Boston Scientific Corporation (BSX) Earnings Call Transcript & Summary

Ladies and gentlemen thank you for standing by. Welcome to the Boston Scientific Second Quarter 2020 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Susan Lisa. Please go ahead.

Thank you, Greg. Good morning, everyone. Thanks for joining us. With me on today's call are Mike Mahoney, Chairman and Chief Executive Officer; and Dan Brennan, Executive Vice President and Chief Financial Officer. We issued a press release earlier this morning announcing our Q2 2020 results, which include the reconciliations of the non-GAAP measures used in the release. We have posted a copy of that release as well as reconciliations of the non-GAAP measures used in today's call to the Investor Relations section of our website under the heading Financials & Filings. The duration of this morning's call will be approximately 1 hour. Mike will focus his comments on Q2 performance inclusive of the impacts of the COVID-19 pandemic as well as catalysts for recovery by business. Dan will review the financials for the quarter. 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. Ian Meredith and Dr. Ken Stein. Before we begin, I'd like to remind everyone that on the call, operational revenue excludes the impact of foreign currency fluctuation; and organic revenue further excludes the impact of certain acquisitions, including Vertiflex and BTG in the relevant periods for which there are no prior period related sales, as well as the divestiture of the global embolic microspheres portfolio and the Intrauterine Health franchise. On this call, all references to sales and revenue, unless otherwise, specified are organic. Finally, average daily sales, or ABS, normalize the sales growth for a difference in selling days year-over-year. Also of note, this call contains forward-looking statements within the meaning of federal securities laws, which may be identified by words like anticipate, expects, believe, estimate and other similar words. They include, among other things, the impacts of the COVID-19 pandemic upon the company's operations and financial results; statements about our growth in market share; new product approvals and launches; clinical trials; cost savings and growth opportunities; our cash flow and expected use; our financial performance, including sales, margins and earnings; as well as our tax rates, R&D spend and other expenses. July trends provided qualitatively refer to month-to-date results, and actual results may differ materially from those discussed in these and any forward-looking statements. Factors that may cause such differences include those described in the Risk Factors section of our most recent 10-K and subsequent 10-Qs filed with the SEC. These statements speak only as of today's date, and we disclaim any intention or obligation to update them. At this point, I'll turn it over to Mike for his comments.

