Boston Scientific Corporation (BSX) Earnings Call Transcript & Summary

So everybody, welcome, and good morning. I'm Joanne Wuensch. I'm the medical technology analyst here at Citibank, and we are going to kick today off with the management of Boston Scientific. Thank you, Dan Brennan and Lauren Tengler for joining us this morning.

Thanks for the invitation. It's a pleasure to be here.

So a lot...

And help you kick off.

And help me kick off, thank you. A lot to cover. I'm going to start with a big picture question and then we'll dig into some things.

So it's been almost 3 years to the day that the pandemic started. And at that time, we were talking about silver linings and opportunities for growth and what we can actually positively learn from a very difficult situation. What do you think Boston Scientific has learned? And how do you think the company may be stronger today?

Yes. So maybe before jumping into that, I'll give a quick recap for the folks that might not be as familiar with -- just a couple of quick comments. So super proud of the team, what we were able to accomplish in 2022. We grew 9% organic revenue for the year. We expanded operating margins, which was kind of unique in our sector. Actually, importantly, got back to where we were in 2019. So a bit of an answer to your question there, that we were 26% operating margin in 2019. We had $375 million of global supply chain disruption and inflationary headwinds in 2022. And we stepped back to that number in 2019, kind of a nice jumping off point for the next phase of the company's next chapter. So we're proud of that last year. Fast forward to guidance. So off that 9% we gave, I think, very solid guidance of 6% to 8% earlier in February. We have continued to drive operating margin, and we’re going to do that again in 2023. So 26.4% is our goal in 2023, which should be a nice adjusted operating margin expansion. And then I think again, a bit unique. Actually, the majority of our range is double-digit adjusted earnings per share growth. So we're 9% to 13%, which I think is a bit scarce in our sector as well. So proud of '22 and looking forward to another great '23 kind of rinse and repeat. So as you look at your question on where are we relative to -- I mean, more procedure volumes, that type of...

Anything you want to hit. I mean, you actually sort of answered the question by saying, you passed this.

Yes. I mean I think that we have. I mean I think we're on to -- '22 was kind of a nice year coming out of '20 and '21 with the kind of malaise of the pandemic and such. '22 was a nice kind of a reset year. Good results, feel good about '23. From a -- we often get the question around procedure volume, where are you with that? I think what we see is a very positive backdrop of a macro environment within the health care system for growth. So are there staffing issues and things that you hear about? Absolutely. But we see -- and obviously, we put up 9% last year. So we see a backdrop of that macro procedural environment across almost all of our procedures and our businesses that's supportive of growth. So we're excited.

Good. So a lot of, I think, what I talk to investors about are products in the pipeline. And there's some that you're already leveraging and some that are on the -- here to come. Let's start with WATCHMAN. I mean, it's been a big driver of growth over the last 2, 3, 4, 5 years. Where do you think it is in the evolution of penetrating the space? How do you think about the competitive landscape and what's next?

Sure. I mean WATCHMAN's a fantastic product. To answer your question very specifically, it's still only kind of high single digits to 10% penetrated of what it could be ultimately, right? So just the math answer. The why is it so successful and why do we like it so much? I think it's product and people. So the product itself, it's just a great product for patients. It provides an alternative for folks that are looking for an alternative to oral anticoagulants. It's a safe procedure. It's a very well-designed product. We're coming out with two -- with the next generation this year with FLX Pro. We're coming out with a steerable sheath. So we're continuing to innovate. We're not resting on the laurels of what is a great franchise. We're continuing to innovate. We've crossed 300,000 patients that have been treated globally recently. We crossed $1 billion last year in sales. It grew 24% last year. And then lastly, we continue to advance clinical science. So we have a couple of landmark trials in OPTION and CHAMPION that I think, over time, have the chance to really continue to improve that space and drive kind of outsized growth. Not in the next couple of years. The readouts are further out, but move that up on the treatment continuum to potential to get it to first-line therapy. And that's exciting for us. Our team, ever since the inception, has been great at working with physicians and with patients to increase awareness of the technology. In the early days, it was what is WATCHMAN? I think we've answered that question loud and clear now. So it's a great product, and I think it will be a great growth driver for us for many years.

