Boston Scientific Corporation (BSX) Earnings Call Transcript & Summary

Okay. Thank you, everybody. And good morning. We're getting set to kick off day 2 here of Virtual Vegas BofA Healthcare Conference. Very happy this morning to have Boston Scientific with us. I've got Dan Brennan, the company's CFO; and then Susie Lisa, who everybody knows, runs Investor Relations; along with Lauren Tengler, who also works in Investor Relations. And so the format for this morning is 100% fireside chat. So I'll just go kick right off with some questions and just wanted to start off by thanking the Dan and the Boston Scientific team for being here this morning.

Thanks, Bob. It's great to be with you. And thanks as always to BofA for the invitation.

Yes, absolutely. You're great to be here. So I guess, Dan, the place to start, just kind of following up from the first quarter call. You guys nicely kind of gave us some thoughts on April with the down 45% to 50%. And I just want to start off by asking, over the course of April and kind of into early May, I just want to make sure that you're seeing sort of the same thing that we're hearing from a lot of different companies, which is gradual improvement off of the low base. I just wanted to start-up by asking that or if there's anything kind of unique to what's going on at Boston Scientific that's worth calling out in terms of kind of pace of recovery off the low?

No. I think you're -- we're in line with what we had talked about on our call on April 29. Just to reiterate on that, what we had said was we've seen some slight improvements towards the end of April in the trends as some facilities, to varying degrees, had begun to reopen for elective procedures, so that was a good sign. Slight improvement trend continues here, and we're tracking to the expectations that we had laid out, which would be April to be the low point in Q2 -- within Q2, with revenue down 45% to 50% versus the prior year, as you said. And we anticipate a sequential monthly improvement throughout Q2, April to May, May to June. But Q2 sales, obviously, still down significantly year-over-year. No surprise there. And then expect Q3 revenue to also be down year-over-year, but to improve from the second quarter's rate of decline. And the aim is to return to growth in the fourth quarter, but obviously, still many uncertainties with respect to that. So we know physicians and hospitals are preparing to work through the deferred procedure volumes, again, which is a good sign for both the systems and the suppliers and the patients. One of the things that's out there is the patient reticence to come back. So hospitals and physicians are working on patient outreach. We're partnering with them in that regard, particularly in those businesses where we have a stronger digital connection to patients like WATCHMAN and spinal cord stimulation and in our Neuromodulation franchise. And I think in terms of the recovery, given the high acuity mix we have, we think we're well positioned for that. We laid that out on the earnings call. We put a slide in our -- on our website. I think that laid that out pretty nicely in terms of our procedures and the ability to be deferred and believe that it positions us well for the recovery. And then additionally, if you look at our mix, about 2/3 of that mix is in the outpatient setting. So whether it's office-based labs, hospital outpatient, ambulatory surgery centers, physician office, and we think those might be a little bit quicker to restart than some others. So you look at franchises like Neuromodulation and urology, and feel like they might have a little bit of an advantage for the restart, given their heavily outpatient setting. So long way of saying on track with what we've talked about on the April 29 earnings call.

And Dan, relative to what you guys mentioned on the call, anything worth pointing out from a geographic perspective that's kind of interesting or noteworthy relative to what you were saying on the Q1 call?

No. Again, it's very similar trends as we would have expected and predicted, and we're seeing at the end of April. So the U.S. is -- and everybody sees that the U.S. is starting to reopen in certain places, continue to see a recovery in most parts of Asia Pac. And then EMEA is on kind of a -- Europe, Middle East and Africa is probably on that same kind of trajectory as the U.S., opening up in some of the major markets. You think of Germany, Spain, U.K., France, Italy, we're starting to see some momentum there. So again, all in line with what we had talked about on April 29.

And we've heard from a couple of companies that Japan may lift their emergency status restrictions sometime soon. I don't know if you guys have heard something similar, but kind of anything -- I know Japan has been a little more resilient. Anything worth pointing out as it relates to Japan from your perspective?

Yes. I haven't heard that. Maybe, Susie, you might have heard something specific to lifting the order? I haven't heard anything relative to that. But I would say your comment is accurate, which is it's been a little bit more resilient. We haven't seen the saw too sound and the kind of the V-shape that we've seen in some the other countries. Japan has kind of held in there a lot better than many of the other countries around the world through the last 2 months.

