Boston Scientific Corporation (BSX) Earnings Call Transcript & Summary

Thanks, everyone, for joining us today at the Jefferies 2020 Virtual Healthcare Conference. I'm Raj Denhoy from the medical device research team. Now we realize it's kind of unprecedented time, so we appreciate everyone joining us this morning for the presentation. We have Boston Scientific this morning. We have the Rhythm Management and EP team. Joe Fitzgerald, the President; Ken Stein, the Chief Medical Officer; we have Mark Bickel, who's VP of Finance; and also Susie Lisa, who does IR. Now before we dig into some questions, I think Joe and Ken had some comments they want to make, and so I'll turn it over to you, Joe.

Thanks, Raj, and thanks for having us. Wish we could be there in person, but I guess 12 weeks now living in the virtual world is -- we're kind of getting used to this. Just a couple of quick statements about some of our current product launches. I'll cover those over a couple of minutes, and then Ken is going to talk about the clinical science abstracts and late breakers that came out of HRS. I will say just qualitatively, following on from our analysts, call it, wrapping up Q1, we've seen what we expected, i.e., as the country opens up and as certain parts of the world open up. Qualitatively, we've seen a really nice sequential week-to-week growth in procedures as our labs around the globe and the U.S. have started to open back up for deferrable or more electable procedures, and we've seen that both in our CRM implant business and our EP ablation business. And I'm sure we'll get a question on that later. We can provide a little bit more color. Obviously, we're not giving mid-quarter or 2/3-of-the-way through-quarter guidance, but we have seen what you would expect as really nice qualitative return each week, which improves upon itself. So that's good news. I want to talk a little bit about the launches that were either smack dab in the middle of or launches that we're expecting here in the next few quarters. So first of all, let me talk about our 3300 programmer. This is the core sort of data hub which allows us to interrogate program, diagnose all of our active implantables across brady and tachy. We continue on that launch. One key feature of that, that really opportunistically was a great thing, although we've put this in 5 years ago when we began the project, but this is a connected programmer where we can view and assist either implants or interrogations with one click of a button. It's a proprietary software system inside the heart -- inside the 3300 programmer called Heart Connect, and we are essentially in full launch mode in the U.S., and we'll shortly start that launch in Europe. As well, we received approval for our next-generation INGEVITY+ brady lead. We got that approval in the U.S. We're a few months into the launch of that. That's going super well. We do have approval in Japan on that, and we'll begin that launch midsummer and then expect to go through an MDR filing for Europe, and that's probably pushed -- it is pushed into 2021 for that launch. Lux Dx, which is our implantable cardiac monitor, that is still pending 510(k) clearance. We had said previously we would get that. We expected to get that clear in Q2. That is still our expectation. And then we'll begin a limited market release in Europe -- I'm sorry, in the United States sometime in the month of July. On the EP side, we're really thrilled. We got a PMA supplemental approval for our DIRECTSENSE local impedance lesion assessment tool in the United States. Along with that, we have a Software 4.0 that really improves our workflow in AF ablation cases. So we got that approval earlier in the quarter, and we started our limited market release in the last 2 weeks. I'm really super excited about that. And that also goes for both Japan, Europe and many other markets around the globe. Really important for us. On POLARx, which is our cryo balloon for AF PVI ablation, we are expecting to begin the IDE for that in early July. That slipped a little bit. It really wasn't, I would say, appropriate to try to start that IDE during the months of March, April and May or June given the COVID impact on clinical trials enrollments, et cetera, so we've targeted that for a July 1 start. As well as our European limited market release, didn't really want to try to launch POLARx into the COVID crisis when you looked at the Europe trends in case volumes. So we've moved that to a July 1 target start date as well. And I think last piece of news then I'll hand over to Ken for some clinical science updates. We did complete our StablePoint force-sensing catheter project. We are in the process of negotiating our IDE for that with the U.S. FDA. We expect CE Mark really any day now and have already submitted for approval on that in Japan. So that really -- once that product gets available, completes its IDE, that will complete the majority of our AF mapping and ablation portfolio. So we're really happy to have the technical, call it, verification, validation work complete with that, and now we're just prosecuting approvals and IDE approvals. So with that, Ken, I know you are chomping at the bit to talk about our late breaker and key abstracts at HRS. So I'll hand it to Ken.