Thank you, Susie. Good morning, and thank you to everyone for joining us today. I also want to express my gratitude to all of our employees at Boston Scientific who are helping serve our customers, patients and communities during the COVID-19 pandemic and living our Winning Spirit value every day. As the impact of the coronavirus began to spread globally in the first quarter, we took a number of cost-related actions as outlined in our first quarter earnings call in the face of significant uncertainty to protect our employees and also to ensure the strength of Boston Scientific. Importantly, with the consistent monthly improvement in sales trends, we have accordingly ended our reduced employee work schedule, we're accelerating key investments appropriately, appropriately increasing variable spend in CapEx and we're quickly ramping up manufacturing production to pre-COVID levels throughout most of our plant network. We're also establishing new and stronger capabilities in virtual physician education, remote clinical support and digital sales enablement to partner with our customers on this path to recovery. We absolutely appreciate the agility of our global team, and we absolutely believe that we will emerge from the pandemic a stronger company. I'll now provide detailed highlights on performance in second quarter '20, including average daily sales trends for the month of June. I won't give specific July results, but it's encouraging to see that across all of our businesses, July trends are continuing to improve nicely from June levels. For the second quarter of 2020, total company sales declined 23% on an operational basis. On a regional basis, Asia Pac declined 14% in the second quarter, but importantly, delivered growth of plus 2% in China for the quarter. In addition, for the month of June, China, Australia and New Zealand and Korea all delivered year-over-year growth. Europe, Middle East, Africa declined 26% in the second quarter. Yet importantly, 6 countries returned to growth versus prior year in the month of June. Finally, while revenue in the U.S. dropped the most in April, down 55%, the U.S. has also seen the sharpest recovery, declining 12% in June on an ADS basis and 28% in the second quarter, both versus the prior year period. Total company sales declined 29% on an organic basis as trends evolved throughout the quarter that were in line with the previous outlook we provided in our first quarter call. April sales decline was the trough with monthly sequential improvement in May and again in June. Specifically, worldwide organic revenue was down 47% in April, down 24% in May and down 17% in June on an average daily sales basis. Operationally, Interventional Medicine contributed 320 basis points to sales versus prior year, and Vertiflex contributed 20 basis points before those sales went organic in June. In addition, Spec Pharma sales of $68 million in the quarter was ahead of forecast and contributed 260 basis points to total company sales. Adjusted operating income of approximately $250 million represents a 12.6% adjusted operating margin, roughly half the rate of 25.5% in second quarter '19. Adjusted EPS for second quarter was $0.08, which is a 78% decline versus second quarter 2019. Much of the shortfall occurred at the gross margin level given lower volumes, which Dan will detail further. Now to turn to the outlook for the rest of the year. While July has seen flare-ups of COVID-related challenges in certain regions, we're very encouraged by the strengthening trends we have seen in July versus those in June. From a regional perspective, we see various sales results based on the different phases of recovery with Asia Pac having recovered the most, followed by the U.S. and then Europe. All told, there is no change to the 2020 outlook we gave in our late Q1 earnings call. We estimate that Q3 revenue will likely decline year-over-year, but will improve sequentially versus second quarter and that we aim to return to organic growth in fourth quarter. Despite the procedure volume impact from COVID-19, our businesses remained strong with a compelling global pipeline and several ongoing launches and recent approvals that are helping lead our recovery, as well as the overall favorable mix of our business in terms of high acuity mix and outpatient site of care. Recall that a binary split of elective emergent does not clearly reflect clinical practice and that we have seen and expect to continue to see