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spk05: Good morning and welcome to the Boston Scientific second quarter 2021 earnings 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 Lauren Tangler, Vice President, Investor Relations. Please go ahead.
spk11: 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, Dan Brennan, Executive Vice President and Chief Financial Officer. We issued a press release earlier this morning announcing our Q2 2021 results which included reconciliations of 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 filing. The duration of this call is approximately one hour. Mike will focus his comments on Q2 performance, largely compared to 2019, since Q2 20 included key procedural impact from COVID, as well as future catalysts and the outlook for our business, including Q3 and full year 21 guidance. Dan will review the financials for this quarter, provide more details regarding our Q3 and full year 21 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. Ann Meredith and Dr. Ken Stein. Before we begin, I'd like to remind everyone on the call that operational information foreign currency fluctuation and organic revenue growth further excludes acquisitions and divestitures for which there are less than a full period of comparable net sales. Relevant acquisitions for organic growth versus 2020 and 2019 include preventives, which closed March 1st, 2021, and birthrights and BTG interventional medicines, which closed in May and mid-August of 2019 respectively. Divestitures include BTG specialty pharmaceuticals, which closed on March 1st, 2021. and the Global Embalic Microsphere Portfolio and the Intrauterine Health Care Franchise, which were divested in mid-August 2019 and second quarter 2020 respectively. Guidance exclusively recently announced Luminous Surgical Acquisition, which is expected to close in the second half of 2021, and Ferriculse Acquisition, which is expected to close in Q3 2021, which are subject to customary closing conditions, including antitrust insurances. For more information, please refer to slide 9 of our Financial Operating Highlights deck, which may be found on our Investor Relations page. On this call, all references to sales and revenue, unless otherwise specified, are organic. Finally, growth goals of 6% to 8% ex-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 security laws, which may be identified by words like anticipate, expect, may, believe, estimate, and other similar words. They include, among other things, the impact of COVID-19 pandemic upon the company's operations and finance. about our growth in market share, new product approvals and launches, acquisitions, 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 we disclaim any intention or obligation to update them. At this point, I'll turn it over to Mike for his comments. Mike. Thanks, Lauren. Thank you to everyone for joining us today.
spk04: I'm pleased to report very strong Q2 financial results as a resumption of electric procedures strengthened in the U.S. and many, but not all, of our regions across the globe. We're well positioned for the second half of 2021 and beyond as we continue to execute our category leadership strategy, driven by our innovative pipeline, expansion to faster growth markets, Globalization efforts and enhanced digital capabilities. Total company's second quarter operational sales grew 50% versus 2020. Index sales grew 52% versus 2020 and 9% versus 2019. Exceeding expectations as recovery from the pandemic occurred more quickly than expected, particularly in the U.S. Importantly, six of the seven business units grew double digits organically versus 2019. We estimate that five of our business units grew faster than the respective Pleased with our ongoing and new product launches, and we're now enrolling our clinical trials at pre-COVID run rates. Q2 adjusted EPS at 40 cents grew 378% versus 2020, and 3% versus now, leading to high net guidance by 2 cents, primarily due to sales outperformance and lower spend. Adjusted operating margin of 25.1, slightly ahead of our expectations, as we continue to balance investment with sales recovery. Continue to be pleased with our free cash flow, second quarter pre-cash flow generation of $541 million, and adjusted pre-cash flow of $800 million. Given the second quarter outperformance, we are increasing and narrowing our guidance ranges for both sales and EPS, which assumes a manageable level of COVID impact in the second half of the year. Compared to 2020, we're targeting third quarter 21, organic revenue growth of 12% to 14%, and full year netting at 20%. And compared to 2019, we're targeting a third quarter 21 organic revenue growth of 5 to 7 and for the full year growth of 6 to 7. Our third quarter 21 adjusted EPS estimate is 39 to 41 cents, and we are updating our full year adjusted EPS to a revised range of $1.58 to $1.62. This will provide more details on both sales and EPS performance, including the revenue contribution.
