Boston Scientific Corp (BSX) 2021 Q1 法說會逐字稿

Good morning, and welcome to the Boston Scientific First Quarter 2021 Financial Results Conference Call. (Operator Instructions) Please note this event is being recorded. (Operator Instructions)

I would now like to turn the conference over to Susan Lisa, Vice President, Investor Relations. Please go ahead.

Thank you, Andrew. Good morning, everyone, and thanks for joining us.

With me on today's call are Mike Mahoney, Chairman and Chief Executive Officer; and Dan Brennan, Executive Vice President and Chief Financial Officer.

We issued a press release earlier this morning announcing our Q1 2021 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 Financials and Filings.

The duration of this morning's call will be approximately 1 hour. Mike will focus his comments on Q1 performance as well as future catalysts and the outlook for our business, including Q2 and fiscal year 2021 guidance. Dan will review the financials for the quarter, provide more details regarding our Q2 and fiscal '21 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. Ian Meredith and Dr. Ken Stein.

Before we begin, I'd like to remind everyone that on the call, operational revenue growth excludes the impact of foreign currency fluctuation. And organic revenue growth further excludes acquisitions and divestitures for which there are no comparable period net sales. Relevant acquisitions for organic growth versus 2020 and 2019 include Preventice, which closed March 1, 2020, and Vertiflex and BTG Interventional Medicine, which closed in May and mid-August of 2019, respectively. Divestitures include BTG Specialty Pharmaceuticals, which closed March 1, 2021, and the global embolic microspheres portfolio and intrauterine health franchise, which were divested in mid-August 2019 and second quarter of 2020, respectively. Guidance excludes the recently announced LUMINIZE Surgical acquisition and the BTG Specialty Pharmaceutical businesses, which, as I mentioned, was divested as of March 1, 2021, one month earlier than originally anticipated.

For more information, please refer to Slide 9 of our financial and operating highlights deck, which may be found on our Investor Relations website.

On this call, all references to sales and revenue, unless otherwise specified, are organic.

Finally, growth goals of 6% to 8%, excluding COVID, represent comparisons between time periods in which results are not materially impacted by the COVID-19 pandemic.

Of 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: the impact of the COVID-19 pandemic upon the company's operations and financial results; 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 and earnings; as well as our tax rates; R&D spend and other expenses.

Factors that may cause such differences include those described in the Risk Factors section of our most recent 10-K and subsequent 10-Qs 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?

Thanks, Susie, and thank you, everyone, for joining us today.

I'm pleased to report a good start to 2021, with a return to growth versus both '20 and '19. Financial results that exceeded our guidance for both revenue and EPS, and multiple significant clinical milestones, and continued advancement of our category leadership strategy, with new product launches and tuck-in M&A, including Preventice in cardiac diagnostics, and LUMINIZE which is a leader in laser technology for kidney stones.

Total company first quarter operational sales grew 5.6% versus 2020. Organic sales grew 6% versus '20 and 3% versus '19, exceeding expectations, as the second half of the quarter came in stronger than anticipated on procedure recovery and market share gains across many of our businesses and regions.

Many of these gains were fueled by new and ongoing product launches, most notably our Ranger DCB, Eluvia DES, POLARx Catheter, LUX-Dx Implantable Cardiac Monitor and their Vercise Genus Deep Brain Stimulation Platform.

First quarter adjusted EPS of $0.37 grew 33% versus '20 and 5% versus '19, which exceeds the high end of guidance by $0.03, primarily due to higher sales performance and spend controls. Adjusted operating margin of 24.3% was in line with our expectations and demonstrate solid progress from 2020. And we're really pleased with our free cash flow generation of $213 million and adjusted free cash flow of $404 million.

We believe these better than expected results are indicative of our ability to regain our pre-pandemic 6-year track record of excellent performance, as we execute against our strategic plan objectives and drive towards ex-COVID financial goals for 6% to 8% organic sales growth, continued operating margin expansion, double-digit adjusted EPS growth, and importantly, an improved ability to deploy our healthy free cash flow.

We're encouraged by the outlook of the rest of the year. And we're emerging from the headwinds of the pandemic well positioned, given our category leadership positions, innovative pipeline, commercial execution, enhanced digital capabilities and ongoing expansion into higher-growth markets. And we look forward to highlighting these capabilities with you further at our Investor Day this year, which will be held on Wednesday, September 22.

So looking ahead, we continue to expect a steady recovery from the pandemic, with less of an impact from COVID-19 in the second quarter versus first quarter and more normal procedure levels in second half '21. Given the first quarter outperformance, we're narrowing the range for both full year organic revenue growth and adjusted EPS. So compared to 2020, we're targeting second quarter '21 organic revenue growth of 44% to 48% and full year plus 15% to plus 18%. Compared to '19, we're targeting second quarter organic revenue growth of 3% to 6% and for the full year growth of 2% to 5%.

Our second quarter adjusted EPS estimate is $0.36 to $0.38. And we're updating full year adjusted EPS to a revised range of $1.53 to $1.60. Dan will also give the revenue contribution from Preventice, and we continue to expect second half '21 close for LUMINIZE.