So this is a little bit more of a -- it's a follow-on to what we've just been talking about, admittedly, though, it's a little bit more kind of 2020 focus than long term. And I realize long term is what a lot of investors are focused on as it relates to Boston Scientific. But it is important to try to understand what might happen over the course of the year. And there's a lot of companies in med tech that have expressed a thought that perhaps by the fourth quarter, we might be approaching sort of normal levels of demand and see almost a normal growth quarter. And that, as it does, has affected sell-side analyst models. And so a lot of sell siders are modeling flat year-over-year growth or even nice growth for a lot of medical device companies in the fourth quarter. Now it's not quite the case for Boston. I think people are still modeling a slight decline, but pretty close to flat year-over-year. So I'm just curious, Dan, to get your kind of high-level views on is it remotely possible to be back at normal levels of demand in the fourth quarter, given the logistical challenges of doing surgery in this environment of 20 million, 30 million unemployed and just the absolutely unique scenario that we're in? Just would love to get your high-level thoughts on that topic.

Sure. I mean, anything is possible. But obviously, we chose to go out with our Q4 discussion around a return to growth rather than a return to normal. And I think it's a bit early to be calling a return to normal and back to the growth rates that we're used to as -- forget Boston Scientific, but as an industry overall. So I think we're much more comfortable saying that as we get to Q4, we aim to grow again, right, Q4 2020 versus Q4 2019. I think that's a reasonable spot to target and aim for. The theory that there's a whole bunch of pent-up procedures out there, and those all come back and Q4 is better than it would have been. I mean that's certainly an upside case that folks can look at. I think we're more comfortable with just talking about returning to growth and aiming for growth then getting back to what would be considered normal.

And is that because you're expecting a lot of the procedures that were delayed to be rescheduled over the course of this year, including the fourth quarter? Or do you think that fourth quarter or even kind of excluding kind of catch-up procedures, if you will, can see year-over-year growth?

I think it's probably more the former, which is going to be an interesting year because everything is not going to line up quarter versus quarter as it was last year. And if you -- it's going to take a while to restart everything, right? Obviously, all the states in the United States are not fully restarted relative to elective surgeries and the same in Europe. So I think it's going to be -- it's going to take a bit of a crank in the engine to get everything going back to a point where we're able to do all the procedures that the system would like to do. And so as we look at that fourth quarter, we're much more comfortable just talking about aiming for that return to growth. And well, obviously, the key and the key in all this, right? As you know, we've taken -- but I believe and the team believes they are very prudent measures to reduce costs during the time when revenue is lower, and at the same time, though balancing that was being ready for the recovery. So we're making sure that if the scenario does play out that Q4 is better than aiming for growth, and it's more of a return to what would have been normal, we'll be ready. We'll have the products and support and be ready to support the customers with that. We're just, I think, a little bit more tempered in our expectations.

Yes. So it sounds like it's a combination. The thought on fourth quarter is that one of the reasons why it will be back, in your view, to some growth, not normal growth, but some growth is that it's a combination of both delayed procedures being rescheduled and done and base underlying demand returning. It's a combination of those 2 things. Is that a fair paraphrase of what you're saying?

I think that's a fair paraphrase. And I think the third element I would add on there is just the sheer lack of deferrability over a long period of time of many of these procedures, right? These are not wholly elective procedures that are cosmetic in nature. These are procedures that need to get done. As we showed on that chart, we had -- some can be deferred for days, some can be deferred for weeks, some can be deferred for months, but very few, if any, can be deferred forever. So I think there's going to have to be a balance of making sure that the procedures are getting done. And that feels like a Q4 time line to us more than a Q2 or Q3 before that equilibrium kind of sets in.

Okay. Well, I'm -- I hope you're right. I think that'd be very bullish if that were the case. So we'll just -- I guess, we'll just have to wait and see. But I appreciate the thoughts on kind of how you arrived at that conclusion. I wanted to...

And to be clear, Bob, I mean we have a bunch of other scenarios that we're running. Obviously, we're not just running the one play that says, this is the only thing that can possibly happen. We've got scenarios that pivot off of that either way. So I think we're well prepared for whatever the world delivers us over the next 8 months.

Yes. No, that's a good statement and reminder. I just -- one of my concerns is that we go from minus 50% back to minus 20% or 15% pretty quickly and pretty linearly, and then it's a big push to get back to normal, just given the state of the world. But we'll see.

Yes. And I'm sorry, just one other thing is, I mean, it's in the hospital's best interest. Obviously, elective procedures is a big source of revenue, a big source of their profitability. So there's a -- there's obviously a desire on the part of the hospitals to get back to as many of those elective procedures as they can as well. So there's -- I think there's a lot of different ores rowing in the water on this one.

