Boston Scientific Corporation (BSX) Q2 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Boston Scientific Second Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn conference over to your host, Michael Campbell. Please go ahead.

Thank you, Greg. Good morning, everyone, and thanks for joining us. With me on today's call are Mike Mahoney, President and Chief Executive Officer; and Jeff Capello, Executive Vice President and Chief Financial Officer. We issued a press release earlier this morning announcing our Q2 results for 2013, which included reconciliations of the non-GAAP measures used in the release. We have posted a copy of that release, as well as reconciliations of the non-GAAP measures used in today's call, to the Investor Relations section of our website under the heading Financial Information. The duration of this morning's call will be approximately 1 hour. Mike will begin our prepared remarks with an update on our business progress and his perspectives on the quarter and for the remainder of 2013. Jeff will then review our Q2 financial results and business performance as well as Q3 and full year 2013 guidance. We will then open the call up to questions. During today's Q&A session, Mike and Jeff will be joined by our Chief Medical Officers, Dr. Dawkins and Dr. Stein. Before we begin, I'd like to remind everyone that this call contains forward-looking statements within the meaning of federal securities laws, which may be identified by words like anticipate, expect, believe, estimate and other similar words. They include among other things statements about our growth and market share; new product approvals and launches; procedural volumes and pricing; clinical trials; cost savings and growth opportunities; our cash flow and expected use; our financial performance, including sales, margins, earnings and other Q3 and full year 2013 guidance; as well as our tax rates, R&D spend and other expenses. Actual results may differ materially from those discussed in our forward-looking statements. Factors that may cause such differences include those described in the Risk Factors section of our most recent 10-K and subsequent 10-Qs and 8-Ks filed with the SEC. These statements speak only as of today's date, and we disclaim any intention or obligation to update them. At this point, I'll turn it over to Mike for his comments. Mike?