a higher rate of recapture of deferred procedures given the majority of the conditions we treat have a relatively high level of acuity and thus generally can't be deferred for extended periods. I'll now provide some additional commentary on our business units. Starting with Urology and Pelvic Health. Sales declined 32% organically in the quarter with June ADS down 12% versus prior year, and July trends are continuing to improve versus June. Our stone and prostate health franchises led the recovery, and thus far, we have seen a faster-than-expected recovery in our prostatic urology and pelvic floor franchise. We continue to believe Uro and PH will have one of the faster potential recovery curves. In addition, we recently received positive guidance from the United Kingdom National Institute of Health and Care Excellence, called NICE, for Rezum, recommended as a minimally invasive treatment for BPH given the product's effectiveness and significant cost savings. Turning to Endo. Endo's second quarter sales declined 26% and June was down 10% versus prior year ADS. This improvement trend continues into July as our Endo business has a favorable mix of both relatively high acuity and outpatient site of service. Trends in the quarter were led by resilience in ERCP procedures for the pancreas and bile ducts, such as stone removal and tumor biopsies, which typically cannot be deferred more than 4 to 6 weeks. We also saw a nice recovery in upper endo procedures as well as colonoscopies. Our EXALT-D launch was slow due to COVID impacts in the second quarter. However, we were seeing increasing interest in EXALT-D as the recovery improves and the current pandemic emphasizes the need for infection prevention. In addition, CMS granted a transitional pass-through payment for single-use endoscopes, including EXALT-D, which went into effect on July 1 and will facilitate Medicare patient access to this important technology in the outpatient setting. The next scope in the franchise is called SpyGlass Discover. It's created specifically for the surgeon call point and enables a single-stage approach to treating bile ducts. It's also in limited market release in both Europe and the U.S. with a full launch planned in the second half of '20. We believe that our therapeutic imaging portfolio of single-use scopes represents a multibillion-dollar market opportunity over time. We've accelerated investment to enable our strategy of launching 1 single-use scope per year. Turning to CRM. Second quarter sales declined 29%, with both high- and low-voltage franchises down similarly in June with average daily sales declining 20%. And July trends have continued to accelerate. In May, we saw the release of 2 positive late breakers in HRS as both the PRAETORIAN and UNTOUCHED studies continued to support growth of our S-ICD franchise. Demonstrating the S-ICD system should be considered as a first-line therapy for a broad group of ICD-indicated patients. In addition, we're excited to be launching our LUX-Dx implantable cardiac monitor, which offers a seamless patient interface and back-end monitoring as well as the ability to be programmed remotely and have event-detection studies adjusted without an in-person visit. Electrophysiology sales in the quarter were down 39% as this franchise has a higher deferrable mix than CRM. EP trends did improve within the quarter to down 28% in June on ADS and are improving further in July. We have several new important product launches in Europe in the second half of '20, and we're in the limited market release of POLARx, which is a second-generation single-shot cryoablation catheter. We expect growth to accelerate in Europe as it moves to full launch in second half '20. We also recently received EU approval for STABLEPOINT, which is our novel 4-sensing therapeutic catheter with DIRECTSENSE. In the U.S., we're encouraged by early launch feedback at DIRECTSENSE, which monitors the effect of RF energy delivery via changes in local impedance around the catheter tip after approval in mid-April. Turning to Neuromodulation. Second quarter organic revenue declined 43% and operational revenue declined 40%, reflecting a higher rate of deferrability for spinal cord stimulation and deep brain stimulation procedures. As a reminder, Neuromod sales declined 84% in April. However, the business is returning very quickly with an 11% decline in June on an ADS basis versus past year and continued improvement in July. We've received