Boston Scientific Corporation (BSX) Earnings Call Transcript & Summary

Good morning, everyone. Welcome. I'm Robbie Marcus, the med tech analyst at JPMorgan. Really excited to have our next session, Boston Scientific. Going to introduce the CEO, Mike Mahoney, to come up and do a presentation, and then we'll turn to Q&A. Mike?

Good morning, everyone. Hey, Robbie. JPMorgan, Wednesday, you're hanging in there? First of all, it's such an honor for me to help lead Boston Scientific. I've been with the company for 10 years now, and it's just real -- an honor and a pleasure to work with the team. I appreciate the shareholders that are in attendance. And hopefully, we're going to give you a quick summary of the company in about 20 minutes here, and you'll find the company as exciting as I do. Here are our safe harbors, our regulatory disclaimers and our financial disclaimers. When it comes to the company that -- you have so many health care companies talking about their businesses here, and you see a lot of slides like this, I think what's great about the company is, every year, we do modify our strategies a bit in the market, modify our operating plans. We build new capabilities. But these values that we hold really are -- don't change across the company in the 130 countries that we're in, and really advancing science for life is what motivates our employees and fires them up every day to drive differentiated performance as well as helping patients. So we keep this front and center with our employees. In terms of what to expect from Boston Scientific, this is, at minimum, what we expect from ourselves in the company. And we'll show some slides here to continue to drive differentiated growth versus our peer group through our portfolio innovation, globalization of the company, commercial excellence, digital capabilities and basically new capabilities, and really our relentless focus on getting better and our relentless focus on talent and depth of talent across the globe. Continued execution of our category leadership strategy, putting ourselves in faster-growing markets, you're going to see a slide on that, fueled by our internal R&D as well as our active M&A capabilities. Strong commitment to corporate responsibility is not a new thing for the company. It's really always been a focus of Boston Scientific. And importantly, for shareholders, consistent, differentiated financial performance. Not just consistent, but consistent differentiated financial performance. Revenue growth at the high end of our peer group, 50 basis points of adjusted operating margin expansion, double-digit adjusted EPS growth and strong free cash flow. I think it is important -- it gets me, as a father. Some of the actions in the past give more credibility to what you do in the future. And we have a very exciting future of the company, and it's embedded by the consistent performance that we've delivered over many years. Really proud of this. Back in the early days, 2011 to 2013, we were a negative 1% growing company over those 3 years. And what you see is as the portfolio and our capabilities evolved, we've enhanced our organic CAGR consistently over this 11-year period. In 2021, we grew a big number, 20% versus '20, which is impacted by COVID, 6% organic over '19. And this year, we guided to approximately 9% organic growth for full year '22, which we'll give an update on the earnings call in February. Also importantly, something we're highly focused on is improving adjusted operating margins. So we're roughly around 18%, 19% -- actually lower than that in 2012. But 2019, call it 19%. Pre-COVID levels, we reached 26%. We had a COVID year of 20% as well as [ 2021 ], and we guided this year to getting back to pre-COVID level operating income margin of approximately 26%, again, which we'll update at our February earnings call. And then you'll see our focus on improving our operating margin 50 basis points going forward. So our expectation is that we would exceed our operating margin of 2019 in the near future in '23. With adjusted EPS, similar goal of double-digit adjusted EPS growth. Importantly, this year, we guided to $1.71 to $1.74. That also includes a $0.06 impact from the R&D amortization policy that was put in place, which is a bit of a one-timer, which we will annualize in 2023. So that performance is terrific. This is the slide I'm most proud of, besides the people in the company. Every company wants to improve their weighted average market growth rate. It's not easy to do unless you're a startup. So we're not a startup. And years ago, we were less than a $7 billion revenue company in markets that grew negative 1%. And over this kind of many years here, every quarter, every year, we -- and this can't be done overnight -- we focused on improving our weighted average market growth rate through our organic R&D, where we spend our money, what projects do we take on, how we drive remote -- or global capabilities in our core business for sustaining engineering to drive lower cost R&D, focus our higher cost R&D on fast-growing markets, a lot of tuck-in M&A. And I'm really proud to say this year, in 2022, the market -- weighted average market growth rates, so the markets we compete in, are 6%, approximately 6%, coming from negative 1%. Approximately $13 billion of revenue this year with big expectations in our LRP. And we expect in 2024, that weighted average market growth rate will be closer to 7% than it is to 6% based on the product launches that we have, the acquisitions that we've done and really the lower scale of DES and CRM across our portfolio. This is just a quick breakdown of those markets. We could play in a $55 billion approximately served market. This is the average market growth rate by segment of our 8 divisions within the company. And through third quarter, which is what we expect of our team, proud to say that 7 of our 8 businesses have outgrown their market peers through third quarter of 2022. So we have pretty simple metrics of the company. Outgrow our peer group, deliver operating income growth faster than sales growth for leverage and hire great people and free them up to run. So this is the market growth rates that we have as a company. So this is really difficult to do, because running Boston Scientific can be, first of all, a privilege, but it really can be distracted in many different areas. What we focus on -- the center of our focus is on people and talent and portfolio innovation. You do people and talent, to retention and succession and depth and