Boston Scientific Corporation (BSX) Earnings Call Transcript & Summary

Good morning, everybody. Welcome to Stifel's Annual Healthcare Conference. My name is Rick Wise. I'm one of a group of excellent, I hope, medtech analysts here at Stifel. And it is my sincere pleasure to welcome 2 outstanding members of the Boston Scientific team. To my left, Dan Brennan, Chief Financial Officer. And to his left, to Dan's left, Lauren Tengler, Head of Investor Relations, and there are many other titles, but we'll just focus on that. And thank you for both being here to open up this year's conference.

I appreciate the invitation. Pleasure to be here as always, Rick.

Thank you, Dan. And I mean, this has been quite an extraordinary period for Boston. I appreciated your recent Analyst Meeting that CEO, Mike Mahoney, emphasized that his goal, intention, desire, hope and dream that Boston will grow at the top of medtech. And we have a particularly exciting pipeline of compelling product launches that I think support that kind of viewpoint. Having said, I started off talking about medical technology. I know that you're very anxious to dive in the world -- into the world of pharmaceutical products and we had some major data.

You are first up in terms of being asked following that data. Your thoughts on the data, any perspectives about what it might mean for Boston, for the industry, for cardiovascular procedures. Is that -- with that, I'll just turn it over to you.

Sure. Yes. So you're referring to GLP-1s, I assume?

Yes, I am.

So I think as we look at it, I think the good news is that class of drugs is going to be helpful for weight loss for obesity, for obese patients. And that's a good thing. That helps everybody. As I say, it was helpful to see the full data set this weekend. And I think that's supportive of our view and other's view that if you look at the impact on cardiovascular procedures, we see that as being minor even at peak penetration. And that's many, many years away.

No. And I mean it seems like to quote a certain individual that med tech dodged a bullet this weekend a little bit, at least in the near term. But I'm glad that you feel that way. Maybe more importantly and more specific to Boston Scientific following your excellent superb ADVENT data in August, we got a 17,000 patient group manifest data. Maybe talk about your reactions or how you'd have us think about 17,000 patients being treated with FARAPULSE, major event rate, 1% seemed to get even better as operators gain more experience, which was exciting to me. Any critical takeaways or just more of the same, more positive news for FARAPULSE?

This is really adding to the body of clinical evidence that we're seeing with FARAPULSE. You mentioned ADVENT, which is our U.S. IDE, which achieved primary safety and efficacy endpoints. And just this past weekend, over 17,000 patient data from the real-world registry manifest was presented, and that was focused on acute safety outcomes, which really reinforces the safety profile of FARAPULSE and continues to give more broader view on what FARAPULSE is and how well it can perform in the European marketplace. And just recall, this is real-world registry. So it's commercial European data. And so I think that helps to again just bring more value of evidence there.

Right. And just one technical question, and I don't mean to get too much in the weeds here. But -- and I know you can't compare trials, et cetera, et cetera, et cetera. But the major event rate in MANIFEST was 1%. Again, in a real-world trial, it was 2.1% in ADVENT. Any early thoughts or reactions and what that means? I mean it sounds incredibly encouraging.

Yes. So ADVENT is a smaller trial, right? So in comparison, it was 2.1 versus 1.5 in the control arm, still met inferiority, which was the endpoint. I think as you see more and more physicians utilize the device, I think you said it right, the learning curve is quick. And as you have a broader set of patients to look at, you see that rate be in that sub-1% range. And just recall that only 1 physician had used FARAPULSE in the U.S. IDE trial before that clinical trial was started.

It's very promising. We'll dive back into FARAPULSE in a minute. I thought following those data sets that we revisit briefly the Analyst Day, your first in several years. It was very exciting. I thought it was actually extraordinary excellent meeting. And interestingly, you raised the long-term organic growth rate by a couple of 100 basis points, now talking about 8% to 10%. As I look ahead, Dan, maybe just a high level to start us off. I mean talk about the range or confidence in the range and the drivers and maybe just the puts and takes as you'd have us think about that range?

Sure. And I think, if you will indulge, I may just do a quick '23 before we jump into '24 to '26.

I would be delighted.

