Boston Scientific Corporation (BSX) Earnings Call Transcript & Summary

Great. Thanks, everybody, for joining. We're very excited to kick off this morning with Boston Scientific. We have CEO, Mike Mahoney. We're going to jump right in. Thanks so much for being here.

Hi. Good morning.

So it's been a strong start for the year for med tech and Boston delivered an impressive 14% organic growth in the first quarter, which sets the company up for a really strong year. Maybe you can just kick us off with a few thoughts on the state of the business at Boston Scientific.

Sure. Hello, everyone. Thanks for joining here, bright and early at 8 am. Really excited about really how we exited last year, grew about 9% last year. In the first quarter, we had our leanest quarter, all the other companies have reported. And really pleased -- I think every single one of our business units grew faster than our peer set, which is terrific. So we're set up to have a really strong year. I think it's really broad-based momentum, I would say, across each region. Europe was our fastest-growing region. You don't say that very often, grew almost 20% with a lot of the products that will be launched in the U.S. over the next 3 years. China grew over 20%. U.S. grew in the teens. So it's really across each region. It wasn't one region or one product. Almost every business grew double digits. And we saw an improvement in procedure volume, I would say, in general, for the sector, which is great. That's enhanced better pricing dynamics, given the mix shift that we've had. And we've got an excellent leadership team, I would say, across the board and a lot of depth in the company. So we've had strong retention and really strong depth across the company. So it's -- really excited about this year and the future.

Excellent. Excellent. Thank you. So like I said, Q1 growth rates were really strong across all of med tech. You had some easier comps in January, perhaps, but procedure volumes have been really strong as staffing improves, maybe you're getting a little bit of backlog coming back in. Maybe can you talk a little bit about what you're seeing in the markets more recently, April, May, still seeing that good strength in procedure volume?

Yes. I refer almost like as a wait time. So even today, we have seen maybe a slight reduction. But if you want to have a kidney stone removed or AFib procedure, in many cases, there's still a 2- or 3-month wait list to get in. So the demand is very, very strong amongst all of our businesses. Spinal cord stimulation is still a bit softer, I would say, in terms of the market versus historical. But in general, the procedure demand is quite high. And I think what's really important for Boston Scientific, we're an interventional medicine company. So many of our procedures are done in a setting that can be a surgery center or an outpatient center. And that just drives a lot of efficiencies for hospitals. And they're pushing for efficiency given the staff shortage. So I think given the tailwind that we have of an interventional same-day procedure for most of our procedures and the demand so high globally, there's sustainable tailwinds for supply.

Yes, good.

Demand, I would say. Supply is a bit more of a challenge -- demand, supply.

Yes. From a staffing perspective, on the supply side, you said you still see some wait times. Is that improving? You're starting to see...

Yes, yes. The hospital big systems have talked about this quite a bit. You're seeing an improvement for sure. There's less turnover. There's less of a need for the traveling nurses and staff. There's built up more infrastructure for nursing capabilities, which will help the system longer term. But overall, they've been very, very efficient, but there still are some gaps that hopefully will continue to ease throughout the year.

Got it. So after that 14% organic growth quarter in Q1. You're guiding to 8% to 10% growth for 2023. You expect to see some strength through the rest of the year? What's the outlook on the rest of the year from here given sort of where we are?

Well, we're quite bullish. We raised our guidance for the full year of 8% to 10%, which is strong. And our goal is to continue to deliver against that guidance and hopefully beat the guidance for the year, we'll see how that goes each quarter. But I'm really pleased with not only the organic growth that we're seeing, but also the -- how we're managing still some of the supply chain disruptions, which is very, very tricky. But we have a very strong supply chain team globally that limits our back orders. So that's also positive. And I'm really excited about the product launch cadence that we have coming in the next few years and preparing really the U.S. for those amazing products. So we're kind of doing all those in parallel. And then lastly -- fronts, just with the growth, we feel like we have done many years pre-COVID that we can continue to improve margins at the same time. So we're excited to get our gross margins back over time to where they were pre-COVID and hopefully get to a margin profile this year where we were just before COVID.

