Boston Scientific Corporation

Ladies and gentlemen, thank you for standing by, and welcome to the Boston Scientific Q1 2020 earnings call. Now, at this time, all participants are on a listen-only mode. Later, we will conduct a question-answer session. If you wish to place yourself in queue for questions at any time, please press 1 then 0. Now, repeating the 1 then 0 command will remove you from Q&A. Once again, please press 1 then 0, and then press 1 then 0. Repeat the command to remove yourself from the queue. As a reminder, today's call is being recorded. I will now turn the call over to your host, Susan Lisa. Please go ahead.

Thank you very much, Kevin, and for those explicit directions. 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 Q1 2020 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-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 focus the majority of his comments on the impact of COVID-19, inclusive of April trends and procedural acuity by business. Dan will review the financials for the quarter and our liquidity outlook, 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 VertiFlex and BTG, in the relevant periods for which there are no prior period-related net sales, as well as the divestiture of the global embolic microspheres portfolio. 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, the impact of the COVID-19 outbreak on the company's results of operations, 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, and earnings, as well as our tax rates, R&D spend, and other expenses. April trends refer to month-to-date results, and actual results may differ materially from those discussed in these and any forward-looking statements. Factors that may cause such differences include those described in the risk factors section of our most recent 10-K and subsequent 10-Qs filed with the SEC. These statements speak only as of today's date, and we disclaim any intention or obligation to update them. At this point, I'll turn it over to Mike for his comments.

Thank you, Susie, and thank you to everyone for joining us today. I hope that you and your families are healthy and braving the COVID-19 pandemic as well as possible. I'm truly honored to be part of Boston Scientific, as I see every day the resilience of our employees across the globe who are helping us to navigate the crisis and emerge stronger on the other side. We're humbled to be able to continue to serve our customers, patients, employees, and community needs in the COVID-19 pandemic. Our focus is to communicate with transparency and take actions consistent with our core values while keeping employees safe and informed, providing patient support to customers, and effectively managing our operations. We've expanded our capabilities in virtual physician education, remote clinical support, digital sales enablement, and trainings. We're also partnering with our customers to enable a fast recovery while also acting to reduce operational expenses and preserving our cash position. We have taken these immediate actions with the goal to preserve as many jobs and strategic programs as possible. We've also leveraged our capability to develop countermeasure technologies, such as the Coventer Personal Respirator, which was developed and approved in just four weeks, as well as face shields and donations of personal protective equipment. I'll now provide some highlights on first quarter 20, and we'll focus most of my comments on the impact of COVID-19. While we're not providing specific revenue and EPS guidance at this point, we will offer insights into our segments, along with recent businesses and geographic sales trends, and highlight some 2020 launches. I'll then wrap up with some key sustainability updates as our teams continue their dedication to innovation and long-term commitments to the environment and our communities. For the first quarter of 2020, total company sales grew 3.2% on an operational basis, with the U.S. up three, EMEA up one, and Asia-Pac down 5% operationally. Total sales declined 2.9% on an organic basis, reflecting the impact from COVID-19 and in line with our April 2nd pre-announcement. Sales were tracking two expectations of both January and February before significant negative trends kicked in in mid-March. These first quarter sales results were led by low single-digit growth in our med-surg segment, with uro-pelvic health up three, endo up two, and both our cardiovascular and rhythm and neuro segments declined organically. Within cardiovascular, interventional cardiology sales were down 3%, peripheral interventions was down 2%. Operationally within PI, BTG Interventional Medicines contributed 390 basis points to total company growth, led by Theraspheres, which grew mid-teens in the quarter. In Rhythm and Neuro, CRM sales declined 10%, EP dropped 5%, and neuromodulation declined 7%. Neuromod did grow 3% operationally with a 70 basis point contribution to company sales from Vertiflex. And specialty pharma sales of $41 million in the quarter was