Yes. Yes. So I wanted to ask about some of the businesses. But before I did that, you guys provided some commentary on how you're being proactive about costs and careful about expenses. And I just wanted to see if we could take this opportunity to dive in there. Just a little more deeply than we were able to in the limited time on the Q1 call. And so maybe, Dan, if you wouldn't mind, just kind of walk through kind of specifically, where you are reducing costs? How we think about the decremental margins in light of the environment? And maybe if you wouldn't mind refreshing us on your thoughts on kind of percentage of costs roughly that are fixed versus variable? And just to understand where you're cutting and where you're not?

Yes, happy to. And just as an overarching comment, with respect to costs, and I mentioned this a bit earlier, that we believe we're being what I would call appropriately prudent by reducing the variable spending at a time when our revenue is going to be challenged, right? So we feel like we're striking the right balance of trying to mitigate the loss to gross margin coming from the lower revenue, while preserving the spending to continue to execute the strategy and innovation that's worked so well for us for the last several years. So we're really working hard to strike that balance. So at a high level, in the short term, our spending is roughly, call it, 70% fixed and 30% variable. Obviously, in the long term, everything is variable, right? But in the short term, call it, 70% fixed, 30% variable. This -- the operating expense structure is approximately 2/3 fixed. COGS is a little bit higher than that. That's how you get to the 70%. What we're doing is we're focused on the variable portion of the spend, so the 30%. And we're trying to take the equivalent of, call it, around 2/3 of that variable spend out while preserving that strategic investment. And most of these cuts are to that discretionary variable spend. So I'd say we're taking a variety of measures to reduce costs proactively, again, to offset the lower expected revenue. But at the same time, being in a strong position to support customers and patients as the health care systems begin to recover, which we think we're seeing, and elective procedures start to return to what I would call more normal volumes. And fundamentally, again, I -- we believe this is the prudent thing to do, reduce that spending at the time when the revenue is declining. For example, like running plants at full capacity when April demand was at 50%, call it, rounded, isn't how we want to invest for this recovery, right? We want to make sure that we're matching the demand that we're seeing with the output from the manufacturing plants. I believe that's the right way to do it. Why would you build inventory that you don't think you're going to need? So try to match those 2. In terms of specific measures, we've canceled travel and meetings and we've delayed hiring. We've deferred marketing programs while we wait for conditions to improve. Again, we're ensuring that planned capacity is aligning to the revised revenue estimates. Again, I'll keep saying this, however, constantly monitoring to ensure adequate supply for recovery. We will be there to capitalize on the recovery. Clinical program savings, given the procedural enrollment challenges in the current environment as well as reductions in programs where hands-on R&D is required in that regard. On the cash preservation side of things, we're reducing capital expenditures. Our split is about 50-50 maintenance and investment. We can certainly delay the investment portion given the temporary reduced need for capacity expansions. And then we took some kind of, I think, lead from the front type of actions where Mike is foregoing his entire salary, the NEOs are taking 50% salary reductions, including -- and the Board. We've gone to a temporary 4-day work week for most employees. And we're utilizing a very flexible strategic compensation plan with our sales reps to ensure retention. And to -- the final thing and to be clear, this is the savings side of the equation, but also realize at the same time, we're also looking for areas to invest in, to develop new capabilities, whether it's medical education, proctoring, any other opportunities to help us as deferred procedures return. So again, we're trying to balance this. This isn't all just about a cutting exercise. It's looking to also look at places where we can strategically invest to capitalize on the recovery and be a stronger company on the other side.

Thanks for the rundown. And then kind of while we're on this topic, first, any comments on thoughts on decremental margins through this period? And then perhaps more importantly, as we think going forward, if we were to hypothetically say that 2021, kind of from a revenue perspective, looked sort of like 2019, would it be that margins in 2021 would look kind of like 2019 margins? Or are there other things that we need to consider sort of as residual effects of COVID, if you will, on the margin profile of the company as we think about the future?

Sure. I mean, obviously, given the uncertainty around 2020, it'd be hard to fully comment on 2021. But I can probably make some comments that might be helpful. So I'll just -- I'm going to use your example. So you say 2021 gets back to 2019, not our words, your words. So I would say once things return to a more normal level of revenue, I think we'd have a more normal P&L. So that's incredibly helpful statement, I know, Bob. But as you look at some of the things that will impact 2020, one of the keys is the manufacturing variances, right? So when you have manufacturing variances that are abnormal, that are not the usual run rate variances and you're not capitalizing those into the inventory, then they flow through the P&L directly in the time that they are incurred. So that -- the largest portion of that should be Q2. So you'll see Q2 will be challenged. That when we -- I talked about this on the earnings call. Not insane to imagine that April could have a negative operating margin, just given the gross margin, the operating expenses and then the incremental flow-through of the unabsorbed manufacturing overhead, okay? So 2020, what we talked about is that the margins will improve as revenue improves. So Q2 would be the lowest, Q3 would get better and Q4 would get better, similar to the trend in revenue. If you look at 2021, if you're running the factories at a normal level and you've taken the right actions relative to your operating expense base and you're back to your words, a 2019 level of revenue, then the goal would be to have a more normal level of a margin profile related to that revenue. Again, I'm not going to quote specific numbers, but you should be able to leave a lot of the legacy 2020 COVID-19 issues behind you in 2020, if you tell me that 2021 is going to be a more normal year.