Great. Great. So you talked about supply chain. On the Q1 call, I think you mentioned that you expect supply chain and macro inflation pressures continuing in 2023 at kind of a similar level to what you saw in 2022. Are you seeing anything new there on the supply chain front? Any...

I mean, overall, there has been definitely some improvement. Freight costs have come down a bit more. We still -- the big carryover for us is the material costs that we have in our products. We have so many suppliers that we work with, and there are many component shortages that we've worked through for the most part. And there's been some increase in pricing from many of those suppliers. So you kind of carry those forward. But the team is absorbing all that and really reducing our back orders. We still have some, but they've made nice progress on that. And so all those additional supply chain costs that we carry over are built into our guidance, and we still expect to improve margins and grow nicely despite that.

Got it. Yes, you mentioned your goal for this year is 26.4% operating margin for '23, which gets you to just above 2019 prepandemic levels. And you've talked about kind of 50 bps or more of annual operating margin expansion from there. Given all the growth drivers that you've got in place and thinking about balancing investment and growth, is that still the right way to think about it, kind of 50 bps a year of operating margin?

Yes. So last year, I was pleased. We grew margins last year, '22 over '21, which is nice. Not many companies did that in our space, and we grew nicely. And so we do feel, for many reasons, the product mix shift that we have in the business, improved pricing dynamics. Also we're not quite at a normal state with supply chain, but our teams are back to value improvement programs to reduce the standard cost of our products. So really a combination of all those things and just the top line helps as well. So we feel quite confident in that goal of the 50 bps.

Yes. Great. Your SG&A as a percentage of revenue is a little bit higher than some of your peers. Is that by design? And is that something that sort of stays there? Or are there some opportunities maybe for efficiencies?

It is a bit higher. So there's quite a few levers that we have. So we don't run the company quarter-by-quarter. We want to have sustainable kind of above peers, hopefully leading peer growth and sustainable margin improvement. And so we could do a lot to just dramatically improve margins in the short term, which would impact our longer-term portfolio. And we can ignore margin improvement and just -- we're going to do that. So we feel like we owe kind of market-leading or high-end growth and margin improvement at the same time. And there's many levers. One of it is SG&A. Our SG&A is a bit higher. We are preparing for a number of launches in the U.S. but that's a lever over time. We can manage a bit down and get -- also get our gross margins back up to where they used to be and a combination of price as well. So we used to be really kind of low negative 2% to 4% price. We're getting closer to neutral on our price performance as our product mix shifts in the portfolio.

Yes. Great. And that's a big change, actually, right? Can that continue as you look at the portfolio and launches that you've got coming? Can you -- is flat price kind of achievable over the next few years?

I think so. The two biggest drivers of our price decline historically have been drug-eluting stents, which used to be a dominant part of our business when I joined 11 years ago. Now it will be about 5% of our business at the end of the year. And the prices have come down so much that the incremental impact is less and less, and it's a smaller piece of our portfolio. So if you take that piece of it out, the rest of the businesses do fairly well with price. And so we do expect that a flat pricing environment is not a crazy goal.

Yes. R&D is one place where you've invested historically, 10% plus or minus of revenue on R&D. You're starting to see some economies there. And what's the right zone for sort of R&D investment as a percent of sales going forward?

We like where we are. So that 9-ish percent, 10% range. The clinical spend within that, it continues to increase. So of that spend, about 1/3 of its clinical studies which are really important for us to expand markets, to get into new markets, and we'll continue to do that. But we also do a lot of work to globalize our R&D. Now we have a significant footprint in China, in Costa Rica, in India as well as the U.S. We've globalized our R&D a bit more. We put more of our sustaining R&D in low-cost countries. So our goal is to continue to maximize that spend. We do a pretty good job of really diagnosing that R&D spend by business unit and how much is being spent in core versus higher growth and more transformational. So we try to push that a bit more to higher growth and transformational, knowing that we have to continue to improve our products. So I think by putting more of our sustaining capabilities outside the U.S., you get cost savings there, and we can invest more in organic higher-growth markets, which we continue to do.