So I'll now provide some additional highlights in first quarter '21, along with some commentary on second quarter and the outlook. So regionally, in the first quarter, on an operational basis versus '20: the U.S. grew 9%; Asia Pac grew 9%; Middle East, Africa grew 2%; and the emerging market sales grew 13%. Growth in the U.S. was supported by procedure recovery, particularly in March, along with new product launches across the entire portfolio. Europe, Middle East, Africa was driven by new product innovations, with particular strength in PI, EP and endo, as the majority of markets grew in the first quarter versus first quarter '19, even as some countries experienced lockdowns and related procedural impacts.

In Asia, every market grew in the first quarter versus first quarter '20. And going forward in Japan, despite COVID uncertainties, we expect full year growth versus 2019, thanks to the diversified portfolio and new product launches, such as Ranger DCB, StablePoint, WATCHMAN FLX and LithoVue, which is expected later in the year. China sales grew 20% versus 2020 and were flat versus '19, which reflects the negative impact of tender pricing for drug moving stents and blows. The rest of the China portfolio saw strong double-digit growth in first quarter versus '19, with particularly notable momentum behind both complex PCI and imaging products as well as endo, euro and PI. We continue to expect full year '21 double-digit growth for China versus both 2020 and 2019.

I'll now provide some additional commentary on the business units. Urology and public health continued to expand market share, and sales grew organically 9% versus 2020. And first quarter growth was balanced regionally, with strength in stone and prostate health. Product highlights include continued momentum with SpaceOAR Vue Hydrogel, which drove double-digit growth overall for the SpaceOAR business. Rezum also grew double-digits, fueled in part by the publication of the compelling 5-year results, demonstrating Rezum's durability, with a low 4.4% reintervention rate for BPH patients. And looking ahead, we're excited to continue to build out our stone portfolio and extend our global footprint with the acquisition of the surgical business of LUMINIZE and its leading laser fiber technology. The deal is expected to close in the second half of the year.

For Endoscopy, sales grew organically 10% versus 2020. And Endo continues to grow market share globally, with double-digit growth in all regions versus '19, led by strength in key franchises, such as pancreaticobiliary, hemostasis and infection prevention. And thanks to recent launches in our differentiated technologies, such as SpyGlass DS, Discover and AXIOS. EXALT-D momentum is gradually improving as we have started to see capacity differ hospitals to establish new protocols, hospital access has increased and the Medicare outpatient pass-through payment. We also continue to target launch of our single-use bronchoscope in the second half '21, and remain bullish on the long-term opportunity for single-use scopes broadly.

In Cardiac Rhythm Management, sales were up 1% organically versus 2020. And we believe that our CRM performance was slightly below the overall market. For the full year '21, we forecast a slight tailwind from the replacement cycle and anticipate beginning enrollment midyear in modular ATP, which is our dual-track clinical study for stand-alone leadless pacemaker, as well as to provide pacing and antitachycardia pacing to EMBLEM S-ICD patients. Our LUX-Dx implantable cardiac monitor launch is gaining U.S. share, given its high-quality ECG signals, arrhythmia algorithm performance and streamlined back-end monitoring.

We closed the Preventice acquisition as of March 1, and are pleased with the Preventice portfolio, which grew mid-20% on a pro forma basis for the full quarter. And despite recent reimbursement challenges in 1 segment of testing, long-term ECG, we expect plus 20% pro forma growth for Preventice in '21, given its ability to offer all 4 testing modalities with Bodyguardian Mini and excellent detection algorithms. We're excited to have such a unique position in the field of cardiac diagnostics and the ability to offer all diagnostic modalities, including the ambulatory ECG, LUX-Dx, ICM and the HeartLogic detection alert for heart failure.

Electrophysiology sales were up 8% versus 2020. And In POLARx, which is our second-generation single-shot cryo catheter, is off to a strong start in Europe and taking share given its effectiveness and ease of use. StablePoint, our Force Sensing therapeutic catheter with DIRECTSENSE is also enjoying a good start in both Japan and Europe and has begun enrollment in its U.S. IDE trial called NEwTON AF.

In Neuromodulation, organic revenue grew 2% versus 2020. And the first quarter result is an improvement sequentially despite the challenges of higher rates of spinal cord stimulation patient cancellations in December that also seeped into January and February due to the COVID surge. As patient reticence waned in March, trends improved significantly, and also helped by the ongoing launch of our next-gen WaveWriter Alpha SCS system. Alpha has driven excitement due to its FAST and Contour paresthesia-free wave forms with MRI compatibility, which is also supported by our Cognita software solutions that enhance the physician's ability to identify, manage and maintain SCS patients. In deep brain stimulation, our Vercise Genus platform expands our MRI capabilities in both the rechargeable and nonrechargeable segments, with Bluetooth communication capabilities.

In Interventional Cardiology, organic sales grew 7% versus 2020. And every structural heart franchise, WATCHMAN, ACURATE neo2 and SENTINEL delivered strong growth. The WATCHMAN franchise accelerated its recovery, growing over 30% versus 2020, with extremely positive physician feedback on FLX device performance and safety, as supported by the PINNACLE FLX IDE study that was published in Circulation during the quarter.