Thank you, Michael, and good morning, everyone. I'll begin today with some comments regarding our second quarter performance, and Jeff will review the financials in more detail later on the call. So overall, it was a strong quarter for Boston Scientific. Our team is beginning to build momentum, and we're executing against our global strategy. So key highlights for the second quarter include the following: We delivered both sales and adjusted EPS above our stated guidance range and above consensus. We delivered net sales of $1.809 billion, down 1% on a reported basis, and we grew positive 2% year-over-year on an operational basis, which excludes the impact of foreign exchange in the divested Neurovascular business. In terms of sales, on an operational basis, Neuromodulation grew at an impressive 21%. Endoscopy grew at 8%. PI, 5% versus the same period in the prior year. In addition, we're encouraged with the improved performance of our CRM and IC businesses. We are strengthening our global position in the EP market through the signing of a definitive agreement to acquire C.R. Bard's EP business, our internal R&D efforts and the recent approval of the Rhythmia platform. We continue to see strong returns in our investments in emerging markets. Our second quarter sales in the BRIC countries grew 29% year-over-year. Turning to our earnings highlights. We delivered adjusted EPS of $0.18, which is above both the high end of our guidance range and Street consensus. In a year-over-year basis, we delivered adjusted EPS growth of 6% while absorbing the full $0.01 impact in the quarter due to the med device tax. We also generated solid cash flow, used $100 million to buy back approximately 12.5 million shares of stock in the quarter. And so with that, I'll move into the business unit performance for the second quarter. The revenue growth figures that I'll highlight are all in a constant currency basis, so I'll start with the MedSurg businesses. In Endoscopy, we had another strong quarter with 8% worldwide revenue growth. We experienced consistent growth across all of the Endoscopy franchises. Our hemostasis franchise led the way driven by continued global adoption of our Resolution Clip for GI bleeding. Our biliary device franchise grew faster than market fueled by our Endoscopic Ultrasound platform. And the recent launch of the true tone biliary access device. And again, our metal stent franchise growth was primarily driven by our industry-leading WallFlex platform. In addition, our Alair Bronchial Thermoplasty platform is building momentum. We continue to see an increase in size during the quarter, exceeding 300 centers across 23 countries. And during second quarter, the 5-year data from the Air2 clinical trial represented confirming that Alair continues to show therapy benefits in adult patients with severe uncontrolled asthma. BT was shown to provide long-term asthma control demonstrated by a sustained reduction in the heart -- in the rate of severe exacerbations in emergency visits over a 5-year period treatment. So we anticipate publications of 5-year safety and efficacy data during the third quarter of '13, and we continue to execute a focused coding coverage and payment strategy. So turning to Urology/Women's Health. We achieved modest growth in the quarter with solid growth in Urology, offset by a challenging pelvic organ prolapse market in Women's Health. In Urology, we delivered solid international growth resulting from our global commercial expansion and new product launches. In the Women's Health, we did successfully launch 2 new products in the U.S. during the quarter, and we do expect the Women's Health division to return to growth in the second half of '13 given the refreshed pipeline and the anniversary of the pelvic organ prolapse market decline in comparable. So Neuromodulation. Our team continues to execute extremely well. We gained market share during the quarter and firmly established ourselves as the #2 global player in the neuromodulation market. We delivered an impressive growth of 21% on a worldwide basis, driven by a positive physician response to our recently launched Precision Spectra Spinal Cord Stimulation platform. It is really the highly innovative, next-generation Spinal Cord Stimulator that's designed to deliver more coverage and provide a new level of flexibility and advanced control. It's a great example of our internal innovation that enables us to provide differentiated technology to our patients. In Deep Brain Stimulation, we recently reported interim data though from the European VANTAGE study that demonstrated significant improvements in motor scores of approximately 60% in patients with Parkinson's disease using the Vercise platform at 6 months. We also commenced enrollment in INTREPID, which is our pivotal U.S. clinical trial for use of Vercise in Parkinson's disease and launched the GUIDE DBS system in Europe. Let's now move into Interventional Cardiology. While our worldwide IC results for the second quarter improved and we maintained our global share position, we still have work to do in this important area. Our worldwide IC revenues declined 3% in a market that we estimate declining in the low to mid-single digits. We did deliver sequential revenue improvement in the second quarter, driven by operational growth in the international markets. While we expect the global market headwinds to persist, we continue to believe the market will moderate over time due to underlying patient demographics and the proliferation of differentiated premium technologies such as our SYNERGY Stent platform. In Europe and Asia, our IC growth was driven by the successful execution of new launches. In mid-second quarter, we launched Promus PREMIER in Europe. Customer feedback has been very positive, and our European team has been successful on using the product to open up new accounts. Data from the first human use trial was presented at late-breaking trial at EuroPCR in May. And the results reflected the outstanding outcomes we continue to demonstrate in our robust PLATINUM clinical trial program. We also anticipate U.S. FDA approval for Promus PREMIER in the fourth quarter of 2013. Our next-generation SYNERGY Stent also continues to perform very well. The limited launch we began in Europe has been progressing according to plan, and we're expanding it in anticipation of a full European launch in 2014. Enrollment in the SYNERGY U.S. IDE trial is tracking ahead of schedule, and we expect to complete enrollment in the third quarter 2013. We believe we have stabilized our DES share and expect to grow DES share in the second half through a continued focus on commercial execution, a strengthened overall IC portfolio and the continued favorable clinical evidence of our DES platforms. In our core IC business, we improved our performance with worldwide sales growth of 3%. We recently received clearance of our Guidezilla Guide Extension Catheter and OptiCross. We also accelerated the commercial rollout of BridgePoint Medical suite of coronary CTO devices. We expect this growth in our core IC business to continue, as we expand our commercial rollout of these new products in the second half of the year. So now a quick update on our TAVR program. We presented the 30-day results on the first 60 patients from our REPRISE II CE Mark trial at the EuroPCR in May. We met our primary endpoint, and we believe that the results affirm the clinical advantages of the second-generation platform, including both precise control and very low paravalvular leakage rates due to its unique Adaptive Seal and differentiated positioning capabilities. We continue to anticipate CE Mark and commercialization of