Boston Scientific Corporation (BSX) Earnings Call Transcript & Summary

[Audio Gap] Boston Scientific -- members of the Boston Scientific [Audio Gap] in the 40th Annual Cowen Health Care Conference. We always appreciate you guys joining us. But I guess I shouldn't give you guys too much credit because we kind of bring the conference right into your backyard, but -- just kidding.

We're a train ride away, yes.

But no, thank you, guys, for joining us.

Thanks for the invitation.

Looking forward to the discussion. We have the Chief Financial Officer, Dan Brennan; and Vice President of Investor Relations, Susie Lisa.

So it's been a little bit trying to start off each of these fireside chats just talking about the coronavirus because there is higher level kind of world health risk in play here, but there is a focus on [Audio Gap] companies, not just in the med tech sector. You're possibly one of the few that kind of called out the potential headwind early on, I think, on your fourth quarter call.

We did.

That was in early February, so [Audio Gap] updates. I know we've now seen some movements in the coronavirus [Audio Gap] but any high-level thoughts you can share or update you can provide would be great.

Sure. I'll start. Thanks, Josh. It's obviously a really tough and fluid situation. Our focus has been on our employees and are happy to report that none of them have caught the virus. We're focused also on the patients and our physician customers with donations and -- of supplies, et cetera. We did try and put some bands around this back on our fourth quarter earnings call on February 5. At that time [Audio Gap] that our core growth was in the 6% to 7.5% range, but that our China [Audio Gap] would likely be anywhere from a $10 million to $40 million range. And just to give you some of the background on that, is that we said at Investor Day 2019, it's approximately a $500 million business last year and growing 20%, $600 million kind of on track for this year. Easy math, right, $50 million a month. And so essentially, February and March at risk of $100 million. We took $25 million bottoms-up analysis from the team and then ranged that plus or minus 15 -- $15 million. That equates to about 50 to 100 basis points on our total top line. So if you take the 6% to 7.5%, less the 50 to 100, that's our organic guidance for the first quarter of 5% to 7%. And it's our policy always not to update guidance intra-quarter. What we have said is that core growth is healthy and the coronavirus situation, obviously [Audio Gap] impact that we discussed at the time, and we'll give more details on the first [Audio Gap]

[Audio Gap] that's reportable? Or is it just -- is it fluid and too early to really make any statements?

Yes. Maybe a couple of other things I can add, is we don't manufacture in China. We do source some componentry, so the impact for us is largely one of procedure volume. And we said that we do expect, based on the SARS example, that some of it would be recapturable, if you will, later on in the year. And the 6.5% to 8.5% organic growth guidance for the full year does assume some of that and/or our ability to make it up in other regions over the course [Audio Gap] I think that now with cases obviously reported pretty significant in South Korea and Italy, Iran [Audio Gap] you could see people just deferring procedures. Most of our portfolio is acute, but the majority of it is not emergent, right? So you've been seeing things like structural heart procedures being delayed. Particularly [Audio Gap] focus on corona detection, containment, treatment and physicians being redeployed, et cetera, so it's definitely having an impact. And that's why we attempted to put -- we knew there would be a negative impact in the fourth quarter -- in the first quarter and arguably, early back on February 5 but did the best that we could.

And as you'd expect, it has the senior leadership team's full attention, regular updates with our teams on the ground in the affected areas, so staying very close to it.

Understood. Thanks for sharing all those details. Maybe we'll just talk about the core business and [Audio Gap] there are some headwinds in play, but also numerous tailwinds as well in the positives [Audio Gap] on the negative, but just maybe lay out some of the businesses and business segments that faced some headwinds and then how you recover on those. I think CRM -- yes, I see high-voltage franchise had some headwinds in the fourth quarter that seemingly could reverse or at least stabilize. There's some paclitaxel headwinds still in play to a degree. The ISCHEMIA trial hasn't been impactful, but I'm just kind of going down the long...

