Boston Scientific Corporation (BSX) Earnings Call Transcript & Summary

Good afternoon. I'm Josh Jennings, from the medical device team at Cowen, along with Bryan Kennedy, Neil Chatterji and Eric Anderson. We're thrilled to get you on the afternoon track with Boston Scientific. It's usually an easy ask to have them travel just down the road when we host a conference live in Boston. And this year, it's virtual, but we're still very happy and appreciative of Boston joining the Cowen Health Care Conference once again. We have an executive from Urology and Pelvic Health division, Meghan Scanlon, Senior Vice President and President; along with Susie Lisa, Vice President of Investor Relations. And I think the Urology and Pelvic Health franchise doesn't get as much attention as it should considering the performance over the past 3 to 4 years. So we're really excited to dig into the business, Meghan. Thanks so much for being here, both you and Susie. And I can just start to dig in, if that's okay.

That's great. I'm honored to be here. Thanks for having me.

So I think we want to spend a really short period of time just on COVID-19 recovery trends. The team did a great job laying them out on the earnings call in terms of 4Q. But maybe just quickly you can parse out between the different divisions within your business of stone, men's health, women's health and just how procedure trends fared in 4Q? And then any updates you can give in the early days of 2021.

Sure. Yes. So I mean -- so at a high level, I'd say Q1 and Q4 are looking somewhat similar, right? The COVID impact is largely going to be relatively comparable. In Q4, we saw -- as you know, right, we have a high mix of elective procedures. And -- but in Q4, nonetheless, we did see strong double-digit growth in SpaceOAR, in Rezum and in LithoVue. So -- and we're starting to see continued strength. And -- we're not starting to. We're seeing continued strength in those franchises. 2020 overall, we definitely -- if you recall, right, we had plus 2% in Q1. Q2 was when we got hit the worst, minus 26%. And then Q3, recovery -- starting to recover at minus 3%, and then we did end the year in the growth club, as we like to call it. And we're looking forward to getting COVID behind us. In Q1, we're -- definitely, COVID is still relevant. But the good news is we're starting to see ICU capacity no longer being above the tripwire in most big markets, which starts to free up our ability to get to more of these elective procedures. And there is some hesitation around choosing when to have a procedure based on when a patient is going to be getting their vaccine. But net-net, we are starting to see a good recovery emerge. But we are expecting COVID to still be relevant in Q1.

Right. Getting back to that growth in Q4. That was an outperformance relative to some of the other business units, not just within Boston Sci's house, but also in the industry, medtech industry. I mean is that -- you attribute that to just the percentage of procedures within your franchise that are performed in the outpatient or ASC setting? I mean I think Boston has called out about 66% or 2/3 of their kind of devices being levered to outpatient procedures. Is that percentage different for the uro pelvic health franchise?

We're on the higher end of the BSC outpatient range. And I think notably for urology, clearly, a lot of our procedures are done in the hospital outpatient setting, but we also have a higher mix of the privately owned and privately run ambulatory surgery centers. Big -- a sizable portion of our business comes in these side of care that we call LUGPA, which is these large urology group practices, which are physician-owned practices. I mean they play a pretty big role and very financially oriented to kind of drive back to recovery, which definitely helps with what we kind of caused this sort of, call, a bit of a rubber band resilience, if you will. So yes, outpatient setting definitely helps us when the hospital setting has some acute issues. However, nursing staffing, even in the outpatient setting, becomes relevant when you see a huge demand in the hospital arena. That's why we're constantly monitoring ICU capacity. And just I had a review with the team today, and it's nice because none of the states are kind of considered in that critical category, if you will, relative to ICU capacity. And that's the metric we've been monitoring. And we start to see as that kind of critical capacity starts to improve, so does our business.

Wonderful. Maybe moving on from these recent trends or some high-level questions for you. And I hate to ask about competitors, but I still always do for some reason because I guess you have to. But Medtronic, I mean, it has introduced a decentralized operating model, claiming of business unit leaders will now have more autonomy, less red tape, more control over their own P&Ls and M&A initiatives. Maybe it'd be how just you being one of the unit leaders at Boston, of one of their big silos. And can you provide any details to help investors understand about Boston's model? How much autonomy you have, how much autonomy you allow the heads of stone, men's health and the women's health units underneath you or within your business? Is Medtronic replicating the Boston model here? Or maybe just to understand how Boston model is -- more details on how Boston is set up.

