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spk11: Ladies and gentlemen, thank you for standing by. Welcome to the Boston Scientific Fourth Quarter 2019 Earnings Conference 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 assistance during the call, please press star, then zero. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Suzy Lisa. Please go ahead.
spk06: Thank you, Greg. 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 Q4 2019 results, which included reconciliations of the non-GAAP measures used in the release. We've 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. Duration of this morning's call will be approximately one hour. Mike will provide strategic and revenue highlights of Q4-19, Dan will review the financials for the quarter, and then provide Q1-20 and full year 2020 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 certain acquisitions, including Nextera, Claret, Augmentix, VertiFlex, and BTG in the relevant periods for which there are no prior period-related net sales, as well as the divestiture of the bees business. On this call, all references to sales and revenue, unless otherwise specified, are organic. 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 Q1, and full year 2020 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 these 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.
spk12: Good morning. Thank you, Suzie. Good morning, everyone. Fossil Scientific finished up a strong 2019 as we've significantly strengthened our portfolio and capabilities for the future by delivering strong revenue and EPS growth. Consistent with the preliminary results we announced on January 14th, we delivered 14.1% operational revenue growth and 7.3% organic revenue growth for the fourth quarter of 19. This represents excellent growth, yet was below our organic revenue guidance of 8 to 9% due primarily to our U.S. high voltage and U.S. EP businesses. Importantly, operational growth outside of U.S. in both CRM and EP were solid, as were worldwide results in five of our other divisions, which all grew at or above market in three-posted double-digit growth, interventional cardiology, urology, public health, and endoscopy. With today's results, we disclosed adjusted EPS of 46 cents in Q4, exceeding the high end of guidance due largely to a 3-cent tax benefit. For the full year of 2019, we delivered 11.1% operational revenue growth 7.3% organic revenue, a 60 basis point improvement in profitability to 26.1, an adjusted EPS of $1.58, which is up 13% over the prior year, which is also normalized for the 7 cent tax settlement benefit in 2018. We delivered these results while also generating approximately $2 billion in adjusted pre-cash flow. Our 2019 financials continue a five-year trend of excellent results provide solid evidence that our strategy of category leadership in key markets and portfolio diversification into higher growth adjacencies continues to deliver differentiated results. Our goal is to continue to execute against our strategic plan objectives, further increase our organic growth profile, and deliver top tier sales and EPS growth results over the next five years. Boston Scientific brings a combination of long-term consistent above-market revenue growth, margin expansion, targeted double-digit adjusted EPS growth, and a greatly improved ability to deploy our strong free cash flow. And that is what we believe positions Boston Scientific to continue to drive compelling shareholder value. We're excited about our plans to build upon our momentum in 2020 and beyond. We're targeting 2020 operational revenue growth of 10% to 12%, which includes approximately 350 basis points of growth from the Veriflex and BTG acquisitions. resulting in full year 2020 organic revenue growth guidance of 6.5% to 8.5%. Similar to the trend in 2019, given the ramp in timing of 2020 product introductions, acquisitions that will turn organic in the second half, as well as an expected negative first half impact in China procedure growth from coronavirus, we expect to see organic revenue accelerate in the second half of 2020 in comparison to the first half of the year. by approximately 200 basis points. We're guiding to adjusted EPS of $1.74 to $1.79, representing 10% to 13% adjusted earnings growth, which includes a 4% to 5% of accretion from the BTG acquisition, as well as approximately $2.3 billion in adjusted pre-cash flow. I'll now provide some highlights of our fourth quarter and 90 results, along with our thoughts on 2020 outlook. Our revenue growth in this quarter was broad-based across businesses and regions, led most notably this quarter by 13% operational revenue growth in the U.S., 12% in Asia-Pac, and 10% in Europe and Middle East Africa. Emerging markets had another outstanding quarter, growing operational revenue 16% in the quarter and 19% for the full year, and now represents 12% of total company sales. So turning to each business, our MedServe segment represents 31% of our revenue mix in 2019 and continues to deliver excellent results. with sales growth of 11% in the fourth quarter and 9% for the full year. Endo sales grew 10% in the quarter and 9% for the full year, with fourth quarter sales led by double-digit growth in our biliary franchise and infection prevention franchises. Endo sales also are expected to decelerate slightly in first quarter 2020, where we're targeting a full-year growth acceleration in endo. Given the breadth and strength of our category-leading portfolio, as well as more significant contributions from the Exalt-D single-use scope launch in second quarter and beyond. I'm also pleased to announce that Exalt-D received CE mark in late January. We begin a limited launch later this quarter. Our endo business is also advancing additional pipeline opportunities, including the resolution ultra-hemostasis clip and the next generation launch in our therapeutic imaging portfolio called the Spy Class Discover, which is a single-use surgical scope. We continue to believe our therapeutic imaging portfolio represents a differentiated opportunity in 20 and an incremental 2 billion market opportunity by 2024. Turning to Euro and Pebic Health, this franchise also continues its excellent performance, growing organic still 12% in the quarter and 8% for the full year 2019, with 15% full-year operational growth, and that's despite a 170-pages-point headwind from the mesh withdrawal. Fourth quarter strength was led by double-digit growth in our single-use lithovue scope, core stone, resumed minimally invasive therapy for BPH, and almost doubling of space ore revenue. As a reminder, space ore hydrogel diminishes the risk of local undesirable side effects of prostate