Yes. Maybe the best way is just kind of tick through the divisions, maybe do a full accounting on that. And stop me if there's any more detail you want to go into. So if you start at cardiovascular, if you think of cardiology, obviously DES [Audio Gap] to pricing. And so that's still a very important product but more challenging relative to price. We have a nice complex PCI franchise with the goal of having that kind of offset DES, which it did very nicely in [ 2019 ] [Audio Gap] structural heart goes, right? We have the $900 million to $1 billion guidance range for structural heart for 2020. And largely, our successes should be built on the momentum that we have with the launches in there. So we have LOTUS in the U.S., LOTUS in Europe. We'll have ACURATE, which will be getting the next-generation Neo2 with a skirt, midyear in Europe, which we think will be a really nice uplift to the ACURATE growth. We have Sentinel, which continues to grow in its procedure volume and penetration into the overall TAVR procedures. And then WATCHMAN has continued to be a tremendous product for us [Audio Gap] opportunity for growth still with WATCHMAN. So I think if you think IC, structural heart [Audio Gap] and nice momentum over time there. PI, PI had a kind of a mid-single-digit quarter in Q4. We looked and said and forecasted that's probably likely to be a Q1 event as well with not a lot of momentum relative to new launches. We also have -- still have the tough comp from Q1 of 2019 relative to the Eluvia launch. We had a really strong quarter in Eluvia in Q1 last year. So the strength of that comes from the integration with BTG, the interventional medicines, which is made up of the Interventional Oncology and venous franchises, kind of growing in that double digit -- low double-digit to mid-teens growth rate over time as it integrates into our world. And we also will be launching Ranger, our drug-coated balloon, in 2020 in the U.S. So I think you'll see that continue to increase growth as you go through 2020. If you look at rhythm and neuro, CRM, we obviously had more of a challenge in Q4. We did -- we now do have the third-party data that we were looking for, for December. I think it validated what we thought was happening with the procedure volume dropped significantly in December within defibs and in replacements in the U.S. And so that's what we saw in our business, and that's what we saw from the third-party data. So now we have kind of the answers there, and it's onto 2020. I think if you look at the equation of what our CRM business would be for 2020, it's largely similar to what we've seen, which is strength in defibs, more weakness in pacers with some competitive launches there on the leadless side. And that feels like it nets out to us to be overall in line with the market, and we think the market is probably flat to down low single digits. So that's probably the expectation that we have for CRM for 2020. EP, frankly, probably a little bit disappointing over the last 12-plus months. Haven't been able to access that 15% growth that happens every quarter. Reasons for optimism in 2020: we'll have our POLARx Cryo Catheter coming out in Europe, which will be the only competitor to the 1 competitor that exists there, hopefully make some inroads there. And we also have DirectSense, which is our next-generation RF ablation -- traditional RF ablation catheters coming out in the U.S. We've kind of reorged the sales force at the end of last year and kind of ready to go there with that. So I feel like there's reasons for optimism in EP. And then MedSurg, really the poster children of category leadership. Our overall strategy as a company, just continued strength across the franchises in urology and Endoscopy. And then you layer in EXALT, which we're super excited about the prospects for that. Q1, largely contracting and kind of setting the stage for Qs 2 through 4, not expecting -- as we discussed last year, not expecting a huge contribution in Q1. It's really setting the table for the rest of the year. A lot of excitement about that product from physicians as well as the FDA and internal to BSC. So hopefully, that gives you a view of all the different puts and takes in the different businesses.

Can I just add one quick thing on Neuromod, Dan? But I think that we are hoping or believe, with all the product launches and new clinical data, that you'll see the SCS market return to growth. We've just said return to growth. We think, long term, it's a high single-digit grower, but this year, we're looking for return to growth. And then our deep brain stimulation franchise with Vercise continues to do very well now with MRI compatibility and the directional lead. We said it had doubled sales in the fourth quarter, and we're excited to continue to penetrate that market.

And just one comment on Neuromod. The thing that's really taken place over the last 3 or 4 years within neuro is, we used to be a Spinal Cord Stimulation company. And now we're -- we have the category leadership, breadth that we have in many of the other divisions in that division because we have -- as Susie said, we have SCS. We have deep brain stimulation. We have RF ablation from the Cosman acquisition, and then we have the treatment of spinal stenosis with Vertiflex. So we're seeing the category leadership kind of bug caught in Neuromod as well, which is nice.