ahead of forecast and contributed 160 basis points to total company growth. Despite taking immediate actions to reduce costs, the lower overall sales levels led to a challenging P&L for the quarter as adjusted operating margin fell to 21.6%, down 400 basis points year over year, and adjusted EPS of $0.28, which is a 21% decline, versus Q1 2019. Now to turn to outlook for the rest of the year. As I mentioned, Q1 sales were tracking the expectations until mid-March, when we started to see significant declines in U.S. and European revenue as a result of procedure deferrals in those geographies across all of our businesses. Generally, those negative trends in the second half of March have continued in the first three weeks of April. We are currently planning for the most significant negative impact of COVID-19 in Q2, and within Q2, we expect April to be the toughest month, with global revenue for the month of April down approximately 45% to 50%. From a regional perspective, we see varying results based on the different phases of recovery. Through the first three weeks of April, regional sales results have trended down 15 percent in Asia-Pac, down 45 percent in Europe, Middle East, East Africa, and down 55 percent in the U.S. versus prior year. Importantly, we've seen a very recent slight improvement in April sales trends as some facilities, to varying degrees, have begun to reopen for elective procedures. We anticipate some sequential monthly improvement throughout Q2, but with net sales results still down significantly year-over-year for the second quarter. We also expect Q3 revenue will likely contract on a year-over-year basis, but improve from Q2 rates of decline. And then we aim to return to growth in Q4, but there are obviously still many uncertainties. Despite the procedure volume impact from COVID-19, the global pipeline across our businesses remain very strong, with several ongoing launches and recent approvals now poised for commercialization as soon as the broader environment improves. I'll also provide color on procedural urgency along with trends in April. We've framed our major product lines across the spectrum from emergent, which is measured in hours to days, to semi-emergent, which is measured in weeks, to elective, which is measured in months. And note that several product families cross over categories and majority of conditions we treat have a relatively high level of acuity, including those that are elective, and thus generally can't be deferred for extended periods. In addition, when estimating the overall pace of recovery, site of service is an important consideration, and the recent guidelines for reopening from a range of physician societies enable elective outpatient procedures to restart before inpatient procedures. Site of service varies by business, but overall, based on 2018 Medicare claims data, our 2019 U.S. revenue split was approximately one-third inpatient and two-thirds outpatient. The two-thirds mix within the outpatient setting spans across hospital outpatient, physician office labs, and ambulatory surgery centers. Please refer to slide 12 of our investor relations website for supporting details to the commentary. For urology pelvic health, given the high mix of deferrable procedures, trends through the first three weeks of April were down roughly 60% versus prior year, with sales from our Stone franchise and Space Orb products showing better resilience and more pressure in our prostate health, prosthetic urology, and pelvic core franchises. We believe uroPH may have one of the faster potential recovery curves, aided by a higher office ASC mix for our most elective procedures, as well as specific products playing a key role, such as the recent launch of the TRIA stents in the U.S. and Europe. And LithoView, which is our single-use uretoscope, could benefit as the current environment supports the speed and utility of single-use scopes. SpaceOAR is also an important technology for the recovery as treatments for cancer patients will be prioritized, and hydrogel spacing is now included in NCCN guidelines. In BPH, Resume, which is an entirely office-based procedure, recently reported five-year clinical data in which the surgical retreatment rate through five years was 4.4%. Importantly, this is unchanged from the published results of Resume's four-year data, and it compares to a 13.6% retreatment rate for competitive MIS technology. Finally, given the multiple strategic priorities and investment opportunities within the broad EuroPH portfolio, We're announcing today that we've reached a definitive agreement to divest our commercialized intrauterine health portfolio to Minerva Surgical. In addition, we've made a decision, at least for the near term, to stop funding additional clinical or R&D work for Cytuity. Cytuity is a potential platform for ovarian cancer diagnosis that we acquired from Envision in 2018. Unfortunately, while we recognize the strong need for improved ovarian cancer detection options, Particularly for