cancer. Radiation therapy continues to resonate in the marketplace and with patients, resulting in 100 million sales in 2019. In addition, the Resume system recently obtained expanded commercial coverage wins this year, including Anthem, Blue Cross Blue Shield, and Cigna. We expect EuroPublic Health to deliver double-year revenue growth in 2020 and the continued progress of our broad portfolio and globalization efforts. Turning to global rhythm and neurosales, which were 1% in the fourth quarter and 3% for the full year, and they represent 29% of our total mix in 2019. Neuromodulation delivered fourth quarter organic revenue up 8% and operational revenue up 19%. The full year organic sales were up plus 7% and operational sales were up 13%. As detailed last month at our investor update from the recent NAMS annual meeting, we remain very bullish in our comprehensive portfolio and exciting pipeline in both pain and brain modulation. Neuromod results for the quarter were led by doubling in sales of our precise DBS system, which offers unique directionality with our Cartesia lead. The ability to provide precise neural targeting with this lead allows physicians to optimize therapy and help reduce unwanted side effects for patients. This in addition to the CE mark approval of Neural Navigator 3, which integrates enhanced visualization with clinical programming to simplify and accelerate physician program. We expect continued strong momentum in DBS in 2020. Our global spinal cord stimulation sales also improved sequentially from third quarter to fourth quarter in 19. For the full year, SCS sales were down low single digits, but we believe the SCS market will return to growth in 2020, given low patient penetration rates, as well as new product launches and clinical data from our team and industry more broadly. In SCS, Wayrider is the only platform approved by the FDA to provide simultaneously paresthesia-based and sub-perception therapy, which targets two different mechanisms of action at the very same time, not alternating them for patients suffering chronic brain. In our combo randomized clinical trial, three-month data presented in NAMS last month, Waverider combination therapy demonstrated an 88% responder rate, which is one of the highest responder rates reported among other comparable SCS clinical studies. Also, our VertiFlex acquisition complements our RF ablation and SES portfolio in pain and represents an important therapy for patients with moderate lumbar stenosis. Myrtiflex performed well in the quarter and exceeded its full-year pro forma 19 sales goal of $60 million. Turning to CRM, CRM sales fell 3% in the fourth quarter after growing above market in Q1 through Q3, and they ended up 1% for the full year. The weakness in the fourth quarter was caused primarily by mid-single-digit declines in the U.S. ICD revenue with global ICD sales declining low single digits. Fourth quarter pacing revenue, as expected, was down low single digits worldwide. And we believe that global ICD softness in fourth quarter was largely related to the tough comps we faced with a global mid-single digit growth comp in fourth quarter 18. In addition, while we don't have all the fourth quarter inputs, our best estimate is the fourth quarter 19 worldwide CR market which excludes implantable cardiac monitors, electively declined low single digits. In 2020, we'll aim to continue to deliver above-market growth in DFib due to our longevity benefits, heart logic, heart failure diagnostic, and MLS ICD. In 2020, we remain on track to launch LexDX, which is our implantable cardiac monitor by mid-year, but we do expect limited revenue contribution due to revenue recognition policies. Overall, we expect worldwide CRM revenue to be more in line with the market 2020, potentially flat to down low single digits. EP sales grew 4% in the fourth quarter and for the full year, 7%, and US sales grew 8% in the quarter. Importantly, international sales continue to be very strong, up 15% in the fourth quarter and up 16% for the full year, led by the launch of our DirectSense catheter in Europe and Japan, as well as continued double-digit growth in major markets for our Rhythmia HDX mapping system. We also continue to enjoy a stronger response to LumaPoint, which is a next-gen HD mapping algorithm that illuminates critical areas of the heart by utilizing user-defined inputs to assist in map interpretation. We continue to answer our pipeline globally in EP, and we're pleased to announce that we've just received CE mark for our PolarX single-shot pulmonary vein isolation technology in Europe. We look forward to bringing PolarX to the market in Europe, as well as beginning enrollment in our U.S. IDE trial. So overall, we do expect EP sales growth to accelerate in 2020 as we're excited to enter the single-shot market while continuing to increase our mapping and navigation footprint and also expanding the launch of our nav-enabled catheter portfolio and adding new features to Rhythmia mapping. Turning to cardiovascular, this segment grew sales in fourth quarter 19% operationally and 10% organically. For the full year of 2019, growth is 14% on operational basis and 9% organic, and accounted for 39% of our total company sales. Pertful interventions grew 4% in the quarter and 8% for the full year on organic basis, and 34% for the quarter and 19% for the full year operationally with the BTG interventional medicine acquisition. Legacy PI growth was driven by strong double-digit growth in Asia-Pac, offset by a slight decline in U.S. sales due to tough comparisons from the U.S. launch of Alluvia, as well as a competitor's manufacturing issue one year ago. The interventional medicine business performed in line with expectations, growing plus seven pro forma with high single-digit growth in interventional oncology. We expect similar global organic growth trends in PI in the first quarter of 2020, with acceleration thereafter on the integration of BTG as well as important new product approvals such as Ranger DCB, which is supported by great new head-to-head data from the Compare trial, which was just released last week at Link. Interventional cardiology continues to grow nicely above market, delivering 13% organic and operational revenue growth in the quarter. For the full year, IC organic sales grew 10%, which is a 550 basis point increase versus 18, while operational sales were up 11 for the full year. We delivered coronary therapies growth of 1% in the fourth quarter and 2% for the full year. Synergy Megatron is an important line extension to our market leading Synergy bioabsorbable polymer platform as its purpose built for large proximal vessels. Megatron is launching in Europe now