Excellent. Maybe just to piggyback on some of your lead-ins there. Because on Neuromod, specifically spinal cord stim, you guys had a solid -- strong showing at NANS and a nice investor update there. But maybe just about the market, I mean any kind of retrospective look in terms of -- so is it just a comp issue? Was it kind of a little hole in the industry? Is it kind of new product launch cycle and now we're back on track here with some of the updates we saw at NANS? Or...

Yes. I think '19 was obviously a challenge for the market, more so a challenge for us because we were coming off 20%-plus comps in Spinal Cord Stimulation from '18, and then the market in Q1 kind of went negative for spinal cord stimulation. So I don't think anybody doubts the long-term under penetration of the market for Spinal Cord Stimulation in the treatment of chronic pain. So I feel very good about that, and that remains unchanged. We have said that we think in '20, based on the fact that we'll have new technology, as will some of the competitors, which I think is helpful to kind of float the overall market within SCS, we'll return to growth in 2020, not the heydays of old but return to growth, which will be nice. And we should be kind of at market in that world. And when coupled with -- as I just mentioned, with Vertiflex and with deep brain stimulation and with the RF ablation, I think it should be a good overall year for Neuromodulation for us.

Great. And then on EXALT-D, I mean you talked about Q1 contracting, getting the ramp started or the launch started. When you think about the competitive landscape, I think PENTAX has a disposable head that was approved late last year. Maybe just help us think about kind of the competitive landscape and EXALT-D's positioning there kind of being fully disposable versus just disposable head or tip. I think there's a more technical term that I'm just forgetting here, but any general response there?

Sure, yes. So I think the compelling rationale for this single-use scope and we have others with different rationale already launched like LithoVue and SpyGlass DS and to come, Spy Discover (sic) [ SpyGlass Discover] and gastroscopes and bronchoscopes, but there's -- probably the biggest infection issue is with duodenoscopes because since there's an elevator and the scope turns a corner at the end. And so that's what those single-use tips are -- will replace. And it is true that a significant portion of infections in a scope or contaminations are in that tip, but it's certainly not all of them. And so just replacing the tip is not definitive in terms of the contamination and infection prevention, unlike with EXALT-D, where we know it's a sterile scope every time and complete and definitive elimination of any sort of contamination or infection risk. So I think that PENTAX has been on the market. They've all the reasonable players have had these in Europe for a little while. Olympus just got theirs approved. It does require -- it's only compatible with their latest generation scope, so you'd need to upgrade to that version of a reusable scope for partial improvement versus you can go to EXALT-D for complete and definitive infection reduction. So I don't think it really is -- as we had expected, it doesn't really change the landscape. And as Dan said, we're excited to continue to launch EXALT-D.

And just in terms of the FDA document or notice that was put out, I think, late last year as well, not trying to put any markers or stakes on the ground on the EXALT-D launch, but I mean just in terms of the market and transitioning to disposable scopes, I mean how do you see that playing out? Or I mean is that centers are just transitioning as soon as possible? Is it going to be a kind of not a hockey-stick ramp but just a slow, steady kind of change-out?

Yes, I think there'll be a range. And I think we've heard some people thought the FDA might been -- have been more forceful on some of their language. We actually -- it was probably stronger than we had expected because they -- this is a -- 1.5 million of these procedures are done each year. They're important, they're life-saving and you can't convert all at once to single-use just because of that procedure volume. So we've talked about, we believe, that sites that have a strong culture of infection prevention, sites that treat large populations of immunocompromised patients, transplant centers, oncology centers, et cetera. You could see sites adopt it in a smaller way and only use it for patients who are coming in who they think are at high risk of contaminating their -- someone with a lot of comorbidities already. You could see it at smaller hospitals because they don't want to deal with the 38 steps, and the human staff required to sterilize properly even though it's still not complete infection prevention. So I think it will be a range. And we've just talked about a goal of $1 billion total addressable market by 2024 for EXALT-D, which assumes something in the mid-20% range in that time range in terms of penetration.

Perfect. Thank you. Let me shift -- shifting over to structural heart. I mean that's a powerhouse business for you guys. I mean focusing on LOTUS. I think we -- The Street gets some updates in terms of revenues for -- from Edwards and Medtronic on their transcatheter aortic valve replacement platforms. And I mean anything you guys can share and comment here from a detail standpoint, the number of centers you guys are in, what share position maybe you guys had in the United States or outside the United States exiting '19? I know you guys haven't been getting that granular but...