Lotus in the fourth quarter of 2013. And we're in discussions now with the FDA to finalize plans for our U.S. IDE trial, which we look forward to starting in mid-2014 subject to FDA approval. Now I'll turn to our PI business, our Peripheral Intervention division. This division continues to deliver consistent above-market results, and the second quarter global revenues grew 5%. Sales of our leading stent balloon platforms were particularly strong in national markets. We're advancing our core PI pipeline, including our drug-eluting balloon platform in Europe, which we expect to launch in 2014. In addition, we're excited about international launch of the Vessix Renal Denervation System, which came several months earlier than planned. While we're very early in the launch, the feedback from customers have been encouraging. At EuroPCR, we reported the interim results from the Vessix REDUCE-HTN clinical trial, and the interim results showed a significant and sustained reduction in the blood pressure of patients treated with the Vessix out to one year. We look forward to continued progress, as we drive toward the expected start of the U.S. IDE trial for the Vessix platform in first quarter of '14. So let me turn to our Rhythm Management segment. We're encouraged by the improved performance of this business. In the second quarter, our worldwide CRM revenues declined 2%, exceeding the high end of our guidance range. We believe the worldwide CRM markets continue to be a challenge, but they have stabilized in the negative low to mid-single digits versus prior year. In our defib business, we estimate our worldwide second quarter market share remain stable despite the impact of the S-ICD supply constraints. These results were driven by the continued momentum of our ICD de novo share, improved performance across our replacement business and continued elevated lead purport ratios. Our CRT-D share remains under pressure. However, we believe we are on track to launch our quad lead in Europe in the first quarter of 2014. Regarding the launch of the S-ICD. As discussed in the first quarter, our sales outpaced our ability to supply the market, and we've seen significant supply constraints since March. We continue to manage this with our customers, and we're making progress toward resuming our controlled S-ICD launch in late third quarter. In addition, we expect that our GEN 1.5 device will become available in the fourth quarter to further address the increasing global demand for this highly differentiated therapy. Turning now to our pacer business. We are now at our 1-year anniversary of the launch of our INGENIO family of pacemakers, and we're through our first full quarter of LATITUDE, which we believe will continue to drive pacer share gains in the quarter with growth of 1% on a worldwide basis and 7% in the U.S. We're pleased with the performance of this platform, which includes a number of new design features, including wireless RF telemetry and LATITUDE NXT Remote Patient Management system with cellular capabilities. Now turning to Left Atrial Appendage Closure. The WATCHMAN product line continues to show strong growth in international markets on both a sequential and a year-over-year basis with international revenues in implants growing by more than 50% compared to the second quarter last year. We submit the final PMA module to the FDA in May and expect U.S. approval in second quarter '14. Our long-term PROTECT-AF 4-year follow-up data presented to the HRS showed the WATCHMAN device was statistically superior to warfarin for preventing cardiovascular death, all-cause stroke and systemic embolization, as well as all-cause mortality and cardiovascular mortality. We continue to be encouraged by the long-term efficacy data from PROTECT-AF coupled with safety results of PREVAIL and CAP, which provide strong evidence that the WATCHMAN is a viable alternative to chronic warfarin for stroke reduction in non-valvular AF patients. And finally, we continue to the make progress in expanding the capabilities of our global EP business. The Rhythmia EP mapping and navigation system achieved CE Mark approval in late second quarter and FDA clearance just earlier this week. We expect the U.S. launch along with the new steerable sheath and ablation catheter in the back half of the year. As mentioned earlier, we're excited about entering into a definitive agreement to acquire Bard's EP. This business generated sales of about $110 million in 2012, and we expect it to be accretive to BSE in 2014. We believe that Bard EP will strengthen our global commercial footprint and further enhance our emerging EP product offering by adding strong base of diagnostic catheters, other diagnostic tools and EP recording systems to our portfolio. We're confident this transaction will improve our ability to better serve the global EP market. So we look forward to welcoming the new Bard EP team to Boston Scientific, and we estimate the closing of this transaction in the fourth quarter pending the completion of regulatory approval processes and other customary conditions. So to wrap this section up, overall, we're pleased with our second quarter results and the momentum we're beginning to build. We return to growth on an operational basis in the second quarter, while we're making progress on our strategic growth imperatives. Our MedSurg and PI businesses continue to grow faster than market. We're beginning to improve our global execution in both the IC and CRM markets. We're aiming to grow IC and CRM share in the second half of '13 with continued focus on sales execution, a differentiated portfolio and an improved S-ICD supply chain. We're expanding globally as demonstrated by our overall growth in international revenue and growth of nearly 30% in the BRIC countries. We're also focused in delivering meaningful innovation to our customers, and our pipeline reflects this core value. We're advancing our efforts to expand in the high-growth adjacencies. Our long-term PROTECT-AF data demonstrated the WATCHMAN device is statistically superior to warfarin, including all-cause mortality. We are advancing our Lotus Valve program, including a favorable 30-day data from REPRISE II CE Mark trial, and we anticipate CE Mark approval later this year. The interim data from the REDUCE-HTN clinical trial showed positive results, and we're able to launch our Vessix Renal Denervation platform from in Europe earlier than planned. We're continuing to focus on continuous improvement, while we drive our previously outlined productivity and restructuring programs in order to fund our journey and to improve our operating margins. We expect to continue generating strong cash flow, which enables to fund more share repurchase in the second half and to evaluate appropriate acquisitions to improve our future growth profile. In terms of third quarter guidance, we anticipate a normal seasonality, but we do expect year-over-year revenue performance to accelerate. For the third quarter, we're providing a sales guidance of positive 1% to positive 4% growth on an operational basis and adjusted EPS from $0.14 to $0.16 per share. For the full year of '13 guidance, we anticipate delivering sequential quarterly year-over-year revenue improvement. For the full year, we are increasing both our sales and adjusted EPS guidance. The full year '13 sales guidance is a range of flat to positive 2% growth on an operational basis and adjusted EPS of $0.67 to $0.71 per share. Finally, I really want to thank our employees for their winning spirits and their commitment to Boston Scientific. So now let me turn our call over to Jeff for a more detailed review of our second quarter financials.

