Boston Scientific Corporation (BSX) Earnings Call Transcript & Summary

On our last day of the conference, we welcome to join Boston Scientific. Dan Brennan; and Lauren Tengler, VP of IR, welcome.

Thanks so much for the invitation, Travis. A pleasure to be here. Thank you.

Thank you.

So Dan, I just wanted to start out, first, thinking through like the Q1 performance and March recovery. Like we've been talking to a lot of companies this week, and it seems like for most of the elective names, March, strong; April, even for some companies, similar to March or better for March and that's continued into May. Seems like elective recovery's well on track. But I'd love to get your thoughts on kind of what you're seeing around your portfolio.

Sure. We were very pleased with the Q1 performance. We had 9.7% organic revenue growth for the quarter, had very solid P&L metrics. So we were pleased with the quarter. I think similar to what you've heard from other companies, the trend was probably like that relative to January, February, March: January challenged with COVID; February, less so; March, good, strong recovery. And we did say on our earnings call back at the end of April that April was in line with expectations. So probably not that dissimilar from what you've heard from other companies, but I think it's -- the recovery is going well.

Right. And then if you look at Q2 specifically, guided 3% to 6%. When you think about some of the puts and takes on that, kind of what you're seeing into April. I'd love to get some color. China is obviously an incremental headwind. Anything else that you'd call out?

Yes. I think -- so again, as you said, our guidance -- organic revenue guidance is 3% to 6% for the second quarter. Importantly, I think at the midpoint of that at 4.5%, it represents sequential momentum from Q1 comp adjusted because the comp in Q2 is [ 600 ] basis points higher than it was in Q1. So that feels good to continue the momentum from Q1 to Q2. I think you're right. I think China probably is the most logical take on that. But as we said on the call, we believe that Q2 will be a challenging quarter for China. Still think that we can grow the business double digits for the full year as it recovers in the back half and believe in that 3% to 6% that we've included different potential outcomes for China in the quarter.

And China, I know -- it doesn't sound like you wanted to quantify exactly how China is going in the quarter, how far it's down. But are you expecting that to recover pretty much back to baseline levels in Q3? Or is it more back half Q4?

I think I would just say that Q2 will likely be challenging. This is not a Boston Scientific, it's obviously a macro issue for the -- for China as a whole. So I think Q2 will be a challenge, but I would look for a recovery over the back half. Does it start July 1? Don't know. But over the back half, still feel comfortable that we can get to double-digit growth, '22 over '21 for China for the year.

Okay. Great. And then on the margin side of things, you baked in $300 million of incremental headwinds on that front. And if you think about the puts and takes on that, like what are those pieces are likely to go away versus permanent?

Yes. So we gave some pretty detailed disclosure, I think, which was appropriated on the earnings call at the end of April relative to that macro headwind. And by the numbers, the reason is -- so in 2019, we were 72.4% adjusted gross margin. In Q1, we were 70.3%, so kind of a couple of hundred basis points in the round. That $300 million macro headwind basically is that difference. So the takeaway is the fundamental gross margin engine for Boston Scientific on the micro side is intact, doing all the right things. We just need to, over time, get a little relief as -- again, I'm not only saying this on the macro side. And just to detail it out a bit. So we talked about the $300 million impact at the gross margin level. About half of that is freight. And that's really the freight of us moving our product around the world from the manufacturing plants to sterilizer to distribution facilities and such. So that's half of it. I don't believe that's permanent. Will it ever go back to the level it was pre-COVID, 2018, '19? Don't know if it gets all the way there, but I think everybody would believe that with more flights, more activity, that prices will come down for freight over time. So we see relief coming there. And then the other 2 are really based on our direct material inputs into our manufacturing process, and it's the price you pay for them and the availability of them. So the price is obvious. If you pay more for the direct material inputs into your products, you -- that impacts your gross margin. The kind of the choppy availability of some of the direct materials, what that causes is inefficiencies in running a manufacturing plant. If I have a product that has 40 components in it, and I get 39 of them perfectly, but I can't get to 40, well, I can't finish that product. So it drives inefficiencies in how you want to run a manufacturing plant, and that drives variances. So what we need to see there, and I believe we will, over time as supply catches up to demand and things moderate is you hopefully see lower prices and greater consistency of availability, and both of those are good for gross margin. So our goal is -- the 72.4% is kind of a beacon for us to get back to that over time and doing everything we can internally. And with a little bit of, as I said, macro help, I think we can get there over time.

