Boston Scientific Corporation (BSX) Earnings Call Transcript & Summary

Okay. Great. Thanks, everybody. Bob Hopkins here from Bank of America. Thanks for joining the next session for virtual no fun, all work Vegas. We're very happy to have Boston Scientific as the next fireside chat. Dan Brennan, the company's CFO, is on the line. Susie Lisa is on the line, who runs Investor Relations; and Lauren Tengler, who works in Investor Relations, are all the line. And then my associate, Clay DeMarcus, is also lurking in the background in case I blow up. So thanks to Boston Scientific for being here. Dan, appreciate -- and Susie and Lauren, appreciate you being here.

Thanks for the invitation, Bob. Appreciate it.

Thanks for inviting us to no-fun Vegas, Bob.

Right. And we'll try to remedy that next year.

So Dan, unless -- we'll just kind of jump right into the questions, if that's okay?

Yes.

There's a couple of topics that we want to follow up on after your call from a couple of weeks ago. And I guess maybe just to start, since it's such a topic for everyone, just wanted to kind of get your kind of overview thoughts on the pace of the global recovery in surgical procedures. Just kind of, what are your broad thoughts right now? Where are we? How -- I know it's devastating what's going on in India and Brazil, but how big are those geographies relative to the total company? I just wanted to kind of get an overview on where we are from your perspective on the recovery in surgical procedures globally.

Sure. Thanks, Bob. So on our recent call, we detailed out what Q1 looked like, and we said it was a bit of the mirror image of Q4 where Q4 started off strong and weakened in December with much more COVID impact, and Q1 was kind of the reverse, where January looked a lot like December, pretty significant COVID impact across the globe. And what we saw was a nice recovery particularly in the back half of February and a nice consistent run rate in March. So that's what delivered the 3% growth -- revenue growth for us versus 2019 and the 6% versus 2020. The guidance range that we've given for Q2 would have acceleration of that growth rate in Q2. So we did -- I'll stay versus 2019. We did 3% in Q1, and the guidance range is 3% to 6%. So at the midpoint, 150 basis points of acceleration. So we are anticipating that the recovery continues through Q2. I won't make any specific intra-quarter comments, but that's the assumption is that we drop off a January, and we start adding months that have a better recovery pace to them. Obviously, there is still some uncertainty. COVID is not gone. What we're seeing in India is obviously a humanitarian crisis and challenge. We're working with living our caring value and working with our teammates on the ground there to do what we can for them. The good news, from a financial perspective, is that India and Brazil, they just -- they're not material to Boston Scientific. So we're obviously seeing impacts there, but it's not material enough to take us off the course that we've put in place. So obviously, watch those very closely. Japan's another one that has more impact than some other geographies. So we're seeing some impact there. And obviously, Europe's not fully out of the woods yet. There are some places overall there that still have some impact. But the 3% to 6% for us looks at a global recovery that continues through the quarter.

Are there any geographies beyond Brazil and India where you're concerned about, potentially, things going backwards from here? Just -- or are things progressing as you anticipated earlier?

I think they're progressing -- as we anticipated earlier. Nothing's new relative to things that we saw a few weeks ago that we don't see now. Japan was having its challenges. Obviously, the situation in India has worsened since our call. But again, from a financial perspective, that's just not material to the company. So I'd say, overall, the places where there are hotspots and we see impact is no different than we had seen when we gave our guidance back in April.

Okay. And how variable is the recovery in the United States by geography? I mean is -- just curious what the range of outcomes is currently -- or the -- sorry, the range of recovery rates by geography in the U.S.. Are there significant differences at this point?

Those differences are starting to regress around a mean a bit, right? I mean earlier on, you'd see some that were extremely high, some that were low. I think we're kind of getting back to more of -- where one state isn't significantly different than another state. There obviously are differences. There are differences in a non-COVID world, right, when you look at performance -- performances of regions. So in a COVID-impacted world, you'd expect that as well. But I think you're seeing it calm down a bit where you're seeing less specifics where there's one that's out of control versus others.

I think Bob, once you get below sort of that ICU bed capacity threshold level, then that just kind of eases up everything throughout the system in terms of staffing, bed capacity and an ability to begin to schedule and host elective procedures. So that's really the key factor.

Yes. Yes. That's a great point. Anything by procedure type that's worth calling out in terms of, again, range of recovery -- range of the pace of the recovery?

I think WATCHMAN is probably the one worth calling out. We called it out in Q1 that, that's going extremely well. Part of that makes sense because that's generally an over-65 population that's getting that procedure. Those were the first folks to get vaccinated. So there's a correlation there. But WATCHMAN has been doing really well. Cardiology in general -- obviously, you saw some really strong cardiology results, and WATCHMAN is a key driver of that.

