Boston Scientific Corp (BSX) 2020 Q3 法說會逐字稿

Good morning, and welcome to the Boston Scientific Third Quarter 2020 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

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. 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 Q3 2020 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 & Filings. The duration of this morning's call will be approximately an hour.

Mike will focus his comments on Q3 performance, inclusive of the impact of the COVID-19 pandemic as well as future catalysts and the general outlook for our business. Dan will review the financials for the quarter, and then we'll take your questions. During today's Q&A session, Mike and Dan will be joined by our Chief Medical Officer, Dr. Ian Meredith and Dr. Ken Stein.

Before we begin, I'd like to remind everyone that on the call, operational revenue excludes the impact of foreign currency fluctuation, and organic revenue further excludes the impact of certain acquisitions, including BTG, through August 15 as there are no prior period related net sales as well as the divestitures of the global embolic microspheres portfolio and the intrauterine health franchise.

On this call, all references to sales and revenue unless otherwise specified are organic. Finally, average daily sales, ADS, normalizes sales growth for a difference in selling days year-over-year.

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.

Thanks, Susie, and thank you to everyone for joining us today. I'm pleased to report that we made significant progress in the third quarter with excellent commercial execution and strong clinical adoption across our category-leading portfolio as we build new capabilities and fuel our new product launch cadence. We continue to invest in our promising future and are confident that this will enable us to continue to grow at the high end of our peer group, improve operating margins and deliver double-digit adjusted EPS growth and strong free cash flow for the long term.

In the third quarter, operational sales declined 2.5%, and organic sales declined 5.7%, normalizing for currency and the divestiture of both our intrauterine health business and legacy beads business as well as excluding the contribution of BTG through August 15. Importantly, note that the organic revenue result includes a negative 230 basis point impact related to sales return reserves in the quarter as we strategically shifted to a consignment based model for our left atrial appendage closure franchise with the launch of our next-generation WATCHMAN FLX device in the U.S. I'll provide more detail on the strategy and the success of the WATCHMAN FLX launch in a bit as I now offer highlights of our performance in third quarter '20.

Every region and every business segment improved sequentially versus second quarter, and many countries returned to year-over-year growth in the third quarter. Regional performance improved significantly. It was very consistent around the globe.

U.S. sales declined 4%. Europe, Middle East and Africa also declined 3% and Asia Pac declined 4%. We delivered growth in China for the second consecutive quarter, plus 2% growth in the third quarter on an organic basis. This China growth includes a negative 770 basis point impact from sales return reserves for channel inventory adjustments in anticipation of DES becoming national tender in drug-eluting stents in fourth quarter.

China has strong sales in complex PCI, including imaging, rhythm management, peripheral intervention, structural heart and urology and pelvic health, and our swift progress diversifying the portfolio into these high-growth markets means that DES will represent approximately 10% of our China revenue in 2020. We expect our China business to accelerate growth in the fourth quarter, and we are targeting double-digit growth in 2021, including the DES tender-related impact.

This regional sales performance was mirrored with a balanced and sharp recovery across our business units. PI delivered 2% growth in the quarter. Uro pelvic health, neuromod and Endoscopy revenue all declined 1% to minus 3%. CRM was down 4%, and EP was down 7%. Interventional Cardiology's organic 17% decline includes more than 10 percentage points of negative impact related to the combined sales return reserve for transition to WATCHMAN consignment and China DES tender, which are $63 million and $10 million, respectively.

Specialty pharma sales of $74 million in the quarter were in line with our expectations, down mid-single digits year-to-date. Adjusted operating income of approximately $620 million represents a 23.4% adjusted operating margin, nearly double our second quarter rate and down 270 basis points year-over-year. This, too, includes a negative 170 basis point impact related to the transition to consignment for our WATCHMAN franchise. Adjusted EPS for third quarter was $0.37, which includes a $0.06 tax benefit that Dan will detail.

Now to turn to the outlook for fourth quarter. Trends continue to evolve largely as we've expected, with worldwide organic revenue improving sequentially in third quarter, even in those regions experiencing COVID flare-ups. We aim to return to organic revenue growth in the fourth quarter, excluding the impact of the shift to consignment for WATCHMAN and with the obvious caveat of COVID uncertainty.

From an adjusted operating margin standpoint, we are targeting a similar rate in the fourth quarter, again, excluding the impact of the shift to consignment for WATCHMAN. Our businesses are strong with a compelling global pipeline and multiple ongoing launches with recent approvals that are helping lead our recovery. We're also benefiting from the overall high acuity mix of our business and site of care.

Admittedly, determining the remaining backlog or estimating the new patient funnel remains a challenge and varies by business and region. We believe that we have worked through a meaningful portion of our patient backlog, given the acuity profile of our technologies. We're also encouraged by the ability of our customers to manage COVID while performing elective procedures as well as improvement in new patient referral rates, which are still slightly below normal levels. We have confidence that across the portfolio, our broad product launch cadence will help offset these challenges.

I'll now provide some additional commentary on the business units. Uro pelvic health sales declined 1% in the quarter, normalizing for the intrauterine health divestiture. Sequential improvement was led by our stone and prostate health franchises with LithoVue, Rezûm and SpaceOAR all growing double digits in the third quarter. Notably, Rezûm achieved its highest sales quarter ever, supported by our differentiated 5-year clinical data. And we target ongoing improvement with new launches such as SpaceOAR Vue in the U.S. as well as the benefit of a higher office ASC mix for our more elective procedures.