and is on track for a second half 2020 US launch. Strong structural hard sales then drove the IC sales to 13% overall in the quarter. Strong growth across our structural platforms led to achievement of the high end of our 19 revenue guidance of $700 to $725 million, which is up over 50% versus 18. Watchman achieved its strongest quarterly growth rates of the year in fourth quarter as we continue to focus on four important areas, market development and education, continued pursuit of clinical evidence to understand the benefits of Watchman in broader patient populations, including lower risk patients to be enrolled in the head-to-head champion AF study, Number three, product enhancements such as the next-gen Watchman Flex, which is expected to launch in the U.S. in the second half of this year. And fourth and lastly, geographic expansion in Japan and other countries. Turning to TAVR, we continue to be pleased with the launch and progress of Lotus Edge and remain on track to open 150 accounts in the first 12 months post-approval. We also recently received Lotus Edge reimbursement approval in Japan and will begin a limited market release over the coming months. Our superannual valve offering, AccurateNeo, grew mid-teens in the quarter, and we look forward to the launch of the next generation AccurateNeo 2 in Europe mid-year. And Sentinel, which is the only cerebral embolic protection device, is now in over 600 US hospitals. We estimate that Sentinel is approaching 20% of the overall US TAVR procedural penetration. We believe definitive evidence focused on the stroke endpoint will continue to elevate Sentinel to become the standard of care for all patients, and will help influence future clinical guidelines. To that end, we look forward to beginning enrollment this quarter in the collected TAVR randomized clinical trial. Finally, in the mitral field, we are pleased to have entered the clinic in summer in Australia with our millipede full aneuplasty ring for mitral valve repair. We're targeting enrollment in our early feasibility study in the U.S. by the end of 2020. So with our portfolio of Watchman, Accurate Lotus, Sentinel, and millipede, we're excited about our structural art capabilities. and long-term growth prospects. And we target combined revenue of $900 million to $1 billion in 2020. And also, outside of the three reporting segments I detailed, fourth quarter BTG spec farmer revenue of $58 million brought full-year pro forma sales to $250 million, which is down slightly year over year and also in line with our expectations. So to wrap up, we have an extremely exciting future and believe that we're well-positioned to continue and strengthen our performance track record in 2020 and beyond. And for that, I'd like to thank our employees and their winning spirit and commitment to patients. So now I'll turn things over to Dan for a detailed review of our financials. Thanks, Mike.
spk10: Fourth quarter consolidated revenue of $2,905,000,000 represents 13.4% reported revenue growth and reflects an $18,000,000 headwind from foreign exchange, slightly less than the $20,000,000 to $25,000,000 headwind expected at the time of guidance. On an operational basis, revenue growth was 14.1% in the quarter. Sales from the VertiFlex and BTG acquisitions, partially offset by the divestiture of our legacy embolic beads portfolio, contributed a net 680 basis points of growth at the high end of our acquisition contribution guidance range. Of the 680 basis points, BTG contributed 610, split between international medicine contributing 380 and specialty pharmaceuticals 230. The resulting 7.3% organic revenue growth in the quarter was below our organic to 45 cents, representing 16% year-over-year growth and 19% growth excluding the 1 cent net tax benefit in Q4 2018. Earnings were driven by healthy P&L metrics across the board, as well as an approximate 3 cent tax benefit, higher than expected at the time of our preliminary fourth quarter and full-year results announcement. The tax benefit is related to both discrete tax items within the quarter, as well as a lower full-year operational tax rate, which I will detail shortly. The FX impact on adjusted earnings per share was immaterial, as expected at the time of guidance. Our full year 2019 consolidated revenue of $10,735,000,000 grew 9.3% on a reported basis and 11.1% on an operational basis, which includes 380 basis points of growth related to the acquisitions of Nextera, Claret, Augmentix, Vertiflex, Operational growth was in line with our guidance as the contribution from acquisitions was slightly higher than our expectations, and organic growth of 7.3% was slightly below our guidance of approximately 7.5%. Full year 2019 adjusted earnings per share of $1.58 represents 8% growth, or 13%, excluding the 2018 net tax benefit of 7 cents in the base. Adjusted gross margin for the fourth quarter was 73.1%, just above the midpoint of our guidance range, and an improvement of 30 basis points over the prior year due to manufacturing improvements, favorable FX, and mix driven primarily by strong sales in our Watchmen franchise. For the full year 2019, adjusted gross margin was 72.4% within our guidance range and represents 10 basis points improvement over 2018. The full year impact of FX to adjusted gross margin was a positive 70 basis points in line with our expectations and along with manufacturing improvements was offset by price erosion, primarily in coronary drug-eluting stents and pacers. Adjusted SG&A expenses were $1,026,000,000 or 35.3% of sales in Q4 above our guidance range, primarily due to the lower sales, but an improvement of 40 basis points over the prior year period. Throughout the year, we balanced the need to fund initiatives related to key commercial launches and recent acquisitions with our commitment to operating expense control and optimization. As a result, we were able to achieve our full year 2019 guidance and decrease adjusted SG&A spending by 30 basis points year over year to 35.1%. Adjusted research and development expenses were $297 million in the fourth quarter, or 10.2% of sales, which is down 60 basis points from Q4 2018 primarily due to the timing of certain investments. And we're also gaining traction within our R&D efficiency efforts. For the full year 2019, adjusted R&D expenses were $1,138,000,000 or 10.6% of sales compared to 10.7 in 2018. Royalty expense was 0.6% of sales in Q4 and the full year 2019, which was roughly flat year over year for both periods. As a result, Q4 2019 adjusted operating margin of 27% improved 150 basis points year over year and is within our guidance range of 27% to 28%. We also met our full year 2019 adjusted operating margin