agility, and winning spirit of people with a common mission and you focus on innovation, a lot of other things get figured out. And this is just a snapshot of our business units as quickly as I can do, but at least though you have the information of our business units and what some of the key innovation drivers are for the next 3 pages. So I'll try to do this pretty quickly here. Our Endoscopy -- starting with MedSurg, which is our Endoscopy business, Urology and Neuromodulation, is run by Art Butcher. He also runs Asia and China for us and some other corporate functions. But our Endoscopy business is a terrific business. It grows accretive to Boston Scientific. Margins are very accretive to Boston Scientific. Clear market category leadership in this business. Some exciting new announcements in 2022, none of which have closed yet. On the acquisition side, we signed M.I.Tech. Different stent capability. A Korean-based company. We also acquired but not -- signed but not acquired Apollo Endosurgery to expand this into endoluminal surgery as well as the obesity business. with some terrific technology there. Both of those acquisitions, we expect to close sometime in the first half of 2023. If you turn in Urology, very similar characteristics as Endoscopy. Clear global #1 share leader, very much a global business, accretive to Boston Scientific growth, accretive to our operating income margins and very strong category leadership. The Lumenis integration, the Israeli-based company that we acquired in 2021, has gone extremely well. And that gives us tremendous capabilities across the different Urology segments in stone, prostate and prosthetic urology. So we'll continue to advance -- to invest at the high end of the R&D profile for Urology and endo, primarily 510(k) businesses, where we do tuck-in M&A, have very strong contracting advantages and globalization skills. Neuromodulation is a business that's been -- the market growth has been not quite as strong as it had been prior to 2019 through COVID, so we're calling kind of a low to mid-single-digit market growth rate, call it 5%-ish range. for Neuromodulation, which consists of pain and brain. Starting with brain, really proud of this business. Started off not in this business 8 years ago. Now we're the #1 de novo share player in Europe and #2 overall given -- with the change-outs, and the #2 player in the U.S. So just a terrific job, great innovation here, great partnerships with Brainlab and terrific products to treat Parkinson's tremors and other movement disorders. In the pain business, again, #1 or #2 depending whose survey that you look at globally, led by our WaveWriter Alpha program as well as tuck-in acquisitions that we've done in RF and Vertiflex to give doctors, pain doctors and neurosurgeons more continuum of portfolio. So this business -- do we show it through the third quarter? What did that [ grow ]? 3%. Thank you, Lauren. Good save from the bullpen. 3% through the third quarter, and we expect increased results in 2023 at this business. Turning to Cardiovascular. Our PI business, similar to endo and uro, strong category leadership in arterial, interventional oncology and venous. ELUVIA and Ranger, our 2 PMA products with excellent data, excellent capabilities, the #1 share player in the arterial business globally. Interventional Cardiology. A couple of years ago, we talked about this acquisition of BTG. This has gone fantastic with Y-90, our cryo product. We just acquired another company called Obsidio last year, which is a gel embolic, which is very differentiated, which we'll launch this year. Venous is the segment that lags our growth profile in this business. Of these 3 segments, venous makes up about 15% of our sales growth, and we've got some great products with Varithena, but an area that we're improving on with our Devoro acquisition that we made in 2021. Interventional Cardiology is really transforming, on the right-hand side here. Coronary therapies, as many of you know, our non-DES coronary therapy business. Our complex coronary calcium imaging capabilities are significantly greater in size than drug-eluting stents, nearly 2 or 3x larger. And that business has a nice growth profile with it. Importantly, we just received approval in Japan for a product called AGENT Drug-Coated Balloon for in-stent stenosis and small vessel disease. This is a terrific opportunity for us to further differentiate our coronary business with AGENT DCB, and we have enrolled and expect approval for AGENT DCB in the U.S. in early 2024, which would be potentially up to about a $1 billion market with greater price capabilities as well as category leadership contracting capabilities. We think AGENT will be a game changer for this coronary business. I couldn't be more proud in TAVI of our structural heart business and what we're doing with ACURATE. We're going -- albeit off a smaller base, clearly growing faster than our market competitors in Europe with ACURATE neo2. We will complete enrollment in the first quarter of 2023 of our trial for high risk, medium risk and low risk. Then we will seek approval in the U.S., which we believe is a valve that -- a supra-annular valve that's differentiated with its hemodynamics, very low pacemaker rate and importantly, a platform that we can continue to enhance and improve with great agility with our R&D teams with excellent repeatability and quality in our manufacturing. So this is a very competitive valve in Europe, and we're putting a lot of attention on this, and we're excited to enter the U.S. market with this. Turning to our last slide and where we have maybe the most breakthrough transformation for the company. CRM, EP and WATCHMAN. Starting with core CRM. This business has performed very well in 2022 through the third quarter in the -- our portfolio, with our EMBLEM S-ICD, which continues to do quite well globally; HeartLogic and RESONATE, with the longest lasting batteries, reliability and excellent global commercial team growing faster than market when you include our diagnostics business. So we expanded our portfolio to leverage our implantable loop recorder. We acquired Preventice a couple of years ago, which gives us MCOT, Holter monitoring, 2-week Holter monitoring, and combined with our LUX-Dx, a terrific vast diagnostics portfolio to help pull through business. You'll see a lot of our focus on clinical trials in the bottom. I won't go through those. An area that I'm so excited about is in this middle category. Our company, in my 10, 11 years here, has