So WATCHMAN FLX improved upon the original WATCHMAN. You have this next-generation product. How is that different? And how do you think that that's going to be adopted?

Yes. Great question. So FLX Pro should come out later this year, early 2024. It will have a coating on it, which will further enhance healing and further reduce DRT or device-related thrombus. It will have some nice fluoro markers to help physicians know where they are and then also have a larger size. So I think all these things together kind of make it a nice iteration on the existing FLX device. And then I don't want to miss steerable sheath. I think that's an important driver for this business. We don't have one today. And it really helps with accessing more tortuous anatomies and a more efficient delivery of getting to where you need to be in the anatomy.

And so is there another generation after that? Like is this just something you keep iterating on?

I would expect us to continue to innovate here, yes.

And competition was a big theme last year and the WATCHMAN sales plowed straight through. So how do you think about expanding the market or adoption with competition in there instead of focusing on market share, maybe?

Great question. So this is a very healthy market. Dan talked about low penetration rates. We've called the market growth roughly 25% over the 2021 to 2024 time frame. That's just with the existing indication. And we see supportive underlying growth with our continued innovation with things like steerable sheath, WATCHMAN FLX Pro. I think to further enhance the opportunity for WATCHMAN, you're seeing us invest in clinical trials like OPTION, like CHAMPION, which can further expand the indicated population. So within the U.S. today, roughly 2 million patients are indicated for WATCHMAN. With CHAMPION and OPTION that can grow to something like 7 million patients and grow the TAM to something greater than $5 billion. Now those are still a ways out. We completed enrollment in CHAMPION faster than expected at the end of '22. That is a 3-year follow-up. So we're talking 2026 data, 2027-ish sort of time frame.

And what about the label expansion that happened in the last year?

Yes. So we did get DAPT label expansion in sort of summer of 2022. That did help on the periphery. So if you had a physician that really wanted to give the patient DAPT upon -- right after implant in those first 45 days, you were able to really, with that label, be able to treat any patient you wanted in the way that you wanted them to be treated. So I do think it helped to drive some of those nice sales numbers we saw in the back half of the year.

Good. And I think you’ve finished with WATCHMAN. I do want to spend some time on Electrophysiology and Farapulse. Your EP sales were up 25% in the last quarter. A big difference between international and U.S. Can you just sort of give us the lay of the land of what's driving the overall growth rate, but also the geographic dispersion?

Sure. It's actually a pretty clear story. So you're right, electrophysiology globally in Q4 will be 25%. That's exciting. That's clearly north of the market. That's something we have not seen from -- we have a small electrophysiology business, and we haven't seen that for many years. So it's heartening to see that over the last few quarters, we're growing faster than the market. So why is that? It's really driven by our POLARx cryo balloon in Japan, which has done phenomenally well. And then our POLARx balloon and our Farapulse pulsed field ablation in Europe. And so, internationally, we actually grew north of 40% in the fourth quarter. So that's the 40% kind of pulls the whole global franchise up to 25%. So the excitement there is twofold. One, it's the excitement for what we have in Europe and in Japan, and it's doing extremely well. And then the future excitement is those are both coming to the U.S. as our goal. So when you look at POLARx, the cryo balloon, goal is second half launch this year, right? And when you look at Farapulse, pulsed field ablation, that's a 2024 launch. We'll have data readout sometime here in the second half and should have a launch as a goal in 2024. So the excitement there is those are both for us, starting at zero markets, right? We don't have a cryo balloon in the U.S. There's only one competitor in the U.S. And then for Farapulse, it's really the excitement of that technology. I mean, if you sit and speak with electrophysiologists, it's the excitement of what PFA could bring, the class of PFA. And I think we've got a very good device within that with Farapulse, keeping in mind that all PFA is not -- are not created equally. I think we've got a very nice product. And just the potential for that to continue to make inroads into traditional RF ablation. You have the potential for something to be faster, safer and better. I think as good is probably good enough, but early data, maybe the data show that it's better. So if you have those 3 things. I think the opportunity for us to really have that franchise take off in the U.S., continued growth ex-U.S., but also the growth in the U.S. is just exciting for '24 and beyond. So we're -- electrophysiology, which has really not contributed a ton over many years, I think, is poised to contribute outsized growth for the company.