For Endoscopy, third quarter sales declined 3%, reflecting a favorable mix of both relatively high acuity and outpatient ASC site of service. Trends in the quarter were led in the U.S. by sequential growth in our hemostasis and biliary franchises, along with infection prevention, which grew double digits in the quarter. We continue to see good resilience in ERCP procedures for the pancreas and bile ducts, such as stone removal and tumor biopsies.

Our EXALT-D launch is accelerating with over 100 accounts opened globally and encouragingly, early trends from the transitional pass-through payment granted by CMS that went into effect July 1 in the outpatient setting. We also completed the limited-market release of SpyGlass Discover, with surgeons enthusiastic about its direct visualization and resulting ability to treat patients effectively with a single-stage approach, thus, enabling fewer interventions and shorter length of stay in the hospital. We continue to target launch of our single-use bronchoscope in the second half of '21.

In CRM, third quarter sales declined 4% with high-voltage sales down 3% and low-voltage sales down 7% for the quarter. We continue to believe that our 2020 CRM performance will be roughly in line with the overall market. And importantly, our LUX-Dx implantable cardiac monitor is off to a strong start, given the seamless patient interface and back-end monitoring plus the ability to be programmed remotely and have event detection settings adjusted without an in-person visit.

EP sales were down 7% in the third quarter, with trends showing strong sequential improvement. We've been very pleased with the limited market release of POLARx, which is a second-generation single-shot cryo catheter and will move to full launch in Europe by year-end. The EP space remains one of the largest, fastest-growing markets in medtech, and we're excited about our strengthening the portfolio, including our recently announced expanded investment in the irreversible electroporation field with Farapulse. Of note, we have elected to discontinue further development and clinical investments of our Apama LUMINIZE RF single-shot balloon.

In Neuromodulation, organic revenue declined 3% as the business has returned very quickly to serve patients in need aided by our broad portfolio, digital capabilities and site of service. We've seen a nicely balanced procedure recovery across RF, Vertiflex and SCS as we execute our category leadership strategy in pain. We're also pleased with our recent WaveWriter Alpha launch in Europe, which offered the Contour waveform with up to 32 contacts, MRI capability and Bluetooth connectivity.

Turning to deep brain stimulation. Our Vercise PC and Gevia directional systems continue to drive market share gains. Additionally, the recent EU launch of our Vercise Genus platform expands our capabilities in both our primary and rechargeable segments with full-body MRI capability and new Bluetooth capabilities. Genus builds on our innovative foundational technology designed to offer multiple independent channel control, directional capabilities and integrated visualization of the patient's brain structure for optimal programming and outcomes.

Turning to Interventional Cardiology. Q3 sales declined 17% organically, which includes more than 10 percentage points of negative impact related to sales return reserves for the transition to consignment for WATCHMAN and the upcoming China DES national tender.

Within coronary therapies, new products like the MAMBA microcatheter; imaging products such as COMET and AVVIGO, and the SYNERGY XD and 48-millimeter drug-eluting stents continue to drive performance in this space. TAVR sales grew both year-over-year and sequentially as we continue to focus on the EU launch of ACURATE neo2 and U.S. IDE enrollment as well as continued U.S. and Japan rollout of LOTUS Edge and U.S. intermediate risk trial enrollment. We're also pleased with the consistent progress of our cerebral embolic protection device, SENTINEL, which grew over 20% in the third quarter.

As disclosed at our TCT webcast earlier this month, we now expect U.S. approval for ACURATE neo2 in 2024 as well as LOTUS Edge indication expansion into intermediate risk in '24. Our next-generation ACURATE neo2 is launching in Europe and now offers low PVL rates, best-in-class pacemaker rates and great hemodynamics.

LOTUS Edge offers predictable control with a platform that may be fully recaptured and repositioned at any time. We believe both valves offer distinct benefits, while SENTINEL has uniquely demonstrated a reduction in stroke rates during TAVR procedures in both its IDE and numerous large registries.

Returning to WATCHMAN, the franchise experienced a very robust recovery in the third quarter with low double-digit growth, excluding the impact of the sales return reserve. Our U.S. limited-market release of WATCHMAN FLX has gone extremely well with exceptional physician feedback, and we have moved into full launch ahead of schedule. And we're targeting a complete conversion to FLX by mid-2021. We believe the strategic shift to a consignment-based model strongly complements the launch of this highly clinically differentiated product, and we are purposely making this investment given the significant potential for FLX growth.

Moving rapidly to a consignment model will enable us to better support customers and drive committed share agreements while accelerating the conversion to WATCHMAN FLX at a price premium, all of which enhances our competitive position and further strengthens our market leadership. We are exceeding our FLX contracting goals thus far and target completing the vast majority of this shift to consignment by year-end 2020, which will result in a slightly larger headwind to revenue growth in Q4 than in Q3.

Turning to PI. Organic -- third quarter organic sales grew 2%, reflecting the overall favorable mix of high acuity and outpatient site of care for procedures as well as a category-leading portfolio and strong cadence of new product launches. Of note, the BTG Interventional Medicine portfolio grew high single digits on a pro forma basis in the third quarter.