commitment with a rate of 26.1%, representing an improvement of 60 basis points over the full year 2018. I'll now move below the line to interest and other expenses. Adjusted interest expense for the quarter was $93 million compared to $62 million in Q4 of 2018. Our average interest rate expense was 6.6% in Q4 2019 or 3.4% excluding the bond repurchase costs related to our Euro bond offering compared to 3.5% in Q4 of 2018. Adjusted other expense for the quarter was $17 million compared to adjusted other income of $4 million a year ago primarily due to a net gain on certain of our available for sale investments in Q4 2018, and both periods include expenses related to our foreign exchange hedging program. For the full year 2019, adjusted interest expense and adjusted other expenses were $325 million and $65 million respectively, resulting in total below the line expenses of $390 million. This is in line with guidance and an increase from 2018 largely due to the acquisition of BTG, as well as the make-whole call exercised in Q1 of 2019 to execute the early retirement of our 2020 notes. Our tax rate for the fourth quarter was 4.5% on an adjusted basis. We lowered our guidance of approximately 11% due to discrete tax benefits within the quarter, as well as a lower full-year operational tax rate. Our full-year tax rate was 7.3% on an adjusted basis, also below our guidance of approximately 9%, due to the lower operational tax rate. On a gap basis, our tax rate for the fourth quarter and full year include a deferred tax benefit of $4.1 billion related to transfers of certain intellectual property rights among our various wholly owned subsidiaries. These transactions more closely align the global economic ownership of our intellectual property rights with our current and future business operations. We ended Q4 2019 with $1,413,000,000 and full year 2019 with $1,411,000,000 fully diluted weighted average shares outstanding. Adjusted free cash flow for the quarter was $638 million compared to $659 million in Q4 2018. In the quarter, we used cash primarily to pay down $900 million of BTG-related debt, executing on our plan to achieve a debt leverage ratio of approximately 2.6 times EBITDA by the end of 2020. As of December 31st, 2019, we had cash on hand of $217 million. Our full year 2019 adjusted free cash flow of $2 billion is lower than guidance and down slightly year over year as a result of the timing of capital expenditures and increased working capital requirements, mainly in inventory to support upcoming new product launches. We continue to target double-digit adjusted free cash flow growth for the future, and our goal for full year 2020 adjusted free cash flow is $2.3 billion, which would represent 15% growth over 2019. On a GAAP basis, we recorded a net litigation-related charge of $223 million in the fourth quarter, primarily related to litigation with ChannelMed Systems. This drove a $129 million sequential increase in our total legal reserve to $697 million as of December 31st, 2019, which otherwise would have decreased sequentially as we continue to work to fully resolve the MESH litigation. Over 95% of all known claims are settled or in the final stages of settlement, and we expect to pay the remaining $115 million of anticipated payments into the Qualified Settlement Funds in 2020, which will then resolve 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 Funds to plaintiffs. Capital expenditures for the full year 2019 totaled $461 million, above the high end of our range of $375 to $400 million, primarily due to timing and some pull forward from 2020 in manufacturing capacity in anticipation of certain 2020 product launches. We expect capital expenditures to be in a range of $450 to $475 million for 2020 as we continue to build capacity, integrate acquisitions, and position the company for growth. I'll now walk through guidance for Q1 and the full year 2020. For the full year, we expect 2020 reported revenue growth to be in a range of approximately 10% to 12%, which corresponds to 6.5% to 8.5% on an organic basis, with an approximate 350 basis point contribution from the VertiFlex and BTG acquisitions net the divestiture of the Beads portfolio. As a reminder, VertiFlex is included in organic guidance for 2020 as of June, and BTG as of August, at which time the divested beads portfolio will also no longer have an operational impact. We expect foreign exchange to be a headwind of approximately $30 to $40 million for the full year 2020. However, as I'll detail shortly, due to our hedging program, we expect the FX impact to ETS to be neutral for the year. We expect our adjusted gross margin for the year as a percentage of sales to be approximately 72% for the full year with no FX impact. We do not anticipate material improvement over full year 2019, as manufacturing improvements will be offset by pricing declines, which are expected to be slightly higher than usual due to biannual Japan price cuts and China tenders, in addition to mixed challenges from our new high-growth products that are initially dilutive to total company gross margin, such as Exalt-D, PolarX, and Lotus Edge. We expect full-year adjusted SG&A to be in a range of 34.5% to 35%. This assumes up to 60 basis points of improvement over 2019 as we continue to execute on our cost optimization initiatives and also recognize the benefits of programs currently underway. Full-year adjusted R&D is expected to be in a range of 10 to 10.5%, and we expect our royalty rate to remain at less than 1% of sales for 2020. This implies a full-year 2020 adjusted operating margin of approximately 20%. improvement over 2019, consistent with our previously outlined goal of 50 to 100 basis points of annual improvement. We continue to make progress towards our long-term goal of 30% adjusted operating margin. We forecast our full year 2020 adjusted tax rate to be approximately 10%, consistent with our disclosure in January. This assumes an operational tax rate of approximately 11%, below the line expenses, which include interest payments, dilution from our VC portfolio, and costs associated with our hedging program to be approximately $400 to $425 million for the year. And we expect fully diluted weighted average year count of approximately 1,417,000,000 shares for Q1 2020 and 1,421,000,000 shares for full year 2020. As a result, we expect full year 2020 adjusted earnings per share to be in a range of $1.74 to $1.79, representing 10% to 13% adjusted earnings growth, and we expect FX to be neutral for the year if rates hold constant. On a gap basis, we expect earnings per share to be in a range of $0.95 to $1. Now turning to Q1 2020, we anticipate reported revenue growth