Boston Scientific Corporation (BSX) Earnings Call Transcript & Summary

Good morning. I'm Josh Jennings from the TD Cowen Medical Devices team. And thanks, everyone, for joining on Day 3 of the 44th Annual TD Cowen Healthcare Conference. We are excited to have Chairman and CEO, Mike Mahoney from Boston Scientific; and Vice President of IR, Jon Monson, joining us here today for a fireside chat. Gentlemen, thanks for traveling a little bit south and coming to the conference.

it's an easy one. Yes. Thank you. You're welcome.

Awesome. Well, Mike, wanted to start off back in September at the Investor Day, you and your team, you primarily put forward this LRP guidance, and within that, 8% to 10% you set expectations for Boston to be the premier -- the #1 growth story over that time period. And it's only been less than 6 months since then. But just -- any just updates on the drivers here, but maybe most probably just your confidence level in that stake in the ground only 6 months later?

Sure. Good morning, everyone. We said our aspiration is to be the highest performing med tech company over the LRP period, '24 to '26. I think we might have achieved that in 2023 with the 12% growth and 20% EPS growth so we kind of measured on top line and EPS growth. So that's our goal for '24 through '26 over that time period. And the rationale for it is we've continued, as you know, to increase our WAMGR consistently over many years and grow faster than the market. And so we're at a point now where we feel we have the team, first of all. The global team, the cohesiveness with the team, the depth of the team, and we have the product launch cadence and the performance track record to deliver that. So that's what our goal is. Our team is motivated to deliver it and excited about this year and next 3 year.

Excellent. Know what, the 2024 guidance, specifically 8% to 9% organic revenue growth, we'll get into the margin trajectory next, but that fell within the LRP. Very strong growth expectations off of a challenging double-digit comp, as you mentioned. I think investors are with some early approvals here in 2024 of 2 big devices getting -- expectation may be rising at the top end, maybe achievable. But I think there are some -- I think investors are aware of a lot of tailwinds in play for Boston, off of the -- despite that tough comp. But maybe anything you want to add just on the tailwind-headwind dynamic as we're thinking about that 8% to 9% level and Boston's ability to hit that or exceed it.

Yes. I see we're confident in the guidance for the year that we gave, the 8% to 9%. We're pretty deep in the Q1 here, so we can't comment too much on that. But we think it's appropriate guidance coming off the 12% comp for the full year. And there's a lot of things to be excited about the company. We'll talk a lot about likely FARAPULSE so much and so forth. But our divisions, our MedSurg -- if you think broadly, our MedSurg businesses, endo, euro, neuromod and if you include PI into that, have really kind of have been traditionally upper single-digit growth companies. We continue to tuck in M&A in those product areas, and we have very high market share and a lot of global momentum. And then we have the most pronounced launches in cardio. With AVVIGO, which is really a differentiated imaging platform in our largest business, in our coronary business. With AGENT, the recent approval with FARAPULSE, with the WATCHMAN momentum and the success we're seeing with ACURATE in Europe, where we -- I think we're about 70,000 or 80,000 cases now in Europe. And we're filing for our Prime, which is our next-gen, our expanded size and some additional features with ACURATE. So we really have, over the LRP, very compelling launches around the country, around the globe, I'd say, around on the businesses, but the most compelling in terms of swing factors in cardio. And I really believe in our team's ability to execute. So we plan to execute these launches well and deliver on the aspiration that we talked about at Investor Day.

And I wanted to talk about the operating margin guidance as well, 30 to 50 basis points. You guys are funding some key product launches, as you referenced in your last answer. But you also are expecting 150 bps of expansion over the LRP out through 2026. And I think that's a very strong trajectory, 50 bps on average. Maybe there's some outperformance potential depending on how these product launches go. But why is that the right range for Boston Scientific? I mean our understanding is that you guys are highly focused on funding, investing for outyear growth. But any further commentary would be or helpful.

Get that one, Jon.