Yes. Great. Okay. Let's turn to some of the businesses. Let's hit WATCHMAN first. So WATCHMAN crossed the $1 billion revenue mark in 2022. There's a great strategy in place to deal with competition in that business, and you're continuing to win with that product. Maybe talking about market growth first. You've talked about the option in CHAMPION trials, which could -- which will expand the U.S. TAM from around 2 million patients today to 7 million or so going forward. CHAMPION, I think, enrolled in '22. It's a 3-year follow-up. So how do you think about market growth there? Is that kind of a '26, '27 event for...

Yes. Just -- and WATCHMAN in general, I spent a lot of time in the field, and it's just remarkable the feedback you get from physicians. This WATCHMAN -- we used to have this product called WATCHMAN 2.5 or WATCHMAN FLX and the response to FLX is really outstanding. The doctors love the safety profile of this device. And it's easy for them to use and the procedure times are oftentimes 45 minutes, which are less than other structural heart procedures, and this environment is also helpful. We just got ICE on label to also improve same-day discharge and to move it more quickly. So being the safety profile, they love the ease of use of it and the efficacy has been terrific. And so there's just a very strong comfort level with WATCHMAN, and we have these product cadence to improve it with the new steerable sheath and the next-gen product that will be approved fourth quarter or first quarter '24. So we've a very strong cadence. And these -- we invested -- back to the R&D question, quite a bit in clinical. And so we think over time, if these trials are successful, which we believe they hopefully will be based on what we see, then this market could rival the size of the TAVI market in the future. And we really have a significant, I believe, competitive advantage with the resources we have in the field and the next-gen products that we continue to launch for this device.

Maybe for the generalist in the crowd, so this is a left aerial appendage closure. It's kind of an insurance policy type of a procedure. You're not treating a symptom today. You're trying to eliminate a potentially disastrous adverse event going forward, stroke...

It's a great insurance policy. So what it does is, if you have atrial fibrillation, you have a 4x to 5x higher risk of having a stroke. And this device can be done in the outpatient center or whatever, maybe a 5-hour procedure -- in and out in 5 hours, procedure takes less than an hour. So you reduce the risk of stroke and patients are able to get off anticoagulation. So you reduce the risk of bleeding that often occurs with that and you also reduce the risk of stroke. So there's many patient benefits for it and these other trials that have already enrolled, they completed an enrollment. So we're waiting for the follow-up time. The OPTION trial readout, I think, in '25. CHAMPION trial, which will hopefully make WATCHMAN first-line therapy will read out in 2026. And that -- those two things -- the existing market is growing 25-ish percent. And we think those two trials will significantly open up the patient pool even more and also globalize it more. Right now, we're a bit restricted on label in Europe and in Japan. And so we're confident with OPTION and CHAMPION, it will open up those markets much more, whereas today, the business is about 90% in the U.S.

Yes. And like I said, safety is key here in an insurance policy type procedure. Last thing you want to do is have an adverse event on the day of the procedure. So from a competitive standpoint, safety is really important.

That's right.

Yes. Maybe can you talk a little bit about where are we right now in terms of penetration on WATCHMAN? I mean how far can this -- how big can this thing be?

Well, I do -- you mentioned with OPTION and CHAMPION was it -- is it 5 million patients that we say, Lauren?

2 million today and 7 million in the future and 10% penetrated in the industry.

There we go. Okay. So people heard that. So it's about 10% penetrated in the current indication, and that market is growing about 25%. And so what we simply do there is we train new interventional cardiologists or new electrophysiologists for the procedure but you're also getting hospitals becoming much more efficient. Now they're stacking patients. They will dedicate 1 or 2 days a week for WATCHMAN, and they'll do eight patients a day. So they're becoming very, very efficient at it and much more organized that way. And as we said, it's about 10% penetrated in the current indication. So there's a lot of room there, and OPTION and CHAMPION widened it out quite a bit.