Thanks, Mike. Let me begin by providing some overall perspective on the quarter before getting into the details. We generated adjusted earnings per share of $0.18, which was above the higher end of our guidance range of $0.14 to $0.17 and above consensus. This represents improved profitability from the prior year, which is primarily driven by continued gross margin expansion including a $0.01 benefit associated with an adjustment related to our PROMUS profit share agreement, lower operating expense and fewer shares outstanding. This was partially offset by increased investments in our strategic growth initiatives and a $0.01 impact from the medical device tax. In addition, we generated adjusted free cash flow of $388 million and used $100 million to repurchase of approximately 12.5 million more shares in the quarter. Now I'll move to the detailed review of our business performance and operating results in the quarter. For the second quarter 2013, consolidated revenue of $1,809,000,000 represents a decrease of 1% on a reported basis. And excluding the impact of foreign exchange and the divested Neurovascular business, we grew the business 2% this quarter. The actual headwind from foreign exchange on sales was approximately $40 million as compared to the prior year and was $10 million higher than what we had assumed in our second quarter guidance range. In Interventional Cardiology, worldwide revenue came in at $520 million in the second quarter, representing a constant currency decrease of 3% compared to the second quarter of 2012. Total international IC revenue grew by 4% with the Europe and Asia Pacific each growing 5%, including China and India growing by 75% and 41%, respectively, all on a constant currency basis. Worldwide DES revenue came in at $287 million in the second quarter, representing a constant currency decrease of 7% compared to the second quarter of last year. U.S. DES revenue was $117 million in the quarter, representing a decline of 16% compared to the second quarter of last year. This decrease was primarily due to lower share due to competitive products, softness in PCI volumes and lower ASPs. We estimate that our U.S. DES share was stable sequentially in the mid-30s for the second quarter. International DES sales of $170 million remained flat in constant currency compared to the second quarter of last year, driven by over 60% growth in the emerging markets of China and India, primarily offset by pricing declines in Europe. Worldwide non-stent Interventional Cardiology was up 3% in constant currency. With the recent launches of several new products along with the ongoing success of our BridgePoint Medical suite of CTO devices, we expect to see continued improvement in this business over the course of 2013. Now moving on to CRM. Worldwide revenue was $475 million in the second quarter, representing a constant currency decrease of 2% compared to the second quarter of last year. In the U.S., CRM revenue of $282 million was down 1% as compared to the second quarter of last year. International CRM sales of $193 million were down 3% in consent currency compared to the prior year quarter. On a worldwide basis, defib sales were $342 million in the second quarter, which was down 3% in constant currency from last year. In the U.S., defib sales were $213 million, this was down 3% compared to the second quarter of last year. International defib sales of $129 million represented a 3% decrease in constant currency from Q2 of last year. Worldwide pacer sales increased 1% on a constant currency basis as compared to Q2 2012, driven by continued strong performance from our INGENIO family of pacemakers and CRTP devices. In the U.S., pacer revenue of $69 million was up 7% compared to Q2 last year, while international revenue declined 4% in constant currency for the quarter. Additionally, our worldwide Electrophysiology business remained relatively flat on a constant currency basis compared to Q2 last year. Our Peripheral Interventions business delivered growth above the market with worldwide revenue up 5% in constant currency compared to Q2 2012. Global growth was driven by stents, balloons and renal denervation. Our Endoscopy business continue to grow faster than the market and had another solid quarter with worldwide sales up 8% in constant currency led by 11% revenue growth internationally. In constant currency, our worldwide Urology/Women's Health business had growth of 1% in the quarter. However, sales growth was particularly strong internationally at 7% compared to the second quarter of last year. Our Urology business maintained a leadership position with 3% worldwide constant currency growth in the quarter, driven by strong international revenue growth of 5%. Our Women's Health revenues declined 6% on a worldwide constant currency basis as compared to the prior year. However, our international business delivered 6% growth on a year-over-year basis. We continue to see pressure on elective procedures due to concerns around the use of surgical mesh for pelvic organ prolapse, specifically in the U.S. market. However, we expect this market to begin to stabilize as we move past the second anniversary of the July 2001 FDA safety notification. Our Neuromodulation business delivered a solid 21% worldwide sales growth, driven by strong market uptake of the Precision Spectra Spinal Cord Stimulation system and very strong commercial execution strategies. We expect to build on this momentum in the second half of 2013 when we expect Precision Spectra to be fully launched. Now moving on to sales. Adjusted gross profit margin for the second quarter was 70.8% or 230 basis points higher than the second quarter of last year. The increase was largely attributable to benefits from our value improvement programs and a onetime benefit of approximately 90 basis points associated with an adjustment related to our PROMUS profit share agreement. These benefits were partially offset by price erosion and product mix. Looking forward, we expect adjusted gross margins to be between 69% and 70% for the second half the year. Adjusted SG&A expense were $650 million or 35.9% of sales in the second quarter of 2013 compared to $641 million or 35.1% in the second quarter 2012. During Q2 2013, the impact of our cost-saving programs were offset by continued investments in our strategic growth initiatives and costs associated with expanding in emerging markets. In addition, SG&A expenses in Q2 2013 include the impact of approximately 100 basis points from the medical device tax under the U.S. Affordable Care Act. Currently, the accounting treatment for the medical device tax is not consistently applied across the industry. We expect to absorb the first full year impact of the medical device tax during 2013. Looking ahead, we expect adjusted SG&A as a percent of sales to be between 36.5% and 37.5% in the third quarter this year, as we expect to continue investing in our strategic growth initiatives in preparation for the commercialization of several new technology platforms and build our capabilities in emerging markets. Adjusted research and development expenses were $223 million for the second quarter or 12.3% of sales. This compares to $213 million in the second quarter of 2012. We expect R&D spending to be in the range of 12% to 13% of sales in the third quarter this year, as we continue to transform our R&D organization and refocus our spending to drive innovation and growth. Royalty expense was $47 million or 2.6% of sales compared to $48 million in the second quarter of last year. Consistent with the prior year, we expect royalty expense to step down in the second half, as we reach lower per unit royalty rate tiers on our annual volume-based arrangements. On adjusted basis, pretax operating income was $361 million or 20% of sales, up 70 basis points from the second quarter of last year. The increase in adjusted operating margins was primarily due to higher adjusted gross margins, partially offset by an increase in R&D expense and the impact of the medical device tax. It is important to note that the medical device tax negatively impacted our operating margins by 100 basis points this quarter. GAAP operating income, which includes GAAP to adjusted items that had a net negative effect of $141 million on a pretax basis, was $220 million in the second quarter of 2013. The primary GAAP to adjusted items in the quarter were: pretax restructuring charges of $31 million, pretax intangible asset impairment charges of $53 million, pretax acquisition and divestiture-related credits of $44 million, and pretax amortization expense of $101 million. Now I'll move on to other income expense. Interest expense was $65 million in the second quarter, which was similar to the second quarter of last year. Our average interest expense rate in Q2 '13 was 5.7% or about 30 basis points higher than the second quarter of last year. Our tax rate for the second quarter was 14.3% on a reported basis and 15.8% on an adjusted basis. The difference between our reported and adjusted tax rates for the quarter is attributable to charges excluding determining our non-GAAP results. We estimate our Q2 adjusted tax rate will be similar to Q2 and will be lower in Q4 to arrive at a full year adjusted tax rate of approximately 12% to 13%. This excludes any other discrete tax items that may arise during the year. Moving on to the balance sheet. DSO of 64 days increased 2 days compared to June of 2012, primarily due to lower collections in EMEA, particularly in Southern Europe. Despite lower inventory levels, days inventory on hand of 144 days was up 3 days compared to June of last year due to lower cost of goods sold, primarily driven by the favorable PROMUS profit share adjustment and the impact of foreign exchange. Adjusted free cash flow for the quarter was $388 million compared to $386 million in the second quarter of last year. Capital expenditures were $51 million in Q2 '13 compared to $52 million in Q2 '12. We continue to expect our full year 2013 adjusted free cash flow to be approximately $1.2 billion. Turning to share repurchases. We repurchased 12.5 million shares for the quarter for approximately $100 million. Since July 2011, we have now repurchased $212 million or approximately 14% of our outstanding shares. We currently have $960 million of capacity remaining under our share repurchase authorization. We continue to believe that our stock price is undervalued, and we currently expect to continue our share repurchase program in 2013 subject to business development opportunities, market conditions, our stock price, regulatory trading windows and other factors. Let me now walk you through our guidance for the third quarter, as well as updated guidance for the full year. As we look ahead over the remainder of the year, we expect pricing pressure and procedural softness in the U.S. to persist but moderate as the IC and CRM markets continue to stabilize. We have launched many new key products in most of our businesses and continue to make solid progress on our strategic growth initiatives. We return to growth on an operational basis in the second quarter, and we remain focused on accelerating top line growth in the second half of 2013. We also believe, despite the medical device tax, that we continue to have opportunities to enhance profitability and expect to continue to generate very strong cash flow. We expect Q3 consolidated revenues to be in a range of $1,700,000,000 to $1,760,000,000. If current foreign exchange rates hold constant, the headwind from FX should be approximately $30 million or around 180 basis points relative to Q3 2012. On an operational basis, we expect consolidated Q3 sales to be in the range of up 1% to up 4% compared to Q3 last year. On a worldwide basis, we expect DES revenue to be in the range of $265 million to $285 million and CRM revenue to be in a range of $445 million to $465 million in the third quarter. We expect Q3 adjusted EPS to be in the range of $0.14 to $0.16 per share, and we encourage you to model to the midpoint. We expect reported GAAP EPS to be in the range of $0.03 to $0.05 per share, which includes an estimated $0.06 per share impact from amortization expense. We also wanted to remind folks that historically Q3 has been our lowest quarter due primarily to seasonality, typically lower the second quarter, and we expect Q4 to be our strongest quarter given seasonality and the timing of some of our expected new and expanded product launches. Now moving the full year. We now estimated that consolidated 2013 sales will be between $7,050,000,000 and $7,170,000,000. Assuming that current foreign exchange rates hold constant, we expect the full year headwind from FX to be approximately $145 million. On an operational basis, consolidated sales should be in the range of flat to up 2%, and we encourage you once again to model to the midpoint. The range assumes that the IC and CRM markets continue to stabilize and our revenue performance improved sequentially throughout the year, driven primarily by improved performance in our IC and CRM businesses, more meaningful contribution from the emerging markets and our strategic growth initiatives plus benefits of new and/or expanded product launches across our divisions. From an earnings standpoint, we're moving up our guidance and expect adjusted earnings per share for the full year 2013 now to be in the range of $0.67 to $0.71. And once again, we encourage you to model to the midpoint of the range. This range takes into consideration an estimated impact of approximately $0.04 per share from the medical device tax. On a reported GAAP basis, we expect EPS for the year to be a net loss in the range of $0.01 to $0.07 per share, primarily driven by the goodwill impairment charge we recorded in the first quarter. Please note that today's guidance does not include the impact of the recently announced agreement to acquire the Electrophysiology business of C.R. Bard. That's it for guidance. With that, I'll turn it back over to Michael, who will moderate the Q&A. Michael?

