Boston Scientific Corporation (BSX) Earnings Call Transcript & Summary

Okay, everybody. We'll jump in here. So thanks For joining. Lee Hambright, U.S. med tech analyst at Bernstein. We're very pleased to host Boston Scientific Chairman and CEO, Mike Mahoney; and Chief Medical Officer, Dr. Ken Stein. Thank you both for being here.

Pleasure.

For those of you in the audience, we -- if you have questions, you can enter them in the Pigeonhole tool and I will make sure we can hit as many as possible here. Maybe just to kick us off, 2023 was a great year for Boston Scientific with [indiscernible] EPS growth, and started 2024 strong, impressive 13% organic growth, 20% EPS growth again in the first quarter, sets the company up for a strong year. Maybe you can kick us off with just a few thoughts on the state of the business at Boston Scientific.

Sure. Thanks for hosting us [indiscernible] here. State of the business is quite strong. As you know [indiscernible] last year, and we just recently raised our guidance at the end of the first quarter call. And just out of the global execution. We've had every region growing [indiscernible] digits first quarter. [indiscernible] markets are nicely accretive to our growth rates overall, but [indiscernible] Asia, Europe, U.S., Latin America. And then we're also tracking how we do [indiscernible]. And now that's about [indiscernible] 6 of our 8 businesses double digits [indiscernible]. It's a broad based strength of the company. And the vast majority of our businesses grew quite a bit faster than our peer group in the segments that we compete in. So that's terrific. And also, we have underlying strong market demand for our products. And every year, we've showed at Investor Day, we've increased our weighted average market growth rates in the markets that we compete in from what used to be a 0 number 10, 11 years ago to now markets that are growing probably 7 to 8-ish. So we've really done a great job, I think, overall in the portfolio over many years of putting ourselves in high-growth markets, and we have an excellent innovation cadence within the company right now, and the team is executing. So it's a great time to be at the company.

Excellent. Excellent. You touched on market growth a little bit. Market growth has been strong in med tech. You talked about strong procedure backdrop across your businesses. I think some investors worry a little bit that market growth could decelerate when the COVID backlog recovery tailwind starts to peter out. Can you speak to that a little bit?

Yes, it's not a concern of ours, and Ken is probably going to talk about FARAPULSE a bit. We see a consistent waitlist for treatments. If you go to hospitals in the U.S. [indiscernible] could be a 9-month. So we see a high demand, and we're now in the markets that there's excellent supply of patients. And we don't expect a cliff in procedure volume. We have not seen a significant slowdown in waitlist for the procedures that we compete in.

Maybe speculate a little bit, if it's not backlog [indiscernible] strong growth, what else could it be that is driving such strong growth in the market?

There may be a touch of backlog, but I think one is just in the market there is patient awareness. Even in our urology business, we've done a great job of creating more patient awareness on erectile dysfunction and we have a 2% or 3% growth market that's now growing upper single digits driven by patient awareness [indiscernible]. With [indiscernible] everyone has watched peers, population is more aware of [indiscernible] and the diagnostic tools [indiscernible] itself, it just makes patients more aware [indiscernible]. So I think it's a combination of maybe a little bit of COVID overhang that patients were sicker and just general some diagnostic capabilities that are driving the patient demand.

We're 2/3 of the way through Q2. I know you can't talk about the quarter, but are you seeing any changes to that procedure backdrop versus the strong start for your markets in the first quarter?

No, we continue to see nice volume.

Okay. Your long-range plan calls for 8% to 10% organic growth from 2024 to '26. You're already tracking ahead. As you said, you guided 10% to 12% organic this year. Do you expect growth in 2025 to actually accelerate versus 2024?

We'll see. It's a bit too early to [indiscernible] '25 guidance later in the year. And so we're pleased that we enhanced our full year guidance [indiscernible], and we'll do everything possible to deliver that and exceed that if we can. But we'll [indiscernible] until we have little more data.

