Boston Scientific Corporation (BSX) Earnings Call Transcript & Summary

Good morning, everybody, and welcome to the very first meeting of the Stifel Annual Healthcare Conference. Thank you for joining us. I'm particularly pleased to be starting off today's meeting and the conference, in general, with Boston Scientific. I'd like to very much welcome Dan Brennan, Executive Vice President and Chief Financial Officer; as well as his colleague Lauren Tengler, VP of Investor Relations. Welcome. Good morning. Thanks to you both for being here.

Thanks, Rick. Always a pleasure. Thanks for the invitation.

Thank you. And, Dan, I know that you are going to start us off this morning with a few high-level words. Thank you. Over to you.

Just a few, yes. Thanks, Rick. Happy to help kick off the conference this year for you. I look at 2021 for the company and say we're, overall, we're pleased with the progress we've made. Obviously, some macro challenges as we've gone through the year. But despite the challenges, we're excited about finishing out the year and then heading into 2022 and beyond. We had our -- every other year Investor Day in September, laid out some pretty clear financial goals. So I'm sure we'll get into some of that today as part of our discussion. One quick housekeeping item. We aren't going to prerelease our Q4 sales in January as we've done the past few years. Frankly, the churn and additional reviews and work and processes, it's just an organizational distraction for us at a time when we should be closing out the year and getting ready for 2022. It's early in January. It's just become a bit of a distraction. So we won't make you wait long. We'll -- February 2, we will have our earnings call, and we'll give you all the details on February 2.

All right. That sounds great, and I'm grateful because then we don't have to write 2 notes of...

Exactly. It just -- internally, it just became a whole separate thing onto itself that just didn't make a lot of sense to us for this year. So...

Yes. Dan, let's start off with a few big picture topics if we could. And it's hard to avoid starting off with the topic of COVID, macro trends and just the impact on the outlook. As I read the European papers and hear the news reports, it seems like Europe is, particularly in the northern tier is, reramping, and I'm hearing language like the fourth wave is coming. How -- maybe you can address that, just even in the recent weeks or so that since you reported, any more color on the cadence of recovery from COVID, both in the U.S. and the seemingly worsening environment in Europe?

Yes. As we talked about on our earnings call, there's staffing shortages and COVID are really the 2 macro environment challenges. I would say we gave a broader range to account for that. So we -- our range is 4% to 8% organic revenue growth versus 2019 and 12% to 16% and versus 2020. Those are broader ranges to account for that. As you look at what's transpired since then over the last 6 to 7 weeks, I think the U.S. feels kind of like it did in September. There's pockets where there are challenges, but it feels about the same. I think to your point, Europe has had a bit more on the staffing shortages and also the COVID flare-ups. Obviously, very focal where that's happening, but that's had a bit of an impact in our EMEA region. But -- and then Asia has been, again, probably similar to what we've seen as we closed out Q3.

All right. And so you feel like and in Europe specifically, you've already dialed in some worsening there, particularly in Germany, some of the larger countries?

Yes. Well, in giving the larger range, the goal is to encompass the really good outcomes at the high end and hopefully the more challenging outcomes at the lower end.

Right. And Dan, when we think about some of the macro headwinds in the United States, I mean, you said it's staffing, number one, chip shortages, increased supply chain costs. How are -- it sounds like just from your brief comment that the staffing shortage far outweighs the others. The others are more measurable. How are you thinking about it?

Yes. I mean there's a lot there, obviously, when you think of inflation, the supply chain shortages, and just the overall disruption of the global supply chain. So as we're looking at developing our 2022 plan, we've looked at, obviously, from a supply chain perspective, spending a lot of time on that with our global supply chain team to ensure that we have adequate supply. On the inflation front, that's been particularly in freight for us, we've seen a pretty significant increase in freight. We have some pockets of wages, some direct materials, precious metals. So it's in pockets throughout the enterprise, primarily in the gross margin area is where we would feel it the most in terms of our P&L. But we were very clear at our Investor Day that we think this year, in the back half, we'll average 26% adjusted operating margin. So we did 25.6% in Q3. The math would tell you, 26.4% in the fourth quarter would get you to that 26%. That's a reasonable jumping off point for 2022, and our goal is to add 50 basis points on top of that. So the gross margin, the inflation and the supply chain challenges would hit us in gross margin. But the goal is still to have gross margin go north. It was 70.6 in Q3. We've talked about having a slight sequential improvement here in the fourth quarter, and we'd look to continue that trend in '22 and then also have SG&A and R&D contributing to the overall 50 basis point based upon goal. And I can get into more or less detail on each outline items, if you think that's helpful, Rick.