If you look at some of the natural improvement in the second half of this year on gross margin from some of the operating variances, I would say there's probably still some of those operating variances that are happening now. It sounds like they'll probably roll off into '23 if shipping costs go down as well to some degree. It seems like there's potential for gross margin expansion into '23.

Yes. I mean we'll see what happens in '23. Your comment on '22 is spot on. I mean our gross margin in Q1, as I said, adjusted gross margin was 70.3%. We've said that for the full year, we expect to be in line with where we were the second half of last year, which is around 70.8%. So we do see a better gross margin in the second half. That's a very -- that's a historical trend that we usually see as a company in most years. So that shouldn't be surprising. And then we'll look to go north from there.

Right. And so your expectation is you can eventually probably get back to the pre-COVID, 72.5% gross margin?

It's a goal. It's written on the whiteboard in my office, and it's a target that we have. Obviously, we'll determine timing as time evolves. But we were there, and there's no reason we can't get back.

Right. Okay. And then if some of these inflationary pressures do increase from here, I assume you're not seeing that at this point, right? All the stuff is pretty -- fairly you baked in a higher inflationary costs, but it's not getting worse. But if it does get worse, like do you have potential offsets that you can do in and around the portfolio?

Yes. We did -- again, on the earnings call in the end of April, we talked about the fact that the headwinds have gotten worse since our February 2 earnings call. So we made that clear. Again, not unique to Boston Scientific. So if they were to get worse -- well, our assumption is that they don't get any better in '22. So we've said, you know what, what we have now is basically what we're going to have for 2022. We're not banking on a second half recovery. If they were to get worse, then we look at other areas of the P&L to try and make offsets, which we've, I think, done well as a company for many years.

When you look at the potential for price, we've talked a lot of companies this week. And it does seem like some are being a little bit more proactive about managing price around the portfolio. I mean, look at your portfolio, I assume like MedSurg, you probably have positive price already potentially to improve that a little bit more, and maybe cardio little less negative price. Just curious how you kind of look at the portfolio and your ability to manage some pricing actions.

Yes. I mean, obviously, a lot of discussion, as you said, around pricing. And for us, the pricing landscape has been remarkably consistent over the past many years through a variety of different cycles of companies and our customers and institutions and such. And so as we look at that, it's a very low single-digit headwind for us each year. We bake it in. It's in our plans, in our forecasts, in our strategic plans. And the majority of it is made up in cardiac rhythm management and stents, right? So the good news is that those are becoming a smaller part of the company. So therefore, the price change on those 2 franchises has less of an impact on the company. To your point, in the rest of our businesses, there's very little in the way of significant price challenges. And so -- and it just puts a focus on innovation. You tend to get better pricing, the market values innovation. So we are focused on innovating new products, and that also helps. But it really hasn't been a big shift in what we've had over the last many years. It's been very consistent.

Okay. That's fair. And then I guess we've talked a lot about gross margins, kind of moving on down the line to operating margins. Historically, you've kind of targeted this 50 basis points. When you think about the ability to do that kind of post this year, do you have to have the gross margin improvement? Like how do you think about like other offsets in the P&L? Like, looking at The Street, The Street's like 70 basis points margin expansion in '23. Maybe '23 is an above-normal year because some of these inflationary costs go down. I don't know if that's -- if you would think about it that way, or just kind of talk about your ability to kind of still get to this 50 basis point margin expansion.

Yes. I mean it's obviously early to talk about '23, but what is clear, and we talked about it at our Investor Day last September, is our goal is to be interesting to investors at the top line and the bottom line, to outgrow our peers at the top line, which I think we've done a nice job of, and to deliver that differentiated operating margin expansion. So this year, a range is 26% to 26.4% adjusted operating margin. We were 25.9% for the second half last year. So that's expansion versus that. The range is 70 to 110 basis points versus the full year last year, but we were very clear that the jumping-off point should be the second half last year of 25.9%. So it's 10 to 50 basis points this year. Still believe that range is valid, which will be expansion this year, and it's a big part of our story. And that 50 basis points we've talked about for a long time as recently, again, at Investor Day. So that remains the long-term goal.

I guess looking at the op margin this year, 26% to 26.4% was the official guidance.

Yes.