Because I think -- before we jump over 2023. I think it's been a really special year for the company. So if you look at our full year guidance ranges for full year 2023, organic revenue growth of approximately 11%, 26.4% adjusted operating margin is our goal, which would be 80 basis points of expansion versus last year. And then a double-digit adjusted earnings per share growth is always our goal. We have 17% to 18% in our guidance range this year of $1.99 to $2.03. So I think if you close the chapter of 2023 with those types of numbers, we'd look at that as being a very successful 2023 and kind of on to '24 to '26 to your point. The strength of '24 to '26 from our perspective will be, first of all, the core. So a lot of times, we'll -- it's probably underappreciated, the core of Boston Scientific, all the products we have in endoscopy and neurology and cardiology and peripheral and cardiac rhythm management and such. So that, I think, is very healthy. And then you layer on to that some new and exciting launches that we have over that time frame, and that's really what gives us the confidence for the 8% to 10% over that 3-year CAGR over '24 to '26.

And EPS is $1.99 to $2.02 for the full year.

Oh $2.02.

Yes.

Sorry $2.02.

No, that all makes sense. And just curious, the -- I have to say that many positives supporting innovation-driven dynamics here are very clear. What are you concerned about? I mean we've had one large company sort of surprise us this quarter with worse-than-expected currency. Is currency now on your mind more than it was a month or so ago, for example? And maybe just again at a high level, these lingering macro factors, whether it's supply chain or staffing. I mean how are you feeling at a high level about some of those factors, but specifically around currency?

Sure. So specific, it sounds like a question wrapped around kind of guidance philosophy, but let me go specific on FX. So what we talked about at our Investor Day in September was we would look for a headwind in gross margin on -- from FX, driven by the strengthening of the U.S. dollar. That's really all we've said on FX relative to the impact. And obviously, when we give guidance, we're finalizing our AOP here over the next 6 weeks, we'll do that. And as we get to our Q4 earnings call at the end of January, early February, as we always do, we'll give a full set of guidance and expectations for '24. So the guidance philosophy question, I think, you didn't ask it, I'll answer it. I think that's what we try to do is we try to look at all the headwinds that are out there, the tailwinds that we have, whether it's new product launches or our execution, whether it's FX or other headwinds that you see, and come up with a guidance range that makes sense for us that we can achieve. I think our history is pretty good on achieving the guidance range that we put out, and that's our philosophy. Just put all the things together and we will do that over the next 6 weeks, come up with what we think makes sense for '24, and we'll give that on our Q4 earnings call.

Another notable part of the Boston story has been when I think about -- I know exactly actually since 2012, and I've been recommending the stock. The story has been ongoing, steady operating margin expansion that you've set new goals. Why don't you remind us of those goals and your optimism about achieving them at this point?

Yes. I think it's important because it goes to the fundamental financial philosophy that we have as a company, is that you need to do both. You need to have top-tier revenue growth, but you also need to have differentiated margin expansion. I think that's what makes us a unique and compelling story. Relative to margin expansion, just to buy the numbers, as I said earlier. So 26.4% adjusted operating margin is the goal for this year. That would be 80 basis on top of last year. What we set out at our Investor Day in September was a goal of another 150 basis points over the next 3 years, which would have us on the doorstep of 28% at that point, which really brings into focus something we've talked about for a long time, which is a long-term goal of that 30% plus. And so many years ago, when we were 18%, looking at 30% is a long way down the road. When you're at 28% hopefully at the end of 2026, that 30% really starts to come into a sharper focus, and we have the plans to get there. So as we look at -- there's 4 key areas for us relative to margin expansion. And I would say that it's in the DNA of the company, and it's in the goals of everyone within Boston Scientific. I think I can speak on behalf of my colleagues that we all look at it as something that we need to drive and find ways to contribute to. But if you look at the 4 key areas, revenue. It's the first line on the P&L for a reason. It's the life's blood of any company's margin expansion journey because it provides you leverage opportunities up and down the P&L. We think at 8% to 10% that we have for '24 to '26, that will provide us a unique opportunity throughout the P&L to drive leverage where that makes sense. Gross margin. So as you know, we were north of 72% gross margin in 2019. And we have a maniacal focus inside the company to get back to that level. It's a bit of a macro, micro story. We need some macro help over time. I think we'll get that. The macro headwinds are still a little bit persistent relative to freight and the input into our manufacturing costs. I don't think the clouds have cleared on that yet, but we would see that contributing over that LRP timeframe. And then on the micro side, it's really all about the DNA of taking cost out of the system, the DNA of launching new products that are accretive, and that's alive and well within the company. So we think gross margin can contribute to that 150 basis points over the 3 years. SG&A it's really all about balance. So for us, we need to balance the need to drive that revenue growth by investing mostly in commercial-facing resources in those areas to drive that growth while also looking at leveraging mostly, call it, the G&A of SG&A because we don't need to grow those functions at that 8% to 10%. So that provides leverage within G&A, all the while driving shared service centers, centers of excellence and more efficient spending. So we think SG&A can contribute over that time. And then R&D, it's a bit of a leverage story, I would say, with that growing top line, but it's more about efficiencies and more about driving optimization of our global footprint, and there's really been a couple of years of really good examples of that starting to bear fruit for us, been a long time in the making and really starting to drive efficiencies in there. But I think R&D can contribute around the edges on that. We're not looking to leverage R&D significantly. So again, as you look at margin expansion, it's in the DNA of the company, and it's a key part of the financial fundamentals that we look to achieve every year.