spk00: Continue to expect a third quarter
spk04: do in the surgical. I'll now provide additional highlights at second quarter 21 results along with comments at third quarter and at 21 outlook. Within the regions, on an operational basis versus second quarter 19, the U.S. grew 22%, Europe and Middle East Africa grew 9%, Asia-Pacific grew 4%, and the emerging market sales grew 11%. Organically in the U.S., the U.S. grew 12% versus 2019, strength was supported by faster-than-anticipated recovery of procedure volume levels, along with ongoing new launches. Operationally, EMEA delivered an excellent second quarter with broad-based growth across nearly all major markets and franchises, even as some countries experienced COVID-related lockdowns and procedural delays. The EMEA region also had double-digit growth in PI, EP, endo, and neuromodels. products such as AccurateNeo2, AirSphere, Polarex, Axios, and WaveRider Alpha. Notable strength in Middle East and Africa. In Asia-Pac, although second quarter results included approximately 600 basis points of negative impact, China tender pricing versus 2019, five of our businesses grew double digits with strong growth in China, Australia, and Korea. While Japan's second quarter results were success with ongoing and new product launches such as Ranger DCB, StablePoint, and Watson Flex. China sales grew 16% versus 2019 with strong double-digit growth within all business units with the exception of interventional cardiology, which did include the negative impact of the tender pricing. It takes to be pleased with our strong growth in complex PCI and imaging, enabled by our both innovative portfolio and by the tender win. continue to expect a full year in 2021 with a little-digit growth from China versus both 19 and 20. And I'll provide some comments on the business units. Starting with Euro and public health, sales were very strong, grew in organically 16% versus 19, with balanced growth across our Stone, Prostate Health, and Health franchises. Stone, which is the largest franchise, grew double digits as enthusiasm continues to add to this acquisition. So we'll expand our category-leading portfolio differentiate laser technology. CrossFit Health franchised through strong double digits with continued growth in ReZoom and Spacer businesses. ReZoom was driven by further traction of its direct-to-patient efforts in the U.S., global expansion, and appreciation of the long-term durability and cost benefits of this minimally invasive therapy. With our Spacer business, growth was supported by the ongoing launch of our next-generation Spacer PU Hydrogel in the U.S. and a recent launch in Europe. Space review is visible in our CT and now negates the need for physicians to use MRI. It's an important step to optimize your treatment plan for patients undergoing prostate radiation therapy. Our endoscopy team delivered excellent second quarter with sales growing organically 15% versus 2019. Q2 sales grew double digits across all major franchises with notable strength in biliary, hematasis, and infection prevention. Thanks to our portfolio, including key products such as Axios, SpyGlass, and resolution and hemostasis clips. Within the quarter, we complete the CE mark for Exalt-B, and we're pleased with the early launch feedback, highlighting differentiated visualization and suction, and remain on track to launch in the U.S. in the second half of 2021. To continue to make progress with Exalt-B, the physician peer training program launched in the second quarter, as well as the resumption of development activities and has access to hospitals and For the management, sales were down 6% organically versus 19%, so we believe that our CRM performance was slightly below the overall market, inclusive of a temporary impact from the recent emblem SICD position advisory. Importantly, we recently began launching our enhanced SICD electrode, anticipating improved performance in overall CRM in the second half, and so we expect SICD revenues to rebound. Our diagnostic franchise, our LuxDX assignable cardiac monitor, can perform very well in the U.S. We're also pleased with the strong growth execution of the preventive team. We can anticipate that business of at least 20% on a pro forma basis versus 20. Electrophysiology sales were up 10% versus 19. Strong international sales growth of 29% were driven by the ongoing success of Polarex in Europe, Staple-Ploy 4-Sense catheter in Europe, and EPA sales will likely lag market growth until we receive approval for these therapies, which are currently enrolling in the respective U.S. IDE trials. We also exercise our option to acquire Ferrapulse, which is a leader in pulse field ablation, which is an emerging field that has the potential to improve safety, efficacy, and ease of use for cardiac ablation procedures. Ferrapulse is the only company with a commercially approved product in Europe that is actively enrolling in its U.S. IDE admin trial. We're excited to bring this differentiated therapy into our EP portfolio in 2021. In neuromodulation, organic revenue grew 14% versus 19%. Our pain management franchise accelerated growth in the second quarter, supported by an ongoing launch of our next-gen Waverider Alpha SCS system, cognitive digital solutions, and continued clinical evidence generation. In the last mid-year meeting, we released one-year follow-up data to the COMBO study that demonstrated a sustained high level of clinical and functional success at 84% responder rate. We also started reporting on the real-world results of the FAST therapy designed to improve, provide profiling, and immediate pain relief. In advancing outcomes for existing solutions, we're pleased with the progress of our SOLA study, which is focused in a non-surgical back population. started in the first quarter of this year. We look forward to beginning our diabetic and peripheral neuropathy study by the end of the year. In deep-end stimulation, the business continues to gain share globally and delivers growing double-digit growth driven by the launch of the PreciseGenus platform, expansion of our commercial infrastructure, and partnership with Brinkman. In interventional cardiology, organic sales grew 10% versus 2019. Double-digit growth in structural heart valves, watchmen, and complex PCI The growth of the Watchman franchise accelerated sequentially. The growth was driven primarily by increasing hospital and physician utilization rates in the U.S. and some share gains in Europe. Nearly all U.S. accounts have completely transitioned