[indiscernible] headwind to med tech historically but it's been more favorable recently [indiscernible] flattish. It seems like companies have been pretty disciplined in the face of inflationary pressure. How long can that flattish pricing environment last? And do you think we might return to that 1% or 2% headwind formerly seen?

For us, part of it is the discipline around pricing in terms of contracting and [indiscernible] management and some of our businesses can drive better pricing uplift than others can, and so that's where we're seeing a nice [indiscernible]. The other big equation for us is the portfolio mix of business. Whenever you have new innovative products, and you have health care economics and clinical data that supports that, then you can get a higher price point for those products. And so we have a -- we've really done a terrific job of transforming our portfolio and the mix of our [indiscernible] a much smaller percent of [indiscernible] less than 4%, I think, by the end of the year. I think [indiscernible] products like FARAPULSE and many others, and [indiscernible] recent acquisition [indiscernible] supported by clinical evidence, health care economics also is a big part of the equation besides just better pricing [indiscernible]. So net-net, we're maybe slightly negative. We think that slightly negative to flattish is [indiscernible] kind of consider for our 3-year plan.

Yes. A couple of questions on margins. 2024 gross margin is [indiscernible] or slightly below the 2023 level of 70.7% and it was below 70% in the first quarter, driven in the large part by all the capital placements for FARAPULSE [indiscernible]. I know Dan is maniacally focused on getting back to that 73.4% pre-COVID level. But consensus doesn't have you getting back there over the next 5 years. You can just talk about the path back to that [indiscernible]?

That's our goal to get back to where we were. And we've laid out [indiscernible] basis points of improvements over that 3-year period. I think 30 to 50 we claimed for 2024. And the gross margins have been impacted [indiscernible]. One is just the capital [indiscernible], which are great investments [indiscernible] future. We've also had pretty significant [indiscernible] products that we supply to customers. But our -- we have a lot of confidence in our operations team, and we've really, I would say, [indiscernible] COVID we slowed down many of the value improvement programs and engineering programs for sustaining that drive [indiscernible]. And that [indiscernible] has ramped up quite a bit over the last 12 months. So I think this year, the guide is unchanged trying to get back to that 2023 level, but we're certainly pushing the team over time to get back to that historical rates [indiscernible] some time.

So like you said, despite where gross margin is you're committed to 30 to 50 bps operating margin improvement this year and 150 bps over [indiscernible]. When you think about balancing growth and profitability, is that -- that gets you pretty close to 28% by 2026? Does that still feel like the right place to be?

Yes, I think the 150 basis points we laid out is a really good target for us. And that balance, as you said, is one of the tougher parts [indiscernible] portfolio choice making and that balance is always tricky. But we feel like it's really a good hygiene for the company to drive leverage. And we've consistently done that. And our business leaders understand that and our operations teams understand that. And whether -- even when we tuck-in M&A, we find a way to ensure that we keep that margin story alive and find ways to make appropriate cuts or portfolio trade-off to do that while maintaining [indiscernible] the best-in-class organic sales growth.

Okay. All right. Getting into the fun part on the businesses. Maybe before we get into details on FARAPULSE, Mike, FARAPULSE is most transformational product that you've seen in your career at Boston Scientific. Maybe for the generalists in the crowd, maybe can you just reflect a bit on why FARAPULSE is so special and what it means to the broader [indiscernible] at Boston Scientific?