Importantly, we completed the conversion to a consignment-based model last quarter. And accounts in the U.S. are now over 90% converted to FLX. We've also seen a step-up in implants per center per week versus pre-COVID levels, as more physician implanters adopt the FLX technology. And we continue to push for indication expansion as we enroll the CHAMPION study and target enrollment completion of the OPTION trial by the end of the year.

In TAVR, our ACURATE neo2 2 launch continues to do quite well in Europe. And we're pleased to announce that we've expanded our risk indication in our ACURATE neo2 IDE trial. The IDE trial now includes all risk categories, including low-risk TAVR patients. We continue to target U.S. approval for all risk indications and market entry in 2024.

During the quarter, SENTINEL, which is our cerebral embolic protection device, reached a milestone of treating 50,000 patients cumulatively and continue to enroll its Protected TAVR randomized trial.

Coronary therapies grew low single-digits versus 2020, with global strength in complex PCI and imaging. This helped to offset drug-eluting stent price weakness in the U.S. and China. And we continue to launch new products for complex PCI, and are on track to begin enrollment in second quarter for the AGENT Drug-Coated Balloon study, which is a first in the U.S. for coronary in-stent restenosis. And we're pleased that AGENT has been designated a Breakthrough Device.

Peripheral Interventions delivered strong performance and continues to gain market share, with organic sales up 8% versus first quarter '20. And Interventional Oncology grew high single-digits versus first quarter '20, driven by the achievement of several important milestones for TheraSphere. These include the recent PMA approval in hepatic cellular carcinoma, as the positive TARGET study outcomes were featured as a late breaker at the Society for Interventional Radiology. In addition, we were granted a Breakthrough Device Designation for the study of TheraSphere in patients suffering from glioblastoma, an aggressive form of brain cancer.

Performance in our VENOUS franchise was led by mid-teens growth in ecos versus 2020. And in arterial, drug-eluting technologies also had a strong quarter, as growth accelerated sequentially, thanks to our category leadership strategy to offer both a differentiated DES and a DCB, as well as sectors continuing recovery at multiple data sets, proving the safety and effectiveness of these therapies. The Eluvia DES inpatient add-on payment and the ongoing U.S. launch of Ranger DCB are helping us to drive share gains.

I'd also like to highlight 2 important sustainability accomplishments this quarter. The first is the publication of our performance report and its detailed addendum, referencing the global reporting initiative guidelines. And secondly, placed an 8th on the Forbes list of America's Best Employers for Diversity in 2021. We remain as committed as ever to global sustainable economic, environmental and social practices.

And overall, we're pleased with our early performance for the year and optimistic on the outlook. We continue to drive towards ex-COVID financial goals of 6% to 8% organic growth, margin expansion, driving strong cash flow and double-digit adjusted EPS growth, while living our values with an enduring commitment to sustainable business practices.

Very grateful for our employees for their winning spirit. And I'll now turn things over to Dan.

Thanks, Mike. First quarter consolidated revenue of $2.752 billion represents 8.2% reported revenue growth and reflects a $67 million tailwind from foreign exchange. On an operational basis, revenue growth was 5.6% in the quarter.

Sales from the Preventice acquisition, which closed March 1, contributed 70 basis points, more than offset by the divestiture of Specialty Pharmaceuticals and our Intrauterine Health franchise, resulting in 5.9% organic revenue growth, above our guidance range of down 3% to up 3% versus 2020.

Compared to the first quarter of 2019, organic growth was 3%, above our guidance range of down 6% to flat. This 3% growth excludes $15 million in 2019 sales of divested Intrauterine Health and embolic beads businesses as well as $160 million in 2021 sale of acquired businesses, which consists of 1 month of Preventice, 2 months of Specialty Pharmaceuticals and a full quarter of BTG Interventional Medicines and Vertiflex.

Top line results drove Q1 adjusted earnings per share of $0.37, representing 33% growth versus 2020, 5% growth versus 2019, and exceeding our guidance range of $0.28 to $0.34.

Adjusted gross margin for the first quarter was 68.9%, slightly below our expectations, driven by inventory charges and lower sales within higher-margin businesses. As expected, the COVID-driven negative manufacturing variances capitalized on the balance sheet in 2020 should be substantially recognized in the P&L by the end of the second quarter, enabling higher gross margins in the second half of the year.

First quarter adjusted operating margin was 24.3%, slightly above our expectations, driven by strong sales and spend control, as SG&A and R&D remained slightly below historical levels as a percentage of sales.

Moving to below the line. Adjusted interest and other expense totaled $97 million, in line with our expectations. Our tax rate for the first quarter was 5.9% on an adjusted basis, and includes 240 basis points of benefit from discrete tax items within the quarter as well as a 190 basis point benefit from stock compensation accounting, higher than previously expected.

Adjusted free cash flow for the quarter was $404 million. And free cash flow was $213 million, with $284 million from operating activities, less $71 million of net capital expenditures. Our goal is to deliver adjusted free cash flow in line with 2020, despite increased working capital headwinds in inventory and accounts receivable as we return to more normalized volumes during the remainder of 2021.