All franchises in PI delivered growth in the quarter, arterial, venous and IO, with particular strength in drug eluting, IO and China. We also continue to anticipate 2 imminent launches: Eluvia in China and the Ranger DCB in the U.S., with Ranger Japan launch targeted for 2021. The VOYAGER PAD, which is a large study with long-term follow-up and adjudicated outcomes, presented at TCT earlier this month, showed no association of mortality with paclitaxel-coated devices and should further accelerate the growth of this important category where we are uniquely positioned.

Venous results were solid, highlighted by a sharp recovery in our Varithena varicose vein therapy and a new EKOS system controller for pulmonary embolism patients. Interventional Oncology continues to perform very well as TheraSphere Y-90 share gains. We've also moved to full launch for the TruSelect microcatheter.

BTG became organic mid-quarter. And as mentioned at TCT, we expect to exit 2020 realizing $125 million out of $175 million in originally targeting synergies ahead of plan and solely via cost synergies with upside from revenue synergies as we continue to expand the BTG Interventional Medicine product lines globally.

I'd also like to highlight several important sustainability accomplishments this quarter, including being named among the top 50 of America's Most JUST Companies by Forbes and JUST Capital for the second consecutive year. We ranked 38 overall, second among the health care companies and #1 overall for diversity, equity and inclusion. Our efforts for combating climate change, responsible social justice, transparent customer communications and ethical leadership were also commented.

MIT Sloan Management Review of Glassdoor also recognized BSC as a culture champion, 1 of only 21 companies named to this inaugural list. So as we continue our commitment to anti-racism in both actions and resources, including our important Close the Gap initiative to close the health equity gap in underserved communities through provider education and collaboration, advocacy and society partnerships and patient disease state awareness.

So overall, I'll leave you with a few key points about our brighter outlook. We're encouraged by consistent quarterly improvement in business trends and resilience in the face of COVID flare-ups. We have a robust cadence of new product launches across the portfolio, such as WATCHMAN FLX, EXALT-D, POLARx, ACURATE neo2, WaveWriter Alpha, Vercise Genus and LUX-Dx.

Our pipeline in 2021 and beyond also positions us well in high-growth markets with new adjacencies and a portfolio that offers us access, partnership and expansion of our customer reach. We're strategically deploying investment spend to enhance our new launches and digital capabilities, and our strong financial position and compelling venture portfolio enable us to continue to develop multiple high-growth markets.

As we close out 2020 and push to 2021, we remain highly confident in our long-term ability to grow at the high end of our peer group, improve operating margins, deliver double-digit EPS growth and strong free cash flow. I'm extraordinarily grateful to our employees for their winning spirit, and I'll now turn things over to Dan.

Thanks, Mike. Third quarter consolidated revenue of $2.659 billion represents a reported revenue decline of 1.8% and reflecting $19 million tailwind from foreign exchange. On an operational basis, which excludes the impact of foreign currency fluctuations, revenue declined 2.5% in the quarter.

BTG sales contributed 370 basis points prior to becoming organic on August 15, partially offset by the divestitures of our legacy embolic beads portfolio and intrauterine health business. Excluding the net contribution of acquisitions and divestitures, organic revenue declined 5.7%, and includes a $63 million or 230 basis point headwind from the sales return reserve related to our conversion to a consignment inventory model for our WATCHMAN franchise with the launch of our next-generation WATCHMAN FLX device here in the United States.

These sales results represent strong sequential improvement over the second quarter as procedural volumes continue to trend upward through the ongoing COVID-19 pandemic. A rebounding top line and continued P&L discipline contributed to our Q3 adjusted earnings per share of $0.37, along with a $0.06 tax benefit, which was partially offset by a negative $0.04 impact from the WATCHMAN consignment sales return reserve.

Adjusted gross margin for the third quarter was 69.3%, in line with our expectations to approach 70% in the back half of the year, as we outlined on the Q2 call. The sequential improvement is driven by lower negative manufacturing variances, slightly offset by the impact of the transition to WATCHMAN consignment.

As a reminder, Q2 production levels were below 75% of capacity, resulting in material manufacturing variances that were expensed within the P&L in that quarter. In Q3, with production levels above 75% in the majority of our plants, unfavorable manufacturing variances decreased, and we're capitalized within inventory on the balance sheet and it will be recognized over a 6-month period corresponding to our inventory turns. Looking forward, we continue to expect Q4 adjusted gross margin to be in line with Q3, approaching 70%.

Third quarter adjusted operating margin was 23.4% or 25.1%, excluding a 170 basis point headwind related to the WATCHMAN consignment transition. This is slightly ahead of our expectations given the trajectory of our revenue recovery in the quarter and continued P&L discipline. We increased investment spending, while maintaining prudent adjusted SG&A and adjusted R&D rates of 35.9% and 9.5%, respectively. Q3 also had some favorability related to timing, and investment spend will continue to increase throughout the fourth quarter.

Based on these results, we expect Q4 adjusted operating margin to be similar to Q3, excluding the impact of WATCHMAN consignment in both quarters. On a GAAP basis, operating margin was negative 7.7%, and includes a $219 million intangible asset impairment, primarily related to Apama, and a $260 million litigation-related expense. As Mike detailed, we've discontinued the development of the Apama RF balloon, and I'll provide an update on our legal reserve shortly.