from Watchman 2.5. They're now using the Flex exclusively. Additionally, we're pleased with the two-year results of Pentacle Flex, which features a late-breaker at TBT, which reinforces positive one-year primary outcomes. and then a secondary effective descent. We remain excited about the outlook for the Watchman franchise, our next-generation flex device, mobile expansion. We continue to work toward indication expansion through ongoing clinical trials. It will be the option trial comparing Watchman Flex to first-line oral intact valvulence. Patients with non-valvular aphid also undergo a cardiac ablation procedure. Recently, we completed enrollment ahead of schedule despite the challenges presented by the pandemic. In TAVR, our accurate NEO2 launch continues to do well in Europe, supported by real-world data presented in Europe. The CRS demonstrates this to help us. Low accurate NEO2 PBL rate is comparable to contemporary TAVI devices with a continued low permanent pacemaker. These outcomes were reiterated at the early NEO2 registry, which was also presented last week at TBT as a late break. Sentinel, our cerebral embolic protection device, achieved the highest quarterly sales to date, with strong new account openings globally. We continue to enroll in the protected TAVR randomized clinical trial. One-year therapies declined mid-single digits versus 19, attributable to drug-loving stents, which included the impact of the China tenders and global price pressure. We continue to see strong growth in complex PCI and image, with the strength of RotaPro and IVUS. Our global complex PCI and imaging business is now 50% larger than our DDS business. We're advancing opportunities for future growth drivers, and within the quarter, began enrollment in our agent DCP trial. This is the first in the U.S. study of coronary instant restenosis. Peripheral interventions delivered organic cells up 10% versus second quarter 19, with interventional oncology. Therosphere grew over 30% versus 2019 on a proforma basis. its first full quarter post-PMA approval. In penis, Verifina continues to grow double digits and gain share in the varicose vein market. Within arterial, our drug eluting portfolio achieved record sales in the second quarter, supported by global expansion along with the sector's continuing recovery. We need to have started enrollment on the Elegance Registry, which is a study that will gather clinical evidence on the risk of PAD in previously underrepresented patient populations. The study will also look at long-term outcomes of patients being treated with a Luby DES or a Ranger DCB. I'd also like to highlight Boston Scientific's recent inclusion on the Just Capital Top 100 list of companies, which supports healthy families and communities, along with their recognition as the best place to work for disability inclusion. We're proud to be recognized for providing our employees with an inclusive and supportive environment to remain committed to global sustainable practices. Overall, we're pleased with our performance We remain bullish on a long-range outlook for Boston Scientific. We look forward to sharing our strategic and planned objectives at our Hybrid Investor Day event on September 22nd. I'd like to extend a big thank you to our employees for the contributions and winning spirit. I'll turn the call over to Dan. Thanks, Mike.
spk02: Second quarter consolidated revenue of $3.77 billion represents 53.6% reported revenue growth versus the second quarter of 2020. like an $81 million tailwind from Barn Exchange. On an operational basis, revenue growth was 49.6% in the quarter. Sales from the preventive stock position contributed 240 basis points, more than offset by the divestiture of specialty pharmaceuticals, resulting in 52.4% organic revenue growth above our guidance range of 48% growth versus 2020. Here to the second quarter of 2019, panic growth was 8.9% above our guidance range of 3 to 6%. This 8.9% growth excludes $15 billion in 2019 sales of the best in the health and embolic disease business, as well as $178 billion in 2021 sales of acquired businesses, which consists of two months of VertiFlex and a full quarter of PTG Interventional Medicine. Top line results drove Q2 adjusted earnings per share of $0.40, representing 378% growth versus 2020, 3% growth versus 2019, and exceeding our guidance range of 36% to 30%. Adjusted gross margin for the second quarter was 70.5%, slightly above our expectations, driven by sales outperformance in higher margin businesses. We have materially worked through the COVID-driven negative manufacturing variances capitalized down sheet in 2020, and as a result, expect slight improvements in second half gross margin compared to the first half, but still not at full year 2019 level, as other headwinds remain, in particular the lingering cost of running plants with COVID-specific measures, as well as some impact from inflation. Not unique to us, this inflation includes items like increased freight costs, selected wage pressure, and some price increase on direct materials. Second quarter adjusted operating margin is 25.1%, slightly above our expectations driven by sales over performance and balanced investment. It also includes a reserve for legal settlement that we expect will improve access to additional markets for some of our cardiovascular technology. Gap charges within the quarter additionally include $298 million in litigation-related expenses to account for incremental costs to resolve newly estimable claims as well as known claims corresponding legal fees within our legal reserve. Clearly, all U.S. claims remain settled or at the final stages of settlement. Our reserves assumptions are based on full global resolution now in 2023, given recent claim activity and expected litigation guidelines. Our total legal reserve was $617 million as of June 30th, an increase of $162 million versus March 31st, driven by the mesh reserve increase and cardiovascular settlement partially offset by payments to close substantially all of the state attorney's general mess settlement, as well as continuing cash product liability payments. Moving to below the line, adjusted interest and other expense totaled $107 million, in line with expectations. Our tax rate for the second quarter was 11.1% on an adjusted basis, also in line with expectations. Adjusted free cash flow for the quarter was $838 million. was $541 million, $643 million from operating activities, plus $102 million net capital expenditures. Our goal remains to deliver