Yes. Absolutely. And actually, this is something I have an inordinate amount of passion about. And candidly, it's a big part of the reason why I joined BSC now almost 6.5 years ago, which is because of the way we are structured and empowered to serve our customer segments. Yes, at a high level, it looks like Medtronic is moving more towards an empowerment model like Boston Scientific has been operating under since Mike Mahoney kind of took over the reins of the business. What I would say is we are absolutely empowered as the business unit presidents to run our business and run our P&L. However, I kind of call it, it's like -- it's empowerment with thoughtful governance. And so, my job is to represent to Mike Mahoney and Dan Brennan, our business strategies, our top line and bottom line growth objectives and what we need to do to get there. They absolutely have the expectation to kind of ask questions and push back and challenge and support. And I find that to be a really healthy dynamic. And candidly, it really feeds into -- and we say this a lot, but it's not just a tagline. I really have found it to be the way in which we operate. The winning spirit of the company, I think, is inextricably linked to the way in which we're empowered to run our business. And so, what's interesting is as the business unit President in Urology, I try to reflect that same approach with the different franchises inside my division. So we have franchise leads for stone, prostate health, prosthetic urology and pelvic floor. They are empowered to kind of run their businesses. But again, it's empowerment with thoughtful governance, right? And so, based on the strategies and plans and growth returns, that sort of depends what kind of expectations we task them with top line and bottom line growth. So I think it's a nice kind of nested empowerment model. And candidly, I worked for a number of years in the medical device environment that was not structured that way. And I found that I was spending 90% of my time sort of fighting internal red tape battles. And here at BSC, I spent 90% of my time figuring out how do I best serve my customer and what trade-offs we need to make across my P&L. If there's something we need to do to kind of give back to BSC or to hit our growth targets versus constantly having to horse trade across a function that's serving multiple customers, which was a previous sort of paradigm that I just didn't find effective in medical device in particular.

Thanks for sharing all that. That's great to learn. Maybe moving on to operating margin expansion initiatives. I mean it's been a key element for the Boston story for investors. I mean can you share any details on how your unit sets achieves operating margin expansion targets each year? I mean are your -- are you and your other -- the leadership team within uro pelvic health incentivized on an operating metric or profitability metric?

Yes. So I mean our agreement is relatively simple, although how you do it is not, right? It's, first and foremost, my job is to grow our top line faster than market and to grow our bottom line faster than the top line. Now there's a whole lot of detail and nuance and there's thoughtful inspection that might happen along certain elements of whether it be gross margin or SG&A, where we try to share our thoughts and approaches so we can encourage best practice sharing across our divisions. But when my kids ask me what I do for a living, my simple answer is that grow top line faster than our competitors and grow the bottom line faster than that.

Excellent. Your unit has been accretive to Boston's group-wide organic revenue growth trajectory. I mean that's been through a combination of internal development initiatives. Like LithoVue has been a powerhouse for you and tuck-in acquisitions. AMS was a pretty big one, Augmenix, NxThera. Can you just talk about the integration playbook that Boston Sci has? And what have been behind the integration successes in your unit?