Sure. Well, again, we have a broad story because the FARAPULSE and WATCHMAN tended to grow out, great businesses like, and I get there, like endoscopy, urology, peripheral interventions, interventional oncology, our core coronary business is growing double digits. So we have many growth drivers and many products that continue to enhance that. But clearly, FARAPULSE is a unique platform and Dr. Ken Stein is an electrophysiologist, he can speak to it. But I'm really proud this is a company that we were in [indiscernible] and we really went after it because in med tech, it's difficult to get deals that are exponentially [indiscernible] usually a little bit better [indiscernible] products. And this is a procedure that's [indiscernible] fastest growing med tech market. It's about a $10 billion market. This particular category is about a $6 billion market. And we think that will likely double by year-end 2027. It's the fastest growing market, this segment is going to grow plus 20%. And it's a procedure that's safer. Ken Stein can talk about the clinical [indiscernible] actually proving superiority versus the current standard of care, which is radio frequency. And it's also very, very efficient. So hospitals or that patient backlog [indiscernible] work very safely and with great efficacy and improve productivity [indiscernible] which is excellent. And thankfully, we invested in this company many years ago. We've had a nice head-start against the competition, who are typically promoting legacy catheters that they're now putting PFA on. So we are quite a bit more experienced for them, and we have also invested [indiscernible] in our supply chain over the last years. We see the demand as pretty significant. So it's a fun market for us, we have not been a [indiscernible], but we have great customer relationships [indiscernible]. So it's a very common procedure and we -- beyond FARAPULSE, we have the most comprehensive portfolio to wrap around that physician to treat the patients with [indiscernible] disorders. And so it's a terrific product. It's easy for physicians to pick up. And once it's in their hands, they want to use more and more of that.

Yes. Excellent. Let's get Dr. Stein involved a little bit. So U.S. launch began in the middle of Q1, you had approval in January, started launching in the middle of the quarter. You're off to a great start. As Mike said, you're not supply chain constrained. I think you're seeing more [indiscernible] RF users adopting FARAPULSE [indiscernible]. What are you seeing in the field at the moment?

Ham, as Mike said, we literally could not be happier with how this launch is going. And a lot of it comes down to execution by the teams. A lot of it comes down just to really the unique differentiated features of FARAPULSE as a product for ablation. And maybe just a little more color to what Mike said again, if you don't follow this area as close, atrial fibrillation is the most common sustained heart rhythm to start in the world, 1 in 4 U.S. adults will experience it at some point in their lives. It's not unique to the U.S., same patterns internationally. Medical therapy for AFib is almost going to formally [indiscernible] the results, right? Can result in stroke, result in dementia, will take years off people's lives. And so ablation technique where we basically, prior to FARAPULSE, cauterized burn away the tissue surrounding [indiscernible] blood from lungs into the heart. And that is highly effective. But as Mike said [indiscernible] traditionally been [indiscernible] it's a difficult procedure. It's a time-consuming procedure. And there are some really important risks associated with it. And the unique thing about FARAPULSE is that it's a nonthermal way to destroy this tissue in atrial fibrillation. There is no doubt at this point that it is safer than traditional techniques. There is no doubt at this point that is considerably more efficient and faster. It's a very straightforward procedure to employ. And then we had data that was presented just at the Heart Rhythm Society meeting last weekend in Austin as the first time that anyone has shown that this energy source is actually superior to traditional ablation in terms of efficacy and so preventing recurrences. And so again, we've seen [indiscernible] up kind of I guess, [indiscernible] right word is enthusiastic [indiscernible]. And going into the launch, I think a lot of folks outside of the company thought that this would appeal primarily to people who are using a technique called cryo ablation, which is where you freeze tissue rather than burn it away, because workflow wise, FARAPULSE is a lot more similar to cryo ablation. But really what we expected to see [indiscernible] launch in Europe. What we are seeing in the U.S. is that people are adopting FARAPULSE irrespective of what they had traditionally been using. And in fact, may have more advantages if you're coming away from using [indiscernible] frequency energy, which is burning the tissue away. And just because of therapy, the more people who do that, you see more people coming in from the radio frequency world.

Got it. As you mentioned, electrophysiologists are really enthusiastic for FARAPULSE launch in Europe for a while, been hearing European colleagues about [indiscernible], and demand is off the charts. What's the kind of limiting factor for launch right now?