adjusted free cash flow in line with 2020, approximately $2 billion, as we continue to protect increased worth of capital payments, inventory, and accounts receivable during the remainder of the year. As of June 30, 2021, we had cash on hand of $2.7 billion. The top priority for capital development Mains tuck in M&A. We continue to expect to close the acquisition of Lufa Surgical second half of the year and TheraPulse in Q3. We have capacity to pursue additional business development opportunities while continuing to remain active with our venture capital portfolio and consider opportunistic share repurchase. Ended Q2 with $1,432,000,000 fully diluted weighted average shares outstanding. I'll now walk through guidance for Q3 and full year 2022. The full year, we expect 2021 operational revenue growth to be in a range of 18.5 to 19.5% versus 2020, which includes an approximate net 50 basis point headwind from the divestiture of our intrauterine health franchise and specialty pharmaceuticals, partially offset by the acquisition of preventives. Excluding the impact of acquisitions and divestitures, we expect organic revenue growth to be in the range of 19 to 20% versus 2020, six to seven percent versus 2019. and organic comparison to 2019 full year 2019 sales exclusive million dollars in sales of our embolic beast portfolio industry franchise as well as 81 million dollars in specialty pharmaceutical sales and at the midpoint of guidance 2021 sales exclude approximately 409 million dollars in sales from recent acquisitions including vertiflex through may through mid-August and preventative as of March, as well as $13 billion of specialty pharmaceutical sales prior to divestiture. Two, three, 2021, we expect operational revenue growth to be in a range of 11 to 13% versus 2020, which includes an approximate net 100 basis point headman of specialty pharmaceuticals, partially offset by the acquisition of the Fed. Excluding the impact of divestitures, expect organic revenue growth to be in a range of 12% to 14% versus 2020, and 5% to 7% on growth versus 2019, which includes a 300 basis point sequential comprehend with Q2 to Q3 2019. Therefore, the midpoint of guidance assumes results in line with Q2 with a continued manageable level of . For the Q3 organic comparison to 2019, 2019 sales exclude $35 million in sales of our All in Me portfolio, intrauterine health franchise, and specialty pharmaceuticals. And at the midpoint of guidance, 2021 sales exclude approximately $110 million in sales from the acquisitions of BTT Interventional Medicines through mid-August and Preventus. For adjusted operating margin, we continue to target an average of 26% in the back half of 2021, while simultaneously investing normalized operating expense levels in the first half of 2021 remained below what we would expect for a near-term run rate. We continue to forecast our full-year 2021 operational tax rate to be approximately 11%, and our all-in tax rate to be approximately 10%. We continue to expect adjusted below-the-line expenses, which include interest payments, dilution from our venture capital portfolio, costs associated with our hedging programs, can be approximately $400 to $425 million for the year. We expect fully diluted rated average share count of approximately 1,437,000,000 shares for Q3 2021 and 1,435,000,000 shares for the full year 2020. We are raising full year 2021 adjusted EPS guidance to a range of $1.58 to $1.62, which includes our update to sales guidance and considers Q2 results removed additional uncertainty from our previously wider range. For the third quarter, adjusted earnings per share is expected to be in a range of $0.39 to $0.41. Please check our investor relations website for Q2 2021 financial and operational highlights, which outlines more detailed Q2 results. With that, I'll turn it back to our newly appointed Vice President of Investor Relations. Congratulations, Lauren. Very well deserved moderator.
spk11: Thank you, Dan. Andrew, let's open it up for questions for the next 35 minutes or so. In order to enable us to take as many questions as possible, please limit yourself to one question and one related follow-up. Andrew, please go ahead.
spk05: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Bob Hopkins of Bank of America. Please go ahead.
spk13: Oh, great. And good morning. Can you hear me okay?
spk02: Good morning, Bob. You're fine, Bob. Morning.
spk13: That's on the strong quarter and congrats to Lauren. So first question for Mike and Dan is just wondering if you could talk a little bit more about your back half 2021 assumptions. You mentioned that you assume a manageable level of COVID. I'm wondering if you could help us understand what that means. Does that mean specifically that you assume things get a little worse from what you're seeing today or do you assume things stay about the same?
spk02: I think if you look at the numbers, Bob, and I think a lot of it has to do with the comps, right? If you look at our comps from 2019, quarter by quarter, they're 6, 6, 9, 7. And so we put up effectively a 9 in Q2 versus a 6 in 2019. If you look at our guidance for Q3, it's 5 to 7%. So just take the midpoint at 6. That's against the comp of a 6, which is of a 9, which is 300 basis points harder. So in theory, the six effectively becomes a nine when you adjust for comps, which is kind of what we did in Q2. And I won't go through the whole process, but the implied Q4 ends up in a similar range. So I think what you're hearing I say is that, you know, Q2, the impact of COVID was manageable. You heard Mike's comments that the recovery was very strong, particularly in the U.S. And what our guidance would imply is that for the most part continues in the back half. So manageable COVID impact. would be a quarter similar to what you saw in Q2. Okay.
spk13: So it sounds like you think – sorry, go ahead, Mike.
spk02: No, I just – does that track and make sense for you?
spk13: Yeah, it sounds like you're assuming that things basically stay the same. They don't get worse from what you just said, which – Correct. That's correct. Okay, great. And then just a quick follow-up question is, I was wondering if you could talk just a little bit more about Watchman Trends. in the quarter. It sounds like things went really well, but you're just curious if you maybe could provide a growth rate over 2019. Just curious for kind of flushing out the experience with Watchman in the quarter a little bit more, and if you can quantify it at all, that'd be helpful. Thank you.