this by leveraging our digital competencies to maintain connectivity with patients and physicians as well as benefiting from site of service given the majority of all SCS trial procedures occur in the office or ASC setting. Vertiflex has also enjoyed a nice recovery. And in DBS, the differentiation of our Vercise PC and Gevia directional systems continued to drive market penetration, and June monthly sales exceeded the pre-COVID monthly level seen in the first quarter of this year. In Interventional Cardiology, second quarter sales declined 29%. In June, average daily sales declined 24% with all 3 franchises improving sequentially from May and those trends have continued into July. With coronary therapies, we received approval for multiple new product launches across our major markets, including SYNERGY XD and a 48-millimeter version of the device, also to enhancements to our Rotablator atherectomy platform and enhancements in PCI Guidance. In TAVR, we continued to roll our ACURATE neo2 U.S. trial and plan for a limited market release in Europe in the second half. LOTUS Edge continues to see strong utilization within existing accounts while new account openings and geographic expansion did slow in second quarter due to COVID impacts and a slowdown in physician training. June and July results with LOTUS Edge are encouraging, and we continue to enroll REPRISE IV when we expect to get back to our regular cadence of account openings in the U.S. and continue our launch in Japan in the second half of '20. Turning to WATCHMAN. We've seen consistent improvements since the April trough, and importantly, an accelerated recovery throughout the quarter and into July. We've also been encouraged by the resilience of WATCHMAN, and we're seeing a healthy mix of both rescheduled and new patient procedures. With last week's approval of WATCHMAN FLX on the back of strong PINNACLE FLX results in May as an HRS late-breaking clinical trial, we look forward to executing the strong U.S. launch in the second half of '20. In Peripheral Interventions, second quarter organic sales declined 17% and June average daily sales declined 9% with an improvement continuing into July. PI overall has a mix of deferrable procedures similar to our coronary and therapy business and within IC, but with a higher mix of outpatient site of care. PI's resilience has been led by a strong cadence of new product launches, and looking ahead, we continue to anticipate a second half launch of Ranger DCB in the U.S. and Japan as well as launch of Eluvia DES in China. In venous, we launched a new controller for the EKOS system, and we are on track to launch several new products later this year to expand our category leadership position in this under-penetrated market. Interventional Oncology continues to perform very well. And in the second quarter, TheraSphere's Y90 grew low single digits despite the COVID impact and continued to take share. Additionally, within IO, we're focused on globalizing the portfolio along with launching the new HeatFX microwave ablation system and the TruSelect microcatheter in the second half of this year. So overall, we'll leave you with a few summary messages. First, we're very excited by the consistent monthly improvement in business trends, and importantly, the continued progress into July. We also have a robust cadence of new product launches that we expect across the portfolio in the second half of this year, including EXALT-D, POLARx, ACURATE neo2, WATCHMAN FLX and LUX-Dx, as well as a very healthy pipeline in 2021 and beyond. Thirdly, we're also strategically deploying investment spend to enhance our new launches and digital capabilities. And fourth, our strong position and compelling Venture portfolio enables us to continue to develop further multiple high-growth market opportunities. All of which adds up to an exciting prospects for Boston Scientific as an innovative interventional medical device company well positioned in compelling markets due to our minimally invasive approach with important benefits for patients and health care systems. You'll also find supplemental information regarding second quarter trends, 2020 new product launches and our financials within our financial and operating highlights decks on Page 12 through 14. In closing, I'm very proud of the team of Boston Scientific. We have a very exciting future, and I'd like to thank our employees for their Winning Spirit. Now I'll turn things over to Dan.

