Boston Scientific Corporation (BSX) Earnings Call Transcript & Summary

Yes. This is one, Danielle, that actually has had -- COVID has had less impact on that franchise. So when you look at the interventional medicines business overall, it grew high single digits in Q3, and it grew 12% in Q4. And this is a book of business that's in and around $400 million, so it matters. I think some people have struggled with that acquisition over time, just with all the other pieces of it, the Zytiga royalty, the spec pharma business, and so now with all the accounting done, what we basically have is the gem that we were looking for as part of the acquisition. And it is, again, in and around $400 million business that grew double digits in BTG's hands. I just gave you the numbers for Q3 and Q4, which I think bodes well for '21 and beyond for that business. And it came with $175 million of synergies all cost and revenue synergies on top of that, and the price was a little bit north of $2.6 billion when you subtract what we got for the other businesses that we divested. So those comps feel good to me, particularly with where we are with that business. And I think for me, it's a bit analogous to when we acquired the AMS business for our urology division, and it really helped transform and drive a big category leadership strategy for urology. And I think this is going to have the same impact on PI. In addition, PI has a lot of great launches and new products of their own. We can talk more about Eluvia and Ranger from a drug-eluting stent and a drug-coated balloon perspective, but the addition of that business really strengthened our oncology portfolio, arterial and venous are doing well. I'm hard pressed to think that PI won't be either one of the fastest or our fastest-growing division here in '21 and maybe beyond. So I'm even more excited now about the acquisition than I was back in August of '19.

Okay. That's great to hear. All right, switching gears to WATCHMAN. So this has been your highest growth product. You do have a competitor that will release clinical data at some point later this year, presumably will come to market in the U.S. later this year. Can you talk about how we should think first about the mid- to long-term growth trajectory of WATCHMAN when we factor in the potential competition, but then you also are pursuing indication expansion. So help us sort of frame the, "I care less right now about the very near-term," and more, call it, over the next 3 to 5 years, given those 2 dynamics.

Yes. Thanks for that focus, because I think we see a really long runway for growth and continue to have a tremendous focus on building out the body of clinical evidence and expanding indications, as you said, Danielle. So we have discussed in kind of a core indication, right? We're still probably low to mid-single-digit penetration. And kind of every percentage point penetration into that market, which is nonvalvular afib, high-risk of stroke and then not well controlled on oral anticoagulants, that every percentage point or so is about $250 million. We've talked, longer-term, about $1.5 billion market opportunity for the left atrial appendage closure market by the '24 time frame and $3 billion by 2026. And as you start to layer into the latter years of that time frame, you're starting to include potentially some benefit from the OPTION study, which is a head-to-head study on a new patient population who have afib, they get an ablation procedure to treat it. They're typically a younger patient population. They're cured of their afib, but then they're told to go get oral anti-coags, stay on oral anti-coagulants for the rest of their lives. So we think it's a motivated younger patient population that'll really seek out an alternative to reducing risk of stroke and coming off oral anti-coagulants. That's OPTION. And then longer term, even beyond that '26 time frame, is an even larger patient population where we're launching the CHAMPION study, which looks at first-line therapy versus DOAC. For OPTION, it's probably 300,000 or so patients alone, post afib ablation in the U.S. alone; and CHAMPION, you get some really, really large numbers, but that's even beyond that $3 billion market opportunity. And I think what we've seen in addition to that clinical work were at FLX springs in terms of the ease of use, the 100% seal at 12 months, the tremendous safety data, it's fully -- there's no longer any tines for tuning. It's essentially a ball and easy to place in the NAC like a cork in a wine bottle of the left atrial appendage. I think that is encouraging existing positions to increase their usage and then also new physicians at existing centers to adopt the therapy as well, given that ease of use. And a big part of our messaging ahead of competition, in addition to the move to consignment which we can go into, is sort of why risk the switch given the performance, the ease of use and then just the data that you've seen with FLX in terms of its efficacy and safety profile.

Yes. So my next question was going to be around the competitive moats. And you touched on those, Susie. So walk us through those. So one is consignment, how does that drive -- or add to the competitive moat that you're building around it and maybe a little bit more about how you'll be differentiated versus the competition? Of course, we haven't even have the data yet, so let's see what the data says but...

Yes, I think we do need to see the data. But recall, again, their study is randomized to our older generation device and the PINNACLE FLX data that was the IDE that was used for approval is the one where you had I think 98.5% success rate and then that 100% rate of seal at 12 months and very, very low adverse event rates. But the work we've been doing since launching in 2015 in terms of market development, direct-to-patient outreach, direct-to-refer outreach, software tools to help drive that as well as to help hospitals manage patient's initial referral to implant to 45 days post when you come off your oral anti-coagulants, all that work as well as launching a next-gen and continuing to support the practices, while I think, having a very measured rollout and a focus on training and outcomes, I think, has, we believe, engendered a lot of loyalty there. And I think FLX really is a differentiator. Again, I think we'll at least make it worth asking, is it worth the risk of shifting to a 2-part device that may be a little more complex that I'm less familiar with. And then consignment, what we aim to do with that and we're successful is that we were able to, because of the success of the customers of FLX lock up, we could get volume commitments. We could get share commitments. We could get extended duration. And then all of that, in many cases, at a slight price premium, and I think that points to the strength of the product. So consignment is the industry standard. I know there's a lot of confusion around it, but I think by moving to that, we removed 1 potential tool in the Amulet arsenal, and we think we're in really good position for competition. But it is much more so about market penetration, market growth and expansion.

