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Boston Scientific Corporation (BSX)

Q4 2015 Earnings Call· Thu, Feb 4, 2016

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Transcript

Operator

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Q4 2015 Boston Scientific Earnings Call. At this time all participants are in a listen-only mode. Later we will connect a question and answer session and instructions will be given at that time. And as a reminder, this conference is being recorded. I'd now like to turn the conference over to our host, Ms. Susie Lisa, please go ahead.

Susan Vissers Lisa - Vice President-Investor Relations

Management

Thank you, David. Good morning, everyone. Thanks for joining us. With me on today's call are Mike Mahoney, President and Chief Executive Officer; and Dan Brennan, Executive Vice President and Chief Financial Officer. We issued a press release earlier this morning announcing our fourth quarter and full year 2015 results 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 one hour. Mike will provide strategic and revenue highlights of the fourth quarter, Dan will review the financials for the quarter and then provide first quarter 2016 and full year 2016 guidance, and then we'll take your questions. During today's Q&A session, Mike and Dan will be joined by our Chief Medical Officers, Dr. Keith Dawkins and Dr. Ken Stein. Before we begin I'd like to remind everyone that on the call organic revenue growth is defined as excluding the impact of sales from divested businesses, changes in foreign currency exchange rates and sales from the acquisition of the American Medical Systems or AMS Male Urology portfolio over the prior year period. Also note 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, clinical trials, cost savings and growth opportunities, our cash flow and expected use, our financial performance, including sales, margins, earnings and other Q4 and full year 2015 results and Q1 and full year 2016 guidance, as well as our…

Susan Vissers Lisa - Vice President-Investor Relations

Management

Thanks, Dan. David, let's open it up to questions for the next 25 minutes or so. In order to enable us to take as many questions as possible, please limit yourself to one question and one related follow-up. David, please go ahead.

Operator

Operator

The first question will come from the line of David Lewis with Morgan Stanley. Please go ahead. David R. Lewis - Morgan Stanley & Co. LLC: Good morning. Just a couple of quick questions on 2016 guidance. So, the first is, your guidance at the top end of the range at 7% was obviously higher than we expected, I guess, we expected 4% to 6%. So, what factors get us to the top-end of that range and specifically what's assumed for WATCHMAN? And then I had a quick follow-up. Michael F. Mahoney - President, Chief Executive Officer & Director: Thanks. Good morning, David. Yes, the guidance 4% to 7% is higher than we showed at the recent Investor Day meeting. In terms of getting to the higher end of the range, we certainly have to have some good results on our product launches with SYNERGY, WATCHMAN, ongoing advancements of Lotus. We have key product approvals that we're expecting the first half, those need to come through. We also are launching a number of key products in Japan with SYNERGY and also S-ICD. So we need some strong execution there and continued emerging market growth. So it's – we've got a lot of product launches, a number of approvals needed. So to deliver the top-end of that we have to have excellent commercial execution and great execution on the regulatory side. Potentially on some of the downside, we continue to manage, as I mentioned, some of the CRM headwinds, which we anticipate will – after Q1 improve in second quarter and then improve dramatically in the second half of the year. David R. Lewis - Morgan Stanley & Co. LLC: Yeah. That's very helpful, Mike. And then specifically, I know you mentioned CRM, just to follow-up there. In the fourth quarter,…

Operator

Operator

The next question comes from the line of Rick Wise with Stifel. Please go ahead. Rick Wise - Stifel, Nicolaus & Co., Inc.: Good morning, everybody. Just a couple of things. Maybe start with the CRM operating margin. Dan, you did a very clear job of laying out the factors behind the 15.9% instead of your 17% goal. Is the whole of that these variances, and do you come into 2016 thinking that – do we start off with that sort of 17% level or better as we head into the first quarter, first half? Daniel J. Brennan - Chief Financial Officer & Executive Vice President: Thanks, Rick. Yeah, I think the way I would say – characterize that is on the Q3 call, we had talked about kind of being in that 17% range for the back half of 2015. The variances were a piece of it. We also had a little bit higher R&D, about 60 basis points in the quarter. That's timing, that's just going to come one quarter to another, so that doesn't concern me. The manufacturing and the inventory reserve charges are really in anticipation of the launches that Mike just mentioned around the MRI safe Brady and the Quad launch in the U.S. So those are kind of out of the way now at this point as opposed to having had to take those in different quarters. So I think, the way I would think of it is, the 13.9% in Q4, I'd expect a little bit of sequential improvement in Q1, not a tremendous amount, just a little bit. Q2 gets a little bit better than that and really the back half is where it accelerates to get to that overall 18% for the year. So, I wouldn't look for Q1 to be…

Susan Vissers Lisa - Vice President-Investor Relations

Management

Ken, do you want to add anything? Kenneth Stein - Senior Vice President & Chief Medical Officer-Cardiac Rhythm Management: Yeah, Rick. I'd say, while we have some concerns about that first draft of the proposed NCD, overall, it was consistent with our expectations, which are that the NCD we expect to be more limited than the full FDA label, likewise always expected to have the registry, et cetera. And as Mike said, we've always assumed modest penetration into the indicated population and really where we go is much more dependent on our ability to train new physicians to implant the device safely and effectively. Rick Wise - Stifel, Nicolaus & Co., Inc.: Thanks for that.