Yes. Great. So you talked about kind of maintaining category leadership with a lot of steady cadence of enhancements to WATCHMAN over the next few years. Steerable sheath, WATCHMAN FLX PRO, VersaCross Connect capability through your Baylis acquisition. What kind of device upgrades and technology upgrades should we expect in the coming...

Well, all those things, they seem maybe to generals like there's little tools in the toolkit. But all of those things together, this Bayliss company that we acquired a year ago is used to cross the septum in the heart, which is maybe the most technical or hold-your-breath moment for a procedure. And it's the market-leading device to cross the septum. And then you combine that with our WATCHMAN device and -- current device and then this new steerable sheath that allows the physician to navigate more simply to get a more difficult anatomy. All these things combined create a moat of ease of use and safety that's difficult to compete with. And once a physician uses it, it's difficult to want to switch. And so all those pieces together between the Baylis acquisition, which is also -- will be used with our EP products and the steerable sheath and the next gen has a -- the next-gen product will be launched, say, first quarter '24. It has a larger size matrix because there's a few appendages now that are more difficult for us to solve. So it has a wider range of sizes. Also, some radiopaque markers to make it easier to use and a coating that we think will reduce -- improve healing even faster.

Yes. Great. Okay. Let's move on to PFA and FARAPULSE. There's been a lot of excitement about PFA technology. You're going to be one of the first to market in the U.S. Maybe for the generalist client, you could tell a little bit sort of the PFA story and how you see the opportunity as you start to get approval in...

So for a company, we grew 9% last year, and we've improved our organic growth profile and the -- our weighted average market growth rate in the categories that we compete in each year for about 10 years. And the business for Boston, that's been the biggest challenge historically has been in electrophysiology. And we have not had category leadership products in that category for many, many years, but now we do. And after over a decade of work, we have a few products. So I'll talk about FARAPULSE. We have a second product called cryo, which is a second-gen cryo product where there was only one other company who had all the share, which is approximately $1 billion market. That product will launch in July this year. So we're really excited about that launch. Then you had Baylis. So we really have a comprehensive product line that's been approved in the U.S., that's also very differentiated. So as I said the cryo is a second-gen cryo product that will do really well in the U.S. This Pulsed Field Ablation is a company that we invested in 9 years ago from our venture portfolio, and it's really exceeded all of our expectations in Europe. So it's the only company that has this -- has a new thermal energy. So today, you're either using radio frequency to ablate the pulmonary veins to stop your AFib or hopefully stop your AFib or using a cold balloon called a Cryo. And this is called pulsed field ablation. So if you go to HRS, the conference -- the electrophysiology conference or the one that just happened in Europe, 80% of the talks are about pulsed field ablation. So the beauty of pulse field ablation is the safety profile. So if you have a family member with atrial fibrillation, they can treat this with a higher safety profile, less phrenic nerve injuries, less esophageal injuries and the procedure times are also very, very fast. So 2x the current productivity of the existing technologies. And the efficacy is at least as good and that's been demonstrated so far. We just had a manifest trial in Europe at about 15,000 patients, real-world patients, everyday users across the board. So it really proved out the safety benefits, the productivity of the device as well as the efficacy being quite good. And we're also seeing the procedure times in Europe come down quite a bit. And we're seeing some sites eliminating for paroxysmal Afib, the use of general anesthesia, which also is a cost savings and a productivity benefit for patients. So we're really excited about this. We're the only one that has this clinical data, and we -- we have the ADVENT trial, which is our U.S. trial which is fully enrolled and will be -- likely be giving that data in the coming months. And so that's randomized against cryo and RF. So we're the company that has the most rigorous U.S. trial that doctors recognize. And we have the most data outside the U.S., and we'll be launching that product in 2024. So it's really a -- I think the EP market is one of the very best markets in med tech. We've been underweight big time for many, many years. And between our cryo product and pulsed field ablation, and the commercial team that we have in the U.S., I think it would be one of the most exciting times in the company history.