not been -- quite frankly, is not very good in this business, in Electrophysiology. We are in a fantastic disruptive, transformational position as we speak now. I think this is the best market in med tech at over $8 billion in revenue, a clear double-digit growth and also new innovation. This is not at all a mature market, and we are poised to really do extremely well here. We're the only company in the world that has approval in Europe for a differentiated cryo platform, which is approximately almost $1 billion globally where there hasn't been any new innovation in over a decade. So we're going to disrupt the market with cryo. We're doing extremely well with this product in Japan and in Europe, and that product finishes enrollment in second half of '23 in the U.S. and will be approved -- I'm sorry, it will be approved in the U.S. second half '23. The product that we're most excited about is PFA with Farapulse, where we're leading the industry. We did about 10,000 cases or so in 2022, primarily in Europe. The doctor reaction for the safety, number one, the speed and the efficacy potentially of this is something like I've never seen in med tech in my career, the enthusiasm for this. And so we think this PFA will be very, very disruptive to a fast-growing, large global market, and this is one where Boston Scientific is leading in terms of data. We'll be giving our Advent IDE, which fully enrolled. We'll be presenting that data in the second half of 2023, and seeking approval. So we're seeing excellent results in Europe, whether it be cryo users or [ point ] RF users who are adopting and want to adopt to Farapulse. We also have a full suite of other products I won't have time to go through. And then also in WATCHMAN, really proud to see just the continued excellence of this platform. We're excited to say that we nicely crossed the $1 billion revenue mark in 2022, which is terrific. And also importantly, we are focusing on leading this category for a long, long time with a portfolio innovation through our next-gen steerable sheath, through our next-gen WATCHMAN FLX Pro, which will launch either the end of this year or early 2024 as well as VersaCross Connect, which is the capability that we acquired through the acquisition of Baylis. We are leading in clinical trials, and we had the CHAMPION trial finish enrollment almost a year faster than we expected. So the CHAMPION WATCHMAN enrollment happened at the end of 2022, which is really impressive, and it shows the confidence and enthusiasm that physicians have. So if you look at -- to me, that maybe the 2 best markets in med tech right now, I think are EP, and WATCHMAN clearly is the fastest-growing sizable market that exceeds $1 billion and has the potential to be a $6 billion -- $5 billion or $6 billion market with CHAMPION and with OPTION. Okay. All right. On the M&A front, we've been pretty active here, focusing on tuck-in acquisitions to drive -- improve our weighted average market growth rate, and we have an excellent way to integrate acquisitions within the company. In 2021, we had about 5 acquisitions that were really terrific ones, and I'll hit them all probably, Baylis, Farapulse, Preventice, Lumenis and probably others that Lauren -- Devoro, sorry. And in 2022, we closed one, which is Obsidio. We signed 2 that I mentioned in our Endoscopy business with M.I.Tech and Apollo, and we also signed a really strategic partnership in China with Acotec to be approximately 50% to 60% share owner of that company as a stand-alone public company to really drive unique capabilities for Boston Scientific and was a terrific market for us in China. But we'll continue to focus on tuck-in M&A as our #1 capital allocation priority. We realized interest rates have gone up. Our hurdle rates go up. So we're very selective about what we buy. If we do have excess cash, we will use, like we have in the past, but not in a significant way, for share repurchase. So we think we've really spent your shareholder money wisely to improve our growth rate and performance and outlook for the future leverage in our M&A. Similar to globalization. Last year, through third quarter 2023 (sic) [ 2022 ], we've grown our emerging markets over 30%, which is terrific. The focus of that is on China. We -- China is a complicated complex place. There's lots of macro discussions you can have, but we view China as very unique. We'll continue to invest in China, new capabilities we have in China with R&D, with some manufacturing with joint ventures that we just recently signed with Acotec. So we continue to like this market. And importantly, the proof's in the pudding. We'll grow through third quarter and for full year over 20% in China in 2022. And yes, there are some tenders and some other things, but we have a terrific team there, and we will continue to grow double digit in China and invest there. Lastly, sustainable innovation. A bunch of data on this slide. Really proud of our team's focus on diversity and inclusion in the company, on our pay equity, which is almost about 100%, 99.8%. Our focus on the environment, we win many awards in this area. And really, again, it's back to the people, inspiring our employees, doing the right thing for our communities, doing the right thing for the planet, making Boston Scientific a great place to work our employees are proud to be at. Not all of our employees really care about our stock price. Our employees care about being a company they're proud of. They want to tell their family and friends about it. They want to help us recruit, and they want to go the extra mile for the company. We really work hard to create a culture where employees really enjoy working and are proud of Boston Scientific. Also, to wrap that up, 20 seconds left here. Threading the needle perfectly here, Lauren. So for 2022, you know our guidance for the full year. We're going to give those -- some of those results -- all those results in February, and our longer-term goals are very consistent. We want to continue to grow at the high end of our peer group. We have the portfolio to do that, and we will do that. We also don't want to listen to some of the noise that you hear. We think you can improve operating income margin. We did it. We will do it in 2022, and we will do it in 2023. Our goals will continue to be 50 basis points annual margin expansion, double-digit EPS growth and strong free cash flow. So super proud of the company. I'm a little bit over, I think. But I really appreciate your time, and have a great conference.