Moving below the line, our expectations for full year adjusted interest and other expense have not changed from our Q2 call, to be slightly above the range of $400 million to $425 million provided at the beginning of the year. Our tax rate for the third quarter was 31.7% on a GAAP basis and minus 3.5% on an adjusted basis, which includes an $88 million noncash benefit, driven by this quarter's completion of the IRS examination of our 2014 to 2016 tax years in a favorable position compared to our reserves. This resulted in a $0.06 benefit to adjusted earnings per share.

Adjusted free cash flow for the quarter was $870 million, and reported free cash flow was $595 million, driven by strong operating margins and improved working capital efficiency. As of September 30, 2020, we had cash on hand of $2 billion; total liquidity, including available credit facilities, of $4.8 billion; and a prudent debt maturity profile with no near-term maturities. During the quarter, we prepaid the remaining $250 million balance on our February 2021 term loan. This leaves us with no debt maturities until May of 2022.

Capital expenditures for the third quarter were $49 million. We continue to expect full year 2020 capital expenditures of approximately $350 million as we focus on certain plant expansions and projects to meet capacity needs and drive value improvement programs.

With respect to our legal reserves, we booked $260 million in Q3, primarily related to mesh, inclusive of a reserve related to onetime claims made by a coalition of state attorneys general. Year-to-date, we have made cash payments of $30 million into qualified settlement funds, leaving approximately $85 million remaining to fund outstanding individual plaintiffs claims. We ended Q3 with 1.445 billion fully diluted weighted average shares outstanding and expect approximately 1.447 billion for the fourth quarter 2020 and 1.432 billion for the full year 2020.

In closing, our businesses and pipeline remain very strong, and our long-term fundamentals have not changed, with targeted organic revenue growth at the high end of our peers, sustained adjusted operating margin expansion, double-digit adjusted earnings per share growth and strong free cash flow. Please check our Investor Relations website for Q3 2020 financial and operational highlights, which outlines more detailed Q3 results.

And 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 minutes or so. (Operator Instructions) Andrew, please go ahead.

(Operator Instructions) Our first question comes from David Lewis of Morgan Stanley.

Just got one for Mike and then a follow-up related for Dan. So Mike, I just want to come back to this high-end device comment you made. So I just want to confirm that whatever the medtech peers grow, let's say, that's 4% to 5%, you inspire to grow 3 points faster.

And then also for you, I think there's a concern in light of CRM and IC market dynamics or TAVR that the ability to do that, frankly, has changed. So clearly, people are focusing on the things that have gotten below plan. Maybe you could maybe focus on some of the pieces of the business or segments that are above plan that are giving you the confidence that, that algorithm of 3 points above 4% to 5% or whatever have -- you have is still achievable. And then I have a follow-up for Dan.

Thanks for the question. Yes, we're very confident in our ability to continue to grow at the high end of our peer group. We've done so for a number of years, and our product launch cadence, as we look to round out '20 and 2021, are quite exciting.

Now if you look across our businesses and our launch schedule, we've highlighted WATCHMAN FLX, and we laid out at TCT why we believe the WATCHMAN FLX market is larger than originally anticipated. And based on the increase in utilization that we're seeing, we see that as a multibillion-dollar market.

So I don't want to go across every business, but we have a very strong product launch cadence. We talked about in PI with both the Eluvia stent and the pending approval for Ranger. We're seeing excellent growth out of our Interventional Oncology business, led by BTG, which actually grew upper single digits in the quarter and really the strength of our MedSurg businesses. Our endo business, with the launch of our single-use scopes, the momentum of our urology business. And we have 2 big launches in neuromod in Europe in both SCS and DBS, where we continue to take share.

So really across the portfolio, we have a rich bag of product launches. Clearly, we would have liked to have the ACURATE neo approval prior to 2024. And that's certainly something that we wish we could pull in, and we'll continue to try that based on our discussions with the FDA. But if you look at just the incremental tailwind of WATCHMAN growth and paclitaxel, we believe those 2 elements there neutralize the slight delay with ACURATE neo on its own.

So we have a history of growing above market, and the product launch case we have is strong. And our VC portfolio is quite good. And the free cash flow and balance sheet to deploy against that is very strong.

Okay. Very helpful, Mike. And then, Dan, just for you, I appreciate the confirmation of growing in the fourth quarter. Should we assume that growth in the fourth quarter is kind of low single-digit type growth?

And then look, '21, I know we're not going to get a lot out of you here, but everyone is very focused on '21 as a percent of 2019. Street's at double-digit growth for next year. I wonder if maybe you'd comment on kind of the reality of those numbers, but more specifically, any parameters you can offer us on '21 on the top, bottom line tax margins for consideration of our models as we head into next year.

Sure, David. So relative to Q4, the commentary is just very simple. It's aimed to grow. So we haven't given specific guidance relative to a number, whether it be one number or another. So the commentary and our belief is that we're aiming to grow in the fourth quarter, obviously, with the COVID caveats that Mike mentioned.

With respect to 2021, I probably can't give you a lot of detail on that. We're right in the middle of our annual operating plan process right now. Except to say that, again, as I mentioned, closing out my prepared commentary that it's really the same goals we've always had, which is to grow at the high end of the peers, to expand operating margin and to deliver double-digit, adjusted earnings per share growth. So really no change there. We're working through the process. And the goal would be, when we get to the February call, to give you a sense of where we are and let you know what we think 2021 might hold.