I do. Yes, thanks. Yes. So 30 to 50 bps this year, we do feel good about that. And what I'd say, if you look at 2023, 26.3%, that's above where we were pre-COVID. So if you look, the company has struck a nice balance of expanding our operating margins, that's in our DNA despite headwinds that we saw over the last few years. And I feel good about our ability to do that this year and the $150 million over the LRP, as you mentioned. And that is the balancing act. Making sure we're investing in innovation to fund that 8% to 10% revenue growth. I think for this year, we'll see -- we've talked about gross margin roughly flat, maybe slightly down year-over-year. As we look to fund the big launches, there's some capacity expansion we need to do there. So we'll see a little more contribution from OpEx here in 2024. And then over the course of the LRP, you expect all lines of the P&L to contribute to the $150 million.

And we mentioned often that we could improve margins faster, but we want to invest in R&D and important clinical trials to make sure the company is outstanding for many years to come. And so we can talk about that with WATCHMAN and FARAPULSE and so forth. So we would have the ability to do that, but we choose to invest for long-term performance. And also, I would say, expecting leverage out of our business, out of me and our business units, is a good muscle to have. It forces our functions to figure out how to drive more productivity, drive more VIPs. It forces the business unit leaders to make tougher portfolio trade-offs to look at more creative ways to drive R&D outside the U.S. So we think it's an appropriate amount of leverage given the growth trajectory that we have. And I think delivering 0 leverage, despite high growth, just doesn't -- it's not what investors want. That's also not the right leadership muscles you want to build a cost company.

And you mentioned on the gross margin line, but within the LRP, you are expecting expansion. And I think -- just my question here is just on pricing and expected flat pricing for Boston Scientific last year. Expectations were flat in 2024. Just any help just thinking through your internal expectations. Maybe hard to forecast, but just as we move into the outyears of this LRP and whether that flat pricing is sustainable. And we've heard some of your peers -- leaders of some of your competitors in the medical device industry talk about, maybe we're entering into a new area of medical device pricing. But any thoughts there? Any help thinking about pricing as we move through these next couple of years?

Yes. We haven't specifically forecast pricing out through the LRP. But Josh, to your point, see that as goal of flat for '24, flat to last year in '23. And I do think what we've seen inside BSC and across the industry is we built new muscles, and that it was a bit of an upside that came out of some of the supply chain disruption and inflationary pressures that we all saw that across the business. We're focused on trying to maintain a flat price across the company. And that's where innovation really comes into play. The more we can kind of launch the products, which is a top focus for us, the more that we can drive better pricing across the company.

So just consider that mix shift in our forecast as well. Great. I think Boston is unique, $14 billion revenue base, but has multiple needle-moving product lines in terms of becoming -- or already being a contributor, strong contributors to that organic revenue growth performance level in '23. And as we look out through the LRP, FARAPULSE is one that's grabbed investors' attention and then it has become a focus. You guys got approval earlier than expected here in 2024. I just want to -- as expectations start to rise for that product performance and with the U.S. launch, I mean, there are some launch dynamics that we should be considering. I just wanted to maybe run through. I mean, are VAC approvals required. It is a capital placement and there's training involved. But maybe just walk us through the logistics of getting into accounts and having them transition from just early adopters to rolling into a normal cadence of PFA procedures and through centers.

Yes. I would say broadly, this is maybe the most exciting product I've seen in my career, FARAPULSE, in terms of what it's delivering in safety and efficacy and productivity and doctors reaction to it in Europe, and also in Asia and very early in our launch in the U.S. But also, it's not a -- it's not like you're a new CRM device or a defibrillator, where doctors just switch over. So there are some elements of capital placement, and we typically don't have an issue with capital committees because doctors are very anxious for FARAPULSE. And we have enough tools in our toolbox with our customers to figure out a way to get the capital placed somehow. So the capital is less of an issue. It's more just the sequencing of the launch. And having training the doctors and training doctors deeply in the accounts, not just a doctor, and ensuring they have a great overall experience so it sticks. And so as you might expect, obviously, we'll have increasing contribution from FARAPULSE each quarter this year. It just got approval. We're in the very early phases of launch in the U.S. You'll see more meaningful impact in second quarter, more in third, more in fourth. But we're really blessed to have this product. And the amount of focus that we have on this really couldn't be higher in the company.