Yes. Well, let's come back to it. I want to go back just -- and I hate to ask, but it's -- we're taking the temperature of what's happening in the United States from a procedure recovery perspective, sort of every day. It has been a couple of weeks. Are trends in general in the United States, in some of the most affected areas, stabilizing, improving, heading in the direction that you were hoping? How -- it's not fair, but how could you help us think about that?

Yes. I mean I wouldn't get into a day-by-day or week-by-week explanation of each area. I would characterize it as I did at the beginning, which I think the U.S. is -- U.S. feels a lot like it did in September. And Europe is a bit more challenged than it was as we were exiting Q3. But the goal is, hopefully, procedure volume is stable through the rest of the year and then picks back up in 2022. Hopefully, I mean, inflation, a different problem than procedure volume, and we can deal with that, and that's what we get paid to do is offset that and continue to drive adjusted operating margin. And if the procedural volume cooperates and returns to more normal levels in '22, we'd look for a solid year.

Got you. You mentioned inflationary pressures and rate changes. Just the news that U.S. inflation surged in October to 6.1%, a 3-decade-high level. That doesn't seem like business-as-usual to me. How is that affecting the business? Is the inflation challenge then a major problem, a minor issue, a manageable one that can be offset with further cost savings and cost reduction if need be? How are you thinking about that?

I mean that's our goal, is -- obviously, that is a high rate of inflation. It hits us, as I said, for the most part, in the gross margin area. But from our perspective, our goal is to double down on things like our value improvement programs, our center-of-excellence work where we're working to create shared service centers across the enterprise. And so when confronted with higher rates of inflation, we'll work harder to be able to take cost out of the system and still deliver on that margin goal.

Right. Another aspect of inflation, obviously, is the potential, the possibility of Federal Reserve raises in rates or rates moving higher. I'm not going to ask you whether you think the inflation pickup suggests that's going to happen. But how is that possibility impacting your thinking as you approach the year ahead, I guess, is the right way to ask it, revolving around balance sheet, cash used, share buyback, M&A? Does it make you think about your priorities in any kind of different way as you contemplate that possibility?

I think it's more acute for the P&L. So for the balance sheet, the majority of our debt is fixed rate. We don't have a lot of exposure to a change in rates if those were to increase. Our goal is to continue to generate strong cash flow for this year and also for 2022. M&A is our #1 capital structure, capital allocation priority. I don't see a lot of change there. I mean we did 5 deals this year, announced 5 deals. I'm sure we'll get into the details on some of those as well. I would look for perhaps a little slower pace next year. But from a cash perspective, I think we'll have ample cash to be able to put to use and continue that strategy of M&A. So I think on the P&L, we'll be focused on offsetting inflation and others. On the balance sheet for us, less of an impact.

Got you. I wanted to turn to another big topic that I get asked about as I know, to you and Lauren, the outlook for WATCHMAN giving a competitive device entering the market. And just as we approach that, potential investors are asking about the growth outlook. But the initial setup for this battle of the titans, if you will, is data. We've seen certain data on the Abbott Amulet side. But at TCT, just in the last week or so, we saw some interesting data that suggests that devices are not the same. Can you help us think through the competing data claims a little bit? And how that's going to likely affect adoption?

Sure. Let me -- I'll give you my thoughts, and then I can turn it to Lauren. Lauren is our resident data expert, so I'll let her opine on that. So first, relative to WATCHMAN as a growth driver for the company. We believe it's a continued growth driver for the future. It's in our 6% to 8% organic revenue growth goals that we gave at Investor Day. WATCHMAN FLX is a great product, both clinically and procedurally. It's basically all we sell around the world now. We don't really sell the first-generation FLX -- first-generation WATCHMAN, which is what a lot of the data are compared to. And Lauren will get into the details there. There isn't -- now from a market development perspective, it's been us alone for the past many years. Now you'll have another company that will be touting the benefits of left atrial appendage closure versus oral anticoagulants. I think that's good for the market. At Investor Day, we talked about a market that should be $2 billion by 2024. So I think there's ample room in that market for us to continue to grow and have that be part of the 6% to 8% that we have as our organic revenue growth goal. Lauren, maybe you can touch on some of the details?