Thanks, Mike. The focus of my prepared remarks today will be to provide high-level Q2 financial results and an update on P&L trends and our capital structure. We will not be issuing Q3 or full year 2020 guidance at this time, but we will continue to provide as much transparency and disclosure as possible. Second quarter consolidated revenue of $2.003 billion represents a reported revenue decline of 23.9%, driven by the negative impact of the COVID-19 pandemic on elective procedures during the quarter and reflects a $20 million headwind from foreign exchange. On an operational basis, revenue declined 23.1% in the quarter. The net contribution from acquisitions and divestitures offset the decline by 560 basis points, which results in an organic revenue decline of 28.7% for the quarter. Vertiflex sales in April and May contributed 20 basis points as the acquisition is considered organic as of June. BTG sales contributed 580 basis points during the quarter, and as we approach the 1-year anniversary of closing the acquisition, it will become organic on August 15. The divestitures of our legacy embolic beads portfolio and Intrauterine Health business offset the BTG and Vertiflex contributions by approximately 40 basis points in the quarter. Despite top line challenges, our immediate actions to reduce operating expenses enabled us to deliver Q2 adjusted earnings per share of $0.08. Adjusted gross margin for the second quarter was 63.1%. Prior to COVID, our expectations for adjusted gross margin would have been north of 70%. The Q2 result reflects lower production volumes tied to lower demand. The lower production results in unabsorbed overhead and therefore unfavorable manufacturing variances. To provide more detail. When plant production falls below 75%, a threshold specified within our accounting policies, these negative manufacturing variances hit the P&L within the period incurred, in this case, the second quarter. When production is above that threshold, any manufacturing variances are capitalized within inventory on the balance sheet and realized over an approximate 6-month period, which is our average days inventory on hand. The P&L impact for these unabsorbed negative variances in Q2 was actually quite significant, over $120 million or roughly 600 basis points. Product mix also played a role given lower sales of more high-margin products such as WATCHMAN and spinal cord stimulators. As the COVID recovery develops and sales continue to improve, production volumes are also increasing back above our threshold. And thus, these unfavorable variances should decrease and margins will improve in the second half of 2020. Looking forward, as manufacturing capacity improves and exceeds 75%, but it's still below 100%, unfavorable variances would be capitalized within inventory, as I mentioned, resulting in a much smaller but lagging negative margin impact as inventory is sold. Although product mix may continue to be a challenge, this smaller headwind from negative manufacturing variances should drive material improvements to adjusted gross margin, approaching 70% in the second half of this year. Second quarter adjusted operating margin was 12.6%, down from 21.6% in Q1 of last year. This aligns with expectations outlined in April for a high decremental margin rate on lost revenue, including a sharp decline in adjusted operating margin in Q2 versus Q1. The decline was partially mitigated by temporary spend reductions implemented at the outset of COVID as outlined on our Q1 call. While many appropriate reductions remain in place at this time, such as limited travel and meetings, all offices and manufacturing sites are open and most R&D employees have been able to return to their labs. We continue to balance the impact of lost revenue with strategic investment spend, and we remain committed to innovation and developing our long-term portfolio and pipeline. Examples of this investment include additional head count to support key programs, funding for our WATCHMAN direct-to-consumer campaign and strategic R&D priorities such as single-use scopes and therapeutic imaging. In the back half of the year, our goal is for this balance to enable us to increase both investment spending and adjusted operating margin sequentially in Q3 and then again in Q4. Our tax rate for the second quarter was 11.1% on an adjusted basis based on an operational tax rate of 12.4% and an approximate 100 basis point benefit from stock compensation accounting. Our tax rate may have some variability for the remainder of the year as our geographic mix of profits will depend on the timing and speed of the COVID recovery. Adjusted free cash flow for the quarter was $340 million and free cash flow was $203 million. As of June 30, we had cash on hand of $1.7 billion, primarily the result of our equity offering completed on May 27, which I will detail shortly. Capital expenditures for the second quarter were $68 million. During the quarter, we limited spend to maintenance support. We now expend -- expect to fund additional investment spend in order to restart certain plant expansions, meet capacity needs and drive our value improvement programs, which should result in total capital expenditures of approximately $350 million in 2020. In Q2, we completed 3 financial transactions that have increased our access to cash, addressed debt covenant risk and reduced both near-term debt maturities and net debt leverage. As a reminder, the April bank deal amended our bank -- our debt covenants, cleared our 2020 maturities and increased liquidity from $1.8 billion to $2.6 billion. In mid-May, we completed a $1.7 billion bond offering, enabling us to refinance term loans due 2021 at very favorable rates and pay down remaining borrowings on our $2.75 billion revolving credit facility. Lastly, we raised approximately $2 billion in equity in late May. The common stock offering resulted in the issuance of 29.4 million shares. We ended the second quarter with 1.424 billion fully diluted weighted average shares outstanding for the purpose of adjusted earnings per share, an increase of approximately 10 million shares compared to Q1 as the issuance was completed with just about 1 month remaining in the quarter. The mandatory convertible preferred stock was recorded as equity on our balance sheet and the associated 5.5% dividend is presented as a reduction to net income to calculate net income per common share. To date, we've used proceeds from this offering to pay down the remaining $750 million of the term loan due April 2021. The balance will be used for continued investment in the pipeline and long-term capabilities of the business, including R&D programs and opportunistic M&A. Outside of such investments, we expect to maintain approximately $300 million in cash on hand. We believe these transactions strike the right balance of mitigating risk, strengthening our credit profile and enabling us to continue to execute our tuck-in M&A strategy in support of category leadership while managing through the uncertainty of COVID. These capital structure actions also resulted in many puts and takes to interest expense, which ultimately net to a minor impact. Coming into the year, we expected adjusted below-the-line expenses to total $400 million to $425 million and now expect to be slightly above that range for the full year 2020. With respect to our mesh litigation, we continue to make progress towards finalizing all significant existing contingencies and now have less than $90 million left to pay into the qualified settlement funds. Since March, we believe we have taken prudent measures to manage COVID challenges effectively. While the duration and scope of the pandemic is still unclear, we continue to believe in the excellent long-term fundamentals of our company, and we'll manage through these challenges with strategic focus and the Winning Spirit of our talented global team. Thank you for your time. And thank you again to our shareholders, our employees and the global finance team. Please check our Investor Relations website for Q2 2020 financial and operational highlights, which outlines more detailed Q2 results, including the capital actions discussed. With that, I'll turn it back to Susie who will moderate the Q&A.