Yes, honestly the thing that is limiting the launch in the U.S. and I hate to use the term limiting because it is not behaving like say, any governing factor on it [indiscernible] right? There is capital placement associated with launch. The system includes a generator that generates energy as well as catheters and sheaths. And some hospital [indiscernible] capital faster than others. Again, given the broad portfolio that we have [indiscernible] to make that [indiscernible] process easier for hospitals. But I think [indiscernible] probably the biggest [indiscernible] that. We do believe, based on what I just told you, this is a premium product, and we are charging a premium price for it, but honestly, so far, we haven't seen that there would be a barrier to adoption on the launch.

Got it. You said this is a premium product, but at the same time, you're improving hospital workflows and efficiencies by obviating the need in these cases to [indiscernible]. How do you think about that economic value to the hospital?

Yes. This is still a very highly -- very highly profitable procedure for hospitals. And what you just said is something that people can realize the reason why that premium price really has an obstacle. We're seeing the typical hospitals once they have this technology, increase the number of procedures that they're able to perform in a given lab in a given day with 1 to 3 extra procedures. I was talking with [indiscernible] area who said that just [indiscernible].

We've [indiscernible] productivity is [indiscernible] because the safety profile and efficacy is [indiscernible] physicians are now treating younger patients, and they're treating the 80-year-old-plus patient with multiple comorbidities that they were nervous about treating in the past due to some of the safety concerns. So it's actually in the past [indiscernible] further widening [indiscernible].

[indiscernible] data that you presented at HRS recently, there was a subanalysis [indiscernible] and an update from the global [indiscernible]. Can you just describe a little bit the key takeaways from those data points?

Yes, absolutely. And I just come back to what Mike said earlier, right, the importance of supporting differentiated products with clinical evidence that substantiates that they really do meaningfully [indiscernible] outcomes. We've now got a [indiscernible] every thousand patients who were treated clinically with FARAPULSE systems. And we published clinical data on almost [indiscernible] patients [indiscernible]. We've published literally orders of magnitude more data [indiscernible] this system than any of our competitors. And the latest data, as you said, [indiscernible] society. So one was this ADVENT analysis. ADVENT again, for folks who don't follow us [indiscernible] was the trial that got us the U.S. approval of FARAPULSE, results were compelling enough. We got the approval from the FDA 6 months earlier than we had even anticipated. So randomized trial comparing head-to-head FARAPULSE system with traditional thermal ablation. And what the sub study showed is if you look at the actual amount of atrial fibrillation that people have after ablation, there is a cutoff point that's somewhere around spending [indiscernible] of your time in atrial fibrillation that is associated with worse outcomes for patients, a worse-quality of life, more hospitalizations, more procedures. And what we found, again, a very well-conducted randomized trial that FARAPULSE is superior to thermal ablation and keeping patients under that 0.1% burden of atrial fibrillation. As I said, it's the first time that anyone has demonstrated a pulse field ablation, superiority or efficacy. It's the first and only system that has any kind of superiority evidence. The other data that came was from our FARADISE registry, that is a real world post-market [indiscernible] study registry conducted in Europe and Asia. And in that study, over 1,000 patients, again, really pleased to see substantiated everything that we expected to see incredibly good safety performance, no permanent [indiscernible] system, [indiscernible] complications that can occur [indiscernible] energy, and a very low rate of any kind of adverse effects.

[indiscernible] couple of data sets from competitors on PFA technologies. You said in the past not all studies are in the same way. Points are constructed differently [indiscernible] is done. What are the key takeaways [indiscernible] those competitive [indiscernible]?

I think there are 2 things I want to frame this up. First is as you say, right, no 2 clinical trials are the same. I always -- going back into professor mode now from back from when I was here in New York, right? I always told the fellows first look at the headline, you actually have to read the study, what they actually did. But that's also true about the field of pulse field ablation in general. It's really important to emphasize, right, that not all post-field ablation technology is the same, [indiscernible] you can't [indiscernible] generically. The results to get with any type of [indiscernible] are just inherently linked to the design of the catheter, which governs the shape of the electrical field that you're treating the patient with, the waveform [indiscernible] through the catheter, how much energy and [indiscernible] how is it being delivered and those [indiscernible] very closely guarded secrets, and the dosing strategy that you developed. And I think we want to be really clear, right, that no [indiscernible] the high-quality data that we've got with FARAPULSE and assume that any of it can be applied to any of the competitive technology. So those are all going to be stand on your own. And the thing that I'd say is our ADVENT trial is the single most rigorous definition of what [indiscernible] in a trial and certainly [indiscernible] success than any of the other trials that have been laid out.