Yes. So I'll say what's really fascinating to me about this Uro/PH business is we really are a blended family. What was a small stone business, let's call it, 5, 6 years ago is now -- our business has tripled in size. And it's been because of both organic performance as well as acquisitions, AMS, NxThera, which brought us Rezum and Augmenix was brought us SpaceOAR. My favorite phrase is, in some ways, if you've seen one integration, you've seen one integration. And so, you want to treat every single one of them in a bit of a bespoke fashion. Having said that, BSC absolutely has established, I would argue, a core competency in integrating companies. And a big piece of it is really -- I mean, the project management expertise we have on people who know fundamental principles of successful integration, the back end side of things in terms of remediation, order to cash, HR systems, that's all stuff you can playbook. The bespoke nature comes in, for how long do you leave them autonomous, right? So for AMS, we largely let that team continue to operate somewhat independently, I'd say, for the first, really, 3, 3.5 years. And now we're starting to much more thoughtfully connect the dots across all the businesses. And when I look back at that playbook, that was entirely the right play. Whereas with NxThera, it was more important because the nature of the product offering, BPH and BPH. We had green light in our bag in BPH. And then we were acquiring a BPH technology to have separate sales forces selling to the same customer and not connected through the same organization hierarchy, not a recipe for success, right? And so, in that, the speed with which you want to integrate the selling organization becomes important. And then with Augmenix, what worked well for us is, in many ways, we let the commercial side of that team continue to operate independently, but we quickly integrated the sort of back-office functions, quality. Quickly kind of lift and shift manufacturing, which we're now producing out of our Ireland facility. The speed with which we integrated a lot of the behind-the-curtain functions, if you will, was rapid and candidly executed beautifully. And now our selling organization, they get to know Boston Scientific. And then they're ready to sort of be brought into the fold. And look, every single integration is going to be different relative to the nature of the cultures you're pulling together. I think fundamentally, integrations can rise or fall based on how attuned you are to the cultural components and considerations and how you adapt accordingly. If you come in with what I call like the arrogance of the acquirer with every single one thinking you know it better and what this team has built and done, you're not actually learning from and respecting, that's when it falls apart. So I think the -- coming in with an appropriate humility and willingness to learn and not just be the sort of the big purchaser is really a big way I've kind of try to wire our teams to look at each one individually. I found -- we've acquired a lot of best practices from these acquisitions. Notably, I'd say, AMS brought us a real kind of passion and hunger for DTP, right, direct-to-patient with their ED and male urinary incontinence portfolio. Augmenix, in particular, digital patient outreach and in the integration of salesforce.com and to the way that they were kind of looking at opportunities in managing their business were best practices that we were happy to shamelessly import and then spread.

I just learned a lot there. Thanks for sharing all that. Just thinking about future kind of tuck-in opportunities, I mean, you have talked historically about expansion opportunities in overactive bladder, urologic cancer, advanced visualization. Any intel you can share just on where Boston has investments currently or how attractive these adjacent opportunities are now? I think the last update was at your last Investor Day.

Yes. And we'll continue to lean into this in our next Investor Day. So at a high level, we remain interested in OAB. We think that's an attractive market. And the key is, as with any market Boston Scientific opts to enter into is do we have a path to differentiation and a path to category leadership, right? And so, those are the ways in which we continue to look at any adjacency we go into. With respect to like oncologic adjacencies, whether it be through spacing or some of the other technologies that BSC has acquired that have urological application, there is some great opportunity there. Those are longer and further in the distance, right? Because the clinical burden to develop those and then kind of do the pivotal clinical trials, puts those probably out of our strategic planning horizon, if you will, but areas that we continue to sort of fertilize, invest and learn in. And then we still -- we see a lot of exciting tuck-ins in the urology community across the globe. It is a fertile specialty for innovation because of the magnitude of unmet needs. So obviously, I can't get into any real specificity there, much as I may love to. Just know we have a very kind of active VC team and active business development team. They are constantly quite busy in looking at ways in which to shore up our ability to enter into some of these adjacent markets.

Understood. Understood.

How was that for a nonanswer?

No. I mean I understand. I had to give it a shot, though, on my side.

I respect that.

At the -- at your last Investor Day, I think you put out some high-level guidance to your LRP target in 2022 to -- for your business to get to $2 billion in revenue, it represented a double digit CAGR. I think if I back it out, somewhere in the 12% to 13% range. You've had some divestitures since then. Pandemic has probably done some -- delayed the progress for everyone. But just from a high level, I mean, does that get back to normalized periods. You look at your portfolio now. I mean does that double-digit revenue CAGR forecast still hold? Or should we be thinking differently?