Thanks, Dan. Greg, let's open it up to questions for the next 25 or 30 minutes or so. [Operator Instructions] Greg, please go ahead.

[Operator Instructions] Your first question comes from the line of Bob Hopkins from Bank of America.

Can you hear me okay.

We hear you fine, Bob.

Great. So thanks for the detail. I really appreciate it. First question, I guess, is happy to hear that July continues to improve over June on a selling day basis rate. I'm just curious, was July also better in the United States versus June despite the COVID flare-ups we're seeing in the U.S.?

Yes. So as we laid out, we've seen a really nice recovery in the U.S., a faster recovery in the U.S. than Europe and really across each business, as we've outlined in the script as well as I think you see the June results by business as well for the whole quarter. But June was a nice acceleration from May. And we're not quite done with July, but we've seen a very nice acceleration from -- in July really across-the-board in each business versus June. So a really nice recovery. So far in the U.S., obviously, there are some states that would have some flare-ups. So we obviously suspended our guidance, but it appears that the hospital systems are doing a much better job of parallel path in managing COVID patients and doing important elective procedures, which patients need. So we've seen a very nice consistent recovery with the sequential improvement.

Okay. And then also just -- I think a lot of people would like to try to get a sense for what percentage of the procedures that are currently being done. I'm just trying to get a sense for what's driving the growth. Do you have any sense as to what percentage roughly of your procedures are sort of rescheduled versus new demand? And then regarding the guidance you're giving for the fourth quarter, is that assumption of a return to growth? Do you assume more rescheduled procedures happening in Q4? Or is that pretty much all new demand by the time we get to the fourth quarter?

Yes. Certainly, by the time you get to the fourth quarter, it would be more weighted to new demand versus today, clearly. Because we've laid out despite that, many of our procedures are elective, they can't be deferred that long. So I think that's part of the reason you're seeing the improvement in our sequential sales per month, which is encouraging. And to your first point, we have seen -- take WATCHMAN and Neuromod, for example. Doctors clearly working the backlog of patients and many doctors working extra hours and sometimes weekends. But because of our digital capabilities, we're also able to track new patients into the funnel. So we've seen a strong balance of new patients in the funnel that are working to get procedures done or in process as well as working the backlog. So it's not as if the June -- May, June, July improvement it's just been backlog only. We have seen a healthy new funnel based on the digital capabilities that we have.

Your next question comes from the line of David Lewis from Morgan Stanley.

Just 2 for me. Mike, just starting with you, I think across the med tech spectrum, people become concerned about sort of companies with growth-oriented pipelines are very heavily weighted to pipeline. So can you just discuss, during COVID here, the impact that it's had on proctoring. You've got multiple new products, the impact on sort of new product adoption? And sort of as you think about the LRP over some multiyear basis, 6% to 9%, have your views, just given what you're seeing on new product adoption, changed as it relates to getting back to upper single-digit type growth? And then I have a quick follow-up for Dan.

Sure. I'd always rather have a stronger pipeline than not, COVID or not COVID. So I think we fall in that category. We have a very strong pipeline. Some of our products are -- the new launches are far less impacted by COVID and some have been somewhat impacted. So products like FLX, which will be in limited market release very quickly here and full launch in fourth quarter, we're quite confident that given the training capabilities for our clinical team, the strong clinical data, products like DCB, which we expect to be approved in the second half, we think will be a pretty seamless launch irrespective of COVID. Products like cryo that we're launching in Europe, similar, because physicians are very used to that procedure. The procedures that have been -- the new launches that have been impacted more significantly, specifically in second quarter, although we have seen improvement in the second half of June and the full month of July really are products like LOTUS and EXALT-D, which do require in LOTUS another level of physician training when you're opening up new centers. So we have seen some improvement in that very recently. But the current centers are using the device quite consistently. In EXALT-D, there clearly was a slowdown in the second quarter of opening centers given the -- some of the capital equipment that are required as well as training. But again, we have seen some improvement there. So overall, we do have a very strong pipeline. Some of the launches potentially would have less -- clearly have less benefit in the full year '20 than they would have pre-COVID. But many of our launches aren't as clinically intensive in terms of proctoring and training.

Okay. And just a quick follow-up for me. Mike, does that make you think any differently about sort of upper single-digit growth across sort of the LRP? And then for Dan, thanks for the commentary on gross margins and manufacturing in the second quarter. But as you look beyond the next 6 months or so, Dan, is there any reason to believe that, future year or next year, gross margins can't get back to 2019 levels as you think about cost structure in a post-COVID world? Any reason to believe that sort of 50 to 100 basis point type expansion can't be achieved on an underlying basis?

Yes. The first one, the comps are going to be very challenging with 2020 and '21 and so forth for all companies, for -- at least for us. But the underlying premise of Boston Scientific growing at the high end of the peer group, and we talked about a 6% to 9% growth rate in the past, but now the comps are a bit messed up, but given the pipeline that we have, the momentum that we have, most of our businesses continued to gain share versus their peers. The expansion into new adjacencies that we have, we're very comfortable. Nothing's changed in terms of our outlook on be it at the high end of our peer group, and in the legacy works, that's 6% to 9% pre this comp issue. So I think the portfolio supports that. We're very encouraged by the sequential improvement and the -- really the agility of our team.

