Boston Scientific Corporation

Good morning and welcome to the Boston Scientific Fourth Quarter 2020 Financial Results 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, 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 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. Duration of this morning's call will be approximately one hour. Michael focuses comments on Q4 performance, inclusive of the impact of the COVID-19 pandemic, as well as future catalysts and the outlook for our business, including Q1 and fiscal year 2021 guidance. Dan will review the financials for the quarter, provide more details regarding our Q1 and fiscal 21 guidance, and then we'll take your questions. During today's Q&A session, Mike and Dan was joined by our chief medical officers, Dr. Ian Meredith and Dr. Ken Stein. Before we begin, I'd like to remind everyone that on the call, operational revenue excludes the impact of foreign currency fluctuations, and organic revenue further excludes the impact of certain acquisitions, including VertiFlex through June and 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. Guidance excludes the recently announced preventive acquisition and assumes an April 1 divestiture of the BTG specialty pharmaceutical business. On this call, all references to sales and revenue, unless otherwise specified, are organic. Average daily sales normalizes sales growth for a difference in selling days year over year. Finally, growth goals of six to 8%, excluding COVID, represent comparisons between time periods in which results are not materially impacted by the COVID-19 pandemic. 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 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. Thanks for joining us today. 2020, I'm very proud of how the BSC team has responded and how we're able to serve patients while keeping our employees safe and leveraging this year's challenges into a strengthening of our portfolio and digital capabilities. We're excited about the outlook in 2021 and beyond and expect to return to growth supported by our category leadership positions, innovative pipeline, and ongoing expansion into higher growth markets. pandemic and a strengthened position given our innovative and diversified portfolio and our global team. As we pre-announced on January 12, Q4 2020 sales declined 8% on an organic basis, which included 370 basis points of negative impact from the sales return reserve related to our conversion to a consignment inventory model Organic sales, excluding the impact of this Watchman consignment, grew low single digits in October, down low single digits in November, and then declined low double digits in December as the COVID-19 pandemic intensified in Europe and the U.S. in particular. Our fourth quarter sales results were largely consistent with our third quarter 20 results, which declined 6% organically, which included a 230 basis point impact from Watchman consignment. For the full year of 2020, operational sales declined 7.8%, and organic sales declined 11.3%, both of which include the 170 basis point impact from Watchman. Today, we also announced Q4 adjusted operating margin of 18.3% and adjusted BPS of 23 cents, which includes approximately 730 basis points and 13 cents of charges, respectively, related to Watchman consignment and Lotus Edge discontinuation. Importantly, we do not expect any material charges related to Watchman consignment or Lotus in 2021. Adjusted operating margin for the full year was 19.3%, with adjusted EPS of 96 cents, reflecting the impact of reduced procedure volume due to COVID, as well as the impact from the shift to Watchman consignment and Lotus. Full year 2020 cash flow was strong, despite the COVID impact, at $2 billion in adjusted pre-cash flow, with free cash flow at $1.1 billion. Our 2020 financials are clearly a negative outlier to our pre-pandemic six-year track record of excellent results. We believe we'll return to delivering strong results in 2021, thanks to our strategy of category leadership in key markets, portfolio diversification, and high-growth adjacencies. We continue to execute against our strategic plan objectives and drive towards ex-COVID financial goals for 6% to 8% organic sales growth, operating margin expansion, and double-digit adjusted EPS growth, with improved ability to deploy our healthy free cash flow. We're excited to turn the page in 2020 and confident in our plans to build on our global momentum in 2021 and beyond. we are reinstating guidance for Q1 and 2021 full year, which is based on our underlying COVID impact assumptions. These assumptions reflect an ongoing meaningful impact from the pandemic in first quarter, improvement in second quarter, and a return to more normal procedure levels in second half 21. Our guidance also excludes the recently announced preventive acquisition and assumes an April 1st investiture of the BTG Spec Pharma business. We're targeting 2021 organic revenue growth of 12% to 18% versus 