Boston Scientific Corporation (BSX) Earnings Call Transcript & Summary

Good day and welcome to the Boston Scientific Investor Update. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Susan Lisa, Vice President, Investor Relations. Please go ahead.

Thank you, Andrew. Good morning, everyone, and thanks for joining us. With me on today's call are Mike Mahoney, Chairman and Chief Executive Officer; Dan Brennan, Executive Vice President and Chief Financial Officer; Dr. Ian Meredith, Global Chief Medical Officer; and Joe Fitzgerald, Executive President -- Executive Vice President and President, Interventional Cardiology. We issued a press release earlier this morning announcing the voluntary recall and product discontinuation of the LOTUS Edge aortic valve system and will spend the duration of this morning's call discussing our decision. Before we begin, I'd like to remind everyone that on the call, operational revenue excludes the impact of foreign currency fluctuations, and organic revenue further excludes the impact of certain acquisitions, including BTG through August 15 as there are no prior period related net 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. Of note, this call contains forward-looking statements within the meaning of federal securities laws, which may be identified by words like anticipate, expect, believe, estimate and other similar words. They include, among other things, the impact of the COVID-19 pandemic upon the company's operations and financial results; statements about our growth and 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. 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 can disclaim any intention or obligation to update them. At this point, I'll turn it over to Mike for his comments. Mike?

Thanks, Susie. Good morning, everyone, and thanks for joining us on short notice. Earlier today, we announced the initiation of a global voluntary recall of all unused inventory of the LOTUS Edge aortic valve system due to complexities associated with the product delivery system. Importantly, the voluntary recall is related solely to the delivery system and not the valve. The valve continues to achieve positive clinical performance post implant, and there is no safety issue for patients who currently have one implanted. The complexity of the LOTUS Edge delivery system has resulted in the valve's current niche role in the market despite our commercial efforts. Given the additional product development work required to reintroduce an enhanced delivery system to the market and reduce the training and case support necessary to scale clinical use and ensure competitiveness, we've made the difficult decision to retire the entire LOTUS platform immediately. While we are confident in the differentiated benefits of the LOTUS Edge valve and its positive clinical outcomes, we've determined that it's not prudent to sustain the level of investment required for delivery system change and the increasing burden of training and case support requirements. In addition, we faced increases in both manufacturing complexity and the investment required for clinical scalability, which has led us to decide to stop all investments, including all commercial, clinical, R&D and manufacturing activities, on the LOTUS product platform. After much analysis and careful consideration, we've determined that we can better serve patients by prioritizing and focusing our financial and employee resources on one-valve platform, the ACURATE neo2 system. ACURATE neo2 offers customers ease of use, low rates of PVL, best-in-class pacemaker rates and exceptional hemodynamics. It also features a much more flexible and straightforward manufacturing profile than LOTUS Edge both today and longer term. We're very encouraged by our ongoing launch in Europe and confident of this platform that will best serve patients, customers and shareholders over the long term. We are as committed as ever to growing our structural heart valve footprint, including ACURATE neo2, SENTINEL, Safari Guidewire and early-stage mitral Millipede program. And we're making these difficult but necessary decisions now so that we can place greater emphasis upon this portfolio and ensure strong execution moving forward. In addition, our structural heart franchise has, as its core foundation, the market-leading WATCHMAN FLX device. We estimate the left atrial appendage closure market will represent a $1.5 billion opportunity in 2024 and over $3 billion by 2026 and beyond given the ability of WATCHMAN FLX to reduce the risk of stroke and discontinue lifelong oral anticoagulant therapy for over 33 million atrial fibrillation patients worldwide. We continue to advance our core LAAC technology as FLX uniquely offers the ability to reposition and retrieve the device as well as our body of clinical evidence and the currently enrolling OPTION in CHAMPION AF studies. OPTION seeks to expand indication for WATCHMAN FLX in the post-AFib ablation patients, while CHAMPION AF will expand into lower bleeding risk patients. Beyond structural heart, we've made important growth drivers across each of our business units with a robust cadence of new product launches across the portfolio, such as RANGER DCB, EXALT-D and B, POLARx, ACURATE neo2, WaveWriter Alpha, Vercise Genus and LUX-Dx. We also have important recent reimbursement wins in key areas of the portfolio, including EXALT-D, Eluvia and EKOS. Our pipeline in 2021 and beyond also positions us well in high-growth markets with new adjacencies with category-leading portfolios that offer us access, partnership and expansion of our customer reach. Financially, this decision is expected to result in estimated total pretax GAAP charges of approximately $225 million to $300 million due to inventory, fixed intangible asset and certain other exit charges. Approximately $100 million to $150 million of these charges will impact the company's adjusted results. The vast majority of these charges will be recorded during the fourth quarter of 2020. The LOTUS decision is expected to be accretive to GAAP and adjusted earnings per share in 2021 by approximately $0.01 to $0.02 and neutral to EPS thereafter. Importantly, this decision gives us the ability for greater commercial, clinical and development emphasis upon the other aspects of the IC portfolio, including ACURATE neo2, SENTINEL, our Millipede mitral program and our suite of Complex PCI products as well as other areas. This has been a challenging decision, and we're confident that we can better serve patients by prioritizing and focusing our financial/employee resources on a one-valve platform, the ACURATE neo2 system, as well as the multiple high-growth opportunities across the broader Boston Scientific portfolio. We remain highly confident in our ability to grow at the high end of our peer group, improve operating margins, deliver double-digit EPS growth and strong free cash flow. I'll be joined by Dr. Meredith, Joe and Dan and I, and we're happy to take any of your questions.

