Boston Scientific Corporation (BSX) Earnings Call Transcript & Summary

Good morning, everyone. Thank you for joining us for day 2 of the company fireside chat for the SVB Leerink Global Healthcare Conference. I am Danielle Antalffy. I'm the med tech analyst here at Leerink, and we are very lucky to have with us Boston Scientific. We have Dan Brennan, CFO; and also Lauren Tengler, Head of Investor Relations. So I will just launch right into Q&A. Dan, if that's okay.

Sure.

So let's start with 2022 guidance, the sense is that it did disappoint some, but you have historically tried to be as conservative as possible. Tell me if I'm wrong in characterizing it that way. But can you talk about your approach to arriving at the 2022 sales growth and EPS guidance? And sort of what's been complicated at the high end versus low end for COVID, any sort of recovery? And what other dynamics are prompting what feels to me like a conservative guide?

Sure. Thanks, Danielle. Thanks to you and Leerink, for the invitation. Pleasure to be here. And just quickly, for those that don't follow us as closely, we can kind of close off on 2021. We recently released our fourth quarter 2021 results. And I'm really proud of the global team and what we were able to accomplish in a bit of a challenging overall backdrop of a year. We grew organic revenue 7% versus Q4 of 2019, kind of the last normal year, pre-COVID and then 6% for the full year versus 2019 organic revenue growth. So we feel good about that and feel like it's a good jumping off point for us coming into '22. Specific to your question on '22, I would call our historical philosophy of giving guidance to be what we believe is appropriate guidance. We give guidance, we believe we're confident we can hit -- and I think we've got a good track record of that over the many years. And I think our 2022 guidance fits that philosophy. So we have -- again, for those that may not follow this closely, our organic revenue guidance for the full year is 6% to 8% for 2022 versus 2021. And our adjusted earnings per share guidance is $1.73 to $1.79. So feel like both those ranges are appropriate to start off the year. And I think as you would expect, what puts us at either ends of those ranges it's a bit of a micro macro, right? So the macro is COVID, right? We've been very clear that we say that in 2022, we believe there'll be less COVID impact full year 2022 than there was in '21. It was less in '21 than it was in '20. So we're on a good trend, and we hope that trend continues. And believe we'll see some factors that should make that hopefully be a reality for 2022. And so that's probably the biggest swing factor that we don't control. I feel good about what we do control. With the execution of the team, the products, the portfolio, the pipeline, the people that drive it, I feel good about that. So I think if you believe that 2022 has less COVID, I feel good about the range that we've given.

Yes. I guess one follow-up question, if I could go off-script for a little bit here on COVID and I guess, how do you contemplate potential incremental waves from here? Or is it a situation where you feel like hospitals are in a position to manage through where you feel comfortable saying the impact will be less meaningful even if there is a second wave. I guess just trying to get a handle on how you think about COVID.

Sure. Obviously. So as we look at 2022, specific to guidance, we've given the full year guidance, we've given Q1 guidance. So those are the periods that we've talked about. And again, for 2022 full year, we say there is -- our belief is less COVID impact in '21 than there was in '20. So that's good. Relative to, as you said, the hospitals have done an amazing job of being able to work through the various COVID waves that have hit. And for us, as we look at our business, each successive wave that's come has been less affectual, less impactful on our revenue, which is, again, a credit to the health care system and the medical professionals that are that are doing that. So that's what kind of gives us the confidence that we'll get out of this here as we move through 2022. And that, again, the key assumption is less COVID in '22 than it was in '21. That's -- the key takeaway is that.

Okay. Got it. Okay. I'm curious, just sticking to the COVID theme for a second, and I think you'll like this question better than trying to predict what is going to happen with COVID. The legacy trends that COVID is leaving with the health care system over the last 2 years. What do you see happening as far as how it's accelerating or changing how the health care system is evolving. And I'm curious how you think Boston Scientific is positioned as far as taking advantage of some of these trends.

Yes. I think the clear one there is the ability to approach customers in a different way and frankly, internally approach colleagues in a different way. I mean, look what we're doing today here, right, and approach investors in a different way, less in-person setting. So we -- prior to COVID, we had a real nice set of programs that were working well in Europe relative to digital and virtual capabilities. And I think COVID necessitated -- we probably would have done some of it anyway, but COVID probably necessitated us sharing those best practices across the company and creating centers of excellence around digital and virtual capabilities. So I think even in a post-COVID, COVID as an endemic world, call it what you like, I think those will really serve us well in terms of being able to approach the customer. Yes, in traditional ways that were present pre-COVID relative to in-person and trade shows and all the different ways that we used to do, but also giving us a new arm of digital and virtual capabilities to interface with our customers, with our colleagues, with our investors, with all of our key stakeholders.

