Boston Scientific Corporation

Ladies and gentlemen, thank you for standing by. Welcome to the Boston Scientific Second Quarter 2020 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, Susan Lisa. Please go ahead.

Thank you, Greg. Good morning, everyone. Thanks for joining us. With me on today's call are Mike Mahoney, Chairman and Chief Executive Officer, and Dan Brennan, Executive Vice President and Chief Financial Officer. We issued a press release earlier this morning announcing our Q2 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-GAAP measures used in today's call, to the Investor Relations section of our website under the headings Financials and Filings. The duration of this morning's call will be approximately one hour. Mike will focus his comments on Q2 performance, inclusive of the impact of the COVID-19 pandemic, as well as catalysts for recovery by business. Dan will review the financials for the quarter, 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 and the intrauterine health franchise. On this call, all references to sales and revenue, unless otherwise specified, are organic. Finally, average daily sales, or ABS, normalizes sales growth for a difference in selling days year over year. 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 pandemic upon the company's operations and financial results, 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. July terms provided qualitatively 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 of subsequent 10-Qs filed with the SEC. These statements speak only as of today's date, and we disclaim any intention or obligation to update them. At this point, I'll turn it over to Mike for his comments.

Thank you, Susie. Good morning and thank you to everyone for joining us today. I also want to express my gratitude to all of our employees at Boston Scientific who are helping serve our customers, patients, and communities during the COVID-19 pandemic and living our winning spirit value every day. As the impact of the coronavirus began to spread globally in first quarter, we took a number of cost-related actions as outlined on our first quarter earnings call. in the face of significant uncertainty to protect our employees and also to ensure the strength of Boston Scientific. Importantly, with a consistent monthly improvement in sales trends, we have accordingly ended our reduced employee work schedule, we're accelerating key investments appropriately, appropriately increasing variable spend and capex, and we're quickly ramping up manufacturing production to pre-COVID levels throughout most of our plant network. We're also establishing new and stronger capabilities in virtual positioning, education, remote clinical support, and digital sales enablement to partner with our customers on this path to recovery. We absolutely appreciate the agility of our global team, and we absolutely believe that we will emerge from the pandemic a stronger company. I'll now provide detailed highlights on performance in second quarter 20, including average daily sales trends for the month of June. I won't give specific July results, but it's encouraging to see that across all of our businesses, July trends are continuing to improve nicely from June levels. For the second quarter of 2020, total company sales declined 23% on an operational basis. On a regional basis, Asia-Pac declined 14% in the second quarter, but importantly delivered growth of plus 2% in China for the quarter. In addition, for the month of June, China, Australia, New Zealand, and Korea all delivered year-over-year growth, Europe, Middle East, Africa declined 26% in the second quarter, yet importantly, six countries returned to growth versus prior year in the month of June. Finally, while revenue in the U.S. dropped the most in April, down 55%, the U.S. has also seen the sharpest recovery, declining 12% in June on an ADS basis and 28% in second quarter, both versus the prior year period. Total company sales declined 29% on an organic basis as trends evolved throughout the quarter that were in line with the previous outlook we provided in our first quarter call. April sales declines was the trough, with monthly sequential improvement in May and again in June. Specifically, worldwide organic revenue was down 47% in April, down 24% in May, and down 17% in June on an average daily sales basis. Operationally, Interventional Medicine contributed 320 basis points to sales versus prior year, and VertiFlex contributed 20 basis points before those sales went organic in June. In addition, Spec Pharma sales of $68 million in the quarter was ahead of forecast and contributed 260 basis points to total company sales. Adjusted operating income of approximately $250 million represents a 12.6% increase adjusted operating margin, roughly half the rate of 25.5 in second quarter 19. Adjusted EPS for second quarter was 8 cents, which is a 78% decline versus second quarter 2019. Much of the shortfall occurred at the gross margin level, given lower volumes, which Dan will