Yes. Well, I mean qualitatively, we're on track for 150 centers by the end of Q1. And the whole tenet of that launch has been to make sure that it is controlled with great outcomes from physicians and patients. That's all going well. I think we'll stay away from share prognostications and specific numbers. It's included in the $900 million to $1 billion we have for structural heart guidance, and we'll obviously update on that as time goes forward. But pleased with where we are relative to overall performance there in the U.S. and in Europe and looking forward to 2020.

And just on those 150 centers, I mean just in terms of the cadence of getting there, I mean has it been really kind of last -- just back half weighted, I imagine, as you're kind of ramping up and then...

It's been more kind of slow and steady as you go through it, right? I mean you're -- there's a heavy emphasis on proctoring and making sure that folks are 100% able and ready to use the valve. It is a little different than a traditional kind of balloon expandable or self-expanding valve. We want to make sure that people have the right proctor in place to do that before they're off doing it on their own, and that's what we're doing.

And just in terms of that product, I mean we -- a couple of our clinician checks, totally anecdotal, but they've talked about proctoring. And I mean you guys have been slow and steady, deliberate, reasonably so. I mean it makes a lot of sense. Like when do you start kind of putting the pedal on the launch or pushing the pedal down in terms of -- given the launch of [ gas ]? Or is that just going to continue to be kind of a deliberate center by center?

I think it's going to be -- yes. The danger is you try and go too fast and you lose your way relative to proctoring, and then you put outcomes and procedures not where we want them to be. So it's -- this is all about making sure that everybody's proctored, ready to go. And I think you'll -- the slow and steady wins the race. You'll see that continue to go.

Are you seeing any specific cases or patient anatomies where clinicians are moving to LOTUS on those initial cases or even in -- after, again, they're up and running?

Yes. So recall, it's on label for extreme and high risk, so that's another reason to go at this steady pace in terms of proctoring because they are very challenging cases. And I think sometimes you're hearing they're saving patients for LOTUS because of its repositionability and retrievability. We have talked for a while it's very well suited in very heavily calcified native valves, bicuspid and people with unstable hemodynamics. So I think that's going to -- the combination -- we believe firmly, it's a workhorse valve as well given that predictability. You can make sure that you don't have annular ruptures or something -- anything that you don't want to have happen. But it definitely is well suited for those more complex types of patients, and we're seeing docs use it there.

Great. And ACURATE neo, I mean you guys fended off, I think, some of the SCOPE I data headwinds in the fourth quarter. I think you guys predicted that at your TCT update. We were a little bit surprised, we were a little bit more cautiously optimistic about that data head-to-head versus Sapien 3, but it was mostly around PVL, it was the delta. But then just user experience, they feel like they weren't -- they didn't get the same results as SCOPE I and just -- like the performance of the valve and the outcomes that they're getting. Is that just the bottom line there? And...

Yes. I mean we had -- relative to Europe, we said it would be accretive to overall Boston Scientific growth in Q4. There obviously was a bit of a furor over the data. We saw mid-teens growth in the fourth quarter in ACURATE. And what we had said was it might provide, in the short term, a bit of a headwind to opening up new centers. But the folks that have been using it would still continue using it. That's pretty much what we've seen. And obviously, the big benefit of neo2 is the skirt and the reduced PVL that comes along with that. So I feel very good that once we get to the second half, we'll be back on that opening up new centers pathway in addition to the folks that are using the traditional neo today.

Sentinel, there's been this debate. There's the naysayers that cite the low-risk stroke data, particularly Edwards' PARTNER 3 trial, 1%. And if there were going to be strokes, there would have been and there wasn't cerebral protection is there. But then there's the other camp where they are the, I guess, more intuitive, seeing the new brand thing, this is bad. I mean there is supportive data out there and evidence, but the kind of -- I guess the real-deal dataset is on its way. But it seems like the cerebral protection enthusiasts are kind of winning the day, at least from my perception, going to these cardiology conferences, and there's more and more traction. There's about 25% of TAVR cases now using Sentinel, and it seems -- I mean do you sense momentum? Are you seeing momentum there? And is that the right kind of read just from the podium presentations and discussions we're having with KOLs?