It's great to see we're in a much better spot for med tech and Boston Scientific this time versus a year ago. Amazing what a year makes here. It looks like global markets are stabilizing and normalizing. We've seen a lot of macro pressures, but at least they've stabilized. It looked like they could improve in 2023. So would love to get your view of what you see around the world in terms of patient volumes, health care systems, healthiness and willingness to pay for medical treatments and any views on the macro situation as it relates to Boston Scientific.

I mean I'll take a few of those slides then you can jump in, Dan.

Absolutely.

And by the way, this is Dr. Ken Stein. We recently announced -- with the retirement of Ian Meredith, Ken is the Chief Medical Officer for Boston Scientific and also focuses, besides that role, on corporate clinical and a lot of emphasis on our EP and CRM portfolio. So Dr. Stein. Just maybe a couple of areas, and Dan can mention. On the demand side, through the third quarter, which isn't going to say a lot, I guess, today, we saw fairly pretty good demand despite the nursing shortage in the U.S. As you saw, our growth rates through the third quarter were year-to-date at 9% organic growth. And then you see pockets of impact of COVID still. We have seen pockets of continued bumpiness in Japan. And obviously, as we look at 2023, we expect some lumpiness in China, especially in the first quarter here, based on what we're seeing there. But even given that, we have a lot of confidence that our China team, just like they have every year, will drive double-digit organic growth in China. So we expect some COVID impact in some of the Asian companies. We think the hospitals do a remarkable job despite the nursing shortage. So we think volume demand is pretty good. As you know, many of our patient products move to an outpatient facility or ambulatory surgery centers. That's a good product mix tailwind for Boston Scientific. Hospital administrators want to get patients obviously fixed but in and out of the hospital. So our portfolio, being an interventional medicine business where we can get -- you can have a left atrial appendage closure done in your heart and be home 5 hours later. It's pretty remarkable. And so I think that our portfolio and those trends really point to what the health care system wants and needs going forward. Dan, if you want to touch on some of the macro inflationary.