Okay. And one other question on the geographic front, I mean, obviously, what happened in China with the stent tender, I hope, was a pretty unique situation. But Dan, how would you frame that for investors in thinking about the next year or 2? Are we going to see other setbacks there in a category that's big enough to matter? And I'm sure it's onetime, but it's painful for a year. What are your thoughts on what's going on in China from a national tender perspective right now?

Yes. Maybe I'll take the first part of that. Susie, you can take the second. Relative to the tender and how it's operating today, I'd say it's going as we had planned. So we were able to get 2 of the top 10 slots in China for drug-eluting stents. Yes, for drug-eluting stents, but really more importantly, for the opportunity to participate fully in the pull-through opportunities across all of cardiology and the rest of the business. So I'd say that's going as we had expected. You obviously take a hit relative to the drug-eluting stent revenue from a pricing perspective. You get more volume. But the real reason for us to be in the tender is the entire basket of Boston Scientific, particularly cardiology and PI business. And that's played out as we would have hoped. And then, Susie, relative to the future of tendering in China?

Yes, Bob, we don't see another category for us over the near to medium term. There's pretty specific criteria that need to be met. First and foremost, has to be a large area of spend in order to warrant all the effort required to institute such a program. Secondly, it needs to be a product type that where standards are easily set and technical specifications can be met across the third area, which is where you see a number of different manufacturers, including local manufacturers. So if you add all of those up, we just don't see a big overlap with those areas where we have significant exposure and there are significant areas of spend with multiple manufacturers. So we think it's limited. You could see tenders in DES in other countries. So we're always watching, and I think have pretty pragmatic and conservative assumptions regarding our DES franchise. And we've talked about complex PCI exceeding that business, being larger than that business now and continue to minimize the impact. We said it'll just be 5%, DES would just be 5% of our China sales in 2021 is our expectation. But we don't see a near-term or medium-term threat from an additional tender exposure in China.

Okay. Great. That's helpful. And then one other product area I wanted to ask about while we're on this topic is EXALT-D. It's been something that I think has been impacted by COVID, perhaps a little bit more than other areas. And I know, I mean, myself included, there's folks that have been a little -- maybe less optimistic than the company has been on the prospects for that technology. But I just would love to get kind of a big picture update on EXALT-D. I mean is your enthusiasm for that product different than it was pre-COVID? I mean if you kind of put COVID aside and assume that next couple of -- 6 months will be on the other side of it? So I just wanted to put EXALT-D in perspective for people from a Boston Scientific perspective right now.

Yes. Sure. And I think to be clear, the level of excitement is there. I think the realization is it's probably a bit of a longer journey with COVID kind of interrupting the cycle there. We certainly realized in 2020, from a market development perspective, that's a very difficult technology to launch virtually. So we obviously didn't make the progress in 2020 that we would have liked. So that kind of slides the curve a bit. So 2021 is now what 2020 would have been or the back half, to your point, as we get fully through COVID. So we did have some nice reimbursement wins there, TPT and the proposed NTAP. So I think those will be helpful. It's part of the overall single-use scope strategy that we have. And if you look back, we launched LithoVue in our urology franchise. And that was not an overnight, "get to a certain level of procedure," success. It was a bit of, "slow and steady wins the race." And then once seated and once the benefits of the technology we're seeing, then the adoption curve continues to increase rapidly. I think we see that with EXALT over time, but it's not going to drive the endo growth rate 500 basis points in Q2, but we're going to continue to drive both that and the overall suite of single-use scopes for us as part of our category leadership in endo, and we're still absolutely excited about it.

Okay. Okay. All right. That's helpful. And then I wanted to ask a couple of follow-up questions on the 2021 guidance that you provided. Just start with the top line. If you kind of look at the guidance for the full year relative to sort of what you put up in the first quarter and kind of what we see happening in the second quarter, just doesn't -- at the midpoint of the range, it doesn't look like there's a lot of acceleration on a comp adjusted basis in the back half. One, is that fair? Is that conservatism? Should we be thinking a little bit more about the high end of the range? Just would love your thoughts there.

Yes. I would reiterate what I said a couple of weeks ago is that I think it's an appropriate range for where we are today. We did -- again, I'll stick versus 2019. We did 3% revenue growth versus 2019 in Q1. Our range then says, okay, that's the worst we could do 2021 in Q2, so 3% to 6%. So it provides for acceleration throughout the range and how much acceleration we'll see on our Q2 call, which will be Tuesday, the 27th at 8 a.m., relative to the back half. So if you look at the back half and say, if you take 3% in the first quarter, you take 4.5% in the second quarter at the midpoint, then you're getting to 6-plus percent in the back half. And that is, to your point, comp adjusted. The comps are 200 basis points higher in the back half of 2019. So we'll see. I mean a lot will depend on the strength of the recovery, the timing of that, our execution, but feel like the range of 3% to 6% for the second quarter and for 2% to 5% for the year is an appropriate range.