to be in a range of approximately 10% to 12%, which represents 11% to 13% operational growth, and an approximately 600 basis point contribution from the VertiFlex and BTG acquisitions net the divestiture of the Beads portfolio. On an organic basis, we believe our business without the impact of the coronavirus would be in a range of six to 7.5% growth year over year. However, while we're still in the very early stages of assessing the impact and highly focused on supporting our patients and employees in China, we believe it is prudent to include a potential impact to our Q1 revenue related to the coronavirus. Our best estimate at this time is a preliminary $10 million to $40 million potential negative impact to revenue as a result of deferred procedures, supply chain, and other disruptions. Although it is early, the Chinese healthcare system is highly focused on containing the spread of the virus, and thus we expect to see a reduction in volume for all non-emergency medical device procedures as it will not be business as usual in China in February and March. This $10 million to $40 million potential negative impact results in Q1-20 organic growth guidance of 5% to 7%. Full-year organic growth of 6.5% to 8.5% contemplates our ability to recapture some of the lost procedure volume in China during the year, as well as other offsets throughout the remainder of the year. Note that given the leap year, Q1 includes an extra selling day over prior year, but this equates to roughly one-half of a day sequentially, based on the weighted average of selling days globally. We expect the foreign exchange impact on Q1 revenue to be an approximate $25 to $30 million headwind. For the first quarter, adjusted earnings per share is expected to be in a range of $0.37 to $0.40 per share, representing 6% to 15% growth, and GAAP earnings per share is expected to be in a range of $0.16 to $0.19 per share. Please check our investor relations website for Q4 2019 financial and operational highlights which outlines Q4 and full-year results, as well as Q1 and full-year 2020 guidance, including P&L line item guidance. So with that, I'll turn it back to Susie, who will moderate the Q&A.
spk06: Thanks, Dan. Greg, let's open it up to questions for the next 25 minutes or so. In order to enable us to take as many questions as possible, please lend yourself to one question and one related follow-up. Greg, please go ahead.
spk11: Thank you. Ladies and gentlemen, if you'd like to ask a question, please press 1 and 0 on your telephone keypad. You may withdraw your question at any time by repeating the 1-0 command. If you're using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you have a question, you may press 1 and 0 at this time. And one moment, please, for your first question. I have a question for Dan. Your first question comes from the line of Robbie Marcus from J.P. Morgan. Please go ahead.
spk12: Robbie, can you hear us?
spk05: I can hear you. Can you hear me?
spk12: We can hear you now.
spk05: Great. You know, maybe you could just start with top-line guidance for 2020. The range is a little wider than we've seen from you historically. You have a lot of new product launches into new markets in 2020. Maybe just walk through the rationale for the wider guidance range and any important cadence issues to pay attention to.
spk12: Sure. Yeah. So the four-year guidance organic, you heard the script there, six and a half, eight and a half. You know, we think 200 base points wide range isn't crazy for a company our size. So we think that that makes sense. You know, similar to 19 and 19, we saw 6.3% organic the first half, 8.3% organic the second half. And so we expect a similar trend in 2020. As I mentioned, you'll see second half acceleration. As mentioned, due to the product cadence, and we can talk about the various products if you'd like, as well as the M&A turning organic, and also we expect, hopefully, we aim for a resolution of the potential impact in China as we enter the second quarter. So we'll see a second half acceleration, and we expect many of our businesses to grow double-digit. We expect Euro, PH, and Endo. as well as EP, all to accelerate in 2020. We expect PI to put up a first quarter similar to fourth quarter. We expect nice acceleration due to important product launches in PI, as well as that integration going on plan. And we've also given the structural hard guidance in 900 to a billion, which is a significant increase over 2019. So we're very confident in the product launches that we have across all the divisions. And the execution, and our aim will be to accelerate organic revenue growth in 20 faster than we did in 19.
spk05: Great. And maybe just to follow up on CRM, at the JPMorgan conference when you preannounced, you thought that some of the softness in fourth quarter was due to replacements and high power. Have you been able to dig into that any further and come up with why maybe replacements were softer in December versus expectations?
spk12: Yeah, so we don't have all the market data yet. It's still too early to receive kind of unit volume across the industry. Similar to what I mentioned before, we think primarily the impact in Q4 was due to our comps. You know, we had mid-single-digit positive comps. Our competitors had negative comps. And, you know, so we don't see a – we don't believe that we lost market share in DFID in fourth quarter We think we faced a tougher comp than our competitors did. And also, we don't have the ICM loop recorder yet, and some competitors include that in their sales. So in a pure like-for-like basis, we think we held share. And we do think the market's a bit softer, though. We think the market in 2020, we project global CRM to be flat to declining low single digit. And we expect, we obviously aim to continue to grow faster in the market, like we have for many years at DFIF. but we think the market growth is probably zero to negative two for the full year.
spk05: Thank you.
spk11: Your next question comes from the line of Bob Hopkins from Bank of America. Please go ahead.
spk02: Oh, thank you, and good morning. So first question, just wanted to ask about the guidance you're providing for the first quarter, that 5% to 7%, and if you use the midpoint of your assumptions on coronavirus, maybe 6% to 8% excluding that. My question is that, you know, even excluding the slower China growth in Q1, it does feel like a deceleration from what you've been experiencing over the last couple of quarters, you know, given the selling day and an easier comp in the first quarter. So what do you assume slows in Q1 relative to the last couple of quarters, you know, or is this just you guys being conservative? Sure.