And understood. I mean ensuring that strong early experience is important, training, et cetera. But how do you balance that speed of -- or strategy for a deliberate launch when you have some competition potentially getting approved for their PFA platforms in the next 12 months? And I mean our check suggests that there is this pent-up demand for PFA as you guys are well aware. And to be competitive, say, in the Boston region, one of our physician expert panels is we need to have PFA soon, and FARAPULSE is the option for us. So there's this pent-up demand, and I think you guys are attacking some of the high lines...

At this point, because of the great work by our supply chain team and the investments we made over 2 years, we don't have the supply chain constraints that we talked about in '23. And so those really opened up, I would say, November last year in Europe. And so we're not constrained by supply chain. So they've done a remarkable job there. And so supply chain won't be an issue for us. It's purely cadencing out the prioritization of accounts, which is a great problem to have. And we're focused on the 25% of the accounts that drive 75%, 80% of the volume in the U.S. We're putting our -- most of our focus in those large centers, who we know those customers well from WATCHMAN through Bayliss, through CRM. And we may not have had as strong a historical reputation in EP with those doctors, but we have it in WATCHMAN CRM and so forth. And those doctors have either been part of the trial, where they have seen all the clinical data. We have a significant lead in terms of user base clinical data through ADVENT and the other trials that we're running. And in this world where information is so quick, the doctors are very aware, the of FARAPULSE. So there's an enthusiasm for it. Clearly, there will be competition, but we want to take advantage of the head start that we have.

Understood. WATCHMAN, you mentioned in your last answer, has been a needle-moving product for a number of years now, and that momentum seems to continue, but there's more to come. And maybe you can touch on just the synergy potential between this FARAPULSE launch and WATCHMAN indication expansion. You've got the OPTION trial to read out in early '25 and the CHAMPION trial in 2026. And those are big indication expansion opportunities for WATCHMAN, but then you have this combination -- potential synergy with the FARAPULSE platform being in play as well, but can you help us think about that.

We think we can uniquely treat Afib unlike any of our competitors simply because you're -- with our POLARx device, with our RF STABLEPOINT device, which is a good enough product to compete in that area and with a highly differentiated PFA device. Then you combine that with most doctors in the U.S. like our Baylis product for crossing the septum, and we have a very high strong leadership position in WATCHMAN. And so that's really the sequence. And then you have diagnostic tools. So we have a very strong, differentiated portfolio for all those. With -- specifically within WATCHMAN, the TAM [indiscernible] 3 or 4, and that TAM has the opportunity to go to $5 billion to $6 billion in the next 3 to 4 years, pending OPTION readout and CHAMPION trial readout. Similarly, so there's a massive TAM expansion within WATCHMAN, where we have multiple product, new launches coming prior to competition coming.

On the FARAPULSE side?

