll leave additional details on this topic for any interest in Q&A, where Ian can provide more detailed commentary about the trial design and physician practice. So now turning to structural heart. The combined strength of Watchman, Lotus Edge, Accurate, and Sentinel positions very well to deliver toward the high end of our guidance of $700 to $725 million in structural heart revenue in 2019. Watchman year-over-year growth accelerated from second quarter's rate as the platform continues to build global momentum with physicians and patients. And Watchman recently received reimbursement in Japan, and we're building out this new therapy with a focus on opening new accounts and physician training. We continue to enjoy strong demand for next-generation Watchman Flex in Europe, and we're enrolling both in the option trial as well as the ASAP2. The U.S. reimbursement outlook for Watchman remains very positive, with an 8.6% weighted average increase in 2020 Medicare reimbursement. So turning to our TAVR business, AccurateNEO sales grew faster than the market in third quarter, and their product is now available in 45 countries. We continue to enroll in the AccurateNEO 2 IDE trial in the U.S. with a targeted 2021 launch. We also continue to expect European launch of our next generation AccurateValve in mid-2020. In post the Scope 1 results and prior to the launch of AccurateNEO 2 in Europe, we do estimate that AccurateNEO growth will likely slow on a percentage basis, but will likely remain accretive to growth for both IC and BSC overall. The Lotus Edge launch is going extremely well, and we're building momentum in both the U.S. and Europe. We remain on pace to open 150 accounts in our first 12 months in the U.S., and we're currently in limited market release for the 15th French iSleeve Introducer Sheet. We also remain on track to launch in Japan in 2020 and continue to enroll the Reprise 4, U.S. clinical trial to expand indication to intermediate-risk patients. Finally, adoption of the Sentinel Cerebral Embolic Protection Device continues as penetration and account openings expand in the U.S., Europe, and other markets. Sentinel is now in 500 accounts globally, and we're pleased to announce recently at TCT that in 2020, we will initiate the Global Protected TAVR randomized clinical trial. We believe that definitive evidence focused on a stroke endpoint will continue to elevate Sentinel to become the standard of care for all patients and will help influence future clinical guidelines. So to close, I'd like to share my enthusiasm for the outlook of the rest of this year and in 2020 and beyond. We believe that Boston Scientific continues to be uniquely positioned to drive shareholder value due to our strong long-term growth profile, meaningful opportunity to improve operating margins, track record of delivering double-digit adjusted EPS growth, and our improving ability to deploy capital. I want to really thank our employees once again for their winning spirit and commitment to advancing science for life, and Dan will now provide a detailed review of our financials.