Sure. So just reiterating what Dan said, we see WATCHMAN as a significant growth driver for Boston Scientific in the future. We continue to see more clinical data generated, which really proves the value of LAAC, and we continue to be really excited about that. I think some of the data that came out at TCT did show different pieces of information, and it is a little bit confusing because it does compare to both our legacy WATCHMAN device as well as FLX. But I think ultimately, we're pleased with FLX's post-procedural complication rate, which is very, very low. And we continue to see improvement in our effective closure rate with WATCHMAN FLX. So in the PINNACLE study, we had 90% complete closure at 1 year. And so we'll continue to innovate and iterate this device in order to improve both the safety profile and clinical outcomes.

One thought just I have based on many doctor conversations is that physicians are looking forward to bundling the offerings from Abbott. Does that put more pressure on you, on your economics? You clearly have a broad product offering. I guess, one, do you feel like you're well set up to meet that need if necessary? And two, does this pressure margin -- are you assuming that margins are pressured in some way because of the desire from customers to bundle more aggressively?

I think ultimately, it's going to come down to the success and the strength of the product. So yes, Abbott could bundle it. We could obviously bundle it. We have a tremendous portfolio of products within that franchise. So we could do that. I think given the importance of the product, though, I think it's going to come down to physician expectations and physician experience with the actual device from a safety perspective and from a performance standpoint. And I think that's what we'll win the day. I mean if you bundle a product that may or may not be as good as another product, I don't think that makes up for the performance of that product. So I think from our perspective, it will come down to the strength of WATCHMAN FLX versus any other competitive devices.

Turning back to the long-term 6% to 8% growth plan, revenue growth plan. We've talked about WATCHMAN, obviously. And I'm guessing that you'd say that WATCHMAN and pipeline products like Farapulse and TheraSphere are key incremental growth drivers. Ex-COVID world, are those the most important products, Dan, that you'd highlight that would get you to the upper end of your 6% to 8% range? The -- is it -- it has to be related to opening up and creating and expanding these new markets.

Yes. As we said, WATCHMAN is clearly a part of that. The challenge with that question is it's a tough one because of the diversification of the portfolio that we have. So it's hard to pick one product or one business. So you mentioned a few with TheraSphere and Farapulse. Just I'd say, overall, the PI franchise in general, with the strength with Eluvia and Ranger being the only company to have a drug-eluting stent and a drug-coated balloon, single-use scope opportunity in endoscopy and urology. There's a lot of products that -- in many of the franchises that aren't headliners that are hundreds of millions of dollars, but everything contributes to the 6% to 8%. And then let's not forget the 5 acquisitions that we did this year, right? So Preventice, Farapulse, Lumenis, Baylis and Devoro, will all contribute over time to our organic revenue growth rate as well. So a lot to like, I think, in the whole portfolio that we have for the next 3 years.

Yes. I wanted to...

Lauren, is there one that you would pick?

It's hard to pick from my favorite children, but I am really excited about PI. And I think you listed some of the big growth drivers there TheraSphere, drug-eluting with both Eluvia and Ranger and just the opportunity it has.

And then obviously, longer term, but I'm also excited for things that are addressing some of the most challenging disease states like DBS for Alzheimer's and Y-90 for glioblastoma. So not going to help '22, but hopefully, it can make a big difference in the out years and for patients and for the company.

Yes. Obviously, tuck-in deals have been and continue to be a major driver of top-tier growth for Boston, and you've done just a terrific job over the years. And you've said many times, growth accretive M&A, your #1 priority. Just before we talk about the what and what kind of deals, Dan, from a cash perspective, the balance sheet is in great shape. You've still got $1.9 billion. But I guess that cash will be paid down largely as you pay down the Baylis transaction. Do you wait until -- I know you're generating like, in round numbers, $0.5 billion a quarter. Do we wait until you're back over $1 billion in cash range? Are you more inclined now to be -- actively finance some of these deals with incremental debt, given the health of the balance sheet? How are you thinking about just as a setup, first?