So let's just pause for a second. Similar to what we just went through with WATCHMAN, how many patients? What is the dollar market opportunity? And what is the penetration rate today?

Yes. So we're not sharing a ton of information around that, Joanne. But what I would say is out of the $8 billion electrophysiology market, roughly half is pulmonary vein isolation with maybe 3/4 of that being RF, 1/4 being cryo. We see PFA falling into either one of those buckets, right? So if what we're seeing in Europe today is interest from both RF users and cryo users in exploring PFA and using PFA in their patients. So really think this is a tremendous opportunity. Physicians are really enthusiastic. We've seen nice quarter-over-quarter growth in Farapulse within Europe. And that's in a supply-constrained environment. So we aren't able to provide the number of consoles we want. We're working towards having supply not be an issue at the timing of U.S. launch, but it continues -- and it continues to improve, but it's still a factor in some of that.

So does PFA cannibalize cryo and RF? Or does it expand?

It's a great question. I think there will be some amount of cannibalization, but I do think there's opportunity to potentially improve throughput as well. If you're seeing PFA procedures done in 30-ish minutes versus 1.5 hours RF ablation, there is opportunity to actually treat more patients in that same day. Now that will take time. Physicians and hospital systems will have to figure out how to manage that but I think there is opportunity to actually improve the throughput.

And when you say data the second half of this year, can we level set at what forum that might be? And what do you consider to be a successful trial outcome?

Yes. So the trial is quite rigorous, so that's our ADVENT IDE. It is a randomized clinical trial that is against existing modalities, so both cryo and RF is a non-inferior trial. So we're looking to be as efficacious as those other modalities. So view success as achieving our endpoints. And then to the extent we can provide any other insights into PFA and how and where we think it might be best utilized, we'll do that. As for timing, second half of '23 is the timing there. We don't know yet which conference, but we'll try to do as early as possible in that sort of second half time frame.

And you'll be looking at the paroxysmal or the persistent population?

So paroxysmal is what is the population included in ADVENT. So it will only be paroxysmal in the second half of this year. We are initiating within the quarter, our ADVANTAGE AF trial, which is for the persistent population. So paroxysmal is intermittent AF, and persistent is constant AF. Today, because of the efficacy on existing treatment, paroxysmal is the larger patient population that is treated within that $8 billion market, but there are more people who have persistent AF. So there is a tremendous opportunity if we can improve the efficacy using Farapulse to treat this patient population and potentially expand the market.

And when do you anticipate U.S. growth to follow international growth?

Another great question. I think we have a great opportunity to lead here. We've got first commercialized PFA product in Europe. It's been very successful. There's a lot of lessons learned. So it's up to us to execute on the U.S. side. And working through all those supply constraints will be really critically important and frankly, a very large goal of ours. And so I would look forward to a strong launch in the U.S.

Okay. Moving to structural heart, you do have products there and some coming around. Do you want to give us some highlights?

We do. I mean the headline one there is probably our ACURATE TAVR valve.

I've heard of that.

You have. That's good. With one C. And so that's doing well in Europe. So it's -- we've said this many times, we're about 20% share in the accounts we've launched in, which we think is a good performance. It's a great valve that continues to put up very positive clinical data. It's well received in Europe. And a very similar story to what we just talked about, our goal is to bring that to the U.S. in 2024 as well. So again, large market, measured in billions, starting at zero. We have a great team. We think that valve is going to find a nice spot within the market, especially as you look at lifetime TAVR management and you look at supra-annular valves and where they play there, I think ACURATE is going to find a nice home in the market. We're not going to prognosticate shares and all that; we'll launch and earn that. But it's exciting because as we just talked about, Farapulse and cryo launching in the U.S. into markets that are -- cryo is not -- cryo is probably about $1 billion globally. But obviously, Lauren went through the numbers on the ablation side. TAVR market is the same thing. I mean we're starting from zero with a good product and a good team. So we're excited about that for '24 as well.