As of March 2021, we had cash on hand of $2 billion. Our top priority for capital deployment remains tuck-in M&A. We have capacity to pursue additional business development opportunities, while continuing to remain active with our venture capital portfolio and consider opportunistic share repurchase. We ended Q1 with 1.431 billion fully diluted weighted average shares outstanding.

And now I'll walk through the guidance for the second quarter and full year 2021. For the full year, we expect 2021 operational revenue growth to be in a range of 14% to 17%, which includes an approximate net 100 basis point headwind from the divestiture of our Intrauterine Health franchise and Specialty Pharmaceuticals, partially offset by the acquisition of Preventice. Excluding the impact of acquisitions and divestitures, we expect organic revenue growth to be in the range of 15% to 18% versus 2020 and 2% to 5% versus 2019.

For the organic comparison to 2019, full year 2019 sales exclude $50 million in sales of our embolic beads portfolio and Intrauterine Health franchise as well as $81 million in Specialty Pharmaceutical sales. And at the midpoint of guidance, 2021 sales exclude approximately $480 million in sales from recent acquisitions, including: Vertiflex through May, BTG Interventional Medicines through mid-August, and Preventice as of March as well as $13 million of Specialty Pharmaceutical sales prior to divestiture.

For Q2 2021, we expect operational revenue growth to be in a range of 42% to 46%, which includes an approximate net 200 basis point headwind from the divestiture of Specialty Pharmaceuticals, partially offset by the acquisition of Preventice. Excluding the impact of acquisitions and divestitures, we expect organic revenue growth to be in a range of 44% to 48% versus 2020 and 3% to 6% growth versus 2019.

For the organic comparison to 2019, 2019 sales exclude $15 million in sales of our embolic beads portfolio and Intrauterine Health franchise. And at the midpoint of guidance, 2021 sales exclude approximately $175 million in sales from the acquisitions of Vertiflex, BTG Interventional Medicines and Preventice.

For adjusted operating margin, while we aim for sequential improvement, we expect Q2 to be similar to Q1, as we remain flexible with investment opportunities and given strong Q1 performance. Our goal is to average 26% adjusted operating margin in the back half of the year, setting us up to exit 2021 at a higher level than full year 2019.

We continue to forecast our full year 2021 operational tax rate to be approximately 11% and now expect an adjusted tax rate of approximately 10% due to the Q1 discrete tax benefits and more stock compensation favorability than previously anticipated. We continue to expect adjusted below-the-line expenses, which include interest payments, dilution from our VC portfolio and costs associated with our hedging program, to be approximately $400 million to $425 million for the year.

We expect fully diluted weighted average share counts of approximately 1.435 billion shares for Q2 2021 and 1.436 billion for full year 2021. We are now raising the low end of our full year 2021 adjusted earnings per share guidance to $1.53, and maintaining the high end of $1.60, in line with our update to sales guidance as Q1 results have removed some uncertainty from our previously wider range. For the second quarter, adjusted EPS is expected to be in a range of $0.36 to $0.38. Please check our Investor Relations website for Q1 2021 financial and operational highlights, which outlines more detailed Q1 results.

With that, I'll turn it back to Susie, who will moderate the Q&A.

Thanks, Dan. Andrew, let's open it up to questions for the next 30, 35 minutes or so. (Operator Instructions)

(Operator Instructions) The first question comes from Bob Hopkins with Bank of America.

Congrats on a good start to the year. First question I'd love to ask is just on your 2021 revenue guidance. And I realize there's a lot of numbers flying around here. But to keep it simple, I think you said your organic sales growth in the first quarter of 2021 over the first quarter of 2019 was 3%. You expect an improvement on that same basis to 3% to 6% in Q2 and 2% to 5% for the full year.

My question is, that suggests kind of very little incremental growth in the back half versus the first half. So is that simply conservatism? Or is there something going on in the back half that we should be aware of?

Thanks, Bob. I'll take that one. I don't think there's anything going on in the back half. I mean we believe the guidance is appropriate. And I think you're correct. I mean the best way to look at it is probably versus 2019 to eliminate the COVID impact in the base year. And so the way I think of it is, you look at Q1, and that was 3%, right? You look at Q2, and at the midpoint, that's 4.5%. So that's a nice acceleration. You heard Mike talk about the recovery And we look for that recovery to continue in Q2. So the midpoint is at 4.5%.

And then if you look at the full year range of 2% to 5%, and you take the high end of 5%, that implies that we're north of 6% in both of Q3 and Q4. And so that's a nice acceleration from where we would be in Q2 at the midpoint. And also, it's worth noting that the comps versus '19 are 200 basis points higher in the second half. So our comps for '19 were 6% and 6% in the first half, Q1 and Q2, so obviously, an average of 6%. And then in the back half, they were 9% and 7%, for an average of 8%. So if you look at the high end of the 5% and you say that implies that we're north of 6%. That's in the range of that 6% to 8% that we always talk about ex-COVID for our expectations. So we feel like, as we look at the 2% to 5% full year and then also the Q2, 3% to 6%, we think it's appropriate.