Okay. Okay. And then maybe wanted to shift gears a little bit on the operating margin side, Dan, if okay. And there's a couple of things that I'd like to ask about. And 2 of the questions are questions we're frankly asking of almost all the companies, because it's such a global issue and that's sort of inflation and tax rates. On the inflation in the input cost side, in terms of the things that you're thinking about as a CFO of a large company, how are you thinking about input costs right now and the impact on your business and the margins?

Yes. I mean it's one of the inputs into the overall process of managing operating margin. I mean, prior to 2020, the team has a nice history of continually improving operating margins each time -- each year. And sometimes, gross margin paid the bill, sometimes SG&A, sometimes R&D. So what we're really focused on is that bottom line, the adjusted operating margin percentage and then making the appropriate trade-offs within each of the lines. So yes, when you look at where we are today, we're paying a lot more for freight than we used to because there aren't a lot of commercial airliners flying compared to what they used to be, okay? So that's a headwind. We're obviously traveling a lot less as a company and as a society. So that's a tailwind. We're spending more on digital than we used to because of COVID and some new capabilities we created. So that's a tailwind. So as I look at all the inputs, and we look at the back half of '21 and heading into '22 and beyond, the goal is to continue to expand operating margins. I mean the one thing about the company is that the financial goals have been remarkably consistent over time. It's achieve revenue growth at the high end of the peer set, which we say ex COVID is 6% to 8%, deliver differentiated operating margin expansion, double-digit adjusted earnings per share growth and strong cash flow growth. And if you look back pre-2020, I think the team has done a nice job of achieving that. So a lot of inputs into it, but it's -- I mean different inputs than in the past, but it's still the same game, which is continue to go up and to the right in operating margin.

And do you have an ability to pass through higher input costs?

I would say, in general, no. If you look at our ability to take increased costs in our system and increase the prices of our products, I would say, generally, no. Where we get increased pricing is for innovation. And so we're focused on innovation and those types of ways to get better margins. But a simple pass-through is generally not going to work for us.

Okay. That's what I thought, but just wanted to check. I mean in terms of input costs, is there any way -- and I know there's offsets like less travel, and you guys are trying to manage the business. But just -- I don't know if you could quantify it or just talk about it qualitatively. How much have input costs changed for you in the last 6 months?

Yes. I mean it depends on what line you're looking at, right? So if you look at gross margin, we are spending, as you said, more on freight, more on inefficiencies within the plants. So it's not one specific thing where you could say it's 1% here or 2% there because there's offsets. There's input costs that are going up. There's other offsets that are coming down. So I continue to look at it with the team as, again, I'm a bit ambivalent as to -- as to where it comes from, whether it's gross margin, SG&A or R&D. I'm just maniacally focused on adjusted operating margin percentage and -- with the goal of making that increase over time.

Okay. Okay. Appreciate it. And now on just tax rate. I know there's probably not a lot that one can say, but it's a question we're getting all the time, and you guys have an Analyst Day coming up. Just kind of curious what is going to be your approach in terms of talking about tax rate and the uncertainty. And just would love anything you have to offer on that front, understanding that it's a challenging question.

Yes. I think it's obviously too early to comment now relative to the legislative process that's ongoing. What we're focused on now is appropriate advocacy, making sure that the tax system in the U.S. allows companies like ours to remain competitive in the global system. When you look at some of the things we've done since TCJA went into effect in the beginning of 2018, we've added over 3,000 positions in the U.S., which is about 20% of our workforce. And so as we look at anything relative to tax reform, we want to continue to be able to do that and create jobs, which I think that's the goal. So our efforts now are focused on making sure that folks -- policymakers understand that, and we're trying to get the word out.

And Boston is one of the lower tax rates among the companies that we cover. As we try to think about modeling tax rate going forward in light of all this uncertainty, just as a qualitative comment, if U.S. corporate tax rates go up and GILTI tax does what it's proposed, are there -- are there potential offsets that we should be thinking about that would lessen the full magnitude when we try to run through some of those numbers?