Do you have a view on market growth rate? And does it matter for Boston Scientific?

I think early days, I'll leave that to the companies that are in the market today. I think early days are that for us is going to be about share capture. And so growth won't be as critical for us in those early days because it's a very large market and it's underpenetrated, and we'll just go out and see what we can do from a shares standpoint.

So you already have SENTINEL that's in the cath lab. I mean two questions. How is that doing? And then can you leverage that presence and that sales force?

You can. We'll have to obviously continue to build that out over time. I think the takeaway is we will not skimp on that. When you think of our ability to capitalize on the things that we have to look forward to relative to POLARx and Farapulse and ACURATE, we haven't gotten to AGENT Drug-Coated Balloon in the U.S. yet, which will be next year. It's in Japan with reimbursement here in the first quarter. We will make sure that we invest whatever we need to commercially to make those a success.

You want to talk about AGENT?

Sure. Yes.

Sure. So AGENT Drug-Coated Balloon is a coronary drug-coated balloon for in-stent restenosis. And so it's an alternative to whether it's a plannable angioplasty or drug-eluting stent or bare-metal stent when you have in-stent restenosis. It's available in Japan today. It also has a small vessel indication. There's only one other player in the market. So it's pretty exciting to launch this differentiated option into this market where there is only one other player. The market opportunity broadly is around $500 million now, but we see that growing to $1 billion kind of over the long term. We're excited to bring it to the U.S. where it would be the first coronary drug-coated balloon indicated for in-stent restenosis, and that's sometime next year.

When will we see data on that?

So it completed enrollment in August of last year. So it's a year follow-up. So it would be sometime thereafter, whether that's -- might be too soon for TCT, but in likely the back half of this year.

Okay. So your guidance this year is 6% to 8% revenue growth, and we just went through 4 different, if I could use the word, blockbuster products. What does that do to your revenue growth rate over time?

Well, I think the good news is we'll probably have an Investor Day in the fall. And as we always do, we'll lay out what we think our 3-year, we call it LRP, long range plan, will be at that time, and we'll see where we are. But I think it's -- I'm excited for the next chapter of the company for '23 and then for '24, '25 and '26, kind of that next LRP period, I think we've got the opportunity to have a special chapter for the company.

You've got other things behind that, some of which came through M&A. So can you highlight some of the recent M&A? And then is it safe to assume tuck-in is the way that you'll keep going?

I think the -- so yes, our #1 capital allocation priority is high-quality, innovative tuck-in M&A. I don't see that changing. That's -- it's worked well for us over the last 10 years. We've got a nice VC portfolio that helps to feed that with about 35-plus companies in that portfolio. And that's half of our recent acquisitions have come from that portfolio. If you look at the most recent acquisitions, so we just closed Acotec, which is a majority investment in a company in China. We have a couple of pending in M.I.Tech, which is a majority investment in a Korean endoscopic stent company. And then Apollo, which was the company that will tuck into our endoscopy franchise as well. I'm really proud of the '21 class, right? So you look at that, right? So you go through it and we won't go through all the ones. We've hit some of them already, but you have Farapulse, Lumenis, Devoro, Preventice and Baylis, right? Those 5 companies. So Devoro is still early days on that, right, from -- in the venous franchise with NPI. The other four, like real revenue, chunky revenue that's growing accretive to the company growth rate, and it's making a difference. And so if you're looking for the proof positive that the tuck-in acquisition strategy works, I think the class of '21 is a really good proof point of that because those are making a difference in '23 and will beyond that.