And you baked in -- it didn't really change that operating margin. Obviously, you've baked in some extra inflationary pressures. Like is the message is going to be at the lower end of that? Like what takes you to the low end versus the high end this year on op margin?

I think there's a lot of different factors that would go into that. Obviously, where we land from a revenue perspective because the higher the revenue, the more that gives you the leverage opportunity through the various areas of the P&L. And then, yes, I think that probably the macro challenges within gross margin, to the extent that they get better or worse, probably puts you somewhere in that range. But as we said today, we still feel comfortable that we can deliver within the range. And if we're sitting here in the January or February time frame and we've done that, I think we'd say that's good. We expanded operating margin. We did raise our full year organic revenue guidance range on the, call it, the end of April from 6% to 8% to 6.5% to 8.5%. So good confidence in our ability to deliver the top line. And obviously, managing the bottom line very closely.

I was looking through like some of the -- you've done several acquisitions, like 4 acquisitions in the last few years. So those start turning organic later this year into '23. Those are all growing faster than your business today. I think that's going to be a tailwind to organic growth. Like I know you're not going to bless my math, but obviously, it's almost like a point of revenue growth acceleration you can get from these acquisitions from the math that I was doing. Does that put you at the higher end of your normal 6% to 8%? Or is it kind of what you need to get to that 6% to 8%?

You're right, I'm not going to bless your math. But we did say for 2022 that it's about 50 basis points. And so just a little bit of -- to back up on that. So we did 5 acquisitions last year. Super proud of the class of '21 acquisitions, right? I don't have time to go through them all in detail, but very different acquisitions across the entire portfolio, supporting our strategy of category leadership, which is to be as deep as we can be in each of the 7 verticals that we support. From an organic revenue perspective, we wait for 1 year post the close to put it into our organic revenue profile. So this year, we have various timing. Preventice would have gone in March. Lumenis will go in the fourth quarter and such. So all of that nets to 50 basis points this year. The good news is that next year, they'll all be organic, except for Baylis will go in February. So we'll get kind of 11 months of Baylis. And that -- it's kind of a -- it was a chunky class. It was $600 million of revenue, as you said, in the whole and on their individual, growing faster than the average of Boston Scientific. So I'm really excited about that class and what it can do for the company. I wouldn't quote a number for '23, but I'm really excited about what that can do for the growth going forward.

So it just gives you a lot of extra confidence in that 6% to 8%?

Yes. Just it's -- there's many ways to grow the top line: our internal R&D portfolio, our VC portfolio and M&A. And as you look at the recent track record of that '21 M&A, I like where we sit there.

When you think about other puts and takes on the top line, as you move from '22 to '23 new product launches, is there anything else that you'd call out, positives or negatives, that we should consider on the revenue side?

Yes. I think it's -- one of the things I love about -- I like a lot of things about the company, but one of the things I really like is the diversification. So we're not relying on one product. We're not relying on one division, one country. It's really an amalgamation of the entire business, right? So as an example of metrics. We launched 70 new products in 2020. We launched 90 new products in 2021. And that's really what drives the engine of Boston Scientific. The products that nobody has ever heard of are the ones that a lot of times will drive the growth. If I had to pick a couple for '23 and kind of that '23-'24 time frame, I am excited about EP. So for a long time, we've been a small player in EP. It's a very attractive market, a $6 billion, $7 billion market, growing, pick your number, mid-teens every quarter. And we've been a sub-share player there. But with the technologies we have now -- and I think we're getting a little bit of a sign of this in EMEA, in our European region, where we have StablePoint, which is kind of our answer to the Force technology. We have the POLARx cryo catheter. And we have Farapulse, the pulsed field ablation technology. And we're seeing kind of outsized growth there. So that makes me excited from when we get those to the U.S. in that '23-'24 time frame, that we could start to much more meaningfully participate in that growth. So I think EP, which again, for us has not been a large success story over the last 8 or 10 years, I think that we're about to turn the corner on EP.

Okay. What's your view on pulsed field ablation? Like it seems like every EP company is investing in that market. Is that where the future is in EP?

Well, I mean, credit to our VC team, we were a Series A investor in Farapulse when their name wasn't even Farapulse 8 years ago and followed that company all the way through. It's kind of a poster child for how the VC portfolio should work. So they've been saying and we've been saying all along that PFA has the opportunity to really transform the EP ablation landscape. We'll see. It's early days, obviously. Farapulse launch is going well in Europe, obviously, moving up the supply chain curve, having acquired a small company. But when you start using words like it can -- it might be able to do things safer, better, faster, you don't often hear that with the technology. So we're excited. A lot of cards left to turn over and such. But we're excited to have that, and hopefully, look to lead in that space.