And then, David, relative to your question. Obviously, too early just given the uncertainty to start commenting on 2021 and beyond. Let me see if I could be helpful relative to the specifics because you started at gross margin and ended at operating margin. From a gross margin perspective, to the extent that sales get back to a more normal level as we continue to put quarters behind us, you leave those abnormal variances behind you because they're in the P&L in the quarter that they're incurred. So that's good news. And then it becomes what happens with pricing, what happens with our ability to reduce manufacturing costs and what happens to the mix of the business? So that's the stew that would take that back above the 70% that we talk about for the back half of this year in terms of our gross margins. So we'll see where that trends as we head into 2021 and beyond. And then, similarly, on the OpEx side, so the next item on the way to operating margin, we'll have some things where we'll have to spend some more money. Digital capabilities, as Mike mentioned, already seeing some nice benefits from that. I believe we'll obviously have some nice tailwinds relative to travel and meetings and other things where we won't spend as much. So as we go through our 2021 annual operating plan process here over the next few months, we'll be looking at that gross margin line in terms of what the components are and how that will play out and also within the OpEx lines, and that will tell us the trajectory of that operating margin line.

Your next question comes from the line of Larry Biegelsen from Wells Fargo.

One on single-use scope, one on Spec Pharma, Mike. So a competitor recently got approval for their single-use duodenoscope and they plan to price it at a 40% discount to EXALT-D. I realize they haven't done any clinical cases yet, but that's a large discount, Mike. How are you thinking about your pricing strategy for EXALT-D? And in addition, any update on the launch timing for the single-use bronchoscope? Is that the 2021 single-use scope approval? And I have 1 follow-up.

Yes. So on the EXALT-D. This is a complex procedure that physicians use and it needs an elegant device. And so our team spent multiple years given the experience with SpyGlass and Lithovue to create this, and more importantly, to create a product that looks and handles like a reusable scope, which requires significant engineering. So I'm sure our team feels very comfortable with the clinical benefits and capabilities of our scope versus the competitor's scope. On the pricing, I won't comment on the pricing. You can always bring pricing down if you need to. But we feel the pricing matches the clinical benefits and uniqueness of the EXALT-D in terms of its features. And we're also -- we recently benefited, as you are aware, with the outpatient additional payment that was received for EXALT. So we're very early in the launch. The team always has the option to modify pricing. We feel like the pricing is appropriate given the benefits that we expect physicians to see with the product. In terms of the bronchoscope, it's planned for -- we've actually accelerated investment in that area and it's planned for a 2021 target launch. And that scope, different from the duodenoscope, I would say, is less complex to engineer and to manufacture than the duodenoscope. So we're quite confident in the timing of the bronchoscope in 2021.

And then, of course, there are media reports about you selling your Spec Pharma business, which did not come as a surprise. But it's a profitable business with a relatively high operating margin. How are you -- how should we think about dilution -- potential dilution or ability to offset it if you were to sell that business?

Yes. So that business continues to perform very well, as we've said in the past. There's a very excellent leadership team that continues to deliver against the targets, but we wouldn't comment any further on any speculation about selling the asset just like we wouldn't with any other asset we have within the company.

Your next question comes from the line of Robbie Marcus from JPMorgan.

I'll ask both mine together as it's a bit longer. But looking at core IC and structural heart along with EP and CRM, there was a bit less of a recovery from April to June. And some of those, particularly structural heart, had some of your most important growth products going forward. I was hoping you could just talk about the current dynamics there. What that's looking like going forward? Should we expect a faster recovery? A lot of these patients can't be put off forever, as you mentioned a couple of times. How should we think about those going forward? And should we see that trend catch up to some of the other performance metrics? And then just spend a minute on what you're seeing in the structural heart new product launches, particularly TAVR and WATCHMAN, and how we should expect those trends to improve going forward.