Next question comes from Robert Hopkins of Bank of America.

Can you hear okay?

Hear you fine, Bob.

So to start, I apologize for the short-term-oriented question. But Mike, I was wondering if you could just comment on the degree to which the pretty significant global flare-up of COVID in the last few weeks has impacted the business. And therefore, how confident are you in that comment on fourth quarter that you offer, ex WATCHMAN?

Sure. So we, obviously, have seen an uptick globally. Everyone reads the newspapers there. I would say the hospitals are doing an amazing job of managing COVID while still performing elective procedures. So you've seen that with the sequential growth that we've had in the third quarter. We're certainly mindful of the fourth quarter of potential interruptions there. So our goal is to aim to return and grow, ex WATCHMAN.

But we're obviously watching COVID quite significantly, like everyone else is. And we continue to see month-over-month improvement in our trends, but we put a caveat there in the fourth quarter as we aim to grow, excluding WATCHMAN. And obviously, if the COVID dramatically improves -- increases, and there's more shutdowns and more pressures on the hospital system that, that could impact the fourth quarter. But so far, we've seen nice improvement sequentially month-over-month. Hospitals are doing better job managing it, and patients need the care that products like Boston Scientific and our peers provide.

We're also obviously managing our spend, and you saw the strong improvement in our operating income margins in the third quarter and the drop-through in EPS. So we expect that trend to continue.

Okay. Great. And then just one product comment. Could you just remind me what you said on WATCHMAN in the quarter? I think you said -- did you say it grew double digits? Just curious, it sounds like you saw a very rapid recovery in WATCHMAN over the course of the quarter. Just wondering if we could get any more specifics or details.

Yes, it did grow double digits in the third quarter. And it's really -- it's been just an excellent launch. The early results have been very good. And as I mentioned in the script, we aim, with this consignment model, to switch the majority -- high majority of our customers over by year-end and complete that by second quarter. And that consignment model shift, we think, is a smart move because it gets FLX in the hands of our operators, which they want, allows us to tie up longer-term -- highly committed share contracts at appropriate price premium. So the launch is going extremely well, and it bounced back very quickly in the third quarter, growing double digits.

The next question comes from Vijay Kumar of Evercore ISI.

Mike, maybe getting back to a bigger picture question on the algorithm here, double-digit earnings algorithm. One, perhaps, could you give us an update on BTG? I think the last update was 5 or 6 accretion. With synergies coming in better, where we are in BTG? And when you look at that 2021, I guess the double-digit EPS, is the right base 2019? I'm curious because the deals annualize here and it's included in the 2020 numbers. And the Street's modeling close to 18%, 19% revenue growth for next year. It seems a little excessive, but any comments, I think would be helpful.

Sure. Vijay, this is Dan. I can start, and Mike can add in certainly as well. Relative to BTG, I think we're potentially even more committed to the benefits of that deal now than we were when we did it. If you look at the growth, one of the highlights in the quarter -- and Mike mentioned it, when you pro forma for the various pieces within Interventional Medicine, they were all high single digits. And so that's obviously accretive to where we are, and that's in the middle of a global dynamic. So a lot of good hopes for that.

Mike also mentioned on the BTG synergies that we had talked about $175 million in total synergies. Well, now we're at $125 million, we believe, exiting 2020. We believe that we'll get that whole $175 million in total out of cost. So the revenue synergies that we had planned will actually be upside. So we look at BTG as a nice driver for us going forward.

Relative to comps, I think the most relevant comp is going to end up being 2019. I mean 2020, we will -- it compare to that, obviously, but it's a different year. I'm not going to comment on the specific numbers that are out there relative to your -- revenue growth for 2021. But I think when you look at it, it will be 2021 versus 2019. That will be the most relevant comparison, I think, we have.

Got you. And then maybe on structural heart here. Mike, maybe just comment on SCOPE II. Does it matter? I mean, the stocks certainly reacted post TCT, but it feels like with that neo2, it shouldn't matter. Perhaps could you talk about what structural heart should look like for Boston within Europe?

Sure. Dr. Meredith can make some additional comments. But we just -- are launching SCOPE -- our neo2 platform right now. And so that, obviously, as you know, is our second-gen platform shown in our EU study, that Ian or Dr. Meredith can further comment on, has got improved PVL rates, very low pacemaker rates, very good hemodynamics, and it's our second-generation valve. And the enrollment in the U.S. is going quite well for that system.

So we're quite bullish on ACURATE neo2 in Europe. And we're hoping as COVID, as we're -- hopefully in the second half here of COVID overall, that we'll continue to accelerate the trialing in the U.S. for that platform. So we'll continue to reiterate that platform, and we're confident that the European team will deliver strong results in '21 with ACURATE neo2.

Thanks, Mike. Just to reinforce your comments. I think you heard the panel discussion, Vijay, at TCT and most of the physicians on the panel recognized that this was a comparison of a first generation versus a third-generation product as a comparison for SCOPE II. Most physicians who had significant experience with the ACURATE neo platform know how to use it appropriately. They recognize that ACURATE neo2 has a 60% larger skirt and significantly improved PVL performance in independent core adjudicated data sets. So I don't think it's going to influence SCOPE -- the use of ACURATE neo2.