Okay. That's very helpful and exactly what I was looking for. I just want to make sure that we're not missing anything about the length of time it takes to work through some of those variances and their impact on the P&L. Because 2021 is the year that people are using to value the medical device companies, including Boston Scientific. So it's just important to have any heads-up about things that we should be considering, and that was super helpful. Thank you.

Good.

Now, I did want to take the last 10 minutes we've got here and talk about some product-specific areas for Boston Scientific. And I wanted to start with the PCI business, specifically the kind of roughly $1 billion complex PCI business. And I think that's been a phenomenal driver of growth for Boston Scientific over the last kind of couple of years. And so I was wondering if we could do 2 things to be helpful for investors. One, if we could just kind of roughly break down what's in that division specifically? And I think a lot of us know roughly, but would love any help on just breaking down what's in there. And then help us understand the sustainability of the growth profile of that business because it is pretty chunky at $1 billion, and it's been growing quite nicely. So just one, help us break down the business. And two, help us understand how you think about the sustainability of the growth of that complex PCI business you have.

Thanks, Bob. Yes. So it is a very broad portfolio, and you sized it about right. If you want to think that complex PCI did slightly outpace in terms of overall revenue dollars in 2019, our drug-eluting stent businesses, but roughly $1 billion for each. And I think part of the key to our strength in this segment is the breadth of the portfolio. So PCI guidance, imaging, both IVUS and fractional flow reserve is one of the bigger chunks. Atherectomy devices, the recent launch of ROTAPRO following on from Rotablator, which is a 20-year standard in atherectomy. We have multiple devices for chronic total occlusions. And then multiple guidewires, balloons, et cetera. So it's a really broad portfolio. And I think as you see increasing adoption, of these types of techniques for more complex patients, that's why you are seeing the strong growth there. And I also think there's just -- there's been less price pressure, frankly, than there has been in the drug-eluting stent side of that business. So that certainly has helped, too. But it's definitely been one of increased adoption as physicians have more confidence in their tools and ability to take on tougher patients then avoid open-heart surgery. So also, as we see just a increased complexity in the disease state, that helps, too. And training has been a big, big part of it. So I think -- sorry, I should have also mentioned, too, our WOLVERINE Cutting Balloon was a nice growth driver in 2019. I think it's just an example of the steady pace of new launches that are coming out. We talked about 8 products broadly, either approved or soon to be approved in that combined drug-eluting stent, complex PCI, what we call coronary therapies business. And it did hold in, to your point, better than given the high acuity and the shorter time frame for deferrability, if you will. It was one of our most resilient businesses in that April time frame that we disclosed on the Q1 call. With total IC down around 40%, we said the complex PCI or coronary therapies performed better than structural heart. So it was down less than that down 40%. And so I think we have continued to see good growth broadly across the world. But definitely, emerging markets has been a big part of it, again, as they just sort of catch up in terms of adoption of these types of techniques. And hopefully, that helps. Anything I missed?

Yes. Yes. No, definitely. Isn't the complex PCR where you also include just kind of plain old PTCA angioplasty balloons? That's in there as well, correct?

Yes. Planal Guidewires and balloons are in there, yes. Absolutely.

Okay. So there's -- I would imagine that's a little bit more commoditized and slower growing, and then some of the products you mentioned are higher growing. And just kind of your thoughts in this new world on the sustainability of kind of good growth in complex PCI, especially given the emerging market concentration there, do you still believe that, that can be as good a growth driver as it's been once we return to normal?

I think, yes, in a "normal world", we do still see just the increased complexity of patient disease states and physicians, as they get more comfortable with the tools, tackling more patients with PCI instead of CABG or even medical management. And it kind of epitomizes our category leadership strategy, where it's a steady cadence of new launches to help ease procedures or improve outcomes. And our overall emerging market's mix for total company is kind of been in that 10%, 11% range. It's higher for complex PCI, but I think it speaks to an earlier stage of adoption, and we do see a pretty long runway here on these techniques and a desire to get back to them as the recovery in elective procedures occurs broadly. And while this is primarily a hospital-based setting, an inpatient setting, you have the acuity aspect of it that I -- we think we hope will help with the recovery curve.