Agree. Got it. Okay. All right. Can I ask a question on CRM? I know this is a slower growth business and -- but CRM is still relatively meaningful. I think it's still double-digit percentage of total sales, something around, what is it, 15-ish percent? I'm just making that up off the top of my head, but...

Yes. A little more than that, yes. Yes.

Okay. Okay. It feels like this business has been a bit of an underperformer of late, tell me if I'm mischaracterizing that for sure. But can you talk about whether anything's fundamentally changed within the CRM market from a growth and/or a competitive perspective for Boston Scientific? I don't know if this is for you, Susie or Dan.

I can take that one, Susie. So in terms of the overall CRM market, if you look over time, it's generally a flat market. There are times when it's down low-single digits. There are times it's in up low single digits. But in general, I would characterize that as a relatively flat market. Over the past few years, as a general rule, we have eked out some low single-digit growth overall in that franchise from share gains on the high-voltage side and either holding share or ceding some share on the pacing side, particularly with the advent of the leadless pacers that we don't currently yet have in our portfolio. We'll be in the clinic this year, but we don't have one on the market. And so that's largely playing out as expected, except that the slight change we had this year is as opposed to saying, we're going to outgrow that market and eke out some growth. We said, you know what, we're probably going to be in line with market. So whatever we get in defib, because defib is obviously a much bigger market than pacer, will probably be offset in the share that we cede in pacers. And so we're largely thinking of that as a flat market and us being flat in that market. So that's overall where we are with that. Not a surprise, it's factored into the 6% to 8% that Susie talked about earlier, so it's not a surprise. We do have LUX-Dx, the implantable cardiac monitor, which is a probably an approaching $1 billion market that we think we're going to do very well in and are currently doing very well in. So there are opportunities there. And the Preventice acquisition as well is part of that to be able to -- and Susie went through that. So I think there's reasons for some cautious optimism about the opportunities there, but it isn't one that we look at in the overall portfolio and say, this one's going to be accretive to that 6% to 8% we talk about. We realize that others will have to be above that range, and I think we have the portfolio in place to do that.

Understood. Okay. So probably not a fair characterization to say it's "underperforming," then. Just maybe relative to what you've done historically?

Yes, I wasn't going to correct you, but yes. I think it's performing in line with our expectations.

You should correct me.

It's performing in line with our expectations of how we laid them out.

Okay. Got it. All right. So I think we do have about 5 minutes left. So Dan, I do want to ask you about operating leverage. You've had a few years, of course, ex-COVID, I'm tired of saying that, honestly, but -- of meaningful improvement. Can you talk about where -- or maybe like using the baseball analogy, what inning Boston Scientific is in from a margin expansion perspective? And what are the drivers from here of incremental margin expansion? Does it all come down to pipeline execution? Or is there more that can happen beyond that?

So baseball analogy, I'm not sure what inning it is, but I think you should probably stay in your seat in the stadium because there's still a lot of baseball left to be played, Danielle.

Are we doing the wave?

I don't -- I'm not -- I don't think you've had your crackerjacks yet. I think there's plenty of baseball left to be played. And it really -- it gets to the foundation of the culture of the company. And you look back, going from 18% to 26.1% over the time frame, 2019 was 26.1%. Obviously, COVID has kind of put a stick in the spokes of that there in 2020, but we were very clear on our guidance that we gave on February 3, that our goal for the second half of this year is to get back to north of where we were in 2019. That was a question we've gotten a lot over the last 6 to 9 months, so hopefully answered, with the goal of being north of 26.1% operating margin in the second half of '21. And not for nothing, that coincides with what we believe is more normalized volumes. And so they -- it's highly correlated. There's no substitute for a durably consistently growing top line. And when we've had that, for the many years prior to that, the team has done a great job of continuing to expand operating margins. I think the one change you might see is gross margin had done a lot of that heavy lifting over time. And we had invested in SG&A and things like the emerging markets and other areas where we were a bit late to the party. With the gross margin of 72.4%, which was the component when we were 26.1% overall operating margin in 2019. I don't think we'll get back to that this year. That's okay, because the SG&A world, I think we have more than enough opportunity to offset that and get back north of that 26.1%. We have the plans in place. We have some COVID-specific things in the manufacturing world, like higher freight expenses and some protocols in the plants to keep all of our employees and team members safe. So those -- I believe those are temporary. Those are not going to be around for the long term. So as the team has done for many years, it's about managing the trade-offs within the P&L and making sure that you deliver consistent operating margin expansion. And as we look at the second half and beyond, that's our goal. And I think we have a good track record of having done it.

Okay. Perfect. And last question, we only have like a minute, but you topped that, so I'm going to ask this question. Is there anything you believe that investors underappreciate about the Boston story? When I asked this question 2 years ago, I think the answer would have been the MedSurg business, and it feels like people pretty well appreciate MedSurg at this point. So what would you say today? It could still be MedSurg, but I'm just...

No. I think it's actually -- it's broader and more high-level now. I think it's simple. Since the beginning of 2020, COVID has certainly impacted our financial performance. But as we get to a post-COVID world, which I think now is measured in months and quarters, not years, as we would have potentially thought back in the March time frame last year, the BSX team is energized for the future. The culture of innovation and winning spirit, as I mentioned, is alive and well, and we're focused on achieving historical goals of consistent top-tier revenue growth and operating margin expansion.

Okay. Well, that is a perfect place to end, I think. So everyone, thank you for joining us. Dan, Susie, thank you so much.

Thanks, Danielle. I appreciate it.

Thanks, Danielle. Take care.

Bye.

Take care.