Yes. I think you're correct in characterizing Baylis. Largely, the cash balance that we have today, the majority of that goes towards Baylis. So we basically fund that with no new permanent debt. So -- and I think that's probably the -- the short-term strategy is to not add any significant permanent debt in the short term. As you said, we're generating strong cash flow, both this year and next year and all years. And so from our perspective, we would look to continue the trend and just on the tuck-in opportunities that we have. I mean we did -- we've done the 5 this year, basically 5 different divisions, which is nice, right? Three out of the five came from our VC portfolio, and that's just -- that's awesome. That's great for us. That portfolio has really created a lot of opportunities for us to be acquisitive, and this year is a great example of that. So I'd look for us to continue to be acquisitive going forward, again, maybe albeit at a slightly slower pace than the 5 we did this year.

Yes. And just as you look ahead, I'm sure -- I'm confident that it's about being opportunistic and right technology, the right deal at the right time at the right price. But are there areas where you'd be a little more inclined to act or are there parts of the VC portfolio -- have you depleted the near-term opportunities in the -- and you'd like the rest of the VC portfolio to mature and grow a little bit? Are there more opportunities externally? Any incremental color would be great.

Yes. I mean the beauty of the VC portfolio is it's kind of -- it's a perennial in terms of a garden, right? You just have -- every year, there's a handful of them that come up for potential exits. And it's a much more known and structured process of when those exits come versus the phone rings and company X is in a process, right? Because we've been on -- we've had a Board seat. We've been a part of the company. We regularly review their progress. And so that -- from an acquisition perspective, it's great when something comes out of the VC portfolio. Having said that, not everything, as we said, 2 out of the 5 didn't come out of the VC portfolio. So there just happens to be an opportunistic nature of M&A that is the reality. So we're ready for both. We have a nice portfolio that will put different companies in play over the next 1, 2, 3 years, and we're ready for opportunistic things should they come our way. So -- but there's not 1 particular area where I say, "Oh, boy, we have to have that product, right, or that business? It -- we're looking to invest in high-growth, highly innovative devices. And I think our track record for 2021 shows well on that.

Great. Back to the potential for margin improvement. Obviously, you're indicating that -- you've said it already on this call, you expect margins to improve. But maybe starting with gross margins. When we think about the -- your key priorities over the '22-'24 LRP, how quickly can we get back to pre-COVID -- I'm sorry, exceed pre-COVID operating margins? And is there -- when you think about gross margins, R&D spend, SG&A, what are the greatest opportunities beyond volume improvement? What are the greatest opportunities to tackle that to, again, add to our confidence that, that can happen?

I think one of the things that we've been so focused -- one of the reasons we've been so focused on getting that 26% in the back half of 2021 is that was basically our 2019 adjusted operating margin, 26.1%. So reestablishing that baseline after the challenging macro environment over the last 2 years is really important for us as well as investors. And so establishing the 26% and then growing off of that is really what the leadership team and the entire enterprise are really maniacally focused on. When you think of gross margin, as part of that 26.1%, gross margin was north of 72%, 72.4%. So that's a bellwether that we're focused on to get back to, right? It's not going to be in the short term. Obviously, inflation is one challenge there, but that we will continue to grow gross margin. So as I said earlier, 70.6 in the third quarter, look for a slight sequential improvement in the fourth quarter, and the goal would be to have that go north in 2022. SG&A is really -- it's been a really different last couple of years, right? A lot less in travel, a lot more in digital, approaching the customer differently in terms of our commercial footprint. And so that's an area where we'll look to also spend less, but it's more about optimization across that category. And then R&D, we've been very consistent in saying, we don't need to be at that 10.5% to 11% where we've been historically as a percentage of sales. We can fuel the top line and do that for less than that, just by driving efficiencies in the organization, making better use of our global footprint. So all 3 lines can contribute, and we'll see how that plays out in 2022, but the goal would be get that 50 basis points and have it come from margin, SG&A and R&D with the appropriate trade-offs.

Got you. That's very helpful. I thought maybe we could touch base on some of the recent acquisitions that -- there have been so many. I'm not sure that, I certainly include myself in this, everybody appreciates some of the potential for some -- maybe we'll just take a couple. Baylis. Help us understand again how that's going to help Boston, both competitively from a growth -- the potential impact on the portfolio. I know it makes the transseptal implant approach easier. How does it help WATCHMAN FLX? Or does it add value more to the mitral space down the line? I'm not sure how to think about it.