2020, and flat to up 5% versus 2019, both excluding the impact of acquisitions and investitures. And Dan will give more details. Given the expected waning impact of COVID-19, we expect to see organic revenue accelerate over the course of the year, and we're guiding to full-year adjusted EPS of $1.50 to $1.60. For Q1 2021, sales trends in January continue to be challenging due to the impact of COVID. However, we anticipate that our sales trends will improve throughout Q1 as COVID trends stabilize and vaccine access improves. As a result, we forecast first quarter 2021 organic revenue in a range of down three to up three versus 2020, and down six to flat versus 2019, both excluding the impact of acquisitions with adjusted EPS of 28 to 34 cents. I'll now provide some brief highlights of Q4 and 2020 results, along with thoughts on our 21 outlook. So returning back to Q4, regionally, the U.S. is down 9% on an operational basis, inclusive of the 600 basis point watchman impact. Both Europe, Middle East, Africa, and Asia-Pac were also down 6% operationally. Operationally, emerging market sales declined 9%, and China was down 7%. China results include a 10% point negative impact from the DES tender sales return reserves. Outside this impact, China had excellent sales in IC imaging, complex coronary, PI, structural heart, urology, pelvic health, and we expect double-digit growth from China in 2021, given the momentum in these franchises, the diversification of our portfolio, and with drug-eluting stats now representing approximately 5% of our China revenue mix in 2021. I'll now provide some additional commentary in our business units. Urology and normalizing for the intrauterine health divestiture. Full-year sales declined 7%, and Q4 growth was led by continuous strength in Lithiview, SpaceOar, and Resume. In Q4, Lithiview grew double digits and crossed the threshold of treating 200,000 patients cumulatively. We recently launched SpaceOar View Hydrogel, which is visible under CT imaging, and helped drive full-year growth for that franchise north of 20% versus 2019. And for endoscopy, Q4 sales also grew 1% with a broad-based recovery across regions and notable strength in infection prevention. Full-year 2020 sales declined 6%. Our Exalt-D launch has received strong physician feedback, and we continue to expand our global account base. Unfortunately, hospital systems has COVID-19 restrictions have made adoption of Exalt-D more challenging. We do expect ExaltD to build momentum throughout 2021 and remain bullish on the significant multi-year runway, but the pandemic continues to be a short-term headwind in driving ExaltD access. We will also continue to build a body of clinical evidence and are very encouraged by uptake of the transitional pass-through payment for ExaltD in the outpatient setting. The launch of Spyglass Discover continues to go well, and we continue to target launch of our single-use bronchoscope in the second half of 2021. We're also pleased to have recently launched the RISE ProKnife, which complements our high-growth endoluminal surgery portfolio. In cardiac rhythm management, Q4 sales declined 6%, with both high- and low-voltage performance similar to overall CRM. Full-year sales declined 12%. In 2021, we anticipate beginning enrollment soon in modular ATP, our dual-track clinical study for a standalone leafless pacemaker, as well as survive anti-tachycardia patients. Our high-voltage business is now nearly three times the size of our low-voltage business, so increasing access to emblem SICD for appropriate patient populations is a significant driver for this leadless pacemaker work. Importantly, our LuxDX implantable cardiac monitor is off to an excellent launch, given its high-quality ECG signals, arrhythmia algorithm performance, and streamlined back-end monitoring. We're also excited about our recent acquisition a broad portfolio with Body Guardian Mini that covers all four modalities of ambulatory ECG monitoring and establishes a strong position for BSC in the field of cardiac diagnostics. We expect to close the deal by mid-21, after which we'll be uniquely positioned across all diagnostic therapies, including AECG, LUX-DX, our plantable cardiac monitor, and HeartLogic, as well as implantable and ablative therapies. Electrophysiology sales were down 2% in Q4 and 14% for the full year. In December, we did begin the full launch of Polarex, the second-generation single-shot cryoablation catheter in Europe, and physicians are noting Polarex ease of use and attractive procedure duration. StablePoint, our novel force-sensing therapeutic catheter with direct sense, was also recently approved in Japan and is receiving positive EU physician feedback early in the commercial launch. In neuromodulation, Q4 organic revenue declined 12%, but grew sequentially from Q3, while full-year neuromod sales were down 16%. The fourth-quarter decline is primarily due to a high rate of spinal cord stimulation patient cancellations