spk04: Yeah, sure. Yeah, we won't be providing a growth rate on 19, but overall, the plans with Watchman Flex have gone exceedingly well. As we mentioned, The U.S. has really been fully converted at this point, which happened ahead of schedule. And we enrolled the option trial ahead of schedule. But the big benefit we're seeing is with the ease of use and the safety profile of Flex, the utilization of Watchman Flex in the U.S. accounts in particular continues to increase. So we do have some small new incremental account openings. But far and away, the bulk of the growth in the US is being driven by increasing physician utilization and penetration rates. And we recently had some approval in Japan. And so we're starting to get some minor impact from Japan, which we'll get more so in the second half as well as in 2022. But it's really being driven by the utilization rates, the safety profile, physician comfort with the device. and training new physicians at existing facilities. So current doctors are doing more Watchmen, and new doctors at the same facilities are being trained on Watchmen. And the referral base, the physician community, is becoming more and more comfortable and aware as our patients with this treatment. So we've pegged this growth of this segment to be likely plus 30% growth, and we continue to expect to do well in it. But it's an exciting platform for us. Great. Thank you.
spk05: The next question comes from Robbie Marcus with JP Morgan. Please go ahead.
spk07: Great. I'll add my congratulations on a really nice quarter. Two for me. First, it looks like you had great growth in the US with 12% organic over 2019. I was wondering You know, maybe you could just give us an overview of where you're seeing the recovery. Are you seeing any lagging trends from Delta variant? And is there any discrepancy in inpatient versus outpatient? You're one of the first to report here with such a global covering and diverse offering. I think it'd be really instructful as we think about the rest of the year and the guidance.
spk04: Yeah, so just broadly, you know, we saw terrific results in the U.S., very strong results in Europe, despite the lockdowns in Europe and more COVID impact in Europe. That business grew 9% organic. And we had the most significant COVID impacts in Asia, in the ASEAN countries and Japan in particular, with COVID. Korea, Australia doing well, as was China. So we saw more COVID impact broadly in Asia-Pac and the strong recovery in the U.S. And then in terms of the U.S., for your question there, with the exception of EP, we think every business globally and the U.S. grew double-digit organically versus 19 and likely gained share in their respective markets with the exception of potentially EP and CRM. but EP grew share international markets. And in the, if you break down, if you look at Euro and Endo, particularly, you know, and also PI, where we have a more substantial ASC business and outpatient business, you saw, you know, 16% growth in Euro, 15% in Endo, and 10% organic in PI with strong growth in Terrasphere. So I would say in the U.S., we saw a nice rebound both in the hospital setting and which I think has been verified by many of the public company hospital change reporting prior to us. And we saw strong growth in the outpatient ASC center as well.
spk07: Great. And maybe a follow-up for Dan and a suggestion. Dan, I think some of us had a little trouble hearing the nuanced guidance you gave. If you guys want to send out your prepared remarks, I think that would be really helpful for all the investors. But maybe just as a quick follow-up, you mentioned higher input costs in COGS, so improving in second half versus first half, but maybe not all the way quite up to 2019. How are you thinking about the company's ability to absorb and pass on some of those costs, and do you think that's going to be an issue going into 2022 as we exit the year here? Because you did have great expense control down at P&L. just thinking about the cost component. Thanks.
spk02: Sure. Thanks, Robbie. Relative to gross margin, so we averaged 69.8 in the first half, and I think we feel comfortable that we'll improve upon that here in the second half of 21. Specific to what's going on in gross margin, you know, we will have the tailwind of the COVID-related variances that we put on the balance sheet during 2020. Those are amortized over your inventory turns, and so effectively as of 6-30 this year, the end of Q2, those are gone, so that's good news. We do still have some COVID-specific lingering costs of running plants in a COVID environment. So COVID is not completely done, obviously, as you know, and so we do have those, and those are adding costs. And then as I mentioned in the prepared remarks, not unique to us, we do have some pockets of inflation and particularly with freight where we just need more commercial airliners to be flying than are flying today. We have wage pressure in certain locations. And then direct materials, particularly, you know, precious metals and things like that, we're seeing inflation there. So we do have some headwinds. But overall, as we look at the back half of 21, we would assume we would improve versus that 69.8 average in the first half. And then as it relates to 22 and beyond, I would envision we'll give you a more detailed review of that and invest today on the 22nd of September.
spk07: Great. Appreciate it. Thanks a lot.
spk02: Thanks, Robbie.
spk05: The next question comes from Larry Beagleson with Wells Fargo.
spk09: Please go ahead. Good morning. Thanks for taking the questions and congrats on the quarter and congrats to Lauren. Just one follow-up on the investor meeting in September. Maybe Dan or Mike, just level set us kind of what we should expect. Will you provide an update to your financial goals and pipeline and any reason to think the algorithm of 6% to 8% sales and You know, 50 to 100 basis points margin improvement with double-digit EPS growth has changed, and I had one follow-up.