To be clear, I know what camp it would be in if I were having a TAVR procedure.

Absolutely. No doubt, no doubt.

I think that's a little high. We said it's around -- just approaching 20% in terms of TAVR as of Q4. So I don't think it got to 25% in a quarter, but I do think that it's headed in that direction. And we are currently enrolling the Protected TAVR study, which does seek to settle that debate, that capturing that debris and removing it absolutely protects patients from stroke. With respect to some of the low-risk data and the lower stroke rates, we know that there is kind of a perennial underreporting, we believe, in TAVR cases list, in the TVT registry and others. When there isn't a neurological assessment, you likely see underreporting in the rates of stroke. And I'd say, in low-risk 65-year olds, really devastating consequences from stroke that could last 20-plus years, right? So even that 1.2, you'd want to bring it down. And we hear centers saying that. In my hand, it's a very low rate, but I want to take it as close to 0 as possible. So we're excited for Protected TAVR. There was a study published in -- a retrospective observational study posted in JAMA last week that showed essentially equivalence between the 2 arms. But I think interestingly enough, from a statistical perspective of equivalence, there were lower rates of stroke and devastating stroke and mortality in the Sentinel arm as well as more than a full day shorter length of stay, which is pretty compelling. And we think back to that no mandatory neurological assessment. If you're spending the money for Sentinel, you're probably looking a little more closely for neurological consequences in the Sentinel arm than arguably in the non-Sentinel arm. Again, this is retrospective and observational. So we're excited for Protected TAVR and continue to see good adoption of Sentinel.

Okay. Being able to leverage Sentinel just in terms of -- I know the LOTUS launch is still deliberate. But I guess how do we think about leveraging Sentinel, the only cerebral protection device on the market, to drive LOTUS share?

Yes, that's right. Actually, that Sentinel penetration, it is being used with all valve types, but absolutely, we have different kind of commercial packages depending on if you use it stand-alone or with a LOTUS valve or in Europe with an ACURATE neo.

Great. I mean this was public commentary by Medtronic, and they talked about on their fourth quarter call a couple of weeks ago -- sorry, calendar fourth quarter, fiscal third quarter. But they talked about just kind of change-up in their strategy of reducing kind of bulk orders from their hospital customers at the end of the quarter. Can you just talk about that dynamic within the medical device industry? And if a competitor kind of tries to smooth out their purchasing patterns from their hospital customers, I mean is that plausible from a competitive standpoint? Because, I guess, our assumption is, never being on the operating side and working for a company, but that hospital customers enjoy those bulk orders at the end of quarter because they get discounts. And is that an opportunity for Boston when you hear Medtronic talking about changing up their strategy?

I'll leave their practices to them. From our perspective, bulk has never really been a big piece of our business. Yes, there are some customers really only in CRM and in -- not even IC in general, just in drug-eluting stents that like to purchase that way, but it's a very small minority of the overall procedures and of the overall purchasing patterns. And you're kind of earning your way in every day of the quarter as opposed to the bulk that you do at the end of a given quarter. So never really been a big thing for us, and I don't see that changing.

Understood. And just CRM, it was an anchor performer in the fourth quarter. And I know you addressed it already, but I've got a bunch of questions on it. Can you just walk us through kind of, I guess, the ICD kind of path in 2020, just I guess the market and Boston-type other franchise? And then we can do the same thing for pacemakers.

Yes, sure. Just to piggyback on Dan's original comments about the third party, the industry data that we saw for December, definitely, it was much weaker trend than we saw in November or October. And we believe -- we still don't have perfect answers. But we believe that at least partial explanation for that trend is the holidays falling on Wednesdays at both weeks and people taking long breaks, particularly on the replacement side, which is a more often scheduled procedure. So that all added up to what we believe was a worldwide serum market in the down low single digits in Q4 and is consistent with our market call for 2020 to be flat to down low single, as he said. And really, for us, I think it is more a reversion to the mean in that we've been above market in defib for 8-plus straight quarters. And as HeartLogic is well penetrated now, we will be launching our implantable cardiac monitor, Lux Dx, but small dollar contribution in 2020 due to revenue recognition issues. We'll recognize that over the life of the device. And so I think after having been above trend for so long, we are expecting us to be closer to market, and that's why we're seeing this flat to down low single digits. And probably more of the same type of trend on the brady side.