spk12: Morning, Bob. So, again, we're very comfortable in the quarterly guidance we provide as well as the full year, and we aim to accelerate in 20 over 19 organic growth, which I think is the most important piece here. You know, we look at first quarter, there is an extra of what Dan calls a half day when you look at all the global selling days and so forth. So there's a slight benefit there. But as mentioned in the script in a few areas, we do expect to see in first quarter endo decelerate a little bit from fourth quarter. as well as PI being soft again in first quarter, summer of fourth quarter. So those kind of are in line. And we also see some challenges in drug looming stents with Japan price cuts, as well as the overall pricing environment in drug looming stents. So we anticipate that in first quarter, and we talked about the CRM market, kind of the zero to negative two range. But importantly, we have some nice mixed launches in DES to support the full year, and we expect to see continued complex coronary growth do well. And then all the other businesses across the company should do extremely well, you know, with structural heart. But in first quarter, the combination of some of those pricing pressures we're seeing in DES, combined with the coronavirus issue that Dan outlined, and really moving through that BTG integration, that was the guidance of the And we estimate the impact, as mentioned, 10 to 40 from China, which brings our first quarter guidance down to 507.
spk02: Okay. And then maybe as just sort of an obvious follow-up on that, what do you assume in Endo slows a little bit in Q1? And then also I'd love to hear your comments on Exalt D in terms of what you're expecting for the year out of that product. Thank you.
spk12: Yeah, so Endo is one of our more predictable businesses, I would say, in the company. Very good execution against their plans. And it's not uncommon for them to have a slightly softer first quarter. So slightly soft is going to be above the BSE average and likely above market. So their definition of soft there is probably not fair. But as we look at the full year, they have a nice set of product launches with new hemostasis clip, improvements to digital spyglass, and the big one, the Exalt D. And we've had our first few cases take place over the past week, and they're very, very encouraging. And so you're going to see a kind of more of a controlled launch in the first quarter to make sure things are going well. A lot of the contracting in terms of the capital placements are being organized now. And we're very confident in acceleration really each month in Exalt with a much bigger impact in second quarter and a significant impact in the second half of the year. and then the surgical scope coming. So I think we're really on track with the Exalt D launch and couldn't be more excited about the early results.
spk02: Great, thank you.
spk10: And then just to give you a little bit of the math on the ranges. So the six to seven and a half is the range without coronavirus for Q1 in terms of organic revenue growth. Just to let you know how we got to the five to seven. So the low end of five is basically the midpoint of 6.75, and we took the high end of the risk of 10 to 40 for to get to the five. And then similarly for the high end of seven, it's the seven and a half high end less the low end of the coronavirus of 10 million, which brings you to the 7%. So just to give you a little bit of that math as to how it came to five to seven from the six to seven and a half.
spk11: Your next question comes from the line of David Lewis from Morgan Stanley. Please go ahead.
spk07: Good morning. Just two questions for me. Dan, I want to come back to coronavirus just to sort of set expectations. So by our quick math, China's kind of 5% of the company. Maybe it was a point of growth to 2019. I appreciate the focus in the first quarter, but picking those numbers, it seems like you're implying for first quarter growth. That China business is either a 10% grower, kind of half what you grew last year, 20%, or maybe slightly declined. Is that kind of roughly accurate? And what's actually in the annual guidance for impact from China, given it drove a point of growth from last year? Then I had a quick follow-up.
spk10: Sure. I mean, as we talked about at our investor day, China was about a $500 million business, growing 20%. That would imply about a $600 million business in 2020. So rough math, $50 million a month. The 10 and the 40 are simply the impacts. Our China team that's obviously very close to the issues in China on the ground, that's how they size it today. That's why we included that in the Q1 guide. For the full year, as you saw, the six and a half to eight and a half, we assume that we can get some of those procedural volumes back and then other parts of the company could kick in and keep that six and a half to eight and a half percent organic growth range intact. But it's just the ability to react within Q1 with the acute nature of what we see as the potential in China. That's why we raised it.
spk07: Okay. You are seeing that impact. You have seen that impact here in the early part of January into February.
spk10: As you look at China, I mean, everybody sees it on the news and such. The number of procedures for medical device procedures in Q1 is not going to be what was expected 90 or 180 days ago. So, certainly we are planning to see an impact in that business in year one.
spk07: Okay. And then just for the guidance for the year, just two things maybe for Dan or for Mike. One, obviously you talked about second half acceleration. Maybe just help us understand the key drivers of that second half acceleration from a product perspective and kind of related to that. You have two big products from a revenue perspective, absolute dollar contribution are Augmentix and Lotus. Maybe just sort of talk to your confidence in those two products and what drives that back half acceleration. Thanks so much.
spk12: Sure, we have a number of things we could talk about, but just to hit on the bigger ones, the biggest growth driver contributor is going to be Structural Heart, that $900 to a billion. And the big impacts there are excited about, led by Watchman, with the new Watchman Flex launch will happen in the U.S. in the second half of the year, and that's doing extremely well in Europe, and we have a number of big clinical trials. So we expect very strong growth out of Watchman. Lotus is doing very well in the market. It's kind of on plan for our 150 accounts. You'll see a full year impact of Lotus and expect to see each quarter greater impact there. Our Cimetis Valve, Acurate is doing well. It grew above the company average. It grew about mid-teens in fourth quarter. And we expect to see NEO2 launching in the second half. So the whole basket of structural heart will be big. Exalt will be a meaningful new incremental revenue driver with stronger second half impact. And then in PI, I would say we're confident in quarterly improvements as we settle in on the BTG integration. And you have new products being launched from legacy BTG as well as potentially Ranger in the second half of 2020, which will put our position there. And EP, I mentioned PolarX. You'll see a nice impact from that. particularly in the second half of the year as we ramp that up. And Euro continues to do well with, as you mentioned, Augmentix, which did over $100 million and is growing very, very well, as well as Nextera, which also is doing well and we'll expect five-year data shortly, and new reimbursement approvals from Cigna and Blue Cross. So really across the portfolio, there's a number of exciting things. That's why, to reinforce Dan's comment, You know, despite some of the near-term issues in China, we're very comfortable with six and a half to eight and a half full-year range.