The next question comes from Larry Biegelsen of Wells Fargo.

Just a follow-up on TAVR. Actually, a couple of TAVR questions, and I'll just leave it at that. Mike, at a high level, does it still make sense from an ROI perspective to develop 2 TAVR platforms? And then for you, Ian, I heard your comments to Vijay, regarding the commercial impact. But given the result of SCOPE I and II, there seem to be some clinical risk with the U.S. pivotal trial. And I've looked at the primary safety and efficacy end points. Can you talk about your confidence in the neo2 U.S. pivotal trial being able to show noninferiority between neo2 and Sapien 3 and Evolut PRO, given what we've seen with SCOPE I and II? It doesn't look like a slam dunk, but I'd love to hear your thoughts.

So perhaps I'll start with the second question there, Larry, about our confidence around the ACURATE neo2 platform. As we said before, the ACURATE neo2 is different to ACURATE neo 1 with the larger skirt and significantly different PVL performance, as we saw from the CE Mark study. And so we believe that data will certainly play out in the -- what we saw in the CE Mark study of ACURATE neo2 will play out in the U.S. ACURATE neo2 IDE study. So we are working with the FDA now as a consequence of the results of SCOPE I and SCOPE II to plot the path forward. We believe that we will require longer patient follow-up as part of that study, but we remain confident.

Thanks, Dr. Meredith. And yes, on the first quarter on our product portfolio, we're always looking at -- across our portfolio where our investment spend makes the most sense, given the market opportunities. And we've obviously had the 2-valve strategy, and we're seeing strong results in the sites that are using LOTUS in the U.S. Opening new sites has been a challenging exercise for us given the pandemic, but the sites that are using LOTUS in the U.S. are using it quite regularly. So we do believe that the 2-valve strategy makes sense, and we're excited about the ACURATE neo2 launch in Europe.

The next question comes from Joanne Wuensch of Citibank.

Can you hear me okay?

Yes, we hear you fine, Joanne.

Excellent. Two sets of questions. First one has to do with some of your commentary for the fourth quarter. I'm curious why operating margins would not improve in the fourth quarter versus the third quarter. And I want to make sure I can quantify what the WATCHMAN adjustment is in the fourth quarter because you say you'll have growth ex WATCHMAN adjustment.

Sure. I can probably take that one, Joanne. Second part first. We expect it to be roughly similar. So you saw $63 million top line adjustment for the sales return reserve for the transition. And so as we look at it, obviously, a bit depends on how we -- how that rolls out in the fourth quarter, but roughly similar, I would say.

And then in terms of operating margin, the main driver of that is that Q3 was probably better than we had anticipated. So 23.4%, and that obviously included 170 basis point negative impact from the WATCHMAN sales return reserve. So we're kind of back into a pretty good range on that operating margin in Q3 and would believe that as we head into Q4, being in that range for the fourth quarter is a good place to be.

From a gross margin standpoint, it's probably, again, largely similar to what you saw in the third quarter. We were 69.3% gross margin in the quarter. That included 60 basis point negative impact from the WATCHMAN reserves. So we're in that 69% to 70% range, that's probably where gross margin would settle out in the fourth quarter. And the rest of the P&L should look pretty similar. So the adjusted operating margin for the fourth quarter, I think, is in a good spot, if it's similar to Q3.

Okay. And then big picture, there is a perception -- and this is largely after the TCT meeting, that there's, how do I say this, sort of an execution issue that may or may not be happening at Boston Scientific. How much of this is reality? And how much of it is just -- you have so many products that are going through the pipeline. Not everything is going to go exactly as planned.

Sure. Yes, I think just overall, if you look at the overall execution for a number of years in a row, we've accelerated organic sales growth each year. Last year, we put up about 7.3%, and we -- obviously, with the impact of COVID in 2020, and we've seen strong improvements each quarter. And we're set up for a very strong '21 based on that product launch schedule.

There's no doubt that we were disappointed with the delay with ACURATE neo in the U.S. I think Dr. Meredith has laid out some of those reasons. And now we're excited about the neo2 launch, but we are disappointed in the SCOPE I, SCOPE II, which delayed the impact of ACURATE neo.

But I think the benefit of Boston Scientific is we're highly diversified. You look at the growth of WATCHMAN, you look at the significant growth improvement across our businesses and really the diversification of our business. We've, for many years in a row, continued to reduce down the weighting of DES and CRM in our portfolio, given the growth trajectory of those markets, and increase the weighting of our other businesses. And you look at the growth of our PI business with BTG, Endoscopy, uro and neuromod, and also the promising growth that we see in EP.

So we clearly wish the ACURATE SCOPE results would have been different. But if you look at the overall execution of the company and the diversification that we've enabled as well as the strong free cash flow and ability to continue to improve margins, we're excited about '21 and beyond.

The next question comes from Robbie Marcus of JPMorgan.

Maybe Dan or Mike, I was wondering if you could speak to the current M&A environment. You've had a lot of investments on the private side. The balance sheet looks better than it's been in the past. How should we think about M&A? And if you could also touch on the reason for the discontinuation of Apama.

