Boston Scientific Corporation

Good morning and welcome to the Boston Scientific third quarter 2020 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Susan Lisa, Vice President, Investor Relations. Please go ahead.

Thank you, Andrew. 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 Q3 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 heading financials and filings. The duration of this morning's call will be approximately an hour. Mike will focus his comments on Q3 performance inclusive of the impact of the COVID-19 pandemic. as well as future catalysts and the general outlook for our 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 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 BTG, through August 15th, as there are no prior period-related net sales, as well as the divestitures 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, ABS, normalizes sales growth for a difference in selling days year over year. 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. Factors that may cause such differences include those described in the risk factor 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.

Thanks, Susie, and thank you to everyone for joining us today. And please report that we made significant progress in third quarter with excellent commercial execution and strong clinical adoption across our category-leading portfolio as we build new capabilities and fuel our new product launch cadence. We continue to invest in our promising future and are confident that this will enable us to continue to grow at the high end of our peer group, improve operating margins, and deliver double-digit adjusted EPS growth and strong free cash flow for the long term. In the third quarter, operational sales declined 2.5% and organic sales declined 5.7%, normalizing for currency and the divestiture of both our intrauterine health business and legacy bees business, as well as excluding the contribution of BTG through August 15th. Importantly, note that the organic revenue result includes a negative 230 basis point impact related to sales return reserves in the quarter, as we strategically shifted to a consignment-based model for our left atrial appendage closure franchise, with the launch of our next-generation Watchman Flex device in the U.S. I'll provide more detail on the strategy and the success of the Watchman Flex launch in a bit, as I now offer highlights of our performance in third quarter 20. Every region and every business segment improved sequentially versus second quarter, and many countries returned to year-over-year growth in third quarter. Regional performance improved significantly. It was very consistent around the globe. U.S. sales declined four, Europe, Middle East, Africa also declined three, and Asia-Pac declined four. We delivered growth in China for the second consecutive quarter, plus 2% growth in third quarter on an organic basis. This China growth includes a negative 770 basis point impact from sales return reserves. China has strong sales in complex PCI, including imaging, rhythm management, peripheral interventions, structural heart, and urology public health. And our swift progress diversifying the portfolio into these high-growth markets means that DES will represent approximately 10% of our China revenue in 2020. We expect our China business to accelerate growth in fourth quarter, and we are targeting double-digit growth in 2021, including the DES tender-related impact. This regional sales performance was mirrored with a balanced and sharp recovery across our business units. PI delivered 2% growth in the quarter. Europe Public Health, Neuromod, and Endoscopy revenue all declined 1 to minus 3. CRM was down 4 and EP was down 7. Interventional cardiology's organic 17% decline includes more than 10 percentage points of negative impact related to the combined sales return reserve for transition to watchman consignment and China DES tender, which are $63 million and $10 million respectively. Specialty pharma sales of $74 million in the quarter were in line with our expectations down mid-single digits year-to-date. Adjusted operating income of approximately $620 million represents a 23.4 adjusted operating margin, nearly double our second quarter rate, and down 270 basis points year over year. This, too, includes a negative 170 basis point impact related to the transition to consignment for a Watchman franchise. Adjusted EPS for third quarter was $37. Now to turn the outlook for fourth quarter. Trends continue to evolve largely as we've expected, with worldwide organic revenue improving sequentially in third quarter, even in those regions experiencing COVID flare-ups. We aim to return to organic revenue growth in fourth quarter, excluding the impact of the shift to consignment for Watchman, and with the obvious caveat of COVID uncertainty. From an adjusted operating margin standpoint, we're targeting a similar rate in fourth quarter, again excluding the impact of the shift to consignment for Watchman. Our businesses are strong with a compelling global pipeline and multiple ongoing launches with recent approvals that are helping lead