On WATCHMAN. First for WATCHMAN. Market to a $1.5 billion, has potentially go to $5 billion to $6 billion based on OPTION and CHAMPION readout. And we -- on the portfolio side, we're launching our next-generation product right now, WATCHMAN FLX Pro, and then we'll -- we have other plans in the future for steerable sheets and the next generation beyond that, and we're investing in those clinical trials to expand that TAM. Similarly, with FARAPULSE, we have a focused cadence of R&D investments and new platforms for FARAPULSE, along with VC investments. And importantly, we're leading in terms of TAM expansion with FARAPULSE. So today called the market in $9-ish billion, persistent. It's underpenetrated based on efficacy and time. We'll be finishing our ADVANTAGE trial with FARAPULSE. And given that data, call it, early first quarter 2025. And so that can significantly expand the TAM. And we think FARAPULSE will be the preferred tool for persistent indication. So the TAM expansion between CHAMPION -- between WATCHMAN and FARAPULSE is very significant over the next 3 or 4 years. And the other opportunity that we're looking at to make that even stronger is a concomitant procedure. Is it takes 10 additional minutes once you're already across the septum, to do a WATCHMAN or FARAPULSE procedure. So for most patients, they'd rather have one procedure and treat their AFib and reduce the risk of stroke and get blood thinners. We've got many hospitals who have done hundreds of cases, for the average hospital reimbursement issues, so we want to work with the insurance companies and CMS and so forth to work on common reimbursement, which is very effective for the patient, most cost effective for the hospital, very efficient for the doctor. And we are uniquely positioned, given our WATCHMAN, our Baylis and our FARAPULSE, to deliver on that opportunity.

Great. If the OPTION trial reads out positive, you're -- I think, I'm just reiterating what you just said. But you're optimistic that reimbursement for concomitant procedures can be adequate and...

We need OPTION to read out well, because we have confidence in it. And then we need to work with the reimbursement teams and societies to ideally, over time, get concomitant reimbursement, which doesn't exist today.

And you also have some international expansion for WATCHMAN with those OPTION and CHAMPION trial readouts as well.

Yes.

Great. Want to -- and back to FARAPULSE, I think you guys talked about a potential launch in Asia Pac, China and Japan in the second half of the year. Anything you can share just in terms of the other hurdles once you get regulatory approval or reimbursement need to be put in play? Or could FARAPULSE launch this year in those 2 countries?

Yes. We do think FARAPULSE will launch in Japan, call it, maybe end of third quarter, fourth quarter this year. And again, many of the Japanese actuals are seeing FARAPULSE results in Europe and U.S. and through various means. But that's a significant market opportunity for us. And even though we haven't been a large player in Japan, we've launched cryo 2 or 3 years ago. We have over 50% share now in cryo. And we also have a growing WATCHMAN business there and a CRM business. So again, we have the commercial resources to launch FARAPULSE in Japan, which is a significant market opportunity for us. China, again, another very, very large market. It's taken a little bit of ASP erosion with some of the China tenders, but a very significant, maybe the second or third largest market in the world. And it's a similar playbook for us in China, which would be approval again, back half of this year.

This year. Great. Wanted to move on to another strong growth contributor in your product portfolio, neo2. You guys are continuing to gain share in international markets. You had announcement on the fourth quarter call just about the ACURATE ID interim analysis, and we need to wait for the full 1 year results. And I don't think there's any update to share there, but anything you want to comment on?

Yes. There's no update or on the earnings call. I think we've done 70,000 or 80,000 patients. The valve is used routinely and under excellent performance in Europe every day. The Prime valve, which we will be submitted for, would give us a larger size in Europe and some other things to make the valve more visible. And so we continue to enhance that, and we're excited to -- because that not having a large size, we probably missed 25% of the market in Europe by not having that. We have over 20% share in most accounts that were launched in. And in the U.S., as we mentioned in the call, we need to have the 1-year complete follow-up on the 1,500-patient trial. And then we'll give the investor community, obviously, regulatory authorities, updates once we have that in terms of the next steps.

Great. I believe that, that trial completed enrollment in March of 2023. Great. So it means...

It's April.

April. Thank you. Yes, thank you. Appreciate that. Helpful comment. So maybe we can...

Glad I'm -- yes, there we go. Good [ reaction ].

I mean could we see data presented, assuming it's going to be positive at a conference next year?

Well, we haven't laid that out yet. So as soon as we have the 1-year follow-up on the 1,500 patients, then we'll determine the next steps and when we'll present it, the data.