No. Look, I mean, our outlook for this business is just as strong as it was pre COVID. I mean COVID has been a bump in the road or you kind of sometimes refer to it as the lost year. But I feel we've -- in that time, even since our last Investor Day, I think, the degree to which we've leaned in and continued to really forcefully and thoughtfully prioritize to make sure we are pouring the right fuel on our highest growth drivers, where we have a right to win, is really a big part of what's allowing us to sustain that momentum in that growth projection. For us, some of the divestitures were relatively small. It actually allows us to really focus and hone our sort of -- our kind of top high capability resources towards driving growth. It's in stone, prosthetic urology and prostate health, right? I mean that's where a lot of our growth runway remains. We've got enormous patient populations, which are -- we're still only scratching at the surface of getting them the care they deserve. And those are all core to our urology mission. Our divestiture of the intrauterine health portfolio, we've started from a small market share position. Great market, but just we had too many other great growth opportunities to go after. And candidly, it's a great problem to have, and we're excited at the way in which our divestiture is currently going with Minerva. They're doing a nice job kind of bringing in that new adoption to their family and starting to execute that quite nicely. So we think that was the right strategic move for us to stay core to that urology call point. And that was more of a gynecology call point.

Okay. Okay. Just -- I mean, you mentioned maintaining the outlook. The pandemic here is a lost year. I mean do you -- does your team believe that there is kind of demand or any backlog for BPH, urinary continence, erectile rectal dysfunction, any kind of non-acute, non-stone procedure categories that could provide a tailwind as we get into the second half of this year and into 2022? How do you think about that backlog?

Yes. I mean we see that kind of backlog as upside, if you will, to the guidance that we've offered. And there's a lot of noise in there, right? Because in certain markets, we do see patients, and heck, I mean, I was just arguing with my father the other day who wanted to get foot surgery. Like, "Dad, could you wait until you get your vaccine?" He's 84, right? And so, there is a bit of a dynamic like that. But we also do see in certain parts of the markets in younger populations, right? BPH, well, it definitely can affect men the age of my father. It also can affect men in your age demographic, right? And so, we are seeing patients, once the operating room capacity and the nursing capacity starts to become available, we are starting to fill those operating schedules again. So it's a tale of 2 cities depending on what part of the country of the world you're in. And the nice thing is, is I will say that for -- increasingly, our business is diversifying globally. And so, we are seeing a lot of good runway even in times when the U.S. might be under constraint because of COVID, we're seeing Asia Pac performing particularly well in stone or in BPH, for instance, right? So the diversification is starting to pay off quite nicely, both across the franchises and across the globe.

Makes sense. Makes a lot of sense. I wanted to just start on your stone franchise and ask some questions there, but I -- it would be a miss if I didn't just address the -- LithoVue has been an unbelievable growth driver for the stone business but for the whole uro business. But it did kick off Boston's numerous development initiatives for disposable scope. So maybe worth just a minute just to learn the history on now how the development of LithoVue platform was leveraged and led to EXALT-D and disposable bronchoscope that's on top for one of your other brother/sister businesses, endoscopy.

Actually, yes. So I joined Boston Scientific in the endoscopy business. I was the Vice President of Marketing in endoscopy until about 3.5 years ago. And I will say the EXALT-D storyline is quite an interesting one because, without doubt, there are best practices that have been leveraged and shared from LithoVue. But there also was a great amount of engineering work that had been done like almost a decade ago that actually, it was just -- it was kind of a project before the market was ready for it. And so, the team was able to take advantage of a lot of skunkworks, engineering work that had been done at BSC. Again, I think, it was a decade ago or more. And then you take the learnings from LithoVue. And endoscopy has a disposable scope called SpyGlass, which they've did a great deal of success with. And so, we're sort of building this compendium of expertise, if you will, both in manufacturing and engineering and imaging and capital equipment. And we're starting to see some really healthy collaboration between our engineering groups, our manufacturing teams. Most of our manufacturing for these disposable platforms go through the same manufacturing facilities. So you get a lot of best practice sharing in terms of yields, assembly techniques, et cetera. So yes, good sharing amongst the families. But we're also -- the nice thing is what we're not trying to do is have a one-size-fits-all because importantly, the nuances of what the clinical demands are and flexibly uroscopy are, for instance, very different than an ERCP procedure. And degrees inflection and imaging requirements and size of working channels become very, very nuanced and very different. And if you try to just cram that hammer through all those specialties, I don't see that as a recipe for success. So we are making sure we're, first and foremost, serving the unique unmet need of that clinical specialty and that procedure. But yes, lots of good technical -- yes lots of good technical know-how.