Yes. The way I think about it as we went through diligence, and I'm even more excited now to -- as we anticipate the closing is if you think of that, that's a growth-accretive and then post integration, a margin-accretive deal, right, and significantly accretive on the growth perspective, right? I mean just the level of growth that they've been posting. And if you think of the underlying procedures that, that product -- those products support, it's really 3 of the highest growing -- highest growth rate procedures in med tech, when you think of the LAAC and any other structural heart procedures that the Baylis products are used in. So think of our cardiology group, cardiology and CRM and EP, just a lot of synergies and a lot of excitement about putting that organization as part of Boston Scientific. So that one -- assets like that don't come along that often, and we had the opportunity to get it, which we thought was a fair price, and we're super excited to put that into the BSE family.

Turning to Farapulse, another key acquisition. We've had incredibly encouraging positive physician calls by Farapulse. Maybe as excited, I have -- it's been a long time since I've heard physicians this excited about any new technology as they are about Farapulse. Can you talk us through the commercial rollout in Europe? Are you on track there, given COVID? What's next? And are you concerned about your ability to roll it out given some of these macro headwinds?

I mean COVID, obviously, is a challenge for a lot of reasons across the enterprise. But for Farapulse, I would tend to agree with you. If you get a group of electrophysiologists together, that is the #1, 2 and 3 thing they want to talk about is pulse field ablation and Farapulse -- we have a unique opportunity in EP here to lead. We're the first ones in Europe enrolling the trial in the U.S., and it's a fantastic product. Supply chain is still a bit nascent, obviously, from a small company. We're working to get that on the Boston Scientific rails, so to speak. But we are super excited about this. At Investor Day, all the questions we got at the end of the EP section were all about Farapulse. This is a real unique opportunity for us to lead in EP. And again, back to the VC portfolio, a fantastic opportunity. We were a Series A investor, I think 6 or 7 years ago in this company and saw it all the way through and eventually acquired it. So another shout out for the VC team.

Yes. And what impact does it have on the rest of your EP portfolio? I keep thinking maybe people are underappreciating that pull-through aspect? Is it changing the dialogue you're having today?

Well, I think it is. And it's also the -- with the conversations with electrophysiologists, the level of penetration into procedures that Farapulse, that PFA could have is like is pull-through on its own because of the opportunity to drive into what is traditional ablation procedures today. So yes, if you show up with Farapulse, it's a different conversation than we would have had pre Farapulse pulse with our commercial partners. And the outlook for the technology is just -- is hopefully fantastic.

Yes. Turning to ACURATE neo2, obviously, already launched in Europe, and you're having some solid success there. But where -- how would you have us think about ACURATE neo2's role going forward? And what's next in your mind? And can the device be successful here in the United States and really make a difference for you competitively from a growth perspective or a portfolio perspective, is this going to be really a successful device?

Yes. I mean we wouldn't be investing in it if we didn't think that. The short-term goal is to finalize enrollment for the U.S. and continue to drive adoption outside the United States in the places where it's approved. Can it be a success in the U.S.? Absolutely. We believe so. Just the characteristics of the device, the ease of use, the data that have come out. I mean again, Lauren, we can touch on some of the more recent data, have us -- and we covered this at Investor Day, have us really excited about the opportunity for it to compete effectively. And just a quick parallel, which is interesting was we kind of had the same conversation when we were launching Ranger, right? Boy, you're going to be the whatever number of drug-coated balloon you're going to launch and how are you going to get any share? The uptake with Ranger has been fantastic on the strength of the product. And so if you -- it doesn't matter if you're first, second, third or fourth, if you have a differentiated product, I believe you can drive incremental share gains. That's what we believe will happen with ACURATE neo. Again, we're still a ways off from the U.S., so we're focused now on the clinical execution there and commercially outside the U.S. But you get that question, I'm sure a lot, Lauren. Anything I missed?

I think you got it. We continue to look forward to launching in the U.S. in 2024 with all risk. And we do have our SENTINEL embolic protection, which does give us access in that place along with continuing to drive clinical enrollment.

I think we're a couple of minutes over now, Dan, Lauren. I want to thank you so much. As always, I'm very proud of myself that I didn't ask an update on the fourth quarter guidance, but I appreciate all...

You showed great restraint, Rick.

I'm very proud of myself knowing how anxious you were to answer it. But thanks so much. Have a great day. Appreciate it, and we'll see everybody back here in a few minutes.

Thanks, Rick. Appreciate it. Take care. Bye.

Thanks, Rick. Take care.