Great. Super helpful. And then one quick question for Mike on -- just a geographic question. Mike, I was wondering if you could just comment really quickly on kind of what you're seeing in Europe and Japan from a COVID and surgical procedure recovery perspective?

Sure. And Europe, overall, very pleased with the team's performance. It grew 2% in the quarter versus '20 and 3% versus '19. That's really despite some of the lockdowns that you've seen. So in some markets like the U.K., the business has been stronger. The business has picked up in Germany. Some countries like Italy and Spain have been a bit softer. So we do anticipate those markets to get better as we expand over the second quarter, given improvements in vaccination like we've seen in the U.S. But I would say the COVID impact in Europe has been more choppy given the slightly slower pace of vaccine rollout and some of the lockdowns in some of the countries.

But nevertheless, the team did deliver positive growth versus '20 and '19. And in Japan, really a similar story. Vaccination rates are a bit lower there. But nevertheless, the team did grow versus '19 at 1%, which is encouraging. And we expect that business to strengthen as the year moves on. And that's supported by a number of product launches in Japan, primarily the DCB and Eluvia, the StablePoint platform as well as some additional launches in urology. So the U.S. was the strongest market overall. China performed very well and some choppiness in Europe with some of the lockdowns, but the team delivered nice growth there.

The next question comes from Robbie Marcus with JPMorgan.

Great. And I'll add my congrats on a really strong first quarter here. I wanted to touch on -- I know a lot of your procedures, something like 2/3, are outside of the hospital in the ASC setting. And a lot of these are, as we learned last year, deferrable procedures. So I'd love to get a sense of how you're thinking about the potential for a backlog of patients to come through later this year and into next year? And how sizable an opportunity that might be?

Yes. Robbie, it's a bit difficult to quantify. We obviously try to frame it with our guidance for second quarter, which we anticipate acceleration over first quarter just if you take the midpoint. And so that obviously implies improvement in the -- strengthening of the business. And overall, you saw -- our most susceptible businesses to COVID, all of them were susceptible, but the most sensitive were Urology and Neuromodulation. And we saw quite a bit of softness in the first half of the quarter, really through most of February, particularly in SCS. And then we saw a significant improvement in March. And so we're quite bullish on that business, particularly in the U.S. where the bulk of that business is in the U.S. in SCS in second quarter and second half.

And so we think that will be quite a bit stronger than it was in 2019 and stronger than it was in the first half -- first quarter. And Urology, you saw the Urology numbers were quite strong in the first quarter. So I think, to answer your question is a bit difficult. With the COVID improvement, we anticipate continued momentum based on the guidance that we gave, but it's difficult to predict additional bonuses on top of that.

Got it. Yes. I imagine it's tough for everyone to guess how it will play out. Maybe a quick follow-up on structural heart. 2 things here. One, you had, again, really, really strong WATCHMAN FLX numbers, and I saw it in the slides, you mentioned that the ACURATE neo2 trial is now going after all risk patients. So just thinking about the outlook for structural heart here. And any color you could give us on how you see 2021 playing out and how the updated trial protocol might help you down the road?

Yes. WATCHMAN is doing excellent. We -- in the script there, we talked about, we've had over 90% conversion already to FLX. You're seeing same-center utilization increase, which is probably the most important metric given the safety profile and the effectiveness of the device and the enthusiasm of electrophysiologists and cardiologists to implant it and the growing acceptance of this from the referring physician community. So a lot of momentum behind WATCHMAN, and we think the consignment move with FLX was a smart move for us. So that's all good news.

And Dr. Meredith can kind of maybe comment a little bit on the ACURATE neo2 IDE trial, if you like.

Yes. Thanks, Mike. Thanks, Robbie. I guess the extension of the trial -- the FDA approval this week of the extension of the trial to all risk patient categories, extreme, high, intermediate and now low risk, is certainly a significant step forward. We will have to increase the number of patients, but we don't expect the time line for the trial to actually change. But come approval, to have the approval for all patient, risks will certainly increase the opportunity.

The next question comes from Larry Biegelsen with Wells Fargo.

Congrats on the really nice quarter here. One on the recovery, one on WATCHMAN. When you reported Q4 results, I think January was still declining year-over-year. February didn't seem like it was a great month with the weather and all. So it looks like you must have seen a pretty significant acceleration in March. Can you talk about the trends through the quarter? And what are you seeing in April? Apologies for the short-term question, but obviously, a lot of interest in that. And I have one follow-up.

Sure. I can take that one, Larry. Yes, I think it's probably pretty consistent with what you've heard from other companies that are in our sector. January looked a lot like December, right? A lot of COVID impact globally. And then February was a bit of a tale of 2 halves. So the first half was weaker. The second half, we saw some recovery, both from the anticipation of the weather, some increased vaccination rates and just the strength of the overall procedure volume. And then March continued to recover beyond that. So it's largely in line with what others have said and I think what you would probably expect. Not going to get into specifics on April, but I think you heard Mike comment that our guidance includes continued recovery in Q2 and into the second half. So I think that's what we'll say on that.