Okay. Got it. And then one of the trends that I see from my perspective is the shift to the ASC out of the hospital really, and I'm curious about how Boston Scientific is increasing focus on this particular segment versus the hospital. Where do you see your -- whether you look at it as a percent of sales perspective or what have you that going over the next few years? And how are you focusing R&D and investment in sales and support different from the -- what has been the legacy hospital customer.

Sure. Just a quick number on that. So -- and we've said this publicly before, about 2/3 of our business in the U.S. is in outpatient settings, right? The majority of that is in outpatient hospital settings, right? So the majority of the outpatient business that we have is in hospital settings, but we do obviously have business in ASCs and OBLs, the office-based labs. And you're correct, there's a trend to move to more of those settings. It's really not a new trend. It's a trend we've seen over the last few years. And we see it predominantly particularly in like PI, in Neuromod, in MedSurg with our Urology and Endoscopy businesses. And we have specific commercial-facing strategies of how to approach those customers. So we do that a little bit differently than we may a traditional large IDN or large hospital group. But on the R&D side, not much. We don't have a different R&D portfolio that we put forth for ASCs and OBLs versus the traditional settings because it's pretty much the same product. So I'd say it's more of a difference in how we approach the customer from a commercial-facing standpoint than it is we're going to have a different portfolio to bring to those customers.

Got it. I guess just thinking of following up on that, just thinking about the customer-facing component and the service and support. Is it a higher spend for sales -- just because there are so many of these ASCs and office-based labs out there because you're calling on each of them individually? Like how much incremental spend is associated with that? Or am I thinking about it completely wrong, which is...

I think you're thinking about it correctly, but what that comes down to is each individual business and the coverage that they're going to have. How many sales reps are we going to have? How many clinical specialists are we going to have? How many people in telesales are we going to have to cover the various disciplines across the different geographies of the U.S.? And our team does a good job with that. Our sales teams, our commercial-facing teams do a nice job of figuring out the right Rubik's Cube of how to approach all customers, but in particular to this question, the ASCs and OBLs and where they are and making sure that they have the opportunity to order our products and interface with our team. So there's not a one size fits all, but our teams do a nice job of figuring out the best way to approach that customer.

Right. And just thinking about this is actual -- this COVID dynamic actually maybe has better facilitated that shift to sort of you mentioned telesales, like what we're doing now sort of remote contact with these ASCs. So okay, got it. As far as the long-term guidance, so 6% to 8% long-term organic sales growth target over the next few years. Dan, I know this is asking you to talk about who your favorite child is or whatever. But can you talk about what you see as the most exciting, in your opinion, the most exciting new existing products that maybe are underappreciated that are going to be meaningful drivers to getting you to that 6% to 8% sustainable growth.

Yes. It's a good question. It's a hard question. It's one we get, I think, often around that long range, 6% to 8% growth target that we have. And the reason is the strategy and the diversification that we have as a company. So when you think of our company, we have 7 businesses that we support, right, across different disease states and physician specialties. And our strategy is category leadership. What does that mean? Being as deep in each of those verticals as we can be and to support our customers. And so by its very nature, it creates a great level of diversification for the company that makes this question, which I think is a great thing, hard to answer because there's not just one product that you can pick and say, "Boy, I hope this product goes well." Obviously, WATCHMAN gets a lot of headlines, right, in our cardiology business. And it should. It's a great product. It's great for patients, physicians, and it's been great for Boston Scientific. So people will point to that one. There's new products on the horizon that I think have the opportunity to really change the way care is given, pulsed field ablation, Farapulse, within our EP business, right? It's very small today. It's in Europe only. We're looking to bring that to the U.S. over time with the trial that we have ongoing. And so there's -- that gets a lot of headlines. Again, small today, hopefully very large in the future. And then you look at divisions like endoscopy and urology, and it's -- take urology as an example. There's so many different pieces of urology, Men's Health, LithoVue, stone, all the different pieces. And you can't point to the one product that's hundreds and hundreds and hundreds of millions of dollars, and I hope that goes well, which I think is a great thing. I'd much prefer to have the diversification and the breadth of the business across the 7 lines than to be kind of white knuckled on that one product that has to go well. So I mean -- and we can certainly do a tour through anything, whether it's WATCHMAN or other products or other businesses. But if you take a tour through the different businesses, PI with drug eluting, right? You have Eluvia and Ranger are just doing extremely well. We're the only company that has both a drug-eluting stent and a drug-coated balloon. Within CRM, we have the new diagnostic business with Preventice. We have the implantable cardiac monitor that we have. So I mean, I could go on and on. And then lastly, I would say, I'm really proud, early days, proud of the class of 2021 acquisitions, right? So it's actually -- we have some chunky revenue there, right? We almost of $600 million of revenue in 2022, right? It's not going to contribute significantly to 2022 organic revenue, right, based on the timing of the close. But you just start to say $600 million because your question was the long term, right? $600 million of today revenue that I believe all of that should be growth accretive to Boston Scientific, right? We wouldn't have done that. Our strategy on M&A is high-growth, high-quality adjacent M&A. So I'm excited for that as well to kind of layer on top of the nice organic pipeline that we have. So long answer to a short question, but it's hard to pick one, it's probably 51.