Yes. To what degree is pricing play a role or positive pricing play a role in your outlook? Again, I assume, given the acceleration, if that's the right word, in new product launches, that's going to be helpful. But I don't know how to think about inflation relative to the internally driven positive price?

Yes. So historically, so the new products, that will be helpful from a mix perspective. So if we launch accretive new innovative products, that will be helpful from a mix. But just on a like-to-like price. I mean, historically, for many, many years, we've been low single-digit declines. And that kind of gets in the way, you're starting behind the start line if you're trying to grow revenue, you're starting behind that starting line. And so over the last 2 to 3 years, we've been able to improve that kind of with the goal of being flat. And that's just largely through innovation within the portfolio. There's a bit of a math exercise in there as well that CRM and DES are the largest component of our price decline. And as they don't grow at the overall rate of the company's revenue growth, they become a smaller part of the company, it's a bit of a help from a math perspective. But if you're starting out at the starting line with flat price and you're trying to grow revenue, that's much more helpful than where we've been for a long time behind the starting line.

I couldn't agree more. It seems like as we think about '24, and I appreciate that you're going to give guidance when you report fourth quarter. But I mean it seems like a warm up in a way for '25, '26, as you launch, I mean, many, many products, which was very clear from the Analyst Day, but in particular the full WATCHMAN FLX Pro, the ACURATE neo TAVR, FARAPULSE in the U.S. I assume those are absolutely critical to have happen in '24, are there any other critical '24 dynamics that just big picture that we should be thinking about, if it's tax rate again or currency?

Yes. I'd go back to how we opened the conversation, which is the core. The core is the life's blood and is key to the growth of the company as well. So you add on the new product launches and you mentioned that historically, we've been kind of at that 6% to 8% LRP goal. We raised that to 8% to 10%. And I think that reflects the strength in the core business that we have across all the different franchises as well as the new product launches that we have coming up. Again, as you said, we'll give you guidance on our Q4 call. We did give a few housekeeping items that maybe were helpful at an Analyst Day. I can just take through probably 2 or 3 of those. We said that '25 organic revenue growth would be higher than '24, a bit obvious because a lot of the launches happened in the second half of '24, but hopefully helpful. On tax rate, we did say that in '24, with the current tax laws and issued guidance, we think that we can hold our historical 14% operational, 13% all-in tax rate. And as I said earlier, we did say that FX would be a bit of a headwind on gross margin. So hopefully, helpful from a modeling perspective.

Maybe another aspect I'd be curious to hear your perspective is China. Boston had an extraordinary China quarter easily outperforming the rest of medtech. Yes, VBP isn't easy, and I'm sure anticorruption measures make operating more challenging. But what's your special sauce, so to speak, in driving such excellent performance? And can you continue that kind of performance going forward?