Yes. I mean there's a lot of puts and takes in that. It's not just all about the corporate tax rate and GILTI. There's other proposals that are out there as well. And depending on where those went or didn't go, that's going to be the whole stew that determines our rate. I am confident in our tax team's ability to work -- the work that they've done, but we just need to see more specificity over time. So by the time we get to Investor Day, that's September, maybe there's more specificity. But as things become more crystallized, we'll obviously tell you what we think.

Yes. Okay. Fair enough. And then a couple of other topics I wanted to hit on. Just sort of preparing for this meeting, I was looking through where the Street is kind of modeling long term in terms of 2022, 2023 growth. And I know we'll get specifics at the Analyst Day, but it did strike me that the Street's kind of modeling at the high end of that 6% to 8% and then solidly modeling 100 basis points or more on the operating margin side, and therefore, mid-teens earnings growth. It seemed like that's at the higher end of what you guys have articulated historically. Kind of any thoughts on where consensus is right now? And just, are there things about the base from which people are driving those growth rates that maybe make those slightly higher earnings growth rates make sense?

Yes. Again, I think I'm going to have to make your wait on that one until Investor Day. And I'm sure, as we've done in the past, we'll lay out what we think we can do over the next 2 to 3 years. But relative to specifics, we have said that in an ex-COVID world, so no COVID in the current year, no COVID in the base, we think 6% to 8% is a reasonable organic revenue growth for us, which puts us at the top of our peer set. And then the adjusted operating margin expansion and earnings growth and cash flow growth kind of flow from that. But again, I think we'll give you a good sense of what we think from our pipeline portfolio, execution of what we think we can do over that timeframe. But too early to comment on specifics about where people are beyond the guidance we've given in '21.

Yes. Yes. I mean can you just remind me, Dan, what you said long term about your goals on operating margins? Just thinking long term, I know you've said some things in the past about that.

Yes, we have. And that really remains unchanged. Obviously, 2020 was a bit of a lost year on that journey, but I think our goal is to get back on that train as we were very solidly before that. And what we said is 30% adjusted operating margin longer term is a goal. It's -- I think it's a reasonable goal. It's one that other companies are already at, and there's nothing structurally that prevents us from getting there. And the key to that is a durably, consistently growing top line. So if you tell me that I can continually have a durably growing top line, we can do the things that we need to do to get ourselves to that 30%. And obviously, 28% kind of being a point along the way of that to check our progress. But I still sit here thinking 30% plus is a reasonable goal for the company.

Okay. Okay. And so then from our perspective, it's all about just the pacing.

Exactly.

And so last question on this topic then. As we consider the next couple of years, are there things that you would call out big picture that we should be considering?

Yes. I think on the gross margin side, if I look back 18 months ago and said, hey, Dan, what do you think your gross margin's going to be in the first half of 2021, you wouldn't have heard me say, approaching 70%, right? Because we were 72.4% in 2019. So that has been impacted by COVID for a variety of reasons, both COVID cost, the inefficiencies, some of the manufacturing variances on the balance sheet from last year that we'll be largely done with by the middle of this year. The good news is we've had offsets. So we'll have offsets in SG&A. We're going to spend less on travel. So at a time when gross margin isn't where I thought it was, SG&A isn't where I thought it was to the good side. So that's the balance of what we're working on and analyzing as we look at our long-range plan here over the next couple of months to say, what can gross margins get back to? When do we get back to that 72.4%? What's the level of travel we're going to do? Are we ever going to get back to that same level that we used to travel? Geez, I don't think so. We may be in Vegas next year for this, but I don't think we're going to get back to the full level of travel as a company that we -- or a society that we used to be. So those are the puts and takes, and we're working diligently to go through that. And I think we'll -- at Investor Day, we'll give you a sense of where we think we can go.

Okay. Great. And then, yes, let's talk about the Analyst Day just for a quick second. I assume from a financial guidance perspective, it'll be similar to what we've seen from you in previous Analyst Days in terms of the number of years that you'll be looking forward. So that's -- I guess that's one question. And then the second question is just one of the challenges of analyzing Boston Scientific is that there are a lot of things going on at the company. There are a lot of little products that could be very big products in the future. So from your perspective as CFO, as we head into this Analyst Day, what are the top 2 or 3 that you think we should be focused on and that we'll be hearing about in September?

Yes. I'll let Susie take that one as she is obviously the queen of Investor Day for us. I would say just one thing that, as you said, it's a blessing and a curse, right? We have all these products. And so it's sometimes hard to follow Boston Scientific because you'd like to have the one product that says, geez, let me just follow this one thing and how this goes, goes Boston Scientific. Well, the bad news is that's not Boston Scientific. So it sometimes makes it a bit more challenging and -- to tell the story fully across all the businesses. But Susie, what do you have in mind for September?