Thanks, Jeff. Greg, let's open it up to questions for the next 20 minutes or so.

[Operator Instructions] Your first question comes from the line of Glenn Novarro from RBC Capital Markets.

Two questions on the stent side. By our modeling, it looks like stent share both U.S. and globally has finally stabilized, and I'm wondering what this is a function of. Is it a function of just Resolute Integrity of the trial ending there? Is it Promus PREMIER? I'm kind of wondering if it's all the new products that you're launching into the cath lab like CTO that's just driving overall momentum. So if you could give us some additional color? And on a separate note, what would the impact of Germany be going forward?

Mike Mahoney here. Thanks for the question. I think in terms of the overall worldwide DES market, we see the kind of market in the low single digits in terms of our performance, and again, choose the market, we see the price volume in the kind of 7% to 8% range and price impact for the overall market in the low single -- mid-single digits. In terms of our performance with the DES market, we're very encouraged by our European performance. So in Europe, we're launching our new platforms. So we have SYNERGY, and we also have Promus PREMIER. And we actually had growth both in Europe and in the Asia-Pac markets for the first time in a number of years. That's an encouraging trend as we grow share in Europe, and also, those products will be coming to the U.S. And they also reflect the broader portfolio strategy that we have in our other IC businesses with our CTO devices that you mentioned and also the additional platforms that we're launching in IVUS. So we're encouraged by the momentum we're seeing outside the U.S. where we're launching our first products. And in the U.S., we've essentially stabilized our share, and we are benefiting from the annualization of the comparables of the launches that you mentioned earlier.

And then just...

Glenn, just let me just jump in for a minute to add to what Mike had said. I think the other dynamic that's really starting to benefit is the emerging markets. We've talked about investing aggressively in areas like India and China and some of the other areas. And those areas are growing very well. So if you look at kind of Asia Pacific as a whole, we are probably up mid-single digits plus within DES. So we continue to believe, depending on kind of what happens from a pricing perspective, that the unit growth kind of the emerging markets, subject to kind of pricing results is really going to help the market and us disproportionately as we start to get more of our fair share of the market share in those areas.

Is this what's helping offset the loss of sales in Germany in the second half of the year?

Well, I guess a couple of comments on the German side. So the German market, we had made some conscious decisions based on pricing and based on our portfolio, which we think is differentiated, not to place heavily in Germany this year, and a lot of that's price driven. As a result, our inability to sell in Germany hasn't impacted as much as people may have thought. And in a previous exchange, somebody had asked me how big could Germany be, and I think we kind of landed that it's less than $40 million for the full year. So we're able to grow through that. And of course, we think that our intellectual property position is well positioned, and we intend to vigorously defend ourselves and try to get that appealed in reverse. So despite the impact on Germany, which is not really that significant, the business is performing pretty well.

And can I just ask one question to Dr. Dawkins on SYNERGY? I get a lot of pushback on SYNERGY relative to Absorb with investors asking is SYNERGY just kind of an incremental gain overcurrent DES and why would a doc put in SYNERGY when you could put in Absorb that'll fully disappear. So SYNERGY is in Europe, and I'm wondering if Dr. Dawkins can give us some feedback on how the doctors are viewing SYNERGY. Is it a slight incremental benefit or gain from a technology standpoint over current DES? Or are they viewing this as a major leap forward?

I think the majority of physicians still put acute performance top of their list of metrics when they judge the stent. And obviously, with the modified Element platform, the key performance of SYNERGY, we're very -- we like a lot as do the physicians. They also like the concept of the polymer and the drug disappearing at the 3 months time point. And that obviously is not the case for the BBS as you brought up, where the stent struts and therefore, the polymer is still visible in many patients for 2 to 3 years. So that allows us to explore formally short DAPT. And we know that the overall cost of a DES procedure relates more to the medication than the stent itself. And we -- there is no study currently that is sufficiently par to formally explore short DAPT and the impact of stent thrombosis, bleeding and the financial consequences. And we're going to explore that formally. We have more than 14,000 patients planned for enrollments in registries and randomized trials looking at SYNERGY in a variety of complex patient subsets, and this clinical portfolio will support the SYNERGY launch in a wide variety of patients. So we think doctors like a acute key performance. They like the drug and polymer disappearing early. And we will confirm that in a number of important clinical trials.