Another I guess, channel that we thought about in terms of the Boston story and accelerating revenue growth, potentially off of this 2024 guide and within the LRP, is kind of letting some of the anchor units or some of the lower growth units the drug-eluting stent franchise has become a much smaller piece of the overall revenue base. I think it's 4%, 4.5% now. But you do have this coronary therapies division that may be underappreciated, and you now have AGENT in the mix in the U.S. So maybe just talk about that coronary therapies business and how drug-eluting stent or AGENT will maybe push struggling stents lower and lower percentage of overall revenue base and that whole coronary franchise could lift even [indiscernible] stronger.

Yes. Thanks to the team have really transformed the portfolio mix within our, we call it ICTx, our Coronary business over the years, and we have a very exciting LRP in that business as a result of that. So today, the last couple of years, that business has had some margin impact within BSC given drug-eluting stent pricing. But now, as you said, it's a very, very small percent of our overall mix of business. But importantly, they have really 3 key initiatives that are dramatically changing the mix of that business, the ASP profile and the margin profile over the LRP. And those 3 key products, really, one is AVVIGO imaging. So imaging and -- with IVUS imaging is done less often in the U.S. than it is in Europe and Asia, but a AVVIGO has a very slick AI platform that makes the platform very easy to use and very easy to interpret, which is the primary reason why docs didn't use it in the past. And we're seeing significant success in growth with imaging in the U.S. The second big product, as you said, is AGENT. So AGENT just had approval. It's the first drug-coated balloon approved in the U.S. It has superiority versus PA. And it fills a significant clinical unmet need with restenosis, which is a minimum 10% of the market opportunity. And there's potential for other additional clinical expansion to potentially widen that out more. This product fills a big unmet need for physicians. So it should allow our overall category leadership to enhance in that segment when you have the only product that can provide that drug-coated balloon relief for restenosis, unique imaging aspects and our wider coronary bag will allow us to partner with hospitals more closely. And also, we think the pricing dynamics with AGENT are differently. We'll be working with NTAP and -- not TCT -- TPT. TPT to deliver appropriate pricing for the value of that product. And the combination of those things will really change the margin profile and the growth trajectory of that business.

I wanted to just ask about capital allocation, tuck-in M&A or just M&A in general as this at the top of your list, and it's been run an extremely successful business development program over the last decade-plus. The Axonics deal was on the top end, I guess, from a size standpoint, goes to a $4 billion acquisition. Revenue base is getting bigger. Maybe you guys need to take a little bit bigger swings, as that how investors should think about the business -- external business development strategy as we move forward? And maybe any update within that question -- sorry for a double question here. But any update just on the confidence in the Axonics deal closing, and the time lines you guys put forward.

Yes. So still expect Axonics to close first half of the year. So no change there. And yes, on deal size, we've done dozens of deals over the last 10 years, all of bearing sizes. Our approach is, first, focus on strategic fit, looking for companies in high-growth adjacent markets that can extend our category leadership as well as for us assessing and ensuring there's a compelling financial return. And I think that's, to your point, worked really well for us to help drive our growth as a company, increase our WAMGR over time. So we'll continue to focus there versus consciously shifting up the size of the deal. Obviously, as we get bigger as a company, I think we can do a bigger type deals. So you might see the average size creep up over time, but that's not the priority. It's strategic fit. So we'll continue to focus.

Great. And as that revenue base climbs, if you're going to deliver high single-digit to low double-digit growth, by the time we get to 2026, you're going to be approaching $20 billion in revenue. And thinking past 2026, which is jumping the gun a little bit here, but you guys do have a bunch of investments in -- through your VC arm for some early stage [indiscernible].

Did you sneak in our leadership meeting when we were talking about this?

I wish. But the -- I mean, there's some exciting markets that are high-growth markets that Boston isn't involved in each of the larger segments of the medical devices industry you guys participate in. But maybe to talk about some of the most exciting or some of the out-year opportunities you guys...