detail further. Now to turn the outlook for the rest of the year. While July has seen flare-ups of COVID-related challenges in certain regions, We're very encouraged by the strengthening trends we've seen in July versus those in June. From a regional perspective, we see varying sales results based on the different phases of recovery, with Asia-Pac having recovered the most, followed by the U.S., and then Europe. All told, there is no change to the 2020 outlook we gave on our late Q1 earnings call. We estimate that Q3 revenue will likely decline year over year, but will improve sequentially versus second quarter, and that we aim to return to organic growth in fourth quarter. Despite the procedure volume impact from COVID-19, our business has remained strong with a compelling global pipeline and several ongoing launches and recent approvals that are helping lead our recovery, as well as the overall favorable mix of our business in terms of high acuity mix and outpatient site of care. Recall that a binary split of elective emergent does not clearly reflect clinical practice, and that we have seen and expect to continue to see a higher rate of recapture of deferred procedures given the majority of the conditions we treat have a relatively high level of acuity and thus generally can't be deferred for extended periods. I'll now provide some additional commentary on our business units. Starting with Urology Public Health, sales declined 32% organically in the quarter, with June ADS down 12% versus prior year, and July trends are continuing to improve versus June. Our stone and prostate health franchises led the recovery, and thus far we have seen a faster than expected recovery in our prosthetic urology and pelvic floor franchise. We continue to believe UROPH will have one of the faster potential recovery curves. In addition, we recently received positive guidance from the United Kingdom National Institute of Health and Care Excellence, called NICE, for Resume, recommending it as a minimally invasive treatment for BPH, given the product's effectiveness and significant cost savings. Turning to endo, endo second quarter sales declined 26% and June was down 10% versus prior year ADS. This improvement trend continues into July as our endo business has a favorable mix of both relatively high acuity and outpatient site of service. Trends in the quarter were led by resilience and ERCP procedures for the pancreas and bile ducts, such as stone removal and tumor biopsies, which typically cannot be deferred more than four to six weeks. We also saw a nice recovery in upper endo procedures as well as colonoscopies. Our Exalt D launch was slow due to COVID impacts in the second quarter. However, we're seeing increasing interest in Exalt D as recovery improves, and the current pandemic emphasizes the need for infection prevention. In addition, CMS granted a transitional pass-through payment for single-use endoscopes, including Exalt D, which went into effect on July 1st. and will facilitate Medicare patient access to this important technology in the outpatient setting. The next scope in the franchise is called Spyglass Discover. It's created specifically for the surgeon call point and enables a single-stage approach to treating bile ducts. It's also in limited market release in both Europe and the U.S. with a full launch planned in the second half of 20. We believe that our therapeutic imaging portfolio of single-use scopes represents a multibillion-dollar market opportunity over time. We've accelerated investment to enable our strategy of launching one single-use scope per year. Turning to CRM, second quarter sales declined 29% with both high and low voltage franchises down similarly in June, with average daily sales declining 20%. In July, trends have continued to accelerate. In May, we saw the release of two positive late breakers at HRS as both the Proterian and Untouched studies continued to support growth of our SICD franchise. demonstrating the SICD system should be considered as a first-line therapy for a broad group of ICD-indicated patients. In addition, we're excited to be launching our LUX-DX implantable cardiac monitor, which offers a seamless patient interface and back-end monitoring, as well as the ability to be programmed remotely and have event detection settings adjusted without an in-person visit. Electrophysiology sales in the quarter were down 39%, as this franchise has a higher deferrable mix than CRM. EP trends did improve within the quarter to down 28% in June on ADS and are improving further in July. We have several new important product launches in Europe in the second half of 20, and we're in the limited market release of Polarex, which is a second-generation single-shot cryoablation catheter. We expect growth to accelerate in Europe as it moves to full launch in the second half of 20. We also recently received EU approval for StablePoint, which is our novel force-sensing therapeutic catheter with DirectSense. In the U.S., we're encouraged by early launch feedback