Yes. No, and it's a great point because I do think everyone is hyper-focused on WATCHMAN. I'm guilty of this as well. And actually, the next question was about WATCHMAN. And I guess, that has been one of the highest growth products for the last few years, hence why people are so focused on it. I'm curious how you would characterize the sustainable growth profile of that product, given that there is a competitive entrant. And I've got a quick context around this question. As Lauren knows this, we did a lot of work on WATCHMAN and Amulet in the market. And one of the things our survey interesting -- our survey work interestingly didn't pick up what is incremental market growth, which I think is wrong. I mean, I think you look back at other cardio markets when they go from a monopoly to a duopoly, they tend to expand pretty meaningfully. So just curious what you're seeing out there also today, appreciating it's very early in the competitive launch.

I think that's the point that you mentioned is that the incremental growth of the market as well. I mean, it's not -- the market we talked about today -- and Lauren is the -- as you said, I'll let Lauren -- she's the WATCHMAN expert. The market today, we call it around $1 billion for the global market, and we talk about that market growing 30% over the next 3 years. And that's actually what it's done in the past too, so it's not just picking the number out of thin air. So that's the exciting part of it is. Yes, there's a new entrant, but there's a very large market that still should have a high growth over the -- over our LRP period. But Lauren, you can, I'm sure, expand on that.

Yes. No, thanks, Dan. I think it's a great question, Danielle. So we're really proud of the performance of WATCHMAN in 2021. It achieved $830 million in sales, which surpassed our expectations. And that represents 68% growth over 2019, which is a roughly 30% CAGR over that 2-year period. And we think that increased penetration into this very large market is attributable to WATCHMAN FLX, a true second-generation device as well as ongoing clinical evidence. And if you think about the future and what Dan talked about with that 30% CAGR in the future, representing about $2 billion in 2024. You still have FLX. We're launching it in China this year, and we'll continue to expand in U.S., Europe and Japan. And then we have more data coming out and ongoing longer-term trials. And then you've got a second market entrant. And we think all of that together fuels that growth into the future that we've already seen historically.

And just a follow-up, Lauren, if I could. You are running a number of clinical trials to expand indications here. Do you think those -- is the goal of those trials to be specific to WATCHMAN from a market expansion perspective? Or do you think they will be considered sort of a class effect?

It's a good question. They're being run on WATCHMAN FLX specifically designed for superiority first with the OPTION trial for post-ablation patients who don't want to be on lifelong blood thinners, and then our CHAMPION trial will read out thereafter. So both of these are beyond the '24 time frame. And that one's a head-to-head against the NOAC. So I'd say both of these are powered for WATCHMAN FLX specifically, but I do think it helps with sort of growing the overall pie as well.

Got it. Okay. And the next question I have is a product-specific question, is on the EXALT product portfolio, Dan. And EXALT-B, very promising product potentially will -- it came out literally the year that COVID started, I think, right? So -- or that was the first year of launch. But how has that progressed and you also have EXALT-D coming online now? Can you talk a little bit about the EXALT portfolio and how that launch is progressing and how it strengthens your competitive positioning in that Endo market?

I'm going to jump in again, Danielle.

Go right ahead. Go right ahead, Lauren.