Yes. Good. Mapping, you talked in the past how legacy mapping systems are designed for thermal ablation. Do you expect to have a new FARAWAVE catheter approved in the second half of this year that will be integrated with your RHYTHMIA mapping, what advantages do you think this new integrated system will bring? How do you expect the percentage of docs who do or don't use mapping [indiscernible] FARAPULSE might evolve over time?

Yes. And again, to bring everyone in, the ablation procedure involves a catheter, like FARAPULSE catheter. Many electrophysiologists particularly in the United States couple that with what's called a 3D mapping system, where you can track with [indiscernible] space beyond just looking at it as an X-ray image. We do have a next generation FARAWAVE catheter and this catheter is composed of FARAPULSE ablation that is designed to integrate with our mapping system, the RHYTHMIA mapping system. [indiscernible] really that we can do, once we have the system that's designed from the ground up to understand pulse field ablation. As we said, none of the existing systems, including ours, right, [indiscernible] pulse field ablation in mind. And so we can do a much better dynamic utilization of the catheter with the system. We can also do something we call field tagging. The pulse field ablation is an electric field phenomenon, right? If we know the shape of our catheter and we know the wave form [indiscernible] project on the anatomy, here's where you're going to create a field. So here's where you're going to create the damage that you're trying to create before you actually do it. [indiscernible] right, and everything you're doing [indiscernible] really compelling advantage. Having said that, I think it's also real [indiscernible] for us to [indiscernible] we are never in a locked position in [indiscernible] some of the things our way. The key is to [indiscernible] and physicians can do things. There you don't want to use the mapping, you can use this on any mapping system. And that's what we see predominantly being the use case in Europe. If you want to stick with one of your older legacy mapping systems, fine, I don't know why you want to do it [indiscernible] right, with this next generation catheter enabling you to do that as well.

Got it. Excellent. So let's see, maybe you heard a little bit of the pipeline upgrades down the road [indiscernible]. You've got a few trials underway to the platform beyond the FARAWAVE catheter?

Well, we're pleased and proud of our FARAPULSE platform as it stands today. But as Mike will tell you, we are never going to be complacent and just sit in place, all right? There are competitors. They're good companies [indiscernible] maintain our lead. So there is a pipeline both of technology innovation [indiscernible] clinical evidence to support that technology innovation. We talked already about the next generation FARAWAVE catheter that's [indiscernible] and the upgrades to the RHYTHMIA system. Following that, I think the next important data release that we have is release of our trial called ADVANTAGE, which uses the existing FARAWAVE to ablate what's called persistent atrial fibrillation using a strategy of pulmonary vein ablation plus posterior wall ablation. Hope to have those results out this year. The second phase of that trial, we hope to have the results available next year, looks at our next technology product, which is called FARAPOINT, which is a point catheter that can also deliver the FARAPULSE energy, which can be used as an adjunct to the FARAWAVE catheter that certain patients that may be required in an ablation procedure. Next after that, we're running a clinical trial called AVANT GUARD. And that's a trial with the FARAWAVE system as first line therapy for patients with persistent atrial fibrillation. That's never been proven for. Today, most patients undergo [indiscernible] drug therapy when they get referred to ablation. That trail began enrollment last December. We expect to finish enrollment by the end of this year then some followup period, have the results [indiscernible]. And that's a trial that could materially expand population being referred in for atrial fibrillation today. And then following that, new catheters in development, we have a large [indiscernible] exploring development to [indiscernible]. So [indiscernible]. We got a lot of [indiscernible].