I'm going to pass it to Lauren. You've got 2 queens of Investor Day, Dan.

I think in general, Bob, you're spot on, right? So we'll look to provide more color on the financial outlook. We haven't nailed it down exactly what that will look like. And then we're really excited to host a virtual or potentially hybrid event. We'll update sort of our market outlook and go in-depth on some of those key products that you're looking for a little bit more information on. So I guess stay tuned, and we're excited to host.

Great. Sounds good. I guess I'll follow up with a couple of specifics then just in terms of product areas that I know people are interested in. I would love just maybe a quick comment on how you guys are thinking about your Neuromodulation outlook. I think there's a perception out there. There's a couple of your competitors that have some really interesting innovations and that Boston isn't in as strong a position as they once were because, obviously, going back just a couple of years, this was a huge growth driver for the company. So just any kind of broad overview comments on the pipeline from spinal cord simulation perspective and how you're thinking about growth in that division.

Sure. So spinal cord stim is still an underpenetrated market. There's -- it's still tough to peg exactly what that growth rate is after 2019, but we still see a lot of long-term opportunity there. And we focus on improving patient outcomes with the recent launch of our Alpha, which is WaveWriter SCS device and that really leverages different waveforms, contour and fast, these new algorithms that improve outcomes for those patients. And for future indications, we're looking into PDN later this year, but we've already launched our SOLIS trial, which is for [ virgin back ] and that was initiated in Q4 '20. So not only improving existing indication outcomes but also looking to expand indications into the future.

And do you think this division, Neuromod, is one that can help you in that 6% to 8%? Can you be in that ballpark with this division, you think?

So that's a tough question. So pre-COVID, we talked about overall Neuromod being 8% to 10%, with DBS being a little bit higher than pain, which is SCS, Vertiflex and RF. So I'd say you're probably going to have to stay tuned for Investor Day to hear a little bit more on an updated outlook there.

Okay. And then also 2 other product areas I wanted to touch on really quickly was the whole complex PCI franchise for you guys has been one that's been -- historically deliver a very strong growth. But also a bit of a mystery to us because there's -- it's a big division, but I think not a lot of people have a great appreciation for the stuff that's in there. But I guess my top-down question would be we don't need to do a deep dive on that particular division right now, but just in terms of your kind of general thought on the growth outlook for complex PCI. And then the last product I'd love to get your opinion on is WATCHMAN. Obviously, a lot of work gets done on WATCHMAN in the product given the fact that you're going to have competition in the U.S. soon. I think that competitor will do fairly well, but I still think that WATCHMAN will be able to grow. So I guess the way I'd ask the question is, one, kind of any top-down thoughts on Complex PCI and the growth outlook there? And then for WATCHMAN, do you think you can grow through that competitive launch? Do you have a view on -- kind of a broad view on kind of market growth rates? Just any comments on WATCHMAN because it's just such a hot topic would be helpful.

Yes. Let me take 15 seconds on Complex PCI, and then I'll flip it to Susie to close out on WATCHMAN. So I think the key stat is that complex PCI is now bigger than DES, right? So we used to be known as a DES company 7, 8 years ago. Complex PCI is bigger than that. It -- the procedure growth rates are there. Our technology is there. So I think complex PCI can be a nice growth driver for the company, albeit offset by DES within the overall cardiology bucket, but complex PCI is a good story for the company. Susie?

In less than 60 seconds on WATCHMAN. I think, Bob, it's interesting. We get lots of questions about market share and kind of these share fights in a lot of markets that are still underpenetrated. We talked about SCS. LAAC is another big one, but you could add PE and DVT and deep brain stimulation to all of these. But WATCHMAN has terrific momentum. Flex has enabled us to grow mid-30% in Q1. We're seeing additional users at existing sites and increased usage by existing implanters. It has great ease of use, great safety data. And we continue to see -- we're probably mid-single digits in terms of market penetration. Then we're running OPTION and CHAMPION to expand indications and then expanding geographically as well. So really strong outlook for WATCHMAN, and we're pleased to have voice in the market given how vast this population is.

Perfect. WATCHMAN in 60 seconds. That's great. So again, it gets a lot of airtime. So I don't think we need to spend too much time on it, but it's great to hear your continued enthusiasm for the growth outlook for the business. And we're officially out of time. So I want to just say thanks to Dan, Susie and Lauren for your willingness to participate in this fireside chat. Enjoy the rest of the conference, and we'll look forward to seeing you in September.

Great. And then we'll see you in Vegas next May, Bob.

Absolutely.

Thanks for having us, Bob.

Thank you.

Fun Vegas. Thank you. Okay.

Bye.

Bye.

Bye.