women who have a high risk, our view of the clinical evidence necessary to establish practical utility of the product, as well as the current reimbursement landscape, have extended the cost and time horizon to realize the commercial potential of siteuity. Turning to endoscopy, April month-to-date trends are down 45% year-over-year, reflecting a higher mix of non-deferrable procedures within our med-surg business. ERCP procedures for the pancreas and bile ducts are deferable. However, patients typically can't wait longer than four to six weeks for stone removal, tumor biopsies, and other related procedures. In single-use scopes, the EXALT-D launch is progressing, albeit slowly, due to COVID-restricted hospital access and capacity. The current pandemic certainly emphasizes the need for infection prevention, and we continue to believe that our therapeutic imaging portfolio is if single-use scopes represent a multibillion-dollar market opportunity over time. We're also pleased that the next scope in this franchise, Spyglass Discover, received CE mark approval in early April, and we're working toward a second half U.S. clearance and a global launch. Also in April, we received FDA clearance for the Wallflex colonic and duodenal soft stent systems, and our next-generation hemostasis clip, Res360 Ultra, remains on track for approval in Q3. Turning to CRM, sales in April are down approximately 50% year-over-year, with de novo Brady implants and replacements holding up slightly better than ICDs. And this reflects a slightly higher mix of non-deferrable procedures and pacers, including the majority of patients suffering from heart block and those who more urgently need replacements. In defibrillators, non-deferrable procedures, including secondary prevention, ICD, and CRTD therapy, and a subset of replacements. CRM recovery will be led by HeartLogic, SICD replacements, as well as the ongoing U.S. launches of our Ingevity Plus lead and 3300 programmer with remote service offerings. Importantly, we continue to expect mid-year FDA launch and clearance of our LuxDX implantable cardiac monitor. We also look forward to two virtual HRS late breakers in our CRM franchise, the Proterian and Untouched trials. which should continue to support the global growth of our SICD franchise. Electrophysiology sales in April are down approximately 65% year-over-year, as this franchise is a higher deferable mix than CRM, with a low double-digit percentage of highly symptomatic and unstable arrhythmias considered non-deferable. Our EP recovery will be driven by our strengthening portfolio, including PolarX, which is our second-generation single-shot cryoablation catheter, Now we resume its European launch in Q3 when access to labs improves. DirectSense, which monitors the effect of RF energy delivery via changes in local impedance around the catheter tip, received approval in mid-April. We also anticipate Q3 approval in Europe for a force-sensing stable point therapeutic catheter. In neuromodulation, the first three weeks of April have seen a decline of 90% in sales versus prior year, given the very high rates of elective deferability for SCS and DBS procedures. So to offset this, we continue to leverage our digital competencies to maintain connectivity with patients and physicians that we're ready to serve them as procedures resume. Given that a majority of all SCS trial procedures occur in the office or ASC setting, and that many implanting physicians have access to an ASC, we believe SCS procedures will likely experience an earlier and faster recovery than DBS, which is typically 100% hospital-based. For interventional cardiology, April sales are trending down about 40% versus prior year, with coronary therapy sales more resilient and structural heart sales more impacted, which reflects a higher mix of non-deferrable procedures within coronary therapies. Similarly, with structural heart, TAVR procedures are generally less deferrable than Watchman. And overall, the relatively low April sales decline in IC reflects that as one of our highest mixed franchises, both in terms of emergent and acute procedures. We believe this will drive the recovery curve as the procedures may be deferrable near term, but pose a significant threat for future morbidity or mortality. Importantly, we're planning for eight coronary therapy launches across our major markets later in 2020, highlighted by Synergy XD, Synergy Megatron, and our Synergy 48 millimeter, two enhancements to our rotablator arthrectomy platform, and enhancements to our PCI guidance platform. We're also very proud of the team that achieved our accurate Neo2 CE mark approval earlier this month, and we plan to begin a limited market release in Europe as the healthcare systems resume a more regular cadence of TAVR procedures. Similarly, the ongoing launch of Lotus Edge in the U.S. and Japan has been challenged by COVID-19 restrictions that limit proctor travel and the delivery of training. But we do look forward to the recovery and procedure