spk11: Your next question comes from the line of Rick Wise from Stiefel. Please go ahead.
spk09: Good morning, Mike. If we could focus, if I could focus on ExaltD, obviously you're excited. We've had a bunch of in-depth doctor conversations lately. You know, happily all of them wanted to try it and were interested, some very interested. But they highlighted usability and sort of comparability to their current reusable technology. and they all seemed uncertain about pricing and cost. Can you talk to us about your confidence that ExaltD equals current reusable technology? Talk to us about pricing and how you're going to go about making the economic case to the docs and the hospitals. And maybe last, just talk about the manufacturing ramp and how that ties into the acceleration as you move toward full launch. Thanks so much.
spk12: Thanks, Rick. So the teams, as you know, this is a multi-year program built off of the capabilities we've learned with Lithiview and Digital Spyglass, those capabilities leveraged for Exalt-E. And you hit the key criteria. The number one criteria, if this is to be a Blockbuster product, which we think it will be, will have comparable usability and functionality as existing scopes. focused on over the past three or four years. And so the good news is we've done a number of procedures. We've had a number of key physicians around the globe involved with the product for multiple years. And we're quite confident in the design elements and the visualization capabilities of the product. Also, I think what's important with this, with an FDA-approved device and the capabilities of the team, we'll be able to make improvements to the platform within each year. And so just like we've done with digital and with Lithiview, expect to see probably a once-a-year enhancement upgrade, if you will, to the platform. And so it's not as if this is a stagnant product, which sometimes you get with the reusables for many years. This is a product that we'll be able to enhance at least once per year throughout the next year period, whether it be smaller handles, left-handed, right-handed, different user features that the competition doesn't have. So I think that cadence will allow us to please physicians, and the spec is to make it as good. On the manufacturing side, we have a lot of experience with this. We've been investing ahead of it. That's one reason why you saw the increase in our capital investment in 19 and 20 is to manage the volume that we expect. So we're comfortable with the ramp that we have laid out with acceleration in the second quarter and beyond. On the economics of it, it's a complicated topic. We do believe there's ample room in the existing reimbursement with inpatient at roughly $4,000 to $11,500, and outpatient $3,000 to call it $5,000. And we're also, as you know, we did receive FDA kind of the breakthrough status, which potentially could help with additional potential reimbursement tailwinds. In terms of the pricing itself, we have lots of flexibility within our endo business to price it on its own or potentially look at contracting capabilities leveraging our portfolio across the business there.
spk09: Thanks so much for all that.
spk12: Yep.
spk11: Your next question comes from the line of Vijay Kumar from Evercore ISI. Please go ahead.
spk03: Hey, guys. Thanks for taking my question. So, Mike, maybe – One follow-up on the guidance, and then I had one for Dan. On the guidance, the comments around the cadence, first half versus second half, if I recollect, you know, last year you had the days impact in second half, and I've shared all the comments on structural hard, but shouldn't structural hard cadence be similar to last year? So the real incrementality of our new products, you know, which should step up in second half, is that the right way to think about it? And just on the range itself, 6.5 to 8.5% Are you comfortable at the midpoint of the range? And I appreciate the wider range, just given Q4 and market factors, but I just want to get a sense whether you're comfortable at the midpoint.
spk10: Sure. This is Dan, BJ. So on the structural heart piece, I think that's fair, that as you look at the Lotus launch, that's obviously a very controlled rollout that we've had, and that should gain momentum over time, as should Sentinel, Mike Metcalfe, to structural heart. We obviously wouldn't give a specific number within the guidance range of six and a half to eight and a half organic for the full year. But you heard in Mike's commentary that our goal is to accelerate in 2020 off 2019.
spk03: That's helpful, Dan. And then one on the margins here, Dan, I think I heard you mention China tender, Japan biannual price cuts. What specifically is the impact from those factors on gross margin and and on the operating line, does it have any impact on the mix, just given BTG is coming in, because it looks like you're employing 60 base points margin expansion. Thank you.
spk10: Yeah, actually, on that prior question, for my Watchman team friends here, I want to make sure I include Watchman Flex in the U.S. as well, because that's a huge launch for the Watchman team, who has done a fantastic job since inception. On the price impact, as I look at it, The summary would be we just have a little bit more price across the enterprise this year in a couple of those areas, as we mentioned, the biannual Japan price cuts and the China, that will not allow the normal manufacturing cost improvements to poke their head above that and have gross margin go north. The normal equation is you have your manufacturing cost improvements, then you have pricing and mix, and the net of those three normally has gross margin increasing. This year the pricing is a little bit higher with China and Japan increasing, and potentially some acceleration on the DES front there, as Mike mentioned. So that really just all nets it out where gross margin should be in that approximately 72% range we set. That's not a surprise to us. It's what we've been saying all along for the last two years is that gross margin, which has paid a lot of the bills over the last five or six years, would slow in terms of its ability to contribute to operating margin improvement, and that SG&A and R&D would pick up that slack. You saw that
spk03: Thanks, guys.