Sure. So for those that haven't seen our Investor Day presentation, we do feature June Chang, who is the Head of China. She does a far better job than I will do in answering this question. But I'd say there's a few components that have really supported the success of China. It's grown double digits in the last number of years. And that's really with a very thoughtful market presence, thoughtful portfolio expansion. The diversity of that portfolio is not dissimilar to Boston Scientific in totality. And that has really allowed us to manage the VBP and sort of other things very well. So as an example, drug-eluting stents went through VBP, we were able to expand market access and pull through more innovative technologies within complex PCI, which allowed us to continue to grow double digits in that market. The outlook for China remains good. We see that market as a large fast growing market that we want to be in. We see Boston Scientific growing mid-teens over the LRP period and achieving about $1 billion in sales in 2024. So becoming a nice portion of Boston Scientific revenue over time. The last thing I'd add is we've been very strategic in how we've been expanding our presence there with thoughtful engagements like the Acotec partial acquisition. So we own a majority stake of a local Chinese company, which allows us to have a local status through that company. They retain that local status. And we can partner with them on commercial synergies on R&D, on manufacturing, and I think that's a great example of sort of the strategy behind how we engage in China.

Great. And let's take each of these 3 big opportunities that are going to come into sharper focus in '24. FARAPULSE, the U.S. product launch. All my due diligence says that FARAPULSE is going to drive really dramatic fundamental change in the way EPs practice medicine. I mean just commandingly so. Yes, you're going to face competition. But talk to us a little bit about how you're getting ready. What lessons have you learned in Europe that you're bringing here? Are you going to have a dedicated sales force, is manufacturing ready to go? Just help us frame your readiness to tackle this opportunity.

Yes. So FARAPULSE has been on the market since 2021. So there's a lot of learnings we have, and we are investing to be leaders in this space. We already spoke about our growing body of clinical evidence that's demonstrating the safety and efficacy of FARAPULSE. We've also invested in improving our supply. So we've been constrained since acquisition of FARAPULSE on the consol side, not on the catheter side. But over time, we've invested in gaining a second manufacturing site within our plant network, sits in Minnesota. And now that plant is up and running and you're starting to see consoles hit the European market now that will continue to improve in the rest of Q4 and ramp even further into Q1. And so we feel very confident about our ability to have supply not be a factor when it comes to the consoles at the time of U.S. launch in the second half of '24. As far as commercial, I'd be remiss if I didn't mention that we have 2 nice wins in our sales on the U.S. EP side. So we've got the Baylis acquisition that we did in '21. And that's now organic. That is a fantastic team of folks who are focused on access solutions, which is used in both EP ablations. and LAAC procedures, and we're making that easier with reducing catheter exchanges through our VersaCross Connect platform as well. So we've got some scale there. We also launched our POLARx Cryo Catheter in Q3. It's a differentiated catheter that allows you to go to 2 different sizes within 1 device, which is actually doing really great, early contribution in Q3 from that. So we've got some scale building up. Certainly, there'll be more investment required. But this is an area we know really well. AF is an area that WATCHMAN plays in and other parts of our business. So we'll leverage that broader group of folks and add as necessary to ensure we are ready to go at the time of launch.

And just -- I'm sure we'll get to M&A at some point. But just looking at those 3 products, right, FARAPULSE, Cryo and Baylis, 3 really, really good acquisitions. And proud of those to be able to slot those in, and I think a real good indicator of the strength of our M&A portfolio over time.

There is so much to talk about it. It's like -- I would like to jump in, but I want to quickly hit on WATCHMAN FLX Pro, you are in limited launch, when are you going to be in full launch? And could that launch your multiple generations ahead of your next competitor, could we even see WATCHMAN growth accelerate with that?

Yes, great question. So WATCHMAN FLX Pro is our third generation device. It has a HEMOCOAT coating that enhances healing, which is designed to further reduce DRT, device-related thrombus. We've got some other features, larger size, fluoro markers. So that's in limited launch, and we're enrolling in our HEAL-LAA study, which is a post-market study, studying the use of WATCHMAN FLX Pro. We expect to move into full launch early next year. And this product is one part of the WATCHMAN equation. We have seen strong success. We're growing year-to-date, 26% in WATCHMAN, and we expect the market to continue to grow north of 20% over the LRP. And that's really with continued contribution from markets outside the U.S., so China and Japan, most notably. It's with investing in clinical evidence with trials like OPTION, which is post ablation patients who don't want to be on lifelong blood thinners. And the bigger trial, which is CHAMPION, and that is a head-to-head versus oral anti-coagulation, bringing WATCHMAN to more first-line therapy. And these are really -- if they read positive, these are really indicating expansion trials that would really expand the population that would be able to take WATCHMAN over the long term.

Maybe touch on the timing of those trials and...