That's very helpful. And then on WATCHMAN, nice acceleration here to 30 -- 34% growth over about 18% in Q4. Just looking ahead, just wanted to give you guys an opportunity to comment on new competition in the U.S. 2 things. One, the Street's kind of the consensus is about 30% share for them to take. And my question is, can you still grow WATCHMAN in 2022 with new competition? Any high-level thoughts on those type of metrics, if you're willing to comment would be helpful.

Well, sure. Our expectation is that we'll grow in 2022 the WATCHMAN business. It has a lot of momentum now, a lot of acceptance of the FLX device. And as I mentioned, utilization is growing. We've got a number of clinical trials that are also in process. And we also have a robust pipeline for WATCHMAN in the future. So there's more to come from WATCHMAN behind FLX.

Also, just the therapies, as you know, it's so early. The awareness for the referring physicians, whether it be cardiologists, GI doctors, neurologists, continues to expand. They're seeing great outcomes from their patients. So I think the acceptance level of WATCHMAN continues to grow. And the market opportunity, it's a multibillion-dollar market in the future. And so we think the market will continue to grow very, very healthy. And these positive outcomes are driving more and more momentum. So our expectation is certainly to grow in 2022.

The next question comes from Vijay Kumar with Evercore ISI.

Congrats on the nice results here. Mike, maybe one on cardio. I think there was some noise from, if you may recall. But in the context of your commentary around LUX ICM share gains and ET perhaps coming in slightly better. Are the positives more than enough to offset, I guess, some of the CRM headwinds?

Thank you. Dr. Stein will comment a little bit on S-ICD in a minute. I think you really captured the full portfolio picture here. And so we did see a little bit of softness in CRM in the quarter. We think we may have lost a little bit of share. At sequential quarter-over-quarter growth versus '20, it's very minimal share loss. And it's typically -- it's been common in the leadless pacemaker market where we -- although the share loss, I would say, has reduced or more stabilized, as we think that segment is approaching full penetration in terms of the single chamber. So although we lost share there, I would say that element is declining. And we had a little bit of softness in defib with the S-ICD actions, but that business is beginning to rebound, and Dr. Stein can comment on it.

Importantly, as you said, our full diagnostic portfolio with Preventice and LUX and the acceptance of LUX will be a nice tailwind for us in '21 and '22. And our EP business was quite strong in Europe, softer in the U.S. where we don't have some of these product approvals. So net-net, as you said, the diagnostics business will help offset some of the softness in CRM. And EP in Europe and Japan, in particular, will offset some of the U.S. So those are certainly additive and beneficial to the CRM growth profile.

And maybe, Dr. Stein, if you want to comment on S-ICD.

Thanks, Mike, and Vijay. As Mike said, we did have a softer quarter with S-ICD related to the advisories. We fully expect that to recover. And I -- the message is penetrated to physicians, that the overall performance of the S-ICD system, and the S-ICD lead in particular, is at least as good as the best transients leads on the market. Having said that, we do have an enhanced lead in development that should help resolve any residual concerns. And very excited, as Mike said in his prepared remarks, to the beginning our EMPOWER trial, which is a trial of a leadless pacemaker designing to work in concert with the S-ICD. And thereby preserving all of the unique benefits of the S-ICD in terms of reduced procedure complications, reduced risk of infection while bringing the capability to provide antitachycardia pacing and bradycardia pacing reliably to patients who need it.

That's helpful. And then Dan, one quick guidance question for you. I think the updated EPS guidance, one, just remind us, that does not include LUMINIZE, correct? I think we were expecting a couple of hundred million of revenues and some EPS accretion and gross margin step-up second half. What was the impact from manufacturing variances in Q1? And any sense on what the step-up would be in back half?

Sure. So the LUMINIZE acquisition is excluded from guidance that has not closed. So you are correct, that's excluded. And the way -- we obviously think of operating margin at the bottom line with all the individual components of gross margin and SG&A and R&D. But specific to gross margin, we wanted to be approaching 70% in Q1. We ended up, as I said, slightly short of that because of some inventory charges and some lower sales in some of the higher-margin businesses. Obviously, you look at Neuromod, has one of the best gross margins of our businesses, and that was the most impacted by COVID. So confident that as we go into Q2, we'll get back to that, approaching 70%. And then as you get into the second half, we're not going to get back to the 2019 levels of 72.4%, but we should see improvement, partially because the COVID inefficiencies and some of the things that are specific to COVID should start to dissipate. But also that's normally what happens in a year, where we have the first half margins from a gross margin perspective are almost always lower than the second half because we have the inventory revaluation that happens in the first half.

And if you look back over the last 4 or 5 years, second half gross margin is always better than the first half. So we believe that trend will continue. So if you think of second quarter approaching 70%, and then better than that in the second half, and that gets back to the overall adjusted operating margin commentary that says we want to get back to averaging 26% in the back half of 2021, which is in line with the overall full year 2019 levels, which should set us up well for '22 and beyond.

The next question comes from Kaila Krum with Truist Securities.

So first, I would love to just hear how the Preventice integration is going. And how -- if the strategy with that business has changed at all, just given the reimbursement updates in the extended wear ECG markets a few weeks back? Just to be curious, will you still be able to service all categories of patients. Or do you plan to? And any thoughts on that would be super helpful.