Sure. Again, I can start and Mike can comment as well. The M&A environment is a little bit challenging. I think you're probably referring to the IPO market. So within our VC portfolio, we've seen some of the companies go public and with some pretty lofty valuations. We weren't able to acquire those companies. Obviously, the upside on the other side of it is it's a nice financial gain, but that's not why we invest in these. We invest in them, obviously, for the potential to acquire them.

So it does seem to present a short-term challenge. We have over 40 companies in our VC portfolio. So there's a lot to choose from, and we'll see where that goes. And we have -- as you know, we have the cash ready and available to be opportunistic relative to M&A in general. So still optimistic that we're going to get some good, solid M&A done over time and be able to add to the top line story that we have.

Yes. The pipeline is certainly there of M&A opportunities, but we want to be disciplined in terms of the price that we'll pay and to drive shareholder value. So we'll continue to do that, and we certainly plan to do a few tuck-in acquisitions over the next 12 months.

On Apama, essentially, we made the decision there on our portfolio, given the time line delays that impacted the Apama program with COVID, really along with faster-than-anticipated new technology developments, namely IRE, we made the decision to discontinue the development and clinical investment in the Apama platform.

So we're going to continue to invest significantly in our StablePoint, our Force Sensing catheter. We're very bullish on our Apama -- sorry, on our cryo balloon in Europe. That will be in full launch mode in the fourth quarter, which should provide some significant growth in 2021. And we're very encouraged about the investment that we have in Farapulse for IRE. It's an investment we made 6 years ago, and now we have an option to purchase that company. So as the market continues to shift, we believe we're in a very strong position with those platforms for the future.

And maybe a quick follow-up. As I listen to your commentary, it sounds like volume trends continue to improve. Are you able to speak to how the pipeline is filling up behind that? How patient visits and scans are filling up behind them? Is there a discrepancy by geography?

Yes. I had a few comments there in my script. It's a difficult one to call. I would say, overall, globally, it differs by region, by state. Some states in the U.S. have very normalized referral patterns and new patient funnels; some in the U.S., maybe down 10%. China is essentially back to normal, I would say. And Japan is quite strong. So it really varies around the world.

I think if you were to net it all out, it's down. So we're not quite at normal new patient referral programs globally, and we're down. It's tough to call that, whether it's down 5% or down 10%, but it's down slightly. And it really varies by state and by country.

The next question comes from Rick Wise of Stifel.

Maybe just a couple of product questions and just updates. Mike, you highlighted the early success of EXALT-D. 100 accounts opened. Is that where you wanted to be? Is that what you expected? Again, COVID aside and post-COVID, is that what you expected? Just maybe talk us through what's next.

And I'll go ahead and ask the other 2. Just curious, SENTINEL obviously had a terrific quarter. What's next there? And talk about the trial enrollment. And maybe we haven't talked about the S-ICD program in a long time. Just wondering, it seems a little random, but just hearing some competitive noise. What's next from Boston Scientific on that side of the ledger?

Sure. So EXALT, SENTINEL and S-ICD. I'll get Dr. Meredith to pitch in, in the middle here so I don't bore you too much here. But on EXALT, we clearly lost, call it, 4 to 6 months with EXALT-D with that launch. But the really encouraging news in third quarter, we've really picked up quite a bit of momentum. So our accounts, we've had more access to our customers in the U.S. and in Europe. And we've opened approximately 100 global accounts. And so the team has really made strong progress, call it, the last 60 to 90 days in new account openings, training and really starting to increase utilization of that platform. And we also had a nice tailwind.

Just I would say broadly, we had strong tailwinds and reimbursement in the third quarter. I won't get too off track. But with the new TPT with EXALT, that was a nice tailwind for that. So we looked at, for EXALT, to be a nice growth driver for us in 2021. We also have the surgical scope recently approved, and we're on track for a bronchoscope. So that's a multibillion-dollar opportunity.

Just broadly with reimbursement, I'll just call this out because we've picked on a few of the headwinds with SCOPE I and SCOPE II. We had some great reimbursement news, not only with Eluvia, but with EXALT, also with EKOS in the quarter. So I think it really demonstrates the clinical efficacy of these platforms and the evidence to support the additional reimbursement.

So I'll turn over SENTINEL to Dr. Meredith and maybe S-ICD comments from Dr. Stein.

Thanks, Mike. Thanks for the question, Rick. With respect to SENTINEL, as you know, we're in more than 750 accounts worldwide. And 20% of TAVRs in the sites that are actually using SENTINEL are actually having a SENTINEL procedure. Stroke, as you know, is a debilitating and devastating condition that's underreported in TAVR. We believe that this is the right strategy.

The Protected TAVR trial that you mentioned is now, more than ever, a critical study to actually prove beyond a shadow of the doubt that cerebral embolic protection is the right strategy for TAVR. We're very pleased with having designed that study prospectively. As you know, it's a 3,000 patient study looking at clinical stroke. We have 30 sites enrolled in that trial and continue to activate sites despite COVID. Obviously, there was some slowing of new site activation in the second and early in the third quarter, but we believe that, that will continue to ramp up.

So we're looking forward to the results of that trial. It's a critical study in light of the data that you heard at TCT, which was a mixed bag of evidence. And almost everybody pointed to the Protected TAVR trial as the single most important study in this field, and I'm glad that we actually planned this prospectively.