Operator

Operator

The next question comes from the line of Mike Weinstein with JPMorgan. Please go ahead.

Michael Weinstein - JPMorgan Securities LLC

Management

Hi. Good morning, guys. So, just one quick follow-up on that. So, did you say where you ended up 2015 on that Structural Heart number? Michael F. Mahoney - President, Chief Executive Officer & Director: We didn't give a – we guided $75 million to $100 million, and we beat the high end of the range. We didn't give a specific number.

Michael Weinstein - JPMorgan Securities LLC

Management

But didn't give the exact number, okay, great. Michael F. Mahoney - President, Chief Executive Officer & Director: Over $100 million.

Michael Weinstein - JPMorgan Securities LLC

Management

Over $100 million, understood. So, let me ask about SYNERGY and the launch so far, the feedback we're getting is, has been very positive particularly on the deliverability of the product. It does feel like you are trying to set a premium pricing for the product to the marketplace, can you talk about your success in doing so thus far? Michael F. Mahoney - President, Chief Executive Officer & Director: Yep. We're very pleased with the results. It's really tracking to our plan. In the fourth quarter, we did see U.S. DES growth in the mid-single-digit range and that was against about a 10% comparison from fourth quarter 2015, so we delivered a nice number in the first quarter. And just as you said, we are asking and we believe we deserve a pricing premium for the product. It's the only bioabsorbable product in the marketplace with excellent stent thrombosis rates and we also have a tiered offering that has excellent market share as well. So, we think we're uniquely positioned with it. And the great news is we're launching in Japan as we speak, which is obviously a big market, and we also received reimbursement in France. So, we're really positioned well. We're being very careful with the launch of it and similar to our comments at your meeting, we anticipate about 50% of our mix in the U.S. and Japan by the end of the year.

Michael Weinstein - JPMorgan Securities LLC

Management

Right. One product follow-up, Mike, it sounds like Lotus Edge, the timing of introducing that in Europe may be is sliding, just can you provide some clarity on that? Michael F. Mahoney - President, Chief Executive Officer & Director: Yeah. I don't – in terms of sliding, we do anticipate 2016 we will launch Lotus Edge, and so I guess, maybe we did push that a bit, but we are confident in a 2016 launch of Lotus Edge and it really is similar to some of the comments on SYNERGY, we continue to exceed our commitments with Lotus. We exceeded the high end of our range, we're on track to deliver our 21 millimeter valve. We'll be launching our Lotus Edge platform and we continue to drive great outcomes on our clinical data, maybe, Keith, you can comment on some of the news you anticipate at EuroPCR? Keith D. Dawkins - Global Chief Medical Officer & Executive VP: Yeah. I mean, I think, Mike, the important thing is, when we commercialize Lotus in the U.S. late in 2017, we'll have Edge, we'll five valve sizes, 21 through 29. We'll have the [i-sleeve] 14 French compatibility and increased flexibility. The 21 valve is already in the clinical trial, so that will give us four valves. That will be followed by the 29. And we'll anticipate Edge around about EuroPCR or just after. Edge is already in clinical trials. So, we're very confident about moving to the 14 French compatibility, which of course makes us comparable with the other competitors in the market.

Michael Weinstein - JPMorgan Securities LLC

Management

Right. Perfect. Thanks, Keith. Thanks, Mike. Michael F. Mahoney - President, Chief Executive Officer & Director: Yeah.

Operator

Operator

The next question is coming from the line of Bob Hopkins with Bank of America. Please go ahead.

Robert Adam Hopkins - Bank of America Merrill Lynch

Management

Great. Thanks and good morning. Michael F. Mahoney - President, Chief Executive Officer & Director: Good morning.