I'm just curious at what stage do you say, okay, we have an investment here. You might have a seat on the Board. You go, okay, time to fold that in fully. I mean how do you think about that?

Well, part of it's discussions that we have, but it's also the timing of the exit for those VC companies. Because the earlier you do it, obviously, there's more risk to retire. The later you do it, maybe you missed an opportunity. You could have done it earlier. So you're always trying to strike that balance. And I think we try to do that -- the nice part about the portfolio is there's so many companies and they're across all of our franchises. It's not all focused on 1 or 2 franchises. It's across all 7 of our businesses. and we get smarter about those spaces. And when it comes time for acquisitions, if they are ready for that, we're just -- it's a much lower stress, better informed situation because you've been on the Board. You've been with the company for 4 or 5 years and as opposed to the one where you get the call and the data room is open and your bids are due in 3 weeks, right? We do those too, and I think we've done those well, but the VC portfolio is just a unique opportunity to provide a whole other set of seeds for that process.

Okay. And how do you think about some of the other segments? One of the things that struck me as we're sitting here, we're talking is we've been talking over years. Not long ago, we were talking about Cardiac Rhythm Management and drug-eluting stents and things which are now more -- is the right way to think about it bread and butter?

They're still super important to the overall business and patients and the portfolio, right? They may not grow as fast. They'll be -- they're growth dilutive, but they're still highly profitable and important to the overall P&L. One thing that you do see, as they've gotten smaller, our performance on pricing has gotten better, right? So part of it is math and part of it's activities. But no secret, the 2 biggest areas of price challenges that we have are traditional CRM and drug-eluting stent. So as they have grown more slowly than the company and become smaller, their impact on the overall aggregate price impact for the company has become smaller. So price has gotten better for us as a result of that. But no, they're both still critically important parts of the company that fit in the overall synergistic -- it's great to have -- when you're in cardiology, have stents, but then also have all the ancillary complex PCI and have SENTINEL and have eventually a TAVR and have LAAC. And so they're a nice puzzle piece, albeit that they're growth dilutive.

As part of the medtech life cycle, one of the things which many companies are doing right now is they're spinning out or divesting assets they no longer view as core. Are you looking at things of that nature, too? Or are you just happy with everything in the family?

We always -- I mean, I think that's part of a good hygiene of the company is always making sure that the assets that you have are the ones that you want and contribute to achieving the strategic plan. From our standpoint, we grew 9% last year. We've got solid guidance this year at the 6% to 8% organic growth. So I think everything is kind of clicking at this point.

Good. Pricing, you do want to talk a little bit about what you're seeing. Many Medtech companies have been talking about taking some price. And then in China, there's the BBP headwinds. Just a little bit geographically, how you're seeing that.

Yes. So the -- historically for us, price has been a low single-digit decline every year. Now again, almost largely entirely driven by drug-eluting stents and CRM. And as we said, as they get smaller, that helps the math equation. But then in other instances, we're -- with innovative technologies where the reimbursement supports it, we're able to thoughtfully -- this is not just us. I think the industry had thoughtfully increased price where appropriate. I mean again, we continue to be and have been in a pretty high inflationary environment. So I think that's acceptable. And I think it's reasonable. And so the goal is, over time, that -- could we get that to be flat price? And -- because every year starting off negative means you have to grow faster in units to get growth. So could that get to flat? That's a goal we have. And that might not have been the case if we were here 3 or 4 years ago; we might not have had that idea that we could get there. But I think that's a reasonable goal for us now is to get to flat.

So one of the things that really struck me last year as many companies were managing a host of macroeconomic headwinds as Boston Scientific did well in doing that. Why do you think that was so?