Sure. Yes. We're very pleased with that. That closed, I guess, in March 10, if I am right. I just met with the team last week in Minnesota. So the business performed quite well in the first quarter. And we're quite bullish on that business going forward. You've heard the strategy before. We think we're differentiated. We're the only company that can offer the full range of diagnostic modalities, 4 different ones within the Preventice portfolio. And then combine that with the ICM business that we have in HeartLogic and our ICDs. So we think that provides a differentiated suite of diagnostic tools for physicians.

And the beauty of the Preventice platform is they're able to toggle between different diagnostic modalities within the same device. And so they have quite sophisticated algorithms that can all be done remotely. And so although there's some pressure, as you mentioned, in the extended halter in terms of reimbursement, the other parts of that business continue to grow. And due to the inherent flexibility of the platform, we're able to modulate patients into these different modalities, depending on what the patient need may be or maybe the reimbursement circumstance. So I think that capability provides us a lot of flexibility And you tie together with our LUX loop recorder, which is doing quite well, it gives us a strong portfolio. So we're very bullish on the business and excited for the rest of the year.

Great. And then just -- I mean with Preventice locked in and LUMINIZE expected to close in the second part of this year, how should we think about just appetite for M&A going forward?

Well, the good news is, as I said, we have $2 billion of cash on the balance sheet today. And our #1 priority remains high-quality, high-growth tuck-in M&A. Really pleased with the Preventice and LUMINIZE acquisitions. Obviously Preventice having closed. LUMINIZE closing hopefully later this year. So we have the appetite, and we have the balance sheet in place to continue to do that. And that feels like maybe 1 or 2 more of those tuck-in acquisitions that we could get done here in 2021.

The next question comes from Cecilia Furlong with Morgan Stanley.

I guess I wanted to start off with the EP business. Your comments around POLARx, but really what you're seeing early days of adoption of POLARx in Europe as well as just overall portfolio performance today.

Dr. Stein, do you want to take that one a little bit, on POLARx in Europe?

Yes. I am happy to take that one. We are very pleased with the commercial uptake of POLARx in Europe to date. Again, likewise, on track right now with our IDE clinical trial in the United States, which is called FROZEN-AF. And it's been interesting launching a new product into a pandemic. But in spite of everything with COVID, I think it's become clear to physicians using it that there are really quite a few competitive advantages this has versus the first-generation cryo system that's out there. And we're pleased with the safety results and very pleased with the efficacy and ease of use that we're seeing in Europe.

Great. And if I could ask also, just on structural heart. What you've seen with SENTINEL and protected TAVR post LOTUS removal from the market? And then just any update on Millipede and the EFS you've talked about in the past?

Dr. Meredith, do you want to take the SENTINEL question?

Yes. Thanks, Mike. Thanks for the question. SENTINEL continues to do well. We are operating in more than 800 accounts -- or over 800 accounts worldwide. The protected TAVR trial is recruiting very well despite COVID. And as you know, that's a 3,000 patient definitive randomized trial against the standard of care. So we feel that the results of that trial should provide good evidence for long-term use in standard of care for cerebral embolic protection. So the trial is recruiting very well at present.

And this question on the Millipede, the early feasibility trial.

Yes. So the -- thank you. So the Millipede early feasibility study is underway. We received the FDA approval to -- for the FS study for the U.S. We currently have 5 sites screening and recruiting, trying to identify appropriate patients for that early feasibility study. So we expect to have patients recruited in the first half of this year over the next couple of months.

The next question comes from Rick Wise with Stifel.

One big picture question and then a product question. When I look at the regions and the organic growth, obviously, U.S., Asia Pac, emerging markets, strong. EMEA, clearly the laggard. That's not shocking or surprising. But how are you thinking about the recovery in those regions? And what are you -- how are you thinking about it in offering up your guidance now, second half recovery or it takes a year? Any incremental thoughts there?

Yes. I would say just maybe a couple of other insights there. Our Middle East North Africa business, which historically had been not prioritized enough in terms of capabilities, we've really invested in that business. Eric Thépaut and the team, the past few years, and you've seen that business begin to scale up. And that actually did quite well in first quarter. So we expect continued momentum from that Mid East North Africa region.

But in more the general European business, we do expect improvement in that business throughout '21. It had a softer business, as Dan mentioned, more broadly in January. February, some countries are a more normal, not quite normal, but more normalized based on vaccine rates. And some, as you know, Italy and others have been more on lockdown. But we do anticipate those regions strengthening throughout the year. So overall, I'm quite bullish. If you look at that European business versus our peer set, we've done quite well in terms of share taking in most of our businesses. And despite the lockdowns, they did put up positive growth in the quarter. And we do anticipate that improving throughout '21.

Great. And on the product front, Mike, you mentioned that EXALT-D momentum is, I think your words were gradually improving. Maybe you can help us understand a little more. At the end of March, we spoke to 9 or 10 gastroenterologists. They all highlighted their strong interest, but also indicated that their -- they had questions about reimbursement, first-gen technological limitations, the lack -- understandable lack of -- it's early clinical data. Just how should we think about those concerns? How are you addressing them? And where from here with EXALT-D?