Robert Adam Hopkins - Bank of America Merrill Lynch

Management

So, just wanted to follow up and make sure I heard you correctly on the U.S. ICD and pacemaker pipeline and the timelines for the pipeline. So, specifically, could you just tell us when you expect Quad Pole CRT-D lead approval in the U.S. and then MRI-Safe pacemaker approval in the U.S.? And then also give us any updated thoughts on MRI-Safe traditional ICD and CRT-D timelines for the U.S., since it feels like that's where Medtronic is having the most success. Thank you. Michael F. Mahoney - President, Chief Executive Officer & Director: Sure. I'm really proud of our CRM business. We clearly want to grow faster, but we're in a position now where we can see as we go forward in 2016 and 2017 and beyond, really the strength of the portfolio and I'll give answers to your specific MRI questions in a second here, but we've got these product launches coming second half of 2016. The S-ICD is really gaining excellent momentum globally, we're expanding that and we're going to be moving beyond the replacement cycle headwind. In terms of the product launches, we feel comfortable with a second quarter launch of both the Quad system and MRI pacer. The MRI pacer likely slipped a little bit out of first quarter into second quarter. We'll also have EMBLEM MRI approval likely in the third quarter of 2016. So, big approvals in second quarter and third quarter. And then as we go forward with the ICD MRI capability, we'll start that trial very quickly here and we anticipate approval of that product likely in second quarter or third quarter of 2017. So, we've got a really strong cadence of product approvals coming, MRI capabilities. But I think what's most unique about our offering is this S-ICD momentum that we're seeing around the world. We just received approval in Japan. We have a 5% premium – reimbursement premium in Japan, continued strong acceptance of the product in training and a multi-year head start. So, as you look to our business going forward, this product cadence will come through, S-ICDs continuing to grow, and our replacement cycle headwind will reverse itself. So as you look forward to CRM, I really believe that you're going to see this business strengthen in the second half of 2016 and 2017 and 2018.

Robert Adam Hopkins - Bank of America Merrill Lynch

Management

Great. That's very helpful. Thank you. And then one for Dan, I just want to make sure I understand the margin story, just specifically in the fourth quarter. Is the right way to think about operating margins in the fourth quarter and all the moving parts that you had very strong gross margin performance, and that you took advantage of a very low tax rate to invest a little bit more in SG&A than you originally anticipated, is that from a big picture perspective the right way to think about Q4 margins? Daniel J. Brennan - Chief Financial Officer & Executive Vice President: Yeah. I think overall, and then as I mentioned in our prepared remarks, we did have 80 basis points of the fixed asset write-offs and the litigation fees. So, I wouldn't call that kind of investing for the future. So if you take that off, I'd say, again, as we mentioned, very proud of where we ended for the year and the overall improvement we've had over the past two years. If you take 2016 and 2015 together, you'd be looking at almost 400 basis points of operating margin expansion. So in a given quarter, you'll see fluctuations, but the overall trend is extremely positive.

Robert Adam Hopkins - Bank of America Merrill Lynch

Management

Great. Thanks for the color.

Operator

Operator

The next question comes from the line of David Roman with Goldman Sachs. Please go ahead. David Harrison Roman - Goldman Sachs & Co.: Thank you, and good morning, everybody. Maybe I will switch gears a little to the Urology business and maybe, Mike, you could talk about how the integration is going with AMS and very specifically focus on some of the issues that you may be undertaking to help accelerate top line growth from where AMS was performing at sort of the exit rate of the acquisition? Michael F. Mahoney - President, Chief Executive Officer & Director: I won't give a CRM answer on this one. So, I guess, I just wanted to talk about Urology because I like what we're doing here so much. So we – again, we had nice results in the fourth quarter, business growing 7% overall, really nice job, particularly in international markets as we continue invest in our stone business and training programs, that's growing very well, double-digits outside the U.S. consistently. And the AMS integration is on track. Thankfully, the teams did a really nice job in due diligence. We did project some softness the first six months post acquisition as we wanted to bleed down distributor inventory levels to appropriate levels and that's exactly what we're seeing. So, that's happening and we likely will see continued softness in Q1, but improving in terms of the legacy AMS business, and that's being offset by the BSC legacy business. As we go forward in the second quarter, we expect the legacy AMS business to grow much closer to the BSC overall growth rate and then we'll see additional benefit on top of that as we see synergies between the BPH portfolio, the stone portfolio, the ED portfolio and the incontinence portfolio overall.…

Operator

Operator

The next question comes from the line of Brooks West with Piper Jaffray. Please go ahead. Brooks E. West - Piper Jaffray & Co (Broker): Hi, guys. Thanks for taking the question. Let me start with Peripheral actually, very strong performance there, you've got a lot going on. I wonder if you could give us just a little bit more detail on kind of product cadence, market dynamics and if we can see the business kind of continue to perform at this level going forward? Michael F. Mahoney - President, Chief Executive Officer & Director: Sure. The team has done a really nice job. Jeff Mervis and the Peripheral group delivered 20% growth in legacy Bayer business and 10% organically overall, so, obviously very strong growth and a few quarters in a row here, and we're projected to set up really nicely in 2016. So, I think just a backdrop, the markets there are very healthy, we're seeing nice market growth in atherectomy. Our core business, we just launched a new DVT product and also clearly the growing acceptance of the drug coated technology. So the markets overall are strong, and we really have a unique position in terms of our portfolio. You've heard a lot about our drug-eluding stent ELUVIA, we'll be the only company with both a drug-eluding stent and a drug-eluding balloon in Europe, and we're also kicking off our ELUVIA IMPERIAL trial in the first half of 2016. So we're uniquely positioned in our DES. We're also launching a number of our core SFA metal stents in Japan and Asia and China which will help us grow that business, and we also continue to really expand globally. We've been – we were light weight in terms of the emerging markets in Peripheral five years ago and…

Operator

Operator

The next question will come from the line of Larry Biegelsen with Wells Fargo. Please go ahead.