volumes. We also continue to plan for a second half 2020 U.S. launch of Watchman Flex and await presentation of the pinnacle Flex results in May as an HRS late-breaking clinical trial. And although Watchman procedures are largely deferrable, Patients seeking this therapy are eligible based on their need for an alternative to blood thinners. And physician operators we've surveyed are confident that postponed procedures will be rescheduled when facility capacity and or protocols allowed for increased elective procedures. Turning to peripheral interventions, April to date revenue is down approximately 30%. And the estimated mix of deferrable to non-deferrable procedures ranges by therapy category. arterial, venous, and interventional oncology in order of highest to lowest mix of deferrable procedures. We have a strong cadence of product launches coming in this PI business. In arterial, we plan U.S. launches of the Ranger DCB and Athletus balloon, along with a China launch for Alluvia in China. In venous, we received approval for the venous indication for wall stents and anticipate approval for a new controller for the ECOS thrombectomy system and a new IVUS catheter. Also, the VTE Virto reverse deployable stent and the angiojet clock hunter system all will be launched in 2020. In interventional oncology, we plan to launch the new HEAT FX microwave ablation system and the TruSelect microheat catheter, so a very rich pipeline of launches in PI in 2020. So turning now to lessons learned from our Asia team, Q1 sales in the region declined 5% year-over-year, mainly driven by declines in China and Korea, which were partially offset by growth in Japan, Australia, and New Zealand. In China, we estimated the COVID-19 impact to procedures was close to $70 million in the first quarter. And since the government announced on March 18th that the country has passed the peak of the epidemic, we continue to see improvement each week in China. Leading physicians are also citing concerns that patient deaths from deferral of elective procedures could outnumber COVID-19-related patient deaths. And bans are now starting to lift on interprovincial travel, and this is helping larger city hospitals recover as patient flow from lower tier cities is restored. We are leveraging the China team's experience, including customer engagement via online hospital seminars and remote case support. And overall, we believe that China could recover back to its pre-COVID-19 trajectory in Q3 and potentially be above plan in Q4. Our Japanese business has been less impacted year-to-date, but remains uncertain. In Japan, we look forward to launching Ranger DCB, Synergy XD, and Lotus Edge in the second half of 2020. So turning to the balance sheet, as we announced last week, we believe that we are in a strong liquidity position with our recent bank deal, resulting in over $2.6 billion in near-term liquidity. And Dale will provide more details on the transaction, as well as commentary on our cost-cutting and cash preservation initiatives. Consistent with the deferral of elective procedures, we've witnessed a slowdown in ongoing clinical trial enrollments, and thus would expect a delay to many of our clinical timelines of approximately six months. We're also temporarily suspending the quarterly update to our pipeline chart in our financial highlights decks, but we'll reinstate at one of our future earnings calls. Instead, this quarter, we have provided a summary of our important 2020 new product launches on page 13 of the deck. I'd also like to highlight the online release of our 2019 Integrated Performance Report, which combines financial disclosures with our sustainability report, updates on our 2030 carbon neutral pledge, and reporting on our diversity and inclusion goals. Recall that in 2017, Boston Scientific was the first medical device company to pledge carbon neutrality by 2030. And importantly, we've made significant progress toward this goal. with the latest step being last week's announcement that we have finalized our first virtual power purchase agreement, which is a 15-year solar energy purchase deal to provide 100% renewable energy electricity for our U.S. operations. We've more than doubled the percent of energy used from certified renewable sources in 2019 alone to 11% and achieved a reduction of nearly 34,000 tons of greenhouse gas emissions since 2015. We recycle 80% of all solid waste in manufacturing sites and a 95% rate of landfill avoidance. So in closing, I'm incredibly proud of our team at Boston Scientific. Our fundamentals and long-term outlook remain strong given our people, our pipeline, our high rate of acuity in our portfolio, and our category leadership strategy across diversified markets. I'd like to thank our employees for their winning spirit and commitment to emerge stronger in the recovery post-COVID. And I'd also like to thank the frontline workers for their unwavering commitment, dedication, and selflessness during this time. Now I'll turn the call over to Dan.