Probably a multitude of reasons. And I think the first and foremost is just the culture. So the revenue growth, and it's obviously the first line on the P&L for a reason, right? It's paramount to the company. It's the life's blood of a company, right? But -- and I think we've done well over time with that as recently as last year with the 9%. But we also believe that you have to be able to move profitability and your financial results better each year as well. So we kind of had 2 choices. We could take the $375 million headwind and just kind of use it as a backdrop, and an excuse as to why we couldn't do it or we could dig in and try and get after it and improve margins in the face of that. And so we did that. We improved margins year-over-year, again, which was pretty scarce. But then the key was for us was, again, getting back to that level that we were in 2019 in the face of that $375 million number. And just culturally, that's how we're wired. Just -- we realized that we want to do both things. I mean, tried and true, we've said it forever, right? The revenue growth at the high end of the peer set, differentiated operating margin expansion and double-digit adjusted earnings per share growth. Those are kind of laminated on our cork boards, right? That's how we -- how we're wired. So I think the culture of really digging in and finding ways throughout the whole P&L, it wasn't one area of the P&L. It was the entire P&L, including FX, management and all that to be able to do that. As we gave our guidance this year, we said that the $375 million, we think is consistent this year. So we don't -- we're not banking on a lot of macro help in that regard. I think that's prudent as we sit here at the beginning of the year. We'll see what happens as the year transpires. But from a silver lining perspective, we're not saying it gets worse. Last year, to your point, we had to face $375 million. Now in theory, we're facing 0 because it's $375 million stays $375 million. So that's -- that's a good thing for us. But I think it's prudent at this point to just assume that it stays where it is, and we'll see how the year plays out.

And you're one of the few companies that doesn't have sort of this first half, second half type of dynamic in margins and EPS. In fact, I think your gross margins are higher in the beginning of the year. What are the mechanics that drive that that's somewhat different in medtech?

Sure. So it may be -- I don't know if it's specific to us or what. But normally, our gross margins are better in the second half than they are in the first half because in the first half, you're still selling -- with an assumption that you're reducing your cost of your products, your standard cost of your products each year. In the first half, you're still selling the products that are costed at the old higher standard. And then in the second half, you've burned off that inventory and you're now selling the lower standard products. So you get an improvement in gross margin. That's still the case a bit this year, a bit more muted relative to inflationary challenges. But FX is really the driver of that. And so, if you think back to last year and the trajectory of the dollar and what it did, it was relatively stable in Q1, started to strengthen in Q2, really strengthened in Q2 and Q3, and then weakened a bit in Q4. So you're annualizing those, and then you put those up against the hedging contracts that you have relative to our FX program. And that drives better hedging gains and better gross margin results in the first half than the second half. So we called that out because for most people that have been around, they're like, oh, I expect Boston to have better margins -- better gross margins in the second half. So that's gross. But at the operating, we think through the year, we should be able to continue to have operating go north against that 26.4% for the full year because there's a whole rest of the P&L to manage, right, between sales and all the elements of OpEx, sales and SG&A and R&D, there's other levers for us to measure through that. And that's why we think from an operating margin perspective, it should look more traditional, which is if you look back over history, our operating margin tends to get better as we go through the year. We haven't given specific guidance as to what that number will be, but I think that's the trend we're targeting this year as well.

So when you wake up in the morning and you take a look at Boston Scientific, what do you worry about?

The things I can't control, right, macro things. We learn a lot about those, right? And we learn things that we can do to offset them and such, but the macro events that aren't in our control. What we control, right, from -- in terms of our execution and our product pipeline and our team, 45,000 strong, I don't worry much about that. I like the team. I like the chapter we're in. I like the prospects ahead relative to the pipeline and the portfolio. So I don't worry about much that we control. What we control, I like.

Very good. And then my ending question is when we're here next year or the year after, what are we going to be talking about? What's going to be different?

Well, I don't know if we have to wait a year. I think it's Investor Day. I think let's get to Investor Day in the fall, and we'll give you a sense of what we think the next chapter is, and the different launches we have, and the margin expansion trajectory and all that. We do one every other year, which we think is the right cadence and tune in then and we'll see what we think. But I think it's -- I'm excited about the future.

I look forward to it.

Great. Thanks, Joanne.

Thank you, Dan. Thanks, Lauren.

Thanks again. Appreciate it.