Larry Biegelsen - Wells Fargo Securities LLC

Management

Good morning, guys. Thanks for taking the questions. So, Mike, you're one of the few companies that actually showed an acceleration in emerging growth this quarter, I think about 15% organic versus 13% last quarter, a lot of companies have shown the opposite trend. So, my question is, what's the outlook in 2016? How comfortable – how much visibility do you have on growth in those markets? And any color would be helpful and I had a follow-up. Thanks. Michael F. Mahoney - President, Chief Executive Officer & Director: I'm sorry, were you talking the emerging market...

Susan Vissers Lisa - Vice President-Investor Relations

Management

Emerging market.

Larry Biegelsen - Wells Fargo Securities LLC

Management

I'm sorry. Yeah, emerging market growth. I think you had 15% organic in Q4, I think 13% in Q3. Michael F. Mahoney - President, Chief Executive Officer & Director: Yeah, we were a little bit slower in the second quarter. And we had nice pick up, really the pickup the second half of 2015 was good, but it was also more consistent with what we expected and did in 2014 quite frankly. And so it's really a continuation of, ex maybe a soft quarter, one soft quarter, the second quarter, kind of a continuation of what we've been doing in 2014 and what we expect to continue to do in 2016. So, we had some softness in Russia in the second quarter, we've seen that stabilize a bit, we have excellent growth in China, excellent growth in Brazil and a number of other countries. So, we continue to register new products, add commercial capabilities, we're building R&D capabilities, new education training centers. I just got back from there last night. So, we put a lot of time and effort in it. We just did a joint venture deal with Frankenman there in our Endo business. So, we feel comfortable about our prospects in the mid-teens rate in emerging markets.

Larry Biegelsen - Wells Fargo Securities LLC

Management

Thanks for that. And then Neuromodulation, I don't think has come up on this call, but you had a nice year in Neuromodulation this year, but obviously the competitive dynamics are changing. So just color on 2016 and how we should think about growth and trends there and the sustainability of the nice growth you showed in 2015? Thanks for taking the questions. Michael F. Mahoney - President, Chief Executive Officer & Director: Sure.

Susan Vissers Lisa - Vice President-Investor Relations

Management

Larry, we'll hit that in a sec, but we're going back to the emerging markets revenue question first with Dan. Daniel J. Brennan - Chief Financial Officer & Executive Vice President: Yeah, just one other thing, Larry, on that. So one of the other items with respect to emerging markets is just the foreign currency exchange rates. So if you look back at Q4 and think of our $1.978 billion that we reported again, that included a $25 million negative headwind from FX compared to what we had talked about when we gave guidance. So kind of adjusted for that we would have been over $2 billion and kind of closer to the higher end of the range and emerging markets obviously is a big piece of that.

Larry Biegelsen - Wells Fargo Securities LLC

Management

Thanks, Dan. Daniel J. Brennan - Chief Financial Officer & Executive Vice President: Yeah. Michael F. Mahoney - President, Chief Executive Officer & Director: And Neuromod continues to perform well. We grew 7% in the quarter. We grew 8% full year and we had consistently strong growth throughout the year and we really don't see that – we anticipate that trend to continue. Spectra continues to perform very well. The launch of Novi outside the U.S. is picking up. And we are getting a lot of – we are building momentum in international markets in deep brain stimulation and will hopefully get some good luck and get that clinical trial enrolled in 2016 to position that launch. So it's a very healthy market right now and there is a lot of patient demand and so we like to see that that market is clearly growing in the mid-single digit range, if not a bit more. So it's a growing market. We have some unique innovation and it's a bit more competitive, but it hasn't slowed down our performance.

Larry Biegelsen - Wells Fargo Securities LLC

Management

Thanks for taking the questions, guys. Daniel J. Brennan - Chief Financial Officer & Executive Vice President: Thanks, Larry.

Susan Vissers Lisa - Vice President-Investor Relations

Management

Thank you. With that, we'd like to conclude the call. Thank you very much for joining us today, we sincerely appreciate your interest in Boston Scientific. Before you disconnect, David will give you all the details for the replay.