Your next question comes from the line of Rick Wise from Stifel. Frederick A. Wise - Stifel, Nicolaus & Co., Inc., Research Division: Jeff, can you talk a little bit more about gross margin? It was especially strong, above 70%. I appreciate there are a lot of moving pieces, but can you give us -- help us understand a little more carefully the 90-basis-point positive adjustment for PROMUS agreement? A couple of things, is that a onetime thing? Is that going to be with us in some way in the future? And can you sustain gross margin at the 70%-plus level? Are we at a new high level sustainably going forward? How do we think about it?

Yes, thanks, Rick. So let me take you through kind of a bridge, and as part of that, I'll pick up your question on the Abbott true-up. So I would say the midpoint of our guidance range for gross margins for the quarter was about 68.5%. We guided from 68% to 69%, so 60.5% -- 68.5%. So we're a couple of hundred basis points higher than we guided to. Clearly, one impact is the true-up of the Abbott supply arrangement. So as, I think, most people know, we were procuring PROMUS from Abbott, and we estimated our price from them, the cost of the device, and we had an arrangement, where on a retrospective basis, they looked at their actual cost base, we true it up, kind of our estimate to the actual. So we've now done, in this quarter, the final true-up. In that final true-up, we had a benefit of roughly 90 basis points flow through our gross margin. That's a onetime benefit. It would not recur going forward. So there's a 90-basis-point benefit in the gross margins for the second quarter we do not expect to recur. So that explains a little bit of why the margins were a little bit stronger. However, the other hundred basis points plus was pretty good news for the business, and this really comes into us in 3 different areas: One, we had better performance in the manufacturing side, stronger delivery of our value improvement programs. If you remember back at the Investor Day we want to take out at least 5% of the standard cost. Our manufacturing group delivered, and I think that was very strong performance. We also had the benefit of building some inventories relative to some of the product launches that we helped, that helped us. So part of that survives going forward. Part of that is kind of a onetime benefit. Pricing actually was better this quarter, both pricing and mix. The pricing dynamics continue to get better. There's still a challenge, but they get better. And as we continue to introduce new technology in the marketplace, it's more a mix benefit than a price benefit. We do better from a price perspective. And then mix, overall, helped us. That's the third factor. So I think as we look going forward, I think our guidance for the second half was 69% to 70%. I would hope it would be kind of at the midpoint, if not, the higher end of that, and I think we've got some momentum going into 2014. Frederick A. Wise - Stifel, Nicolaus & Co., Inc., Research Division: That's very helpful. And turning -- second question on the subcu. Mike, you talked about the subcutaneous ICD, and your supply constraints went by a little fast for me. I want to make sure I understood. By the late third quarter, you'll be fully supplied. And did I hear you correctly? Fourth quarter GEN 1.5 launches. But just, in general, can you help us understand when will the subcutaneous ICD be fully rolled out and available to whoever wants it? And it sounds like that 4Q GEN 1.5 is a little faster, if I understood you, than we thought before?

Sure. In third quarter, we'll be reentering the U.S. with S-ICD, primarily with our IDE sites, so we'll begin shipment again of S-ICD, call, late third quarter. And by fourth quarter, we'll be able to ramp up more significantly and also expand our commercial presence in the U.S. and globally beyond our trial centers. So if this ramp up in the third quarter, in the fourth quarter we'll be able to drive significant more supply than the marketplace. And also in fourth quarter, we'll launch our 1.5 release, which would further enable greater capabilities for supply going into 2014 and improve the cost profile of the platform. Frederick A. Wise - Stifel, Nicolaus & Co., Inc., Research Division: So full rollout, Mike, again, you think is going to take another 6 or 12 months beyond that? Or how do we think about that?

Well, we won't be supply constrained as we head into the fourth quarter. So in third quarter, we'll begin launching S-ICD again. We will not be supply constrained as we move into the fourth quarter and into 2014.

Your next question comes from the line of David Lewis from Morgan Stanley.

Jeff, maybe a quick question for you and then a follow-up for Mike. But one of the interesting things is the segment margins this quarter. I think if you adjust for PROMUS, it looks like the standout this quarter was MedSurg operating margin expansion. Maybe help us understand what's the continued strength in MedSurg margins now I think up over 30%. And then the interesting thing is CRM margin's obviously a focus for investors. CRM did a lot better this quarter guiding to improving in the back half. What are sort of the catalysts for CRM margin improvement? And what's that balance between top line's getting better, but you're still investing in that business?

Okay, David, thank you. So yes, as you look -- dig into the press release, our MedSurg margins went 27.6% up to 32% so pretty impressive performance within a quarter. One thing to recognize in the MedSurg business is you've got some larger businesses like Endoscopy that are fairly profitable that we're doing very well that can continue to increase the profitability. But Neuromodulation is a business that, as it grows pretty quickly, has significant leverage from a bottom line perspective because not currently at our average operating margins, but it's coming up pretty quickly. So I think what should continue to happen here in this year and into the future is as Neuromodulation continues to grow and we feel very good about the trajectory within the SCS the Spinal Cord Stimulation and the DBS side, that will grow and operating profit will grow much more quickly. So that'll help the margins, as well Endoscopy and certainly, Urology/Women's Health is opportunity to expand the margins as well. So there's certainly opportunity to push up the margins of the MedSurg, feel pretty good about that. On the CRM side, the margins were down year-over-year, same story as kind of the first quarter. Really, what you see there is investment. Investment in areas like Rhythmia and Cameron are weighing a little bit on the margins as our investments in the EP business, which is lumped in at Rhythm Management. What we do expect though is, over the next 5 years, that 600 basis points that we keep talking about a margin expansion for the whole company, CRM will disproportionately benefit from that because they've got a number of investment programs. What you're seeing so far is all the OpEx. You're not seeing a lot of sales. And as we get back in the market with CRM, as we now have FDA approval for Rhythmia and we have CE Mark, 2014 should be the inflection point from a growth perspective in terms of picking up a lot of sales at pretty good profit margins. And so now you'll have the sales growth with a little bit less OpEx. That's a pretty good equation for us. The other dynamic is we have restructuring programs that we've been running that we updated people on at the end of last year, and certainly, CRM will benefit from those as well.