Yes. Great. You're right. HRS, everybody -- all the talk was about PFA. What's -- I think what's unique about this market is it's already a big $8 billion market, growing 12% to 15%. It's got a lot of physicians out there who are already trained on how to do these procedures. And I think the thought is with this new technology, like you said, it's safer, it's faster and potentially more efficacious. The market could actually move pretty quickly. How do you think about the introduction of PFA in the U.S.? I mean, could -- is it about share capture kind of movement from RF to PFA? Could it be market expanding? How do you think about the path?

I think it's going to be -- what we're seeing in Europe is the users, whether they're cryo user or RF, many are moving to PFA if they can get their hands on it because of the things you said, safer and it's faster and it's at least as efficacious. So initially, I think you're going to see hospitals and physician switch for those reasons in the U.S. And then over time, given the safety profile and the productivity, you may, over time actually see market expansion with patients who have Afib diagnosed early or actually become treated with it. So at minimum, it will be a mix shift. But we think given the profile, it likely will expand the market as well.

Yes. Got it. So the product has been so popular in Europe. You've had some supply challenges trying to meet demand. Where do you stand on supply at the moment?

Yes. So that's been our challenge. We acquired this company, I don't know, 18 months ago or so. And the counsel has been the supply chain issue with all components and boards and so forth and chips. So we've invested quite a bit in building out our own capabilities while we signed long-term contracts with our existing suppliers. So we'll maintain those long-term existing supply contracts. We're also building in-house capability, which we're quite confident we'll have really in place and up and fully operational by year-end. So it is a bit supply constrained in Europe right now, for sure. It will get a bit better in the second half. But by the year-end, we believe with the internal capabilities we have and all of our plans, we'll be ready for the U.S. launch to be able to build that scale, so we don't have to be so selective where we launch now.

Got it. You've got a RHYTHMIA mapping system that you're working to integrate with FARAPULSE technology. Where does that integration stand? And could that be ready for a U.S. launch?

Yes. So what you see in Europe is some physicians will use -- the more complex the procedure, the mapping will become more important. But you're seeing many physicians in Europe use FARAPULSE without any mapping system given how quick it is and efficient it is. But also, we really essentially want to provide an option. So for physicians in the U.S. or anywhere in the world, they can use the FARAPULSE platform without any mapping system. They can use it with their existing mapping system or they can integrate it, which will be the most elegant way to do it with our RHYTHMIA system. And that will come out right around the launch time or potentially shortly thereafter, but close to the U.S. launch. So the physicians can use the RHYTHMIA mapping system along with FARAPULSE. The more complex the procedure is, the more likely they'll want to use the mapping system. The more straightforward, they may choose not to use a mapping system.

Yes. Okay. Great. Excellent. Let's shift to TAVR. So I think some investors will remember your LOTUS drama over the years. A great product, but had some technical issues and ultimately you kind of cut bait there and moved on to a new product, which is now very promising in ACURATE neo2. Are you seeing really strong growth in Europe and looking to launch next year in the U.S. Can you just talk a little bit about TAVR and sort of what success looks like with the neo2 launch?

Yes. So we've had this for about 6 years now, the ACURATE neo2 platform. And we've been -- what's great about this platform, it's -- I won't say relatively easy, but it's pretty straightforward to manufacture, which was our problem with the first generation product that we have with LOTUS. And the team has done an amazing job of building enhancements across that portfolio. So that valve and accounts that we're in of about 20%, 25% share in Europe is doing extremely well there. The product gap we have there, similar to WATCHMAN is having a larger size, which will be approved at the time of the U.S. launch, which is about 1/3 of the patients. So that will help our European business as well as the U.S. When we launch in the U.S. in '24, we'll have all risk indications. So we completed the trial for high-risk, moderate risk and low risk, which some of our competitors have not done who are launching right now. So we'll have all risk indications. The product has been well vetted out in Europe. It has extremely low PVL rates, very low pacemaker rates and very strong hemodynamics and easy to use. And so we've learned a lot over the years. So we'll be able to manufacture this product at scale with a highly trained sales force with a physician base that we know very well and the data out of Europe is quite strong. So we feel like we're not going to be #1 or #2 overnight, but we do believe, over time, we'll have a respectable share of the market in a very big marketplace.