And just, I think, on the brady side, I mean we've talked about it a little bit off-line after the call. But just to -- I think it'd be interesting just to get an update on Medtronic's Micra V launch. And they've had such great success in the single-chamber segment with Micra, Micra AV. But just in terms of Boston's positioning there, I think there are some concerns just about the pacemaker business maybe not performing in Boston, particularly because of that competitive headwind. And -- but there are -- there is there some rationale for why you can -- your low-voltage business can grow at market?

Yes. We think -- I mean we were down mid-single digits in 2019 and are essentially, again, expecting defib to be a little better than brady, is kind of the mix. And we've called to our defib business as 3x the size of brady. Most of that weakness has been caused by the leadless pacemaker penetration. But I think while they deserve credit for pushing the field. The dual-chamber device, we think -- probably in terms of the data that we've seen to date, those mid-70% rates of synchrony when you actually get up or sit up and walk around, we think that that could result in insufficient cardiac output for a lot of patients. So we're not expecting the same type of share uptake that you saw on the single-chamber side. And we're still a ways off but do expect to be back in the clinic -- to get in the clinic in 2020 on our own single-chamber program, which recall, is backwards-compatible with S-ICD. So the whole goal there is to provide antitachycardia pacing for EMBLEM S-ICD patients.

Excellent. And just one question on the peripheral franchise. Understand Eluvia has a tough comp in Q1, and then you even had the paclitaxel controversy that's out there in the market. One of the questions is just the approvability of Ranger in this era of paclitaxel controversy. Is it safe to say that your assumption is that as long as Ranger, I know we've seen data already, doesn't show increased safety risk or mortality signal relative to the other delays on the market, then it's approvable? Because we were at CRT, there was a panel, there's some FDA representatives there. And that was kind of the message that they put on the table during that panel. And is that kind of how Boston is thinking about it?

Yes. We fully expect to get approval. We think there's a place for paclitaxel-coated as well as eluting devices, if you think of our Eluvia drug-eluting stent. We see it growing in the future, obviously not at the level that we would have seen as we exited 2018 with the excitement there. But we see it as having a nice place in the treatment algorithm for peripheral disease and are excited to be the only company that's going to have actually a drug-coated balloon and a drug-eluting stent in the United States when that happens. So yes, tempered from where they'd be -- where they would have been, but I think still a growth engine over the next many years.

Great. And I got to get a margin question in here, having you on the stage, Dan.

Sure. Absolutely.

And understand your guidance or your kind of LRP guidance. Very attractive margin expansion story, Boston has been and continues to be. Maybe a little bit tempered from the 100 basis points-plus era, where you guys were seeing significant leverage, but still very attractive path forward. And maybe you can just talk about some of the puts and takes. I know there's the coronavirus volume issue. But I mean how dependent on margin expansion is kind of that higher kind of top end of the range revenue performance? How volume-driven is it? And then what are some of the other levers?

Yes. I mean goal is to seek to deliver the operating margin improvements no matter where you are on the range, right? So it makes, for different decisions, depending on where you are in the range. Obviously, easier decisions at the higher end of the range. But I think history would tell you that we've done a nice job of making trade-offs when necessary. With respect to where it's coming from, it's obviously less from gross margin this year. At the approximate 72% gross margin guidance that we have for 2020, that's a little bit less than we saw in 2019. Not a surprise, we had predicted this. We said this is where we would be and that SG&A and R&D would pay more of the bills going forward. That's the plan we have in place with SG&A and R&D, and that's what gives us the overall margin -- operating margin trajectory that we have this year, but a little different than we've seen in the past. It's -- in the past, it's been gross margin has paid a lot of the bills than SG&A and R&D. In some cases, we've invested in SG&A in the emerging markets and such. The balance shifts a little bit in 2020, but still delivered very solid operating margin guidance.

Fantastic. Well, I think we're going to wrap it up there. Really appreciate you guys joining again, and thanks for answering or putting up with all the questions. Take care.

Okay. All right.

Thanks, Josh.