Yes. So this is a long-term investment for us. As you know, started off with LithoVue and SpyGlass, that had some similar commentary to EXALT-D. And that added some of the commentary 3, 4 years ago, if you recall. And so we're quite committed to this segment. We've seen the benefit of LithoVue and SpyGlass. And we expect similar results over time with EXALT-D. And we're really just kind of chunking these out and making enhancements all the time. You've seen improved reimbursement in the outpatient setting. There's been some news recently just last night on the NTAP for EXALT-D that just -- I think it was just published yesterday or this -- early this morning, which will help with reimbursement in the inpatient center. So you're seeing stronger improved reimbursement capabilities in general for the EXALT-D, with the TPT and now the NTAP, which is an exciting news.

And on the device itself, it's a 510(k) device. And so with that, the team will continue to make enhancement to that platform like we've done with LithoVue and Spy, too. So you'll see some additional enhancements to the product in the second half of 2021.

And the other pieces you mentioned is impacted by COVID. And so now we are seeing some improvement in there. We're placing more capital. And we're seeing some stronger uptake in March than we had earlier. And so we're bullish on it. It's not going to be a -- we expect a steady improvement and a steady growth cadence of this rather than a hockey stick. But the improved reimbursement, COVID subsiding over time will certainly help the dynamics of this business in -- throughout '21.

The next question comes from Matt Miksic with Credit Suisse. We'll go to the next question. That will come from Josh Jennings with Cowen.

I had a follow-up on the Millipede question. Just wanted to see if Mike or Dr. Meredith would be willing to just give us an update on your views of the transcatheter mitral opportunity. Just the market, do you believe it's a multibillion-dollar opportunity? And then any updates on cost and strategy? We may hear more in the September Investor Day. But Millipede here, any other internal investments or development programs that are in place? And then just what is the strategy from here to get involved in the mitral space -- transcatheter mitral space?

Okay. Thanks very much for the question. First, the mitral valve disease, particularly mitral regurgitation, is at the least 3x more prevalent than aortic stenosis. And with an aging population, an increasing burden of heart failure, and heart failure being a driver to mitral regurgitation, this is a huge global opportunity, and indeed, a multibillion dollar opportunity. So I think the prevalence and the global demography really point to this being a significant opportunity.

The mitral valve and the aortic valve are very differently. Mitral valve, as you well know, is a complex structure. So there's no one single device that will actually serve to treat mitral valve disease. As we often say, the only similarity between the aortic and the mitral valve is the word valve. The rest is completely different. So mitral requires a toolbox approach, if you like, in order to treat that. So the foundation though -- the most important foundation for treating mitral valve disease, particularly functional mitral regurgitation is an annuloplasty device.

And that's why we are focused on a transvenous transseptal mitral annuloplasty device. This is a permissive technology that allow there you to add in whatever other appropriate strategy is needed to tailor the solution for the mitral valve disease. So we have a thoughtful strategy as to how we can build out the toolbox approach note to effectively treat what is the largest single valve condition on the planet.

One final question, please, Andrew.

And that will come from Danielle Antalffy with SB -- SVB Leerink.

Congrats on a really strong start to the year. I just have one high-level question. And it's around -- you've heard a lot of your large competitors talk about COVID, sort of putting them in a stronger competitive position than they were pre-COVID. And I suspect some of that has to do with sort of stronger relationships with your hospital customers, purchasing -- or breadth across the portfolio and R&D productivity.

Mike, I'd be curious to hear about how you think Boston's competitive positioning has changed with some of the shifting trends as it relates to COVID, if it's changed at all.

Sure. Pre-COVID, I commented in the script, we had grown faster than most of our peers. Not all of them, but most of them for about 6 straight years. And obviously, our portfolio was hit by COVID. So now that the -- it's waning, we anticipate we'll get back to that above peer group growth, supported by our strong positions in many of our markets. In this quarter, we gained share in many segments, not everyone, but most of our segments, we gained share. And our pipeline is -- of launches from really leftover from 2020, which our team did a nice job, which we can launch in '21 and beyond, and future pipeline is quite strong.

And another thing, like many companies, we really beefed up our digital capabilities over the past 12 months. That's been a benefit of COVID, everything from physician training, into proctoring, to our internal training and efficiencies that we have there. So we've made pretty significant investment in our all things digital over the past 12 months, which will serve us well.

And you've seen also the -- continuing -- besides the -- our expectation to grow faster than peers supported by the pipeline, going adjacent markets that we're moving into that are faster-growing. You saw great results out of TheraSphere and the Y-90 and the BTG acquisition overall and the very consistent results there. And now recently supported new acquisitions with Preventice and LUMINIZE. So our core business, not every single business, but the majority of our businesses, we are quite confident will grow faster than the peer group and faster in gaining share, and we continue to expand into faster-growth markets And also expand our capabilities in China and Middle East, North Africa.

This concludes our question-and-answer session. I'd like to turn the conference back over to Susan Lisa for any closing remarks.

Thanks, Andrew. Thanks very much, everyone, for joining us today. We appreciate your interest. And before you disconnect, Andrew can give you all the pertinent details for the replay.

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