Well, I think, LithoVue has been a rock star for you.

It has. Yes.

Yes. And I think the -- a lot of different layers of the historic growth, geographic expansion, just penetration of centers. I think you last called out 2,500-plus LithoVue centers worldwide. Any update to that number? And maybe just on top of that, sorry to ask 2 questions in one, but that's -- the first one was a short one. But just what are the next layers of growth for LithoVue? I mean you have this next-generation system with integrated fluid management and optimized energy delivery, et cetera. I mean maybe you could just help us understand why LithoVue is going to continue to be a double-digit grower for Boston.

Yes. I think LithoVue is truly one of the proudest stories in our Uro/PH legacy so far and our BSC legacy. So here's what I'll say. I'm not going to share a specific number of centers, obviously, right? We're growing LithoVue double digits. That is coming from both adding new customers and continuing to penetrate within the existing customers we have. The genesis in the early days of LithoVue was really -- the early value proposition was around kind of always being ready, always being there and being able to kind of make it through the most complex of cases. Net value proposition has grown considerably from where we have some ambulatory surgery centers, who, that is the standard scope that they use because it's always there, it's always sterile, and it allows them to kind of crank through cases with the efficiency that ASCs care about. And in teaching institutions, we kind of talk about LithoVue being sort of resident-proof, right? It's a great scope to learn on, too, because better to break that scope than an expensive reusable scope. So the value proposition continues to expand. Meanwhile, competition continues to come in, which is one of the reasons why I'm not too keen to share some of those specific kind of intel numbers. But with the entrance of competition, the market continues to grow, right? And we continue to grow along with it. And as a double-digit growth driver for us, I think, it continues as proof that we continue to win in this space. And to answer the last part of your question, we continue to invest in innovation. So we're on track to the end of this year to be in some of our kind of first cases with LithoVue Elite. LithoVue Elite kind of solves 2 important opportunities. One, it brings a really kind of advanced and sophisticated imaging chain to kind of take digital imaging to the next level. But as importantly, I'd argue, if not, more importantly, it's going to bring the first-of-its-kind pressure sensing capability to allow you to monitor pressure in the kidneys during -- for some of these long cases where you're doing lithotripsy for 45 minutes, 1.5 hours, it's kind of like a speedometer, if you will, for the urologist to see how much pressure is being delivered to the kidney during those procedures. And the reason this matters is there was actually a manuscript that was just published, I think, literally in the last 1.5 months or so in the Journal of Endourology. And it basically was a meta-analysis showing a 5% sepsis rate after ureteroscopy. And that matters, right? And so, if you think about having too much pressure in the kidney and if there's sort of bacteria in the system. But also, the kidney is a delicate organ that can cause a lot of postoperative pain. And so, we're really excited about what this is going to open up in terms of scientific exploration and delivering safer procedures for patients with this kind of first-of-its-kind capability. So we're trying to leapfrog the market that we created, which is going to be a fun journey to be on.

Absolutely. Only a few minutes left. Wanted to touch on Rezum and SpaceOAR. Can't leave those 2 products out of a discussion with you. But 5-year data for...

Please don't.

Yes. 5-year data for Rezum came during the pandemic. I mean how big of a tailwind can this dataset be? I mean comparative -- I mean cross comparisons are always a tricky game but really stellar data. And what does it do for the franchise?