Okay, very helpful and very clear, Jeff. And then, Mike, in terms of the AF opportunity, we didn't get much time about this at the Analyst Day because that business has really come together in the last several months. So as it sits today, including the recently acquired asset, how do you see the addressable market for AF? And can you give us any sense about when is it appropriate to think about what's the market growth rate and whether Boston should be growing above or below that rate and by when?

Well, it's an area we've invested quite heavily in over the last 2 years, and we've done it because we like the size of the market. It's $2.5 billion. It's growing essentially double digits, and there's a tremendous amount of synergy with our CRM business. So we like the market, and we like the synergies with our expanded CRM business, as well as the customer. In terms of the portfolio, we'll have a much more meaningful business as we look at closing the Bard transaction, which hopefully will be fourth quarter. So we'll be approaching the $250 million EP business with much more global scale in terms of our commercial efforts in U.S., Europe and Asia Pac. And a really much -- a well-rounded portfolio with a mapping system, the recording devices, the diagnostic catheters and the therapeutic catheters, we're continuing to develop internally here. So our portfolio really will be highly competitive post the Bard close, one of the much stronger commercial footprint. So we respect there are some very difficult and challenging competitors in that market, but we believe the portfolio we pull together in the team is very innovative and very focused and a lot of synergies to work within our CRM business, so we anticipate ourselves will be improving the drug profile of that business.

Your next question comes from the line of Mike Weinstein from JPMorgan. Michael N. Weinstein - JP Morgan Chase & Co, Research Division: Let me just follow up quickly, if I could, on the gross margin piece. And, Jeff, could you just walk us through? So you said 90 basis points was the PROMUS catch-up, which we understood. The other, if we looked at last year, so 220 basis points. Could you just break that down maybe how much of that was from as well like FX hedges and how much was from Neurovascular running off? And anything else you can give us, that'd be great.

So if you look from a year-over-year perspective, we're up a couple of hundred basis points from 68.5% to 70.8%. If you look at kind of the impact of -- I'm going to net pricing together with kind of VIP improvements, cost improvements. That was a net benefit of roughly 70 basis points, which is good news for us. That's kind of what we want to see happen, is less pricing pressure and more ability to kind of manage the cost side. It was 100 basis points of -- 90 basis points improvement from the Abbott true-up and about 50 basis points improvement from the Neurovascular divestiture. Michael N. Weinstein - JP Morgan Chase & Co, Research Division: And FX impact on gross margin?

FX wasn't that significant. We were -- unlike some of our -- some other people in the sector, we hedged, so the foreign exchange rates don't move us around as much. Michael N. Weinstein - JP Morgan Chase & Co, Research Division: Okay. And then the guidance for the full year, how does FX in the Neurovascular impact the full year? Just trying to find an organic basis here.

Yes, so from an FX perspective, we don't expect it to have a big impact in the back half of the year. And then I believe the Neurovascular divestiture, there's a little bit of benefit in the third quarter, and then that's gone. Michael N. Weinstein - JP Morgan Chase & Co, Research Division: Okay. Could you just talk about the sustainability of 2 businesses, which were very, very strong this quarter? One, Neuromodulation, which we understand with the Precision Spectra launch. And then the other, I look at the Interventional Cardiology business x coronary stents, the business grew 3% reported this quarter. I assume that's like 5% constant currency. And that sort of business, I think, was down 10% in the first quarter, was down 12% last year. So how does it go from down 12%, down 10% to up 5%?

Yes. So let me start with your last question first. So as you might recall, we kind of targeted investing in the other Interventional Cardiology area a couple of years ago, and it started with kind of looking at our balloons, guidewires, and then the IVUS franchise had been kind of a net share loser for us. And so those are some dynamics that we had that kind of weighed on that side. So what we've done over the past couple of years is we revitalized pretty significantly that segment. We've come up with new balloons, new guidewires, and the other thing we've done is from an IVUS perspective, we come up with our, really our first new catheter in over 10 years and a new software platform, which we really think is going to allow us to reposition that business. And that business was up mid-single digits, and it's a good-sized business for us. So we think we're going to build momentum. And as we talked on the Investor Day, we talked about having FFR capability sometime in '14. So we see that as a good opportunity for us to kind of get back some of the share we have lost. The other dynamic is BridgePoint, the CTO acquisition. That was something we were pretty bullish on that we've been talking about at every public point. We think that really positions us very well to be the provider of choice to treat difficult-to-treat lesions. And we think that's starting to play out, and we think we're going to get more momentum going forward. So credit to the management team and the various individuals running those businesses, this quarter was a strong quarter. We think we can build on that based on all the factors I just listed. The other dynamic I should point out as well is the emerging markets because the emerging markets and this other IC area is a great opportunity for us to kind of continue to grow our share as well.

Your next question comes from the line of Bruce Nudell from Crédit Suisse. Bruce M. Nudell - Crédit Suisse AG, Research Division: Now that the stocks have kind of revalued to more acceptable levels, I think people are looking at some of the longer-term growth drivers that may be somewhat under the radar. So when we -- specifically, with regards to the S-ICD, like what percent of the patients do you feel, who get ICDs today, would have an equivalent shock burden with the S-ICD? And might that make this a 10% to 20% category rather than a 5% to 10% category? And secondly, with regards to Left Atrial Appendage, given the strong superiority result in PROTECT-AF, you guys have pegged the market at around $500 million. Might there be upside to that? And secondly, are you going to need a panel given the compendium of evidence?

Bruce, Ken Stein or Dr. Stein here on the phone.