[Operator Instructions] The first question comes from Bob Hopkins of Bank of America.

Two quick questions, and I'll just state them upfront. First, to level set, I had modeled about $150 million of LOTUS Edge sales for 2021. Is that ballpark what you guys were thinking before this as well? And then the second question, just to get it out there, is that I hear you that it's accretive to earnings for next year, but -- by a little bit. But one potential concern is that with no U.S. TAVR program until 2024, you have a less attractive interventional cardiology portfolio overall relative to your peers. And so wouldn't it make sense in your view to maybe temper expectations around the interventional cardiology growth opportunity until you're back in the TAVR market in 2024?

Sure, Bob. Why don't I take the first one and just give you the raw numbers? So in 2019, LOTUS was approximately $60 million in revenue. In 2020, it's on track for approximately $75 million in revenue. And in 2021, our expectations were $125 million in revenue.

Yes. And so -- just a broader cardiology question, and maybe Joe can also pipe in. So Dan just gave you the numbers for 2020 estimates. $75 million and $125 million is our AOP target for 2021. And so broadly, in cardiology, you've got basically 3 businesses here, the largest being our coronary business, which is really led by our complex coronary business, which is growing, essentially accretive to Boston Scientific's overall profile. And it's becoming a larger part of the business. It's our largest business in Asia Pac as DES continues to get smaller across the company. Bob, you're also obviously aware of the WATCHMAN program, and that continues to exceed expectations in 2020. We've got big plans for that in 2021 and beyond. And clearly, in TAVR, we have a hole in the U.S. We'll do everything possible, Joe and the team, to enroll the -- and our clinical team to enroll the ACURATE study in the U.S., and we're launching that platform now. So we clearly would rather have a TAVR platform right now in the U.S., but we think this is the right decision based on the script that I just read you. And we have a lot of confidence that we can really now resource properly and effectively the ACURATE neo2 program as well as other opportunities in complex coronary. And also, just improve the focus on other areas at BSC that are very exciting in terms of our growth profile. So we'd rather have a TAVR valve in the U.S., but we think this is the best long-term decision for the company.

Yes, Mike. And I would add, we showed a lot of the things that are coming at our TCT call on the Complex PCI front. We've still got launches coming on the DES front. We talked about our imaging growth platform, and you've already mentioned it, we are very bullish on WATCHMAN FLX. We're, call it, 4 or 5 months into that launch right now, and we told you some of the statistics and some of the KPIs that we were looking at, and those all continue to trend. So I think it's just refocusing the group on our growth priorities that we have, which are many, across our interventional cardiology group. We will maintain a structural heart sales force to drive SENTINEL, our accessories, our Safari wire. And I think this allows us to, again, challenge ourselves on the ACURATE neo2 timing in the U.S., i.e., the IDE enrollment being the primary driver in terms of determining the timing on that as well.

The next question comes from David Lewis of Morgan Stanley.

Just a couple for me. I want to just stick with growth here, Mike, for a second. I think for the last couple of years, the company has talked about the 6% to 9% profile. And I think right or wrong, there's been a view that WATCHMAN and TAVR you -- get you to the high end of that plan. Some people, I think, initially thought it could get you sort of over that plan. And on the facts, I think TAVR is worth -- or LOTUS itself is worth a little over a point of growth, a point, a point a quarter, so you still could sort of be in that range. But given investors are so focused on those 2 platforms and the view that got you to the higher end of the range, how should investors sort of now think about it? Is it as simple as just saying, it's 6% to 9%, we take out a point and we're still within that range? How can you sort of convince people that the upper half of that 6% to 9% is sort of still on the table if you have this sort of issue in the TAVR program? And then I have a couple of follow-ups.