our recovery. We're also benefiting from the overall high acuity mix of our business and site of care. Admittedly, determining the remaining backlog or estimating the new patient funnel remains a challenge and varies by business and region. We believe that we have worked through a meaningful portion of our patient backlog given the acuity profiles of our technologies. We're also encouraged by the ability of our customers to manage COVID while performing elective procedures, as well as improvement in new patient referral rates, which are still slightly below normal levels. We have confidence that across the portfolio, our broad product launch cadence will help offset these challenges. I'll now provide some additional commentary on the business units. Euro pelvic health sales declined 1% in the quarter, normalizing for the interuterine health divestiture. Sequential improvement was led by our stone and prostate health franchises with LithaView, Resume, and Spacor, all growing double digits in third quarter. Notably, Resume achieved its highest sales quarter ever, supported by our differentiated five-year clinical data. And we target ongoing improvement with new launches such as Spacor View in the U.S., as well as the benefit of a higher office ASC mix for our more elective procedures. For endoscopy, third quarter sales declined 3%, reflecting a favorable mix of both relatively high acuity and outpatient ASC site of service. Trends in the quarter were led in the U.S. by sequential growth in our hemostasis and biliary franchises, along with infection prevention, which grew double digits in the quarter. We continue to see good resilience in ERCP procedures for the pancreas and bile ducts, such as stone removal and tumor biopsies. Our Exalt D launch is accelerating with over 100 accounts open globally and encouraging early trends from the transitional pass-through payment granted by CMS that wouldn't affect July 1st in the outpatient setting. We also completed the limited market release of Spyglass Discover with surgeons enthusiastic about its direct visualization and resulting ability to treat patients effectively with a single-stage approach. thus enabling fewer interventions and shorter length of stay in the hospital. We continue to target launch of our single-use bronchoscope in the second half of 21. In CRM, third quarter sales declined 4%, with high-voltage sales down 3% and low-voltage sales down 7% for the quarter. We continue to believe that our 2020 CRM performance will be roughly in line with the overall market. And importantly, our LUX-DX implantable cardiac monitor is off to a strong start, given the seamless patient interface and back-end monitoring, plus the ability to be programmed remotely and have event detection settings adjusted without an in-person visit. EP sales were down 7% in third quarter, with trends showing strong sequential improvement. We've been very pleased with the limited market release of Polarex, which is a second-generation single-shot cryo catheter, and will move to full launch in Europe by year-end. EP's base remains one of the largest, fastest-growing markets in MedTech, announced expanded investment in the irreversible electroporation field with Parapulse. Of note, we have elected to discontinue further development and clinical investments of our Opama Luminize RF single-shaft balloon. In neuromodulation, organic revenue declined 3% as the business has returned very quickly to serve patients in need, aided by our broad portfolio, digital capabilities, and site of service. We've seen a nicely balanced procedural recovery across RF, VertiFlex, and SCS as we execute our category leadership strategy in pain. We're also pleased with our recent WaveRider Alpha launch in Europe, which offers the Contour Waveform, with up to 32 contacts, MRI capability, and Bluetooth connectivity. Turning to deep brain stimulation, our precise PC and JEVIA directional systems continue to drive market share gains. Additionally, the recent EU launch of our precise genus platform expands our capabilities in both the primary and rechargeable segments with full-body MRI capability and new Bluetooth capabilities. Genus builds on our innovative foundational technology designed to offer multiple independent channel control, directional capabilities, and integrated visualization of the patient's brain structure for optimal programming and outcomes. Turning to interventional cardiology, Q3 sales declined 17% organically, which includes more than 10 percentage points of negative impact related to sales return reserves for the transition to consignment for Watchman and the upcoming China DES National Tender. Within coronary therapies, new products like the Mamba microcatheter imaging products, such as Comet and Avigo, and the Synergy XD and 48mm transducer, TAVR sales grew both year-over-year and sequentially as we continue to focus on the EU launch of Accurate Neo2 and U.S. IDE enrollment, as well as continued U.S. and Japan rollout of Lotus Edge and U.S. intermediate risk trial enrollment. We're also pleased with the consistent progress of our cerebral embolic protection