Anything about that technology that you want to share that kind of differentiates that technology from some of the competitive pulsed field ablation technologies that are being worked on?

Yes. I mean we're the first one in Europe. It's going well. So we have kind of first-mover advantage there. We've got a concrete plan with the trial enrolling to get to the U.S. So again, we're not going to prognosticate on share or any of that sort. We're just going to be -- humbly say, we'd like to participate more fully in that market and that we believe we have the portfolio on the way to be able to do that.

Right. Okay. And then on WATCHMAN in LAAC, I was actually -- quite rare to actually see a company get competition and actually disclose more information. And pretty bullish, I thought, that WATCHMAN is now a stand-alone division at Boston. And so I'd just like to get your color, like the confidence that you have behind that product that we continue to grow. It's actually probably one of the better growth markets in medtech in Q1. You look at market growth, like almost 40% growth.

Yes, the decision to disclose WATCHMAN wasn't that we're bullish around WATCHMAN. It's really just a reorganization of our segments. So we had some leadership moves -- some good leadership moves that we put in place, and that just drove the necessity to reorganize our segments. And as part of that, WATCHMAN became a segment that we would look to report out. So it's -- I wouldn't read too much into that. It's more of a perfunctory change that we made that -- now we are confident in WATCHMAN. Obviously, we love WATCHMAN. But the decision to report it as a separate entity is more accounting- and segment-driven than it is business-driven.

Right. How should we think about the growth in U.S. going forward versus -- like you've just got the China approval. Is WATCHMAN going to be a bigger OUS contributor over the next 2 to 3 years?

Yes. So we've been really pleased with the growth in China -- I mean, sorry, the growth in the U.S. We have our second-generation FLX, a lot of ongoing clinical evidence, which really sort of surrounds that procedure in the U.S. We're actually looking to continue to augment. We've talked about our next-gen WATCHMAN, which takes into consideration innovation, feedback, similar to what you saw with the next-generation FLX. And that will launch in the 2023-plus time frame. And earlier this week, we actually received approval on our VersaCross Connect, which is a dilator that connects our Baylis RF needle for left heart access and combines it with our sheath, WATCHMAN Fix Curve, to improve efficiencies, streamline access to the left side of the heart for all WATCHMAN FLX procedures. So we'll continue to do things like that to kind of surround the opportunity there and see this as a nice strong growth market.

What are you seeing on the ground with doctors as they're absorbing the second product on the market? Is there more doctors coming into the market, more patients coming in?

Yes. So this is a highly underpenetrated market. We'd estimate it's high single-digit penetration in the existing indication. So there is a ton of opportunity to continue to grow. And we see this as a 30% growth CAGR '21 to '24 just within the existing indication. And that's with our second-generation FLX, ongoing clinical evidence and additional patient awareness with the addition of another player.

And on the next-gen WATCHMAN, what are some of the things that need to be approved on the product to help grow the market?

Yes. I'm not going to give you anything specific there, but absolutely taking into consideration any ways in which we can continue to iterate here, we never rest on what we have and continue to look for ways to improve.

Any sense for your best guess for WATCHMAN share 5 years from now?

We see ourselves continuing to be the majority market share leader. We have done a lot in the space. We're in the market in the U.S. by ourselves for 6 years and have created a really good environment, deep relationships, direct-to-patient strategy. We also have leadership in Europe, where we were second to market. We were able to get leadership based on our launch of WATCHMAN FLX in 2019. So continue to see our sort of approach here, keeping us as a majority share leader.

Okay. That's great. And just kind of going through a couple of other different divisions like SCS. Is that a market that you're expecting to recover this year? And what do you think the long-term growth is for SCS?

It's a really great question. So we've had a lot of strength in SCS. We're very lucky to have launched our WaveWriter Alpha in Q1 of '21. And this market responds really well to innovation, and this is good innovation. We grew SCS 20 -- over 20% in 2021 and had strong growth in Q1. So it's -- you're seeing a continued trend. I'd love to see the market get back to more normal levels kind of across the board, and we've pegged that at a mid-single-digit market growth. I'm hopeful with -- this is a market that's a little bit more impacted by COVID, so you see a lot of starts and stops. So hoping with less COVID impact in '22, you'll see more normalization.