Sure. I would just reiterate what you said. I mean, overall, to summarize, I think it's a very supportive backdrop for revenue growth. You saw that in our results through the third quarter at the 9% and obviously, the full year guidance of 9%. So consistent performance through last year with a supportive backdrop. The inflationary headwinds, they're real. We've documented them as $375 million of headwinds versus where we were in 2019, largely in the gross margin area. But we're trying to power through that as a company and really, with the grit and winning spirit to say, "We were 25.3% operating margin in 2021. We want to grow that. We want to go north from there from 25.3%." Our guidance was approximately 26%. That also gets us back to pre-COVID levels, if we were to do that. So it's really -- not looking at the inflation environment as an excuse. But really trying to drive through it and work through the entire elements of the P&L to try and offset it. And that's the goal, so...

Pre-COVID, your long-term goals were actually what you were delivering. Is there any reason that -- I look at sell-side numbers for 2023, and it's not far off of your long-term goals. Is there any reason 2023 and beyond couldn't be a return to your historical performance?

No, I mean that's the numbers that Mike showed the slides still up on the screen here. I'm not sure if it's up for the folks on the webcast. But those have been our long-term goals. And really the only thing that interrupted that was COVID in '20 and '21. So our goal, as we start off each year is what you see there. To grow at the high end of the peer group, expand operating margins approximately 50 basis points, deliver double-digit adjusted earnings per share growth and strong cash flow. So that's -- those are tried and true goals that -- as you said, I mean, we had a very good track record of achieving those pre-COVID. Look to get back into that routine.

What I find really impressive about Boston Scientific is you're in some of the best med tech end markets. You're #1 or 2 in most of them. And despite being in these very competitive high-growth markets, you're also -- your R&D page and your productivity and your acquisition track record continues to allow for top end innovation. So how do you balance the need for growth in these very difficult markets and being able to still provide the R&D growth engine while growing margins? It's not an easy thing.

It's not, but it's a fun kind of a Rubik's cube.

That's what you pay us for.

That's what I -- I was going to say that.

It's like doing sit-ups. They're not fun at all, but you've got to do it.

But there is a fun element. So we have different pods and areas to be able to fuel the top line, right? We have our venture capital portfolio, which spawns predictable M&A over time. We have more opportunistic types of M&A, and then we have internal R&D. And so we look at that landscape, and we place bets very intentionally across that continuum to fuel growth. And the slide that Mike showed that he said he was most proud of, I would add to that, I think I am as well, is increasing the weighted average market growth rate of the company over time. And that's been a 10-year journey, but it's great to look back and see something that was minus 1% now be 6% and look forward and say, you know what, that could be closer to 6% to 7%. And that's what you do every day, every month, every week, every year, is just continue to get into faster-growth markets and innovate.

But that is the hardest part of the job, I would say, is this portfolio prioritization and what to delay, what to pour more fuel on, what to acquire, how you may have to absorb some of the dilution with that. So that is the trickiest thing. But we work together as a global team on that. So we have global business presence that are maniacal about growing faster than markets and delivering great patient care but also with the Boston Scientific [indiscernible]. So we work as a team to drive prioritization, whether it's tuck-in M&A or large PMA programs for 510(k), and I think we do it pretty well.

And I maybe want to add, I mean, yes, it's hard work. But I mean it's not like we've solved all the problems there are for patients in cardiovascular disease or interventional oncology or neuromodulation. There are some major unmet medical needs right now. And that's why, again, something like WATCHMAN, preventing stroke in patients otherwise unprotected; Farapulse, which we expect will revolutionize ablation for atrial fibrillation; TheraSphere with Y-90 for interventional oncology. And so yes, it's hard work, but there are major benefits we can bring to patients and benefits then that will be rewarded to the shareholders of the company.

So you talked about Farapulse revolutionizing atrial fibrillation ablation. It's probably the most anticipated data set we'll see in medical devices this year. So maybe you could put a finer point on what revolutionizing means. Is it better efficacy, better safety? And how does that pull through the entire portfolio of products for Boston Scientific, if it is as successful as that?