Yes, I am. Thanks, Mike. Yes, Bruce, I guess, let me deal first with the S-ICD question, and then we can -- Mike, I don't know if you want me or if you want to take the Left Atrial Appendage question. So yes, in terms of the S-ICD, particularly if you're asking about where it fits long term, right, first of all, let's understand this is going to be used for de novo. It's obviously only going to be used in selected cases for patients who reach need for replacement. And within de novo, right, it clearly is not indicated for patients who need CRT, clearly not indicated for patients with a defined brady pacing indication. But we do believe that it over a long term, particularly as we continue technical iterations to the device that this can become the device of choice for remaining patients who really have no defined need to have a lead within the heart. There's accumulating data, data that we presented from MADIT-RIT, data we presented as a late-breaking trial at HRS this year from our ALTITUDE study, really showing that there's no reason on earth to think that in patients without an indication for pacing that there's any long-term outcome benefit to having a lead in the heart, and there are obviously a lot of advantages to not have a lead in the heart. And as we kind of went through our even our early experience with the first launch of the S-ICD, we were frankly taken aback at how quickly that began to get expanded use within just a general primary prevention population and really, how robust the demand was for us. And obviously, the product is only going to continue to improve as we start to iterate next-generation devices. Left Atrial Appendage, Mike, do you want me to take that?

Yes, why don't you just comment on the clinical results that were presented and your thoughts on the approval timelines.

Yes. So we were -- really couldn't be happier with the long-term 4-year results PROTECT-AF study of the WATCHMAN Device. And I think being able to show for the first time that this is now not only equivalent in outcomes to use of warfarin, but actually is superior to warfarin, both in terms of preventing strokes and also, obviously, at least as important, in improving all-cause mortality, as well as cardiovascular mortality. And we do believe that, that should have an impact on both the pace at which technology will be adopted, where it's proved today and assuming that it does get U.S. approval, as well as I think the role that implanting physicians or referring physicians are going to see for this as an alternative to drug therapy. In terms of timelines, as we've said, we've already submitted to the FDA. It's always hard to predict where FDA is going to be. We're looking towards approval in the first half next year and obviously waiting to hear whether FDA is going to make this go to another panel or not. Bruce M. Nudell - Crédit Suisse AG, Research Division: I guess, Mike, just as a follow-up. I mean, is there upside to that $500 million that you've kind of roughly scaled the market at?

We believe so. We've taken the market view on S-ICD up to about $750 million. So we'll be back in the market in full in the fourth quarter, and we do see upside longer term in S-ICD. But also just let me just expand more broadly on your question on the growth profile. Think of 3 major buckets, and Jeff outlined our performance in our MedSurg, Cross, Neuromodulation, PI and Endoscopy. We're growing plus 7%, and we have a number of new product launches, and you see the momentum there in the second half. The second piece is the improving performance of our IC and CRM businesses. And you touched on S-ICD and WATCHMAN. And then these adjacencies, we received, quite frankly, better-than-expected clinical results with TAVR, hypertension, S-ICD in the second quarter. And then the expanding impact of our emerging markets. So those 4 elements really deliver a lot of muscle to the long-term strategic plan that we outlined at Investor Day and give us great confidence in that, as well as the operational -- operating margin improvement opportunities that Jeff outlined.

Greg, we're coming close to the hour, so we have time for one more question.

Okay. That question comes from the line of Larry Biegelsen from Wells Fargo.

Just 2 questions for me. First, mike, it would be helpful to hear from you your M&A focus at this point. You did a lot of technology deals over the past few years, and the Bard deal was bit of a departure for you. And then I had one follow-up question for Dr. Dawkins.

Sure. Our M&A strategy, we're always looking for the right opportunities, and as you mentioned, we've done a number of earlier-stage deals in 2012. And those were pointed at faster-growing markets. We're also in markets, the synergies with our existing Boston Scientific business that we can leverage and ultimately, deliver a faster growth profile for the company. And we're really in the middle of the investment phase of those acquisitions and we believe they'll have a growing impact on our revenue and ROI towards the back half of '13 and in '14. So the EP deal, we want to clearly balance our acquisitions. They all want to be in fast-growing markets where we drive synergies. But we'll continue to look for properties like C.R. Bard EP business, where we have quite a bit of leverage with our existing EP business in Rhythm Management area. It complements our businesses, and it would be accretive in 2014. So we'll continue to look for that right balance but ideally seek revenue-seeking opportunities that are accretive to the company.

And Dr. Dawkins, this year, you talked about the controlled rollout of SYNERGY in Europe; next year, the full launch. You've talked about developing some clinical data to show the need for less or shorter dual anti-platelet therapy. Could you give us an update on where you are generating that data, when we might see that and when we might see that data?

Thanks, Larry. We've got a number of clinical trials, some that have already started. Some registries, some comparing SYNERGY with other platforms. And obviously, as you well know for the clinical outcomes with clinical endpoints, you usually need to wait 9 to 12 months following the completion of the trial. But we have also invested in some OCT studies where we'll get an earlier endpoint in terms of strut coverage of SYNERGY about the low [ph] and in comparison with other DES. We're encouraged also with the fast recruitments in EVOLVE II. That's the IDE trial, as you know, comparing SYNERGY with PROMUS Element. And we anticipate,, as Mike said, the completion of EVOLVE II in the third quarter this year ahead of schedule. So I think unlike some of the other platforms that we've discussed earlier, we have randomized trial data, and we have large randomized trial, and of course, that on the background of the EVOLVE versus PROMUS trial with just under 30 -- just under 300 patients randomized. So we're building steadily a data set to support SYNERGY, both at the experimental level, at preclinical level and obviously, the clinical level. And so within the next 6 to 12 months, we'll have increasing amounts of data to support SYNERGY worldwide.

Okay. With that, we would like to conclude the call. Thanks for joining us today. We appreciate your interest in Boston Scientific. Before you disconnect, Greg will give you all the pertinent details for the replay. Have a great day.

Thank you. Ladies and gentlemen, this conference will be available for replay after 10:30 Eastern Time today through August 8. You may access the AT&T Teleconference replay system at any time by dialing 1 (800) 475-6701 and entering the access code 285175. International participants dial (320) 365-3844. That does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.