Sure. Yes. If you put your world where there's no COVID and you take away all the comp challenges -- because, obviously, we're going to have very easy comps in 2020. And then -- so if you neutralize for that, the 6% to 9% company that we said before, we would take 1 basis point off the high end to 6% to 8%. If you look at LOTUS, it kind of contributes about 50 to 60 basis points of growth. And we also talked about the delays with our ACURATE neo2 platform. So on a combined basis there, we would clip off 1 point at the high end, which would take us to 6% to 8%. And we feel like there's many other growth accelerators across the company with the new product launches. So going forward, if you were to model the BSX ex COVID impact, we would call it the 6% to 8% versus the 6% to 9% based on the 2 movements in the structural heart category.

Okay. Very helpful. And Mike, the other question is far more strategic. And I think when the company made a decision to have a 2-valve platform, a lot of investors questioned about what that said for LOTUS. So there's been a series of issues around sort of LOTUS and, to a lesser extent, ACURATE seemingly one after another. So I guess I wonder, just in your mind, if you think back, what are some of the key learnings about the decisions that were made around LOTUS? And what would you say to investors to convince them this is very isolated to just a bad chapter with a bad product or a challenging product and it's not really related to the strategic thinking or there's no other issues in the core portfolios where these learnings, right, they could bleed into other parts of the business or other products?

Sure. I think if you look at the other parts of the business, they're doing -- ex COVID, we had strong improvement, as you know, in the third quarter. Other businesses are really growing faster than their peer group. If you look at our Endo business, our Uro business, the strength of the PI business, the Neuromod business, and really, everything within cardiology except TAVR. So the rest of the business is performing extremely well. And we have struggled with TAVR with the LOTUS platform for a number of years and now making a decision going forward that the best use of our resources is to focus on ACURATE and Complex PCI. So the other parts of the business are executing extremely well. It gives us confidence in that 6% to 8% level. And I think although this is a difficult decision and we'll work with the physician community, we think this allows us to -- really enable us to focus our resources in cardiology to the best growth areas to get them back to the growth levels that we want. So the LOTUS chapter has been a difficult one for the company. In terms of learnings, the biggest learning, I would say, overall is just the complexity of the manufacturing process with this delivery system. So the delivery system itself brings some very unique benefits to doctors in terms of its repositioning. But the ability for us to enhance this product in a profitable way for the future to be competitive just wasn't feasible. So rather than continuing to try to do that and dilute other company resources, we felt it's best to kind of cut bait now and really focus on other areas of the portfolio. So I think LOTUS is really a -- kind of a separate challenge for the company, and we look forward to moving on beyond it. But the rest of the business, all of the BUs in our product life cycle and cadence of pipeline approvals is pretty strong.

And Mike, it doesn't change the way you think about ACURATE and the rollout of ACURATE over time in the U.S.?

No. I think, if anything, it just allows our team -- that's the challenge with the dual-valve portfolio, is we had quite a bit of resources on both platforms. And so with ACURATE, with the performance we're seeing and the enhancements with neo2 with the PVL, and Dr. Meredith can comment on it or Joe, we're very excited about that platform. It's a platform that can be -- the simplicity of manufacturing is significantly easier and more repeatable than LOTUS and has excellent valve characteristics. And we have our next-gen neo2, which we believe will improve the PVL, which has been so far the Achilles' heel, I would say -- the only Achilles' heel of ACURATE neo2. So we're excited to launch that in Europe. That will allow us to focus our R&D and manufacturing efforts just on one platform and kind of pull any overhang in terms of having a dual-valve platform in terms of internal resources.

The next question comes from Matt Taylor of UBS.

So I guess, I wanted to ask 2 things about neo2. The first is, could this allow you any flexibility to pull forward that recent time line that you gave for approval in '24 if you could focus more resources on it? And then secondly, you gave us the numbers for LOTUS. Could you just level set and give us your expectation for neo2 in the historical so we can understand how that match our models?

Joe, you want to comment on the first one?