Yes. Not to give too much. We have a venture portfolio of about 40 companies that we've been pretty active with. And oftentimes, those are used for new high-growth adjacencies where that risk profile is a bit higher. And so some of those VC bets don't work out and some work out terrific like FARAPULSE. And so we're confident that over the 1 to 5 years, we'll be acquiring some of those companies off the VC portfolio that will put us in these new adjacencies. We have 2 or 3 bets in tricuspid as an example, multiple bets in heart failure, internal programs, circulatory support, interventional oncology, maybe disruptive AAA potential opportunities. So just an example. And then along with that as I said, the biggest TAM expansion opportunity, I think, in med tech is that CHAMPION, is that WATCHMAN-FARAPULSE concomitant, that individually. What WATCHMAN could do with TAM expansion. Individually with successful durable, persistent success in Afib, hopefully with FARAPULSE. And with potentially concomitant procedure, I don't think there's a bigger TAM expander in medtech than that.

That's exciting to hear. And maybe a question on China, a $1 billion franchise for Boston today. A source of strength. I think you guys are looking at mid-teens growth over the LRP. That's a unique trajectory relative to some of the med device peers or VBP, and some other macro issues in China are impacting their China businesses. Maybe just help us...

It's impacting ours, too. We're not excluded.

Sure. Sure.

We're not excluded so.

You're navigating through [indiscernible].

We're not that big result expense.

But just help us understand how that -- how you've kind of positioned that business strategically to kind of navigate some of those headwinds a little bit better or a lot better than some others in the med device industry. And that mid-teens growth suggests about $150 million of incremental revenue.

Yes. So we have a terrific team in China. We have a fairly flat organization overall. So our team is aware, knows China. We stay very close to it. We also know that the same playbook that you run in the U.S., you can't run that in China. And so we give appropriate flexibility and support to the China team to make investments in local companies. We've got 2 or 3 investments in local companies there. We've differentiated -- we've diversified our portfolio massively over the years into all our other segments across Boston Scientific. And with the VBP, you're often taking a pretty nice price reduction, which is unfortunate. But so far, we've been able to navigate that with higher share gains and pull-through of additional products because of our focus on the category leadership that we've done pretty well. So despite the ASP, the margins profile for China overall is still quite good for the company. And you're not going to see the 25%, 30% growth that maybe we've had occasionally in prior years. But definitely, we expect accretive growth in the company in China.

Maybe we'll wind up. I didn't need to save this question for the last question. But just the Neuromodulation business, been one of the lower performers, there's some market dynamics. Market growth has stalled a little bit, particularly in spinal cord stem. You've laid out -- you've basically laid out a strategy to enhance that growth trajectory and improve it over the LRP. But I mean, maybe your confidence level and some of the drivers. You already -- I think the Relievant acquisition is one step. But how does Neuromod get back to maybe corporate average or become a lighter -- a lower growth unit?

Yes. I think it's going to take some time, I think, for that to get to the corporate average, because we expect the corporate average to be pretty good. First of all, I would say, our -- really proud of our Deep Brain Stimulation business, which really didn't exist 8, 10 years ago. It's now our #1 market share in Europe and consistently gaining share over other competitors, quarter after quarter for many years in a row, almost all through organic R&D. So that business is accretive to growth to the company. The issue really -- and also in our pain business. The issue really has been U.S. spinal cord [ stem ]. And so we have some additional clinical approvals we've received for diabetic pain neuropathy and virgin back, which will help. And also we've been more aggressive in trying to augment the portfolio to treat the continuum of pain with our RF procedures with Relievant's and with Vertiflex. So we want to give pain doctors more options to treat that pain continuing for patients. We don't have the category leadership breadth and depth yet in Pain than we do in most of our other businesses, but that will continue to try to round out that portfolio to give physicians the most options from one company. But we still have some work to do in that business.

Understood. Well, thank you both for entertaining our questions this morning, helping us out better understand the Boston story. And congratulations on the position here in 2024.

Thanks. All right. Thanks, Josh.

Thank you.