Yes. So OPTION is in -- so OPTION, CHAMPION are both in 3-year follow-ups. OPTION completed first in Q3 '21 and is likely to read out in early '25. CHAMPION enrolled quickly and finished in the end of '22, and we expect that to read out in the first half of 2026.

And just to continue on that M&A point from earlier, credit to the team for the acquisition of a small company that probably 12 years ago now for WATCHMAN. But then all the iterations, and all the new products have come from the internal team. So a great job of integration by the cardiology team and the EP team to drive the integrations that are now coming out, so.

And speaking of M&A, Dan, I think one of the most amazing aspects of the last decade has been the transformation in Boston financially. I mean from billions of dollars of potential liabilities and no virtually limited free cash flow, you're generating like $2.5 billion in free cash flow or something like that. You set now higher free cash flow goals for '24 to '26. How is that framing your thinking about M&A now given the pressure on valuations and the many opportunities out there?

Sure. I think the -- it's all a good story relative to that, right? So you think -- you look at the '24 to '26 timeframe. We're looking to drive more cash flow, right, through increased operating income and sales growth. At the same time, convert it better, right? Historically, not something we've kind of led the league in, but looking at getting to that 70% free cash flow conversion by '26. Establishing that goal, I think, is important. But I think what doesn't change is the capital allocation priorities in terms of where we'd look to spend that. The #1 priority is high-quality tuck-in adjacent innovative M&A. That's what we've done for the last 10 years. As you said, I think it's been an important part of the story. It will continue to be that. That's -- we're not looking to change that. The one subtle tweak we made at Investor Day was we added in a goal of keeping our share count flat relative to our capital allocation. So effectively offsetting the employee stock issuances, so I think that's -- again, I call it a tweak. I guess, it's been well received to keep that share count flat, but it still provides us plenty of firepower and opportunity to continue that M&A tuck-in strategy.

You've always had interesting portfolio of VC, 35% to 40% kind of range. It seems like it's ranged in recent years. I think you haven't been as active as maybe in the last 6, 12 months, and you've done one. Are you just saying we've got plenty on our plate, no rush, let them keep doing their thing? Or is it timing? Is it...

No, it's about 35 companies we have in the VC portfolio now. And as you would imagine, in the portfolio like that, the green shoots don't come perfectly every quarter and every year. So we haven't had an acquisition this year from the VC portfolio. We did -- we closed Acotec. We closed the investment in Acotec. We had closed the acquisition of Apollo. We announced the intent to acquire Relievant. None of those are from the VC portfolio. But it's alive and well, both the continued looking for new investments, you'll see us do more investments over time. That's an important part of feeding the overall M&A pipeline. It's not the only part, as we've shown, but it is an important part of feeding that overall pipeline. So VC portfolio, alive and well and look forward to throw some green shoots over time.

Great. It's amazing how fast the time goes. I'd like to sneak in at least a question on ACURATE Neo2 TAVR. I mean I love CEO, Mike Mahoney's, response at the Analyst Day asking about market share question. Maybe I asked that question, saying that his aspiration was that Boston be #1 despite being later than competition and gave a couple of good historical examples to back that up. Help me think about that playbook, just in closing. I think this is an underappreciated opportunity in the portfolio now.

I'd point to our European experience. So we've been on the market for quite some time with ACURATE. We talked in Q3 about structural heart valves growing double digits. That was led by ACURATE Neo2 sales. Last disclosed, we had about 10% share of the overall European market in Q4 2021. And we will absolutely learn from that and -- but won't make any sort of market share projections on the U.S. side.

If Mike were here, he [indiscernible]. We're almost out. Maybe just the last couple of seconds, just some quick thoughts on the aging coronary DCB. You'll be the only company with a coronary drug called a balloon in the U.S. market. It seems like a unique situation. How does it impact Boston most just from a portfolio perspective potentially?

Yes. So this is a $500 million market globally. We're doing very well in Japan, where there was one other player in the market, took a market leadership position in Q3 and really excited to bring this product to market in the second half of 2024. We will be the only player in the market. It is differentiated and really supports our drug-eluting therapies franchise as well as the broader complex PCI.

Unfortunately, we have to leave it there. Thank you so much. Really appreciate you being here.

A pleasure to be here. Thanks again. Excellent. Appreciate it.