Yes. So obviously -- and it's not just the clinical trial enrollment that we're focused on, on neo2. So I think a couple of things are going to happen as a result of this decision. It will allow us -- because, for instance, in the U.S., we have both the REPRISE IV study and an ACURATE neo2 IDE. So this decision will put more resources on the enrollment of that IDE, for sure. Second part, on the product development, I don't want to underestimate the impact of going from supporting 2 valves to just getting after things like ACURATE neo2/Prime XL. That program has been ongoing, and this will allow us to throw more people, more dollars, more effort into that. As well, it allows us -- when we think about true next-generation products beyond neo2, it allows us, because we won't be chasing 2-valve platforms, to have more resources and more focus on that. I think in terms of framing up the second part of your question, we talked about what experience we have with LOTUS in the United States. I think we needed to get that experience, that first year of commercialization with LOTUS Edge. But truth be told, the Europe team -- actually, in calendar year '20, we will sell more ACURATE and ACURATE neo2 in Europe than we did LOTUS globally. So I think that kind of speaks to the customer reception and the ease of execution in Europe, where we're primarily focused on ACURATE and ACURATE neo2. So we are convinced and have been convinced of the workhorse capability and the share-taking capability of ACURATE neo2 globally.

And so, Matt, we won't give the exact numbers on that, but I think Joe answered that relative to neo2 -- the European neo2 outsold LOTUS globally in 2020.

Yes. Dan, that was helpful. Maybe just one follow-up. So with neo2 now being the primary valve -- in the past, you've talked about the importance of a 2-valve strategy. I can understand the change here. Would you ever think about going after another valve? Or do you think you're set on sticking with neo2? And maybe just talk about your confidence in it in light of the recent SCOPE results.

Joe, will you handle that one?

Yes. So I think Mike hit on it. Across all of the design characteristics of neo2 and ACURATE, the original platform, there's a ton to like: pacemaker rates, access to coronary, simplicity of use, ease of use. And if there is an Achilles' heel, I don't like that term, but it's the PVL rate that we've seen with the ACURATE version 1. And we know that was the primary design element to neo2, and I'll let Dr. Meredith weigh in, but we think ACURATE neo2 will have best-in-class PVL rates. And maybe, Ian, you can comment on that as well.

Thanks, Joe, and thanks for the question. I fully support what you've just said with respect to ACURATE neo2. As you know, the ACURATE neo2 has a 60% larger skirt. And in a previous study that we performed with core lab adjudication, we saw that the PVL rates were consistent with best-in-class valves today with a 3% rate at 30 days and a moderate to severe PVL at 30 days and 2.5% at 1 year. So substantially better than the results that we saw with ACURATE neo, the original platform in the SCOPE trials. We feel that the results in the SCOPE 1 and SCOPE 2 trials are accounted for by the PVL, and this has been addressed with the largest skirt. And in combination with all the other points that Joe mentioned, the rapid, efficient, simple deployment, the low pacemaker rate, in fact, best-in-class pacemaker rate, super expanding -- super annular valves, self-expanding valves and the excellent hemodynamics, so all point to the possibility of very good outcomes in the U.S. ACURATE IDE. So we are confident that this could fulfill the workforce capability.

The next question comes from Robbie Marcus of JPMorgan.

I was hoping you could walk us through the impacts down the P&L of how this will impact or benefit you. Where were you in terms of profitability on the LOTUS Edge program? When did you expect it to happen? And how should we think about the different P&L metrics as we pull this out of the model?

Sure, Robbie. And I think Mike gave the overall net, which is the $0.01 to $0.02 for 2021, so bottom line net. As we talked about for a long time, LOTUS has dilutive gross margins to the overall Boston Scientific profile. And we also had, as you've heard today as well relative to R&D and manufacturing, just long-term challenges around the manufacturing of the delivery system and a lot of R&D to go with that. So that $0.01 to $0.02 that you see is in 2021. At the bottom line, EPS is a net of all the different elements of what was LOTUS. I'm not going to give you the specific numbers on LOTUS as you go through that, but it was overall a drag on the bottom line for the company.

And Dan, I imagine you're not pulling all the R&D dollars out of the business that were associated with LOTUS. Where are they going to be reallocated? And how should we think about the shift in priority here of where those dollars were going to be spent?

I think Mike covered that well. Part of it is going to go into complex coronary and focus there. Part of it will go into neo. And then part will go into the robust pipeline and portfolio and the rest of the company, whether it's MedSurg or PI or Neuromod or other areas within the overall pipeline of the company.

So think of it as pull everything out ex R&D, R&D gets reallocated for the most part?

I think that's the goal, is to take the R&D that we were spending on LOTUS and put it in other high-growth, highly differentiated platforms across the company.