device, Sentinel, which grew over 20% in the third quarter. As disclosed at our TCT webcast earlier this month, we now expect U.S. approval for AccurateNeo 2 in 2024, as well as Lotus Edge indication expansion into intermediate risk in 2024. Our next-generation AccurateNeo 2 is launching in Europe and now offers low PVL rates, best-in-class pacemaker rates, and great hemodynamics. Lotus Edge offers predictable control with a platform that may be fully recaptured and repositioned at any time. We believe both vials offer distinct benefits, while Sentinel has uniquely demonstrated a reduction in stroke rates during TAVR procedures in both its IDE and numerous large registries. Returning to Watchman, the franchise experienced a very robust recovery in third quarter, with low double-digit growth, excluding the impact of the sales return reserve. Our U.S. limited market release of Watchman Flex has gone extremely well, with exceptional physician feedback, and we have moved into full launch ahead of schedule, and we're targeting a complete conversion to Flex by mid-2021. We believe the strategic shift to a consignment-based model strongly complements the launch of this highly clinically differentiated product, and we are purposely making this investment given the significant potential for Flex growth. Moving rapidly to a consignment model will enable us to better support customers and drive committed share agreements while accelerating the conversion to Watchman Flex at a price premium. our market leadership. We're exceeding our flex contracting goals thus far and targeting completing the vast majority of this shift to consignment by year end 2020, which will result in a slightly larger headwind to revenue growth in Q4 than Q3. Turning to PI, the third quarter organic sales grew 2%, reflecting an overall favorable mix of high acuity and outpatient site of care for procedures, as well as a category-leading portfolio and strong cadence of new product launches. Of note, the BTG interventional medicine portfolio grew high single digits on a pro forma basis in third quarter. All franchises in PI delivered growth in the quarter, arterial, venous, and IO, with particular strength in drug-eluting, IO, and China. We also continue to anticipate two imminent launches, Alluvia in China and Ranger DCB in the U.S., with Ranger Japan a large study with long-term follow-up and adjudicated outcomes presented TCT earlier this month, showed no association of mortality with pacotaxel-coated devices, and should further accelerate the growth of this important category where we are uniquely positioned. Venus results were solid, highlighted by a sharp recovery in our varithine and varicose vein therapy, and a new ECOS Interventional oncology continues to perform very well as TheraSphere Y90 share gains. We've also moved to full launch for the TruSelect microcatheter. BTG became organic mid-quarter, and as mentioned at TCT, we expect to exit 2020 realizing $125 million of the $175 million in originally target synergies ahead of plan and solely via cost As we continue to expand the BTG interventional medicine product lines globally, I'd also like to highlight several important sustainability accomplishments this quarter, including being named among the top 50 of America's most just companies by Forbes Just Capital for the second consecutive year. We rank 38 overall, second among all healthcare companies, and number one overall for diversity, equity, and inclusion. social justice, transparent customer communications, and ethical leadership were also commented. MIT Sloan Management Review Glassdoor also recognized BSC as a culture champion, one of only 21 companies named to this inaugural list. So as we continue our commitment to anti-racism, both actions and resources, including our important Close the Gap initiative to close the health equity gap in underserved communities through provider education and collaboration, advocacy and society partnerships, and patient disease state awareness. So overall, I'll leave you with a few key points about our bright outlook. We're encouraged by consistent quarterly improvement in business trends and resilience in the face of COVID flare-ups. We have a robust cadence of new product launches across the portfolio, such as Watchman Flex, Exalti, Polarex, Accurate Neo2, WaveRide Alpha, Precise Genus, and LuxDX. Our pipeline in 2021 and beyond also positions as well in high-growth markets with new adjacencies and a portfolio that offers us access, partnership, and expansion of our customer reach. We're strategically deploying investment spend to enhance our new launches and digital capabilities. And our strong financial position and compelling venture portfolio enables us to continue to develop multiple high-growth markets. As we close out 2020 and push to 2021, We remain highly confident in our long-term ability to grow at the high end of our peer group, improve operating margins, deliberate double-digit EPS growth, and strong free cash flow. I'm extraordinarily grateful to our employees for their winning spirit, and I'll now turn things over to Dan. Thanks, Mike.