Yes. Thanks. Thanks, Joe. Thanks, Raj, for having us. Yes. As you said, Raj, unprecedented times coming to this but also came to HRS from the basement of my house in New York and not there in person. Actually, looking at our metrics, we actually think our big late breakers probably got more exposure because it was held virtually versus the usual in-person meeting. And we have 3 major late breakers as well as 1 other really important abstract. And just to quickly review what we showed. 2 really important trials regarding the S-ICD PRAETORIAN, which is the first-ever head-to-head randomized study of the S-ICD versus the transvenous ICD. Showed very convincingly noninferior, the transvenous ICD, and clear evidence of superiority with respect to reduction of lead-related complications over the long term. And then that was complemented with the data from our UNTOUCHED trial, which is the largest trial ever of the S-ICD in its most recent iteration, EMBLEM, and the EMBLEM MRI device in a standard primary prevention population. And in that trial, we found inappropriate shock rates of sub-3% with the current EMBLEM MRI device and our SMART Pass technology. And in fact, that's better than the best inappropriate shock rates that have been reported in contemporary practice with transvenous devices. So 2 trials that really, I think, went together very nicely in terms of the message that the S-ICD ought to be high on the list and probably the first choice for primary prevention patients who don't have a need for pacing or CRT. The other late breaker was our PINNACLE FLX data. That was the IDE trial for our next-generation WATCHMAN device, the FLX device. That trial showed the lowest complication rates ever seen with the WATCHMAN device in an IDE-type trial and hit a landmark that I'm never ever going to exceed in my lifetime with Boston Scientific. We actually hit 100% on the efficacy endpoint the FDA asked for, which was, again, we had 100% of patients had effective seal of the left atrial appendage at a 12-month beta. So never going to pass that bar again. The other trial to talk about because it dovetails with what Joe mentioned about DIRECTSENSE was we reported the results of our LOCALIZE trial, which studied the use of our DIRECTSENSE Technology to predict durable lesions for pulmonary vein isolation for AFib. That turned out to be, based on the last metrics we saw from HRS, the highest-viewed abstract of the entire meeting and beat #2 by a margin of 100%. And what we found in LOCALIZE was that using our DIRECTSENSE Technology, if you had an adequate impedance drop during ablation, it was over 95% predictive of having a durable lesion. And that's miles ahead of any technology that's out there, one of the reasons we're so excited about the DIRECTSENSE launch in the United States. And then just a couple of comments about clinical trial cadence. Joe mentioned, we did have to push off the start of our frozen AF study. That's the IDE trial for our cryo balloon, POLARx. Anticipating starting that trial in July. And then we've also pushed the start of our modular ATP trial, which is the trial for the use of our leadless pacemaker, the EMPOWER system, both as a pacemaker and in concert with the S-ICD. And the goal now is to begin enrollment in that trial early in the first half of 2021.

No. Great. That's very helpful and thorough overview. Maybe, Joe, I can start with you. I have a few kind of background kind of COVID questions, and we'll talk about RM and EP. At a high level, though, I think what you described there was an encouraging sort of recovery that's unfolding. Maybe the question could be, or is it better or worse than maybe you thought it would be? And I know you guys gave kind of guidance, and I don't expect you're going to update it today. But in early April, have things improved better than you originally thought they would at this point?

No. I would tell you that it's very close to what we thought back when we started to think about what Q2 was going to look like, right? The -- what we couldn't time was when would the severe lockdown that really was similar all across Western Europe, U.S. and came late in Japan, but it was very similar, right? Essentially most of the deferrable and most of the elective procedures, hospitals were just not doing them. So I think if anything, just me qualitatively assessing, I think the move to open, in my opinion, was maybe a week or 2 earlier. So you started to look at that last week in April, and you saw many states, counties, municipalities in the U.S. start to talk about what a reopening plan look like. So trying to split that between weeks is really tough. I think we did a pretty darn good job in assessing what Q2 was going to look like. I think we talked about on the call, May looking better than April, June, which we're 2 days into June. June hopefully looking better than May. So I think maybe, if anything, I would say the move to reopen and restart might have came a week or 2 earlier than we thought. That's about as good as I can give you.

Understood. Are there any other metrics, though, that you think about or look at other than just open, right, whether hospitals are doing procedures or not, things like surgery schedules? Anything you can offer kind of qualitatively around other metrics that might be informing the pace of the recovery?

Yes. I mean we look at and we spend a lot of time with customers looking at is there a clinic back to something that looks like full operation, right? Can they bring the same number of patients in each week? These are your patients that they're assessing and then moving through the testing and hopefully toward some type of therapy. So we spent a lot of time evaluating that. You also look at what the -- we're looking at what is the pipeline, right? You take a referral chain, whether it be primary practice docs, general cardiologists, but what happened to that pipeline of patients during those severe shutdown weeks of March through, call it, mid- to late April? So those are probably the 2 biggest ones. And then, Ken, we're trying to really get a handle on what the whole patient reluctance item is. Ken, you want to mention some thoughts on that?