spk11: Your next question comes from the line of Larry Beagleson from Wells Fargo. Please go ahead.
spk08: Good morning. Thanks for taking the questions, guys. One on complex PCI, one on neuromodulation. So your complex PCI business continues to do really well, but that's a business that we don't have a lot of visibility on. So My question for you, Mike or Dan, is how are you feeling about the sustainability of growth in that business in 2020, and what are the drivers? And I had one follow-up.
spk12: Sure. That business, as we've mentioned, is larger than DES and continues to do very well around the globe, and it's really maybe our most important business in AsiaPAC. So that strategically is a very big business for us. It requires more clinical orientation, which is also helpful and more in our sweet spot, and also is under less pricing pressure, I would say, you know, compared to drug-loving statins. So the innovation there is really important, and you see, you know, a big focus on our IVUS and Rural Blader platform as well as Wolverine, and maybe Ian can touch on some other key products. But it's really, you know, a key cadence of new products that we have, as well as a big focus on complex PCI training that we have around the globe and how our portfolio matches that.
spk04: complex interventions.
spk08: That's helpful. And just on neuromodulation, Mike and Andy gave a lot of helpful color on the different businesses for 2020, but I wasn't sure if I heard your expectations for neuromodulation for 2020 relative to 2019. So how do you see that business in 2020 relative to 2019 on an organic basis? Thanks for taking the questions, guys.
spk12: Sure. Yeah. We're hopeful. We're at We aim for that business, I would say, to accelerate versus 19. If you look at 19, our SES business was slow. The market was slow, and we had extremely difficult comps the prior year. And so we would expect our global SES business to improve over 19 in 2020. And also you heard at NANS, as well as detailed out in some of the script, some of the clinical benefits we have with that portfolio. So I think purely in a comp basis and expectations for the market to improve somewhat, we would expect that to improve. And in DBS, we just have a lot of really good momentum there. Excellent share taking has taken place in Europe and in the US. And you'll see some additional clinical studies being presented with that platform. And we touched on some of the product differentiation there. So then you have VertiFlex, which will go organic in the second half of the year. So we think, broadly speaking, neuromodels will grow faster in 20 than 19.
spk08: Thanks for taking the questions, guys.
spk11: Your next question comes from the line of Josh Jennings from Cohen. Please go ahead.
spk01: Hi. Good morning. Thanks. And just two questions. First, on China, I understand that you provide nice details around the 1Q potential headwind, but Can you help us get a little bit more granular? And any help just in terms of your exposure in China by business unit? I mean, is cardiovascular interventional cardiology most exposed, or is it more broad-based? And then on the second question, just watch when Flex, you know, many comments today just on it being a driver. Can you help us understand that? the boost that you'll get from Watchman Flex launch? Is that premium pricing? Are there accounts out there that are waiting for Watchman Flex to get over to Hump to start a Watchman program, or is it just deeper penetration? The current account says Watchman Flex will open up more procedures in different risk categories for patients. Thanks for taking the questions.
spk10: Sure, Josh, I can start on the first one, and I think Mike can take the second one. The good news is we do have, as you mentioned, a very well-diversified portfolio in our China business. It's not reliant on one particular business within the mix. But as our team reflects on all of what's going on there, it's pretty clear that a vast majority of the healthcare resources in China are focused on diagnosing, treating, and preventing the spread of the coronavirus, and that all of the procedures are at risk of being delayed. So as we look at it, we don't say it's one particular division or another, and that 10 to 40 contemplates the whole market basket of Boston Scientific Business and the impact that we could see here in the first quarter.
spk12: Yeah, and on a watchman's flex, Ian or Dr. Stein can comment on this as well, but I think in terms of what we've seen in Europe, it's been more of a share-taking capability that we have in Europe. And in the U.S., we haven't seen centers not opening because we don't have Watchman Flex. We don't think it's going to drive necessarily new center openings that we wouldn't already receive with current Watchman. I think they can speak to the safety profile and the confidence that physicians have with Flex, which will give them more confidence to continue to increase our utilization rates. So our key metric for Watchman broadly is utilization rates. We'll continue to open some more centers in the U.S. We're expanding in Japan. We're expanding in other countries. But in the U.S., it's all about turning on and continuing to ramp up utilization, which we're seeing. We believe WatchFlex will further enhance that.
spk04: I'll just add to that. I'd say the key drivers to utilization are awareness, and we're driving that through education strategies. direct-to-patient, direct-to-physician education strategies which are highly effective. Then procedural enhancements actually increase utilisation and Watchman Plex is a substantial procedural enhancement in terms of being simpler to use, easier to recapture and physicians immediately recognise the subtle but valuable procedural enhancements. Increasing utilization is building evidence, and I think the mere fact that we've announced the champion trial, a major DOAC versus WatchmanFlex trial, helps to build the awareness and therefore the utilization. So I think things will be very positive.
spk06: Great. With that, we'd like to conclude the call. Thanks for joining us today, and we appreciate your interest in BFS. Before we disconnect, Greg will give you all the pertinent details for the replay.
spk11: Thank you. Ladies and gentlemen, this conference will be available for replay after 1230 Eastern Time today through February 20th. You may access the AT&T Executive Replay System at any time by dialing 1-866-207-1041 and entering the access code 390-0175. International participants dial 402-970-0847. Those numbers, once again, are 1-866-207-1041 or 402-970-0847 with the access code 390-0175. That does conclude your conference for today. Thank you for your participation and for using AT&T Teleconferencing. You may now disconnect.
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