on DirectSense, which monitors the effect of RF energy delivery via changes in local impedance around the catheter tip after approval in mid-April. Turning to neuromodulation, second quarter organic revenue declined 43%, and operational revenue declined 40%. reflecting a high rate of deferability for spinal cord stimulation and deep brain stimulation procedures. As a reminder, Neuromod sales declined to 84% in April. However, the business is returning very quickly, with an 11% decline in June on an ADS basis versus past year, and continued improvement in July. We've received this by leveraging our digital competencies to maintain connectivity with patients and physicians, as well as benefiting from site of service, given the majority all SCS trial procedures occur in the office or ASC setting. VertiFlex has also enjoyed a nice recovery, and in DBS, the differentiation of our Versace PC and Jevia directional systems continue to drive market penetration, and June monthly sales exceeded pre-COVID monthly levels seen in first quarter of this year. In interventional cardiology, second quarter sales declined 29%. In June, average daily sales declined 24%. with all three franchises improving sequentially from May, and those trends have continued into July. With the coronary therapies, we received approval for multiple new product launches across our major markets, including Synergy XD and a 48-millimeter version of the device. Also, two enhancements to our rotoblader atherectomy platform and enhancements in PCI guidance. In TAVR, we continue to roll our accurate NEO2 U.S. trial and plan for limited market release in Europe in the second half. Lotus Edge continues to see strong utilization within existing accounts, while new account openings and geographic expansion did slow in second quarter due to COVID impacts and a slowdown in position training. June and July results with Lotus Edge are encouraging, and we continue to enroll Reprise 4, and we expect to get back to our regular cadence of account openings in the U.S., and continue our launch in Japan in second half of 20. Turning to Watchman, we've seen consistent improvements since the April trough, and importantly, an accelerated recovery throughout the quarter and into July. We've also been encouraged by the resilience of Watchman, and we're seeing a healthy mix of both rescheduled and new patient procedures. With last week's approval of Watchman Flex on the back of strong pinnacle Flex results in May, as an HRS late-breaking clinical trial, we look forward to executing a strong U.S. launch in the second half of 20. In peripheral interventions, second quarter organic sales declined 17%, and June average daily sales declined 9%, with an improvement continuing into July. PI overall has a mix of deferrable procedures similar to our coronary therapy business, and within IC, but with a higher mix of outpatient site of care. PI's resilience has been led by a strong cadence of new product launches, and looking ahead, we continue to anticipate a second half launch of Ranger DCP in the U.S. and Japan, as well as launch of Alluvia DES in China. In Venus, we launched a new controller for the ECOS system, but we are on track to launch several new products later this year to expand our category leadership position in this under-penetrated market. Interventional oncology continues to perform very well, and in the second quarter, TheraSphere's Y90 grew low single digits despite the COVID impact and continues to take share. Additionally, within I.O., we're focused on globalizing the portfolio along with launching the new heat FX microwave ablation system and the True Select microcatheter in second half of this year. So overall, I'll leave you with a few summary messages. First, we're very excited by the consistent monthly improvement in business trends and importantly, the continued progress into July. We also have a robust cadence of new product launches that we expect across the portfolio in the second half of this year. including ExaltD, PolarX, AccurateNeo2, Watchman Flex, and LuxDX, as well as a very healthy pipeline in 2021 and beyond. Thirdly, we're also strategically deploying investment spend to enhance our new launches and digital capabilities. And fourth, our strong position and compelling venture portfolio enables us to continue to develop further multiple high-growth market opportunities. all of which adds up to exciting prospects for Boston Scientific as an innovative, interventional medical device company well-positioned in compelling markets due to our mentally invasive approach with important benefits for patients and healthcare systems. You'll also find supplemental information regarding second quarter trends, 2020 new product launches, and our financials, within our financial and operating highlights decks on page 12 through 14. In closing, I'm very proud of the team at Boston Scientific. We have a very exciting future, and I'd like to thank our employees for their winning spirit. Now I'll turn things over to Dan.