So single-use imaging is a great example of innovation and it's core to what Endo does. It's why they continue to grow above market across their very deep portfolio. And if you think about EXALT-D specifically, you're right, we launched in the middle of COVID. It's a totally new market and to launch into a new market, it requires market development. And so we've really been able to start working that market development work in 2021. We facilitated peer physician training. We're seeing protocols from KOLs coming out on how they're going to use EXALT-D in their practice which is critical because you have to decide to use EXALT-D before the patient is in the room. And to do that, the hospital system has to know that they're going to use EXALT-D before that patient is in the room. So there's work incrementally occurring around EXALT-D. And then in EXALT-B, you have an existing market, and we've got a clinically differentiated device that we're launching in both Europe and U.S. We're in limited launch in '21, moving to full launch in '22. And so between the 2 of those, we see it being a more material contributor to Endo in the future. But again, the story is really innovation and that incremental high-growth adjacent market play and really broadening the core for endoscopy.

Got it. Okay. And some other areas, Lauren, this might be you again, sorry to put you on the spot here, but some other areas that strike me as potential areas of surprisingly high growth are actually interventional oncology and also TAVR. That's not as surprising. We all know the TAVR market relatively well. But just curious about how those businesses are tracking today, specifically interventional oncology, which I think we med tech folks pay less attention to, quite frankly.

Maybe I'll take -- you want to do IO and I'll take TAVR?

That's perfect, Dan.

Right. Go ahead.

Yes. So on TheraSphere, I'm glad you asked. I think it's a super cool product. It is unique in that the indication today is for HCC, so primary liver cancer. And we received PMA approval just a year ago. And so we've really seen an acceleration of growth within this existing indication in the U.S., and we continue to globalize this product as well. And so the runway for TheraSphere is quite large, and we're still pretty early days. We continue to invest in ongoing clinical evidence to show how TheraSphere can improve outcomes. And there's data around how it can be used with immunotherapy and really ensuring that the patient outcomes are improved. We're also looking at other indications. We've talked about a glioblastoma trial initiating in 2022. That's for brain cancer. And then also, we enrolled our first patient in our MANDARIN trial, which is going to bring TheraSphere to China, which holds half the world's population of patients with HCC. So really big opportunity in the future for TheraSphere and look for continued growth here.

And then with respect to TAVR, we've showed some nice progress in -- obviously, not available in the U.S. yet, working on the trial and with the goal of bringing that -- bringing ACURATE to the U.S. in 2024. All the while continuing to gain share and do well in the markets where it is available. So we had talked about being a 10% share for overall Europe and 20% in kind of opened accounts, which is nice. It gives us a good feeling that when we bring it to the U.S. It's a -- we believe it's a workhorse valve, a valve that can compete in the market, and it will be a nice addition to our overall structural heart portfolio. So the U.S. won't contribute likely in '22 and '23. That's fine. We run the company for the next 5 to 10 years. And I think as you look at things that will launch in the back half of the LRP, whether it's Farapulse in the U.S., whether it's ACURATE in the U.S., other products. It's all about having a nice cadence each year. And I think one of the things that I'm excited for is the cadence of portfolio products that we've launched over the last couple of years really haven't had a chance to shine yet because as you said, with -- and as Lauren said, relative to particularly call it EXALT-D, it's a bit of a muted environment to be -- to have new launches. And so as you get to, again, COVID in an endemic or a post-COVID world, I'm excited that they'll have the chance to kind of shine in the light of day of a better macro backdrop in the future.

Yes. Yes, that's a good point. I guess if you look out over the 6% to 8% long-term organic sales growth target, Dan, I'm curious how you would characterize the biggest potential risk to that guide? I'm guessing you're going to say execution, but put a finer point on execution around, is it specific product launches? Like what keeps you up at night?

It's more the macro than the micro again. And I think we're going to get some relief on the macro as we go forward, right? And we've discussed that. On the execution side, there's clinical execution. Obviously, we need to make sure that the 2 I just mentioned relative to ACURATE relative to Farapulse, getting those trials completed with excellence, getting the clinical data getting the products launched. So there's milestones and steps we still need to hit along the way. I'm comfortable with our team. I'm confident in our team and the ability to execute that. So I worry more about the things I don't control, right, the macro things because the 6% to 8% that we give that's not foreign territory to us, right? I mean, if you look back at '17, '18, '19, we grew over 7%. So we think our markets are 5% to 6%. We hold ourselves accountable to grow faster than our markets, right? So that's what we did '17 through '19. So it's -- if it comes down to execution of the Boston Scientific team, I'm bullish on that.