Yes. And so look, with the double-digit growth performing we're seeing out of Rezum, and we're starting to see some really nice, sustained and accelerated momentum with Rezum. We believe the durability of this therapy is what's going to allow this horse to continue to kind of win this long race. So for us, COVID was a bit of a headwind but, in many ways, I look at things in a glass-half-full kind of way. COVID was also the year where we tripled down on our digital investments and digital capabilities to both educate physicians, educate physicians around the world. We launched Rezum in Asia Pacific, in a couple of markets in Asia Pacific, completely remotely. We continue to now do some very exciting and thoughtful outreach and marketing campaigns to patients. And we're starting to see that pay off in 2.5x increase to our websites in those target markets, 4.5x increase to sort of find the doc statistics. And we're starting to see that then pay off a number of patients treated in those target demographics. So you're going to see us amplify and amp up those investments over the coming years. So COVID was a great year for us to kind of pivot a lot of our energy into building that foundation and capability. And we have a lot of optimism on the momentum we're going to continue to see with this durable technology. We're a big believer that for minimally invasive therapies, leaving nothing behind in the patient, particularly if you can deliver a durable result, is a winning combination. And we're starting to really see that pay dividends in many markets around the world.

Excellent. I feel bad just asking one question on Rezum but got only -- have 2 minutes left here. So we'll get one in on Augmenix or SpaceOAR. There has been this movement towards type of fractionation and SRS or SBRT...

SBRT, yes.

In radiation oncology. I mean has that driven some increased demand? Just -- I mean, higher radiation dose, increased risk of radiation impacting healthy tissue, what's been really driving the growth, I guess, is the one question...

Well, I'd say, the growth -- the growth is multifold, right? One is just in regular IMRT approaches, right, the degree to which SpaceOAR is being utilized is still a small fraction of patients, right? So there's just enormous growth in the -- it's not a therapy, in the technology itself. And yes, we are hearing and seeing from our customers that SBRT delivering larger doses, right, to the same volume of the prostate. The benefit of pushing the rectum out of the way to allow that large dose to not sort of spill over into adjacent organs is a definite area of interest. And there's been some nice research and some continued clinical research that we're doing in that arena to continue to prove out that value proposition. We just see that as additive to already the sort of the opportunity for growth for SpaceOAR. That continues to be a double-digit growth engine for us. And we don't see that slowing down anytime in the near future.

To sneak one just last follow-up on SpaceOAR. Just the pipeline indications. I think you guys have talked about pancreas, breast, thyroid, head and neck and maybe some others, but any -- when could we hear updates on pipeline progress -- indication progress.

So as I mentioned earlier when I talked about sort of oncologic adjacencies, these are applications we continue to invest in. They all require longer pivotal trial, clinical evidence generation in order to get clearance and payment, so they're a little further out in the horizon. But we did just launch SpaceOAR Vue, which is a basically classic SpaceOAR but now allowing you to have sort of a radio opaque characteristic. So you no longer have to take patients to MRI. And that's a nice leapfrog in a technology -- in a market that we're the -- currently really the only player in to continue to bring efficiencies and improvements in the way patients are treated. So we're going to continue to invest both in the prostate cancer application because, again, we're just scratching at the surface there. And yes, future runway and some of these other indications. But again, in terms of our immediate planning horizon, most of those clinical trials will sort of take us outside that planning horizon for any big market opportunities that are unleashed.

I mean should we be thinking about that $750 million TAM you guys have put down for SpaceOAR as expandable?

I think it could be expandable. And we'll be updating sort of our latest and greatest thinking there at the upcoming Investor Day later this year.

Great. Great. Well, we'll look forward to that. Meg and Susie, thank you guys so much for participating once again in the Cowen Health Care Conference. Hopefully, we'll be able to do it live in 2022. But have a great rest of the week. Thank you so much.

Thanks for the time, Josh. I'm glad to be able to tell the uro story. I think like you said, when you opened it up, this -- we are an accretive part of the BSC portfolio that I think maybe hasn't gotten as much time and attention as it likely deserves. So I'm happy to be given the opportunity to tell our story.

And it's a great story to tell. And we appreciate all the intel you delivered today.

Thanks a ton, Josh. Have a great day.

Thanks a lot. Bye-bye.

Thanks, Meghan. Thanks, Josh. Thanks.

Thanks, Susie.