spk04: Oh, my gosh. If we give you all this, you're not going to show up. We'll be there, Mike. No, we expect to, as we've done in previous years, provide an update on our portfolio across the company. give some visibility to the long-range strategy and financial goals similar to what we've done historically. So we would look to provide some more updated three-year sales guidance, what we think margin approval will look like. But more importantly, you'll hear from the business unit presidents on the portfolio and innovation across the company.
spk09: All right. And just for my follow-up, Mike, on Luminous and Faripulse, you know, why was this the right time to acquire both? You know, what's the outlook for Luminous? Is that $200 million you said for sales in 2021? Is that net after your distribution agreement? Thanks for taking the questions.
spk04: Yes, I have to verify that number. We'll get the number in the past in terms of the Luminous net number. So we'll Let's circle back on that one. But the timing, just strategically, makes perfect sense. I think that the group is aware of this. We had a distribution agreement with Luminous in the U.S., distribution agreement with them in China, which was effective, but therefore we weren't getting the same level of gross margin benefit that we wanted, nor could we innovate on the platform and, I guess, tie it more comprehensively into our StoneSmart platform. So by owning it, we obviously improve our gross margins, We can drive a more robust product roadmap within our StoneSmart ecosystem. And then we can expand our direct coverage in Europe and especially in China, where they have a very big business. So that makes sense. And what did we say here, Lauren?
spk11: We only disclosed the full year growth number of 200 million for 2021. We did not disclose the net, Larry.
spk09: Got it.
spk04: And Faripulse, Mike? So Faripulse... You know, we expect that to close, you know, pretty soon here, early in the third quarter. You know, I won't go too far on it. We're really excited about it. It's the only approved platform in Europe in the pulse field ablation field, and they're enrolling ahead of schedule in a U.S. clinical trial. The physician community, and Dr. Stein's on the phone, he can comment on it. Ken, if you, Dr. Stein, if you're on the phone, maybe you want to provide a quick update on Farapulse.
spk12: Yeah, absolutely, Mike. Yeah, I mean, I think you know, the pulse field ablation and particularly, you know, the Farapulse approach to pulse field ablation is, you know, the most exciting thing to come along in ablation, you know, really since ablation. You know, what Farapulse has demonstrated in a wealth of clinical data to date, you know, over 100 patients in clinical trials that have been reported out publicly is, you know, a very high expectation that this is going to be safer than other thermal approaches to ablation and And because of the safety, it's a much more straightforward procedure for physicians. It's a quicker procedure for physicians and is, again, likely to be at least as effective and probably more effective than other technologies. So given that, we are extremely excited and optimistic about their approach. And as Mike said, given that they are the only approved technology in Europe, given that they're executing so well on their clinical trials, by exercising the option now, and again, hopefully closing in the near future, we have the opportunity now to help them scale up distribution, production, and again, the ability to help them continue to execute their clinical trials and get to US approval in a timely fashion.
spk09: Thank you.
spk12: You're welcome.
spk05: The next question comes from BJ Kumar with Evercore ISI. Please go ahead.
spk08: Hi, Mike. Congrats on the quarter here. Thanks for taking my question. One on a high level. If I just look at the 2Q performance and the back half implied guide, you know, we did 9% in 2Q versus pre-pandemic 2019. Back half implied is 7 and 9. I mean, we're already running, if I look at the 2Q to 4Q performance, we're already running well north of 8%. Preventus, Lumenis, once these deals become organic, they should be incremental, plus you have these pipelines. I guess when I look at that LRP of 6 to 8, shouldn't these results provide a high degree of confidence in upper end of that LRP on the top line going forward?
spk02: Yeah, I mean, I think we're not going to comment specifically within the range of six to eight. Obviously, we'll, as Mike said, probably tee that up for an investor day conversation relative to the portfolio and the overall results. So I don't think it would serve us well to comment relative to the specifics in there. But the strength of the portfolio and the pipeline is what's given us the confidence to put up the numbers that we put up in the past. And obviously, looking forward, give us the confidence in the revenue growth trajectory for the future. But specific to where in the range, I don't think I'll go there.
spk08: Understood, Dan. Just one on margins, maybe. When should gross margins get back to pre-pandemic levels or perhaps on operating margins, just given the commentary around freight and inflationary pressures? Should 22 operating margins be at 2019 levels?
spk02: Yeah, I mean, if you think of the back half of this year, that's what we're calling for, Vijay. So we're calling for an average in the back half of 21 to be at our full year 2019 level, which was rounded 26%. So the goal is to do that in the back half of 21 and set us up for 22 and beyond. Gross margin, as we said, it was 69.8 in the first half. It'll be improving on that in the second half. So when does that get back to specific 2019 levels? Again, we'll give more details in Investor Day. But if you think at the overall operating margin level, the thing that we've proven time and time again over history is that we make the effective tradeoffs through the P&L. So If you think back, you know, four, five, six years ago, gross margin was growing very nicely as a percentage of sales, and we were investing in places like the emerging markets and other areas. So SG&A was sometimes actually increasing as a percentage of sales. but still delivered very solid operating margin progression through that time frame. So it may shift a little bit as we go forward. Maybe gross margin doesn't pay as many of the bills, so to speak, but SG&A potentially with lower travel spend and other tradeoffs that we'll make in addition to more efficient R&D spend. You know, the goal is always to have operating margins increase year over year, and I think our track record speaks for itself on that.