Yes. Yes. Thanks, Joe. Yes. And so, Raj, as I'm sure you guys are doing, we've been reaching out to our advisers. We've had a series of calls with advisers from a variety of different regions, both in the U.S. and international. One thing that's notable, right, is a lot of regional differences in what's happened. I'm in New York. I mean obviously, we got very bad. If you were -- the Northeast is probably the furthest behind regionally, and there are other parts of the country where we've spoken to docs who still have never seen a patient with COVID, right? So the pace of recovery is very different. I think -- what we've heard from folks, first of all, particularly when you look right at the EP and Rhythm Management procedures, they're procedures that are deferrable, but they're not necessarily elective. You can put them off for some time, but you can't put them off forever either because it's for a life-saving therapy. It's a generator of change that needs to be done at some point in a couple of months. Or even for the AFib patients, I mean, these patients are just terribly symptomatic. And so people will delay for a while but not going to delay forever on these procedures. And the other thing, I think, that we've seen is sort of tracking reluctance of people to come into the hospital. Again, very regionally dependent. And I think one of the things that we like to point to when you look just outside of just EP and Rhythm Management, right, I mean, as a whole, one of the strengths of the BSC portfolio is the large number of procedures that can be done in an outpatient setting where this issue at least of patient reluctance is much less significant.

Understood. Yes, I want to get to that in a minute. One last question on kind of the COVID situation currently. Boston, I think, was one of the companies that was perhaps most aggressive maybe in cost reduction or at least talking about cost reduction, and there's been reports of 4-day workweeks and furloughs and these sorts of things. Even some of your competitors have noted that perhaps they might [ try ] to take advantage of your pulling back here a little bit. Maybe you could just ground us in what is actually happening at Boston, right? I mean are these types of activities taking place? Do you feel like you're losing momentum perhaps because of the cost reduction? And how long do you think these programs will continue?

And so I think you think about it like this. We took a look at Q2 back in March. And obviously, similar to a lot of people, there was going to be a pretty significant downturn in revenue. At the highest level, I would say we did 3 things, and we did all 3 of these to preserve our ability to take maximum advantage and provide all of the services and have all of the supply chain in place for whenever that recovery started, right? So obviously, we took executive salaries, CEO, named executive officers. We took a 50% pay reduction. We took the majority of our U.S.-exempt employee base and moved them to a 4-day workweek and a corresponding 20% reduction in salary. And then we put programs in place for our field sales employees who obviously were not going to earn the type of commissions and incentive payments given the significant impact that we saw in March and what we were predicting for in April. And -- but I will tell you this. We've done a great job. We've had no furloughs. We've had no layoffs. We have our entire workforce in place. And that's really important because as we've seen the recovery start, we're at 100% capacity, both on the manpower and bolt-on supply chain within our plant. So I think we took the actions necessary for our company. I'm really not going to comment, Raj, on how long will those last. I think we said on our call that we saw -- we expected a sequential improvement, April to May to June, and a similar sequential improvement happened in Q3 versus Q2. So I think, Susie, unless you want to make a comment, I think we took the actions we needed to, to address Q2, and I'll stop there.

Answer that briefly that I think it's also leadership by example from the very top with Mike foregoing his salary, our NEOs doing the same, our Board comp cut by 50%. Actually had a voluntary program in Europe for a reduction in pay, and you saw extremely high participation levels there. Again, the messaging, I think, has been very clear and transparent throughout that this was done in an attempt to preserve capital, to cut costs and to make sure that we don't need to go to layoffs or furloughs, as Joe said. And I think, too, with the communication that was likely a Q2 action, I think engagement level is very high and those types of criticisms are just off base.

And then, Raj, one other comment. I'll let Mark Bickel comment just on the actions we took are what I'll call variable spend across all of our businesses, geographies, divisions. Mark, you want to talk a little bit about that?

Yes. No, I mean, it's a couple of buckets. I mean beyond what Joe mentioned with the headcount furlough, there's the obvious savings that you get from things like T&E, clinical trial deferments, really just things that are directly tied to COVID. And to be quite frank, those are probably happening at our competitors. And then the other buckets, we thought it was prudent to look at our plant capacity, our inventory levels, some of our deferrable CapEx. So again, I think these are all very responsible reductions that we did and really didn't touch anything in the long-term portfolio.

Understood. Yes. And I don't want to belabor the point. So maybe we only have about 5 or 6 minutes left kind of in these short sessions, but I want to spend some time on CRM, obviously, on RM in particular, and EP. Maybe, Joe, turning it to you. So even towards the end of last year, your core CRM business, pacers and I think particularly, defibrillators, slowed a bit. And there was some commentary perhaps around the end of the replacement cycle, of heavy replacement cycle on batteries. Maybe you could just ground us in where you are in a sense in growth in Rhythm Management. Do you think you're growing above or below the market at this point? And if we do see a continued erosion in your replacement cycle, is it going to be difficult to grow that business over the next couple of years?