And then one other follow-up look sort of related to that is you guys have talked at the beginning of the year about potential for greater pricing pressure in China and emerging markets as a result of tenders. And I know you assumed a little bit worse pricing pressure this year in your original modeling. Kind of now that the world is so different, how have your thoughts evolved on what you might see with kind of that tender process in China? And then also just tenders generally, just would love your thoughts there.

Sure. So...

Sure. I -- go ahead, Susie continue.

Sorry, Dan. Go ahead. So I think in China, so far, I'll just keep going, sorry, is that we have seen, as we talked about in late '19 provincial regional tenders cropping up. And that was one of the reasons along the expectation for a national tender impacting us in DES for our cautionary statements about increased price pressure in 2020. It does appear that the provincial tenders, the regional tenders in China are picking back up, and we'd expect to see that pressure. And it looks like that the national tender has been paused or perhaps put on the shelf as a result of COVID, but is likely to see more expansion of the regional tenders essentially take the place of that, but it's China and still TBD. I think it's reasonable to assume, we've been spending a lot, Mike and Dan and the team is spending a lot of time on the phone with our hospital customers broadly as hospitals are hurting in this environment. And price is certainly part of that conversation. So I think that there's been price pressure in med tech forever, and we wouldn't expect that to change. And I think this environment, it will continue to be a tough issue and one we're working through. And innovation and products, you can't get anywhere else and contracting across the entire category-leading portfolio is how we have tried to overcome that in the past, and we'll continue to execute that type of strategy. Sorry, Dan.

Well done.

We don't have much time left, but I did want to get 2 last questions in. So maybe I'll just kind of ask them upfront. First question was on 2 very visible products of yours, EXALT-D and WATCHMAN. Can you just maybe give us some latest views on, did -- it's -- strikes me that these are 2 products that might be a little -- they might lag in their recovery. Is that still your thinking? Or is there a reason to be more optimistic on WATCHMAN and EXALT-D? And then the second question is just kind of -- I'm not sure if you can offer any comments on this. But we're going to run into this sort of awkward situation as companies later in the year think about guiding for 2021 because 2020 is going to be so depressed from an earnings perspective. So like if you just look at consensus, you'd be guiding to 70% earnings growth if you matched consensus for 2021, just doesn't seem likely that any company is going to guide to 70% earnings growth regardless of the circumstances. So again, sort of 2 questions there. One on those 2 products. And then two, on just any kind of high-level thoughts on how you kind of manage the guidance process in such an awkward year?

Sue, you want to take the first one? I'll take the second one?

Okay. Sure. So real quick on WATCHMAN. I'd say that, yes, these procedures are largely deferrable. But we know that patients and their caregivers are really -- and their physicians are really motivated for them to have an alternative to blood thinner. So we survey physicians, we have varied, and they're confident that you'll see postpone procedures be rescheduled as you start to see capacity and protocols allow. We also have strong -- this is one of the areas where have the strongest digital connections to these patients. And I think we'll work with hospitals to try and leverage that as appropriately. Secondly, really excited to be launching WATCHMAN Flex later this year. You just saw strong data at HRS on PINNACLE FLX with the trial. I think that will be an important catalyst for the recovery. And then thirdly, is the -- it's just the body of data. So we'll continue to push there. EXALT-D has definitely been a challenge. There's very little appetite or more mind share available at hospitals for any new technology outside of something that's not COVID related. So that's been a challenge. But I think our overall confidence and the -- our market opportunity for these single-use scopes that eliminate contamination risk or infection risk is even greater and is the reason why we talked about -- actually accelerating some of the R&D programs within EXALT-D. So I think just pushed out, but the opportunity, we're probably even more excited about and look forward to getting back to it in a more receptive environment as soon as we can.

And I'll give you 1 sentence on the last one, Bob, to close out. So I would say if the landscape and the visibility improves to where we can confidently give guidance, we'd be much more focused on giving what we think we can achieve in 2021 and less focused on what that means relative to 2020 because I think, obviously, 2020 will be a very different year than we were used to experiencing in the med device industry. So we would give a number that we think that we could achieve. And whatever the percentages are, they would be, but we'd be -- we want to be confident that we could achieve that number in 2021.

That's fair. Thank you very much for that. And thanks for the discussion. We could easily go another hour, but our time is up. And so I just want to express my appreciation for your willingness to participate in this virtual experiment. Thank you, Dan and Susie and Lauren, and good luck with the rest of your day. And again, we appreciate your participation. Thank you very much.

Thanks, Bob. Appreciate it.

Thanks, Bob.

Okay. Thank you. Bye-bye.