spk05: Thanks, Dan.
spk02: Thanks, Vijay.
spk05: The next question comes from Cecilia Furlong with Morgan Stanley. Please go ahead.
spk01: Great. Good morning and thanks for taking our questions. I wanted to ask about SCS trialing trends and really just what you've seen from a relative recovery versus other more elective procedures in the quarter and then kind of tying in also just VertiFlex, what type of traction you've seen recently?
spk04: Sure. You know, we haven't had all the competitors report in that field, so we're not exactly sure how we grew versus the competitive set. But we had a strong acceleration in 2Q, you know, U.S. overall in the quarter. And I think part of it is the combination of the unique portfolio that we have with the new launches, the new fast algorithms, and I detailed in the script that may have had difficult hearings. We're going to send that out to people. but a combination of the new FAST algorithms as well as the clinical work that we're doing. So SCS overall improved versus first quarter. And then it was augmented, as you mentioned, with VertiFlex growth in the quarter as well as continued growth in our RF portfolio. The RF portfolio, although a bit smaller, continues to exceed expectations. And then the other really big growth driver for Neuromod in the quarter was our deep brain stimulation business. And it's really impressive what that group has done. They continue to gain market share, really the number one de novo player in Europe and close to that now in the U.S. And they continue to accelerate market share gains through the innovation of that business. So the DBS probably had the largest snapback of any business in the second quarter with the COVID impact waning in the U.S. But overall, the SCS market and the pain side did quite well as well. But we'll see how the other competitors report, but we're impressed with the sequential growth that we saw.
spk02: Yeah, and happy overall with the 14% growth versus 2019 for all of that neuromod business that Mike just detailed.
spk01: Great. And you also called out resume in your prepared remarks. Could you just comment a bit more, just what you've seen from recent procedure trends and procedure recovery trajectory coming out of COVID? Thank you.
spk04: Yeah, so I think with our resume business report, We continue to drive increased growth there. The overall Euro business had a big bounce back in the quarter, growing 16%. And the big things that we're focusing on with the resume is we're continuing to drive improved reimbursement rates with some of the specific payers, which is helping. But it's also the long-term durability data. And that's giving physicians more confidence in the product. That's driving the growth. And we're also expanding our international footprint with Resume, particularly in Europe, and also some additional DTP, directed patient and directed physician marketing campaigns to drive more awareness. So it's really a combination of all those things that's improving the growth profile of Resume.
spk01: Great. Thank you, and congrats on the quarter.
spk04: Thank you.
spk05: The next question comes from, excuse me, Peter Chickening with Deutsche Bank. Please go ahead.
spk03: Hey, good morning, guys. Thanks for taking my questions. Congrats on a nice quarter and also congrats to Lauren. To follow up on Bob's question, I understand the comps versus 2018 for 3Q is challenging at 9%, but we also heard from the public hospitals that June was the best month of the quarter and strong June trends continue into July. So just curious, as you look at your third quarter guidance, are you seeing normal 3Q seasonality, or are you simply assuming that you'll see it at some point during the quarter?
spk02: Yeah, I appreciate the question. We're just not going to comment kind of intra-quarter as we sit here in the third quarter. I think the answer to Bob's question in the short answer is we're expecting the trends that we saw in the second quarter to continue. We're not going to parse it month by month. We're expecting the overall trend of that growth rate to continue comp adjusted in the back half of 21. But specific to month versus month, we're not going to get into those specifics.
spk03: Okay, fair enough. A quick question on Exalt-E. I understand the markets have been pretty dynamic sort of, you know, last year sort of due to COVID. But just two questions. How many accounts are you selling Exalt-E into at this point? And in those accounts, what is the market share and reorder rate of those accounts? And as you watch Exalt-E be, How much revenue contributions do we assume in the back half of the year? Thanks so much.
spk04: Yeah, we're probably frustrating you. We're not prepared to share that information with you. On ExaltD, just as you've heard in previous quarterly updates, the team continues to make progress. As COVID impact is improving, although hopefully Delta variant isn't too much, but as approved in the U.S., we have seen more of an uptick in traction with ExaltD. Physicians are becoming more comfortable with it. The training and the capital placements have gone well. So you're seeing an uptick in Exalt D usage. And then in the second half of 21, you'll see an enhancement and a next release or next generation release, if you will, of Exalt D to further improve the platform. So we expect to see continued momentum with that. The big news for us is the recent approval of Exalt B. and some sites that tried it for the first time in Europe, and we're really bullish on that platform. That's an established market with a few competitors, but we think we have some differentiated capabilities with Exalt-B. And so in the second half of 2021 and much more so in 2022, you'll see the impact of that platform as well. So it's all going to plan, but we're seeing some improved momentum with Exalt-B in the U.S. as COVID is improving. Great. Thanks so much. Yep.