in November and December due to the COVID surge. We expect the majority of these procedures to be rescheduled and are pleased to have launched our next-generation WaveRider Alpha. fast and contour paraseizure-free waveforms with MRI capability supported by our Cognita software solutions that enhance the physician's ability to identify, manage, and maintain SCS patients. We also recently received U.S. approval of our Versace Genus platform, which expands our MRI capabilities in both the rechargeable and non-rechargeable segments with Bluetooth communication between the implant, the patient remotes, Biology Q4 sales declined 23% organically, but that includes an approximate negative 1,600 basis point impact related to the transition to Watchman consignment and for the China tender reserve. Full-year ICU sales were down 18%, including a 720 basis point impact related to those same reserve items. The Watchman franchise accelerated its recovery in Q4 with 18% growth, excluding the impact of the Watchman consignment. Our U.S. launch of Watchman Flex has gone extremely well, with positive physician feedback on device performance and safety, and a higher than expected conversion rate in a shift to a consignment model. This program to shift is now concluded, and we target a complete conversion to Flex by mid-2021. We also continue to invest in clinical trials to expand the patient indication for Watchman Flex, and we expect a complete enrollment of the option trial by year-end. Within Coronary Therapies, we continue to improve our sales mix each year via the growth and innovation of our complex PCI franchise. Although drug-eluting stents continue to be a challenge from a pricing standpoint, DES now represents 7% of total company sales in 2020. We continue to differentiate with new product launches such as Synergy XD and 48mm, as well as the newly approved Megatron in the U.S. Our complex PCI portfolio is an important growth driver with new products such as Comma de Vigo and NextGen Rotor Pro. We expect our global PCI and imaging franchise to be 50% larger than DES in 2021. In TAVR, AccurateNeo 2 is performing very well in Europe given its excellent ease of use, low rates of PVL, and best-in-class pacemaker rates and hemodynamics. We continue to focus on the NEO2-US IDE enrollment, and in mitral later this year, we'll begin an early feasibility study in the U.S. for Millipede, a transcatheter anaplasty ring system for patients with functional mitral regurgitation. In peripheral interventions, Q4 organic sales grew 5%, which was an acceleration from Q3, and reflect an overall mix of high acuity as well as category-leading portfolio and a broad cadence of new product launches. Full-year PI sales declined 3%, and the BTG interventional medicine business grew 12% in the quarter, led by high teens' growth in ECOS on a new council, new reimbursement, and market penetration into pulmonary embolism. We continue to have best-in-class clinical evidence of our ecosystem that will add to our breadth and research with anticipation of HYPETRA trial, the first global head-to-head study of interventional therapy for pulmonary embolism compared to standard anticoagulation. In arterial, our drug alluvium portfolio grew mid-20s as we launched the Ranger DCB in the U.S. and saw uptake of the NTAP for alluvia. And the market continues to cover as additional long-term data sets continue to show no mortality risk associated with pacotexel devices. And we expect our drug alluvium portfolio to exceed $150 million in 2021. I'd also like to highlight briefly two important sustainability accomplishments this quarter. inclusion in the Dow Jones Sustainability Index, and the Newsweek's America's Most Responsible Company 2021 list. These recognitions are a gratifying reflection of our commitment to sustainable economic, environmental, and social practices. So overall, we're very optimistic on the outlook of 2021 and beyond. The high acuity nature of our portfolio, multiple product launches, and a diminishing impact from the COVID-19 pandemic shall help BSE to execute well and significantly improve performance in 21. We will continue to execute our category leadership strategy and diversify the portfolio into high-growth markets like the Preventus Acquisition, which is expected to have an exciting growth diagnostics platform with excellent long-term prospects. This deal is the latest example of our strength and balance sheet and compelling venture portfolio, which enabled to continue to develop multiple high growth market opportunities. In addition, the excellent work of our health We continue to drive towards ex-COVID financial goals for 6% to 8% organic revenue growth and margin expansion to drive strong cash flow and double-digit adjusted EPS. And finally, we continue to live our values with enduring commitment to sustainable business practices. I'm grateful to our employees and for their winning spirit, and I'll turn things over to Dan. Thanks, Mike.