Okay. And do you think 2023 could be a more normal market growth year outside of COVID?

I would hope so, yes.

Right. And the ability for indication expansions in SCS, obviously, PDN is probably one of the bigger ones. I think you're working on a study there. Is there a potential like you get something on the market faster and then still do the clinical study at a later date?

We're always looking for ways in which we can get to market. But in this case, we prioritized our virgin back SOLIS study. It's the bigger, defined market at this stage. But we are going to initiate early clinical work on PDN because we think it's important to continue to grow while improving the existing indication outcomes.

Yes. And then just a quick question on EXALT-D and B. Just love to see kind of where you're at there. I think probably a little surprising how those 2 played out, one doing better than the other one. So how should we think about that moving into '23? Are those going to be kind of incremental growth drivers for the portfolio for Boston?

Yes. So getting into single-use imaging was a really good move for Boston Scientific. If you think about how we operate, category leaders, unmet need, this is taking a reusable market that we utilize on a regular basis and transitioning to single-use because there is a benefit to infection prevention. And in Q1, we had really strong growth in single-use imaging led by our SpyGlass DS, which is our visualization scope. But we also highlighted that the newer scopes are gaining scale. So you're seeing more progress in the market development activities with EXALT-D and EXALT B moving forward.

Okay. That's great. Is there anything else -- I guess you've had some really good data last year in DES. I don't know if there's anything else that you'd call out on your portfolio that you're like really excited about for kind of '23, '24 time period?

For data?

Well, not on data. Just any other products that you think are like -- I know you've got a lot of products you talked about. Anything you'd really call out and some incremental or exciting for...

I mean this is the problem. We have a lot of little things that are going really well and launching a lot of products. But I would say EP, we are going to make some meaningful changes to that portfolio in the U.S. in 2023; Farapulse, in 2024; and then you've got ACURATE, neo2 coming in the U.S. in '24 as well.

Right. And then -- and Dan, switching gears to M&A. I'd love to kind of see how you're looking at the M&A environment right now and your ability to kind of do M&A and your preference for going more VC route, private companies versus something a little larger.

I think the strategies remain unchanged, right? We -- it's our #1 capital allocation priority. We target high-quality, innovative tuck-in acquisitions. I mean, the class of 2021 is a perfect example, right, a private company from Canada, a company from our VC portfolio, another company from our VC portfolio that we followed for 8 years. So there's no one flavor that we're focused on. We look at all the different pieces. And there's not one part of the business. Again, if you look at the technologies of 2021 acquisitions, where they fit, right, CRM, urology, EP and such. So there's -- the goal is category leadership, 7 businesses as deep as you can be and support that through M&A. And I think the 2021 class kind of, again, shows that. And really no change. So I'd look for us to continue to look for those types of acquisitions that can make us increase our level of category leadership across the board.

And on valuations, obviously, those have come down quite a bit. I don't know -- are you seeing that come down as well when you're out looking at potential acquisitions?

It depends where you're looking and what you're looking for. I mean, again, if you look past over the last 3 or 4 years with the IPO market being hot and cold and such. So we tend not to necessarily focus on what's happening in one market relative to valuations. We look for the technologies we like. We have a very strict process for reviewing them. And it's -- you really need -- you need strategic -- compelling strategic fit and you need compelling financials. So if you have those 2, you have a chance of making it through the stage gates and the hurdles; if you don't, you don't.

All right. And then kind of last question really for me is -- because we're obviously getting a lot of questions from investors on recession and impact to medical devices. And it seems like your portfolio is pretty durable, I would guess, from recession. But if you kind of look across and look back at prior recessions, how do things hold up? Are there areas that do better than other places? Or just like to kind of get your thoughts on that.

Yes. I think I would agree with you. I think med device in particular and us as part of that, I think, could perform well in a recession. It's -- the population is aging. A lot of our technologies are minimally invasive. It's less cost to the system, less trauma to the patient. In many cases, better or -- better outcomes for patients. So I think that's headed -- that would be headed the right way of what I think could perform well in a recession. So we'll see where it goes, but I like the portfolio where we are and where we're positioned for the future.

Okay. All right. Great. That's all I had today. So thanks a lot for coming.

Thanks so much, Travis.

Thanks, Travis.

Bye.