spk05: The next question comes from Joanne Wunsch with Citi. Please.
spk10: Hi, can you hear me okay?
spk02: We can. Good morning, Joanne. Good morning, Joanne.
spk10: Excellent. Good morning, and thank you for taking the question. It looked to us like when we compared the delivery versus consensus, there's two areas that might be lagging a little bit, our EP and CRM. But I also remember that there are a number of key products in those sections. Can you highlight one or two that might bring you back into sort of the market taker or gain position?
spk04: Yeah, well, you nailed it. We think every one of our businesses, with the exception, well, EP grew double digits versus 19, but likely globally that's below market. And CRM we think grew a little bit below market. With the exception of those two, we think every other one grew faster than market. On EP, I think you'll see a similar trend likely for the next couple of years. in that we expect our EP results in the international markets to exceed market growth, which we think they did in the second quarter. On the heels of our Cryo platform, where we're now the only competitor to the established player in Cryo, and we're taking share there. And then our stable point, which is our force-sensing catheters approved in Europe. And as a previous question, we'll be closing the FairPulse deal in early third quarter, and they're commercial in Europe. So the three distinct technologies that are quite differentiated will be our IRE platform with VeriPulse, Upon Closure, our Cryo, and StablePoint in Europe. And we also expect to see benefit of Cryo in Japan towards the end of 2021 and full year 2022. So our international business, which is now bigger than our U.S. business in E.P., will grow faster than market, and our U.S. business will likely lag market until we get those products approved. And all those products are in clinical trial right now. And thankfully, as COVID has improved, the clinical trial run rates of those platforms have increased significantly over the past 100 days. So that'll be the balance in EP, really strong outside the U.S., less so in the U.S., likely for the coming earnings calls. And CRM, We think our performance in the second half of this year will improve versus what you saw in second quarter. And the primary reason for that is the SICD advisory that we had, which caused sales to lag a bit in the SICD segment for us, which is a big segment for us globally. And now we have a new lead that is being implanted now across in Europe and the U.S., And we expect our third quarter and fourth quarter SICD results to improve quite a bit versus second quarter, which will improve the overall growth rate of our CRM business and likely take us closer to market growth rates for all of CRM.
spk10: Thank you. And my second question also is product-related. If I had to say to you what are the three products you want us to focus on over the next six to 12 months, what would your answer be?
spk04: If I only had to pick three, I think Watchman. is number one, given the scale of it, the growth profile we see, and this enthusiasm. I would say within PI, the BTG acquisition has exceeded expectations, and the TheraSphere segment in particular in Verithena are doing extremely well. And then if you give me a third one, there's lots of different areas to speak through. Yeah, I think just overall in the – I know it's super early. We're very bullish on the combination of Cryo and Ferropulse, although not in the U.S. yet. That market is so large and the growth profile of EP is so good that we'll be the only company that will have IRE and Cryo and force sensing. So all those smaller dollars now, an exciting opportunity for us.
spk10: Thank you so much.
spk04: You bet.
spk05: The next question comes from Travis Steed with Barclays. Please go ahead.
spk02: Are you there, Travis?
spk05: Excuse me. I'm sorry. The line is open.
spk06: Hi. Good morning. Thanks for the question. I appreciate some of the longer-term comments you gave on operating margins. Just curious what the base we should be using for that 50%. our 50 basis points of margin expansion per year, if we should think about that 26% in the back half here. So thinking about the street somewhere in 26 and a half percent, next year would be a reasonable place to be at this point.
spk02: Yeah, I wouldn't comment on 22, but for 21, I think the reasonable basis as a starting point would be that 26. That's what we're kind of resetting to here in the back half. It's where we were in 2019, and it should be a nice jumping off point for 2022. Yes, I would agree with you there, Travis.
spk06: Okay, great. And then I just wanted to make sure the message was clear on the full year guidance and the guidance raised. So you're going from 2% to 5% for the full year versus 2019 to 6% to 7%. Is that all coming from the Q2 beat? And so basically the back half expectations are staying the same, or are you actually seeing more confidence here in the back half versus your original expectations?
spk02: No, I think if you go back to the original guidance back in February and for the most part reiterated in April, It was COVID impact in Q1, less COVID impact in Q2, and then a return to more normalized procedure volumes in Q3 and Q4. I think we got a little bit of that early, as our results would point to, versus our guidance ranges for Q2. And then if you take what we were saying about the back half, which we say is the same type of COVID impact and pretty much the same type of results, in Q3 and Q4 as in Q2. It's a broad-based story of Q2, Q3, Q4. It's not just Q2.
spk06: Okay, great. Thank you.
spk11: Okay. The next question? No, Andrew. With that, we would like to conclude the call. Since it was difficult to hear some of the prepared remarks, we will be posting the transcript or prepared remarks to our Investor Relations website. Before you disconnect, Andrew will give you all the pertinent details for the replay.
spk05: Please note, a recording will be available in one hour by dialing either 1-877-344-7529 or 1-412-317-0088 using access code 10156890. Again, 10156890. until August 3rd, 2021 at 1159 p.m. Eastern Time. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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