Yes. I'll make the comment, and Mark has studied this extensively, so I'm going to let him answer it. But I think we -- when we look at now the numbers for Q4, I think we were on market, at worst, slightly below market, and we saw a late Q4 sort of slowdown. And that could have just been to the timing of where Christmas and New Year's kind of fell in the cycle. As we've looked at the general market, I think we're a lot less worried about what happened there in late November, early -- or late November and December than we were when we didn't see everybody else's numbers and the market data. We saw really like on-market performance in January, February. Once you get into March, kind of the wheels come off of our analytical forecast accuracy. But yes, I think we saw back to normal after that December blip. Mark, do you want to add some comments on our CRM trends there is for Q1?

Yes. I mean for core CRM, we've really been on kind of a 3-year run of exceeding market since the back half of 2016. If you look at the splits, Raj, which I know you do, Q1 through Q3, we outperformed the market, both U.S. and international, every quarter. It was really the fourth quarter, and it was U.S. CRM specific. And as we got more of our market data in, in Jan and Feb, 2 things. Joe already mentioned that we performed more on-market in Jan and Feb or at least our belief statement of on-market pre-COVID. But I think more importantly, as we got our market data in, 2 things we saw. One is the de novo market was softer in the fourth quarter. It was the softest quarter in the entire year in the market and with BSC. And secondly, for a reason we can't really explain other than maybe calendarization of implant days, the month of December was, in fact, very light for change-outs. And I can tell you that when we saw our January-February change-out business come in, we were back to growth in Jan and Feb. Obviously, the comps are -- have been distorted by COVID since March.

Understood. Three minutes left, so we're going to do kind of a bit of a speed around here. But maybe, Ken, I can turn to you on S-ICD. So obviously, very positive data out of HRS. But I think what people are looking to is when you can add anti-tachycardial pacing to that system, opening up a whole another segment of the market for you. So maybe you could just remind us quickly on where you are in that process. I think you're -- you might be muted actually right now on your...

Yes. You got me, yes.

There you go.

Three months of lockdown, I should have figured that out. So yes, very excited. Our EMPOWER device, we're studying our modular ATP trial, a leadless pacemaker designed to be able to communicate with the S-ICD. Because of COVID, we have deferred. We're going to start enrollments in that trial, intending early first half of next year.

Understood. Okay. And maybe just on EP. So we have 2 minutes left here. Maybe, Ken, I'll leave it with you or maybe with Joe. So I guess EP has been interesting because it's sort of been a tale of 2 cities, right? You continue to point us to Europe where you're actually doing quite well given your complete product portfolio. But the U.S., you're a little bit behind. And maybe you could just sort of ground us again on when you think the U.S. will finally be able to compete effectively in EP against the 2 big boys.

Yes. I think if you look, Raj -- and I'll try to give a quick answer, right? We said last year if you look at our RHYTHMIA business, so all of the advanced ablation mapping, et cetera, we've grown faster than market nearly every quarter since we launched that in 2014. The problem is, is our business still has -- it's weighted 2/3 to some of the low growth, basic diagnostic and nonadvanced ablation. So I think now with the launch of DIRECTSENSE globally, I think with the launch of StablePoint in Europe and POLARx in Europe and then other markets to come, I think you will see us more consistently beat market or significant beats of market as we flip our business from 2/3 old school stuff to 1/3 advanced, new stuff. We will flip that now. And that key approval of DIRECTSENSE, getting StablePoint across the developmental goal line and into submissions and approvals and then launching POLARx, I think the expectation should be that we go on a long-term run of beating market in each of those regions as we bring those technologies to market.

Do you think that's a late '20 phenomenon? Or what do you think we'd see take off on that growth when you start beating the market?

Well, I said this back in Q4 or Q1, and that is we really needed to get DIRECTSENSE and its associated software for the AF workflow. We needed to get that approval in the U.S. That was significantly delayed probably 2 years from what we thought we would get. So the sort of the spark that we need in the U.S. is DIRECTSENSE approval. We have that, and we're in the LMR now. You saw our press release a couple of days ago.

Right. I think, yes.

And getting that software and Force and cryo into Europe, I mean, those are 3 major growth drivers that will essentially transform our European EP business. And then we're doing a bang-up job getting things approved and launched in Japan. We now have full DIRECTSENSE with the software approved in Japan and have just submitted our filing for PMDA approval of Force. So we're...

I hate to cut you off, Joe, but I think we're out of time. So I appreciate it. But I totally understand your bullishness and as are we. So thank you, guys, again for the time today and..

Raj, there's a time line that lays it all out on the IR website or through the Jefferies link. Thank you.

Awesome. Thank you, guys, again.

Thanks.

Be safe.