And it sounds like execution on the new product launches, but what about on the cost side of things. Another piece of the Boston Scientific story is definitely positive operating leverage. So what do you see there as the biggest risk? Some of that is still not in your control, thinking about the recent call and you having to talk about inflation and cut pressure on COGS, for example.

Yes. No, absolutely. And it's almost a rinse and repeat answer to what I said on revenue. It's more the macro. It's more the inflation on the global supply chain challenges that are kind of the stick and the spokes of the bike of operating margin expansion, right, for us, right? But the fundamental culture and tenet of what we do as a company, again, looking backwards, it's in the fabric of what we do, the goal of expanding operating margins. So we gave our guidance this year. We exited last year second half average at 25.9% adjusted operating margin. We talked a lot about that. We basically hit our target for the back half. So check on that. I was proud of that. And then we gave our guidance this year of 26.0% to 26.4%. So somewhere from 10 to 50 basis points. Very clearly, we've said our goal is to 50. There's some macro and micro we've got to work through to get there. But as we sit in the halls here, that's our goal. And we'll keep everybody apprised as we go through the year as how we do against that goal, but that's what we're shooting for.

Yes. And I think that was emphasized on the call and deserves repeating, you are striving for that 50 bps margin expansion. You're being a little more conservative on the guide given the fact that there are things out of your control right now.

I think it's given -- exactly. Given the macro backdrop, I think it's a prudent range to give. At 10 to 50, it's all margin expansion. It's all higher than the 25.9% we did in the second half, and we're shooting to be at the 26.4%, and that's the goal. So...

Yes, yes. So another component of the Boston Scientific story, you guys have done such a great job on the M&A side of things. You've been very acquisitive actually over the last few years, even some big deals thinking DPG and also Preventice, but we're also in an environment where SMID-Cap valuations have come down meaningfully. So I'm just curious, Dan, if you could comment on how the macro conditions are potentially changing your appetite for M&A or how you're thinking about M&A in the near term?

Yes. The appetite is still the same as it's always been. I mean our goal is to add high-quality, high-growth adjacent tuck-in M&A to the portfolio, as we talked about, that's one of the ways to augment the category leadership strategy that we have through the M&A. Again, the VC portfolio is very helpful in bringing forth some opportunities there. I know we have our organic R&D pipeline. Specific to M&A, I don't think there's a backdrop that we have not been successfully able to operate in, right? So if you -- and I point back to '21, right? Mid-cap valuations and other valuations IPOs and such were higher at that point. And we still got 5, what I would call, high-quality deals done, and they were all very different, right? Some were small private companies. Some were owned by private equity firms. And so we just -- in a very humble way, we have a great team that is very in tune and in touch with the med tech landscape. And we have a very robust pipeline across the different businesses we support of opportunities that we evaluate on a regular basis. And so it is our #1 capital allocation priority to do that high-quality tuck-in M&A and I'd look for us to continue to be acquisitive, albeit likely not at the same levels of -- that we did with 5 deals and $4 billion in 2021. But we're usually good for a few nice tuck-in deals each year and I would see 2022 being the same.

Yes. And it doesn't matter what the macro backdrop is, basically, it's like you would do those deals whether valuations were through the roof or not.

Well, we look -- I would say we look to find a way to do those deals, but we don't compromise on the 2 tenets of what we have, which is it has to be financially compelling and strategically compelling. So we don't chase things. We don't go off and buy things that don't have an adjacency to us. So you have to meet those -- in order to get into the room of being acquired by us, you need to meet those 2 things, and we don't compromise on those.

Got it. Okay. Last question for you in the minute we have remaining, and that's where you think or as you look at the Boston Scientific portfolio as a whole, is there anywhere where you see significant product gaps or white spaces or where you're under-indexed and you're like, "I wish we had more scale here?"

I think I would just harken back to the answer I just gave, which is with category leadership, there's multiple opportunities across those 7 businesses to augment with different products. So I don't sit here and say, "Wow, I've got to have this and I got to go get it." We have a -- look at the products we did last year, with Preventice and Farapulse and Devoro and Lumenis and Baylis, just a real nice potpourri across the business. And the -- I think that's the recipe going forward continue to drive category leadership across those 7 businesses.

I love how you worked potpourri in that, Dan. That was good, I like that.

Thank you.

All right. Well, with that, why don't we wrap up? Thank you, Dan and Lauren, so much for being here this morning. And thanks to everyone that listened in.

Thanks, Danielle. Appreciate the time.

Thanks, Danielle. Take care.

Bye, guys.

Bye.

Bye.