Dr. Stein, any comments on S-ICD?

Yes, yes. Thanks a lot, Mike. And Rick, I'll be quick here. I think we're very pleased with what we're seeing in terms of continued growth with the S-ICD. As I think you know, we recently reported out the results of 2 major clinical trials, PRAETORIAN and UNTOUCHED. PRAETORIAN published in New England Journal of Medicine. UNTOUCHED was just published in Circulation, which really convincingly show that the S-ICD is a remarkably safe, straightforward procedure and ought to be considered as first-line therapy for the broad group of patients with a primary prevention indication who don't have indication for anti-bradycardia pacing or anti-tachycardia pacing.

I think what comes next and what's, I think, very exciting from that standpoint is we push out our modular cardiac rhythm management concept with the development of our EMPOWER leadless pacemaker, which is designed to be able to communicate with the S-ICD and can deliver both backup brady pacing and anti-tachycardia pacing. And that is still on track to launch into clinical trials the first half of next year.

The next question comes from Matt Miksic of Crédit Suisse.

Can you hear me okay?

Yes. Hear you fine.

So just a couple of questions, if I could, on ASCs and sort of your exposure to the outpatient channel. You talked about that, if I remember correctly, kind of in the 2/3 range. If you could maybe comment on just how those are -- how some of those businesses are performing related to the predominantly inpatient lines of business, maybe in terms of pre-COVID -- percent of pre-COVID levels or any other metrics like that. And then I just had one quick follow-up on the same topic.

Sure. Yes, we provided, I think at our -- maybe our first quarter earnings call, the mix by business roughly of our inpatient versus outpatient. And that's really kind of been very consistent in terms of the recovery during COVID. So across our businesses, not surprising where we had a stronger outpatient orientation, you've seen a bit stronger recovery there with PI and urology, endo and neuromod. You saw neuromod of, geez, what? It was down like, what, 70%, 80% or some crazy number in the second quarter and came back dramatically in the third quarter because of patient demand in that setting.

So really, uro, endo, PI and neuromod are more oriented to outpatient setting. And CRM and Interventional Cardiology lean a little bit more towards inpatient. And the kind of pace recovery, if you look at the third quarter results, are pretty consistent with that.

That's super helpful. And then just, if I could, I think we're all looking at the current trends and wondering over the next couple of months if we're going to be facing some version of what we saw in like July and August in some areas of the country. And in terms of hospitals getting -- capacity getting tighter, some regions, some states picking counties or ZIP codes and trying to steer folks away from booking inpatient cases or overnight cases or things like that. And I'm wondering if you have any comments or experience from how that went in those areas in the -- in Q3. Because we did see a little bit of that. And potentially what that might entail over the next several months, if we continue to see that happen as anecdotal as that might be?

Yes. It's tough to call. I mean we don't see a scenario where the results of 2Q are matched again. So we don't see that happening. And you saw, obviously, a strong improvement: 3% negative growth, neutralizing for the onetimers in the third quarter. And as I mentioned before, we've seen sequential improvement really each quarter since the darkest time of COVID.

And so hospitals are doing a remarkably good job of managing COVID patients and elective procedures. Hospitals have built additional capacity to manage COVID patients during the surge. They're better staffed for it. So I think it's going to be potentially a challenging winter, but the hospitals are much better prepared to manage it, I believe, than they were 6, 8 months ago. And they're also better able to manage elective procedures in parallel.

So with that, we commented before that the new patient referral pattern globally still isn't at 100%, and so that likely still could be under some pressure as COVID continues to surge. But we'll continue to -- we're having great progress in launching new products, getting products approved. We're managing our margins. We'll drive strong EPS, and we'll see how the COVID impact plays out. But we've seen sequential improvement monthly, and we continue to aim for growth in the fourth quarter despite the COVID challenges and excluding the WATCHMAN consignment.

Last question, Andrew.

And that will come from Danielle Antalffy of SVB Leerink.

Congrats on a strong quarter. Mike, I have 2 product-related questions. So first on WATCHMAN. One of the things investors are paying attention to is a potential competitor coming to market. And I was hoping maybe you could outline what the moat from a competitive perspective are that you've built around the WATCHMAN business that should make us feel okay about the continued growth trajectory there.

And I'll just ask my second now. On EXALT-D, given the financial constraints at hospitals, I'm just curious about how quickly that can be the meaningful revenue contributor that it probably ultimately will be, but hospitals have to work through their current financial duress. And those are my questions.

Sure. Dr. Stein, do you want to speak to the WATCHMAN clinical capabilities?

Yes, yes. Thanks, Mike. And Danielle, I think on WATCHMAN, first of all, we're very pleased with the response that we've seen and the clinical data we generated with the FLX device approved on the basis of a trial that didn't just meet its end points, but actually showed 100% successful seal at 1 year. And I think combined with the great clinical results and physician familiarity and ease of use with the FLX device, it, I think, is very strong against any competition.

We continue to push what is the most robust portfolio of clinical science on safety and efficacy of the device. The ongoing OPTION trial, which in spite of COVID, has continued to enroll well, which extends the use of the device as a first line for patients following a fibrillation. And then as I think you know, we've recently announced the imminent launch of our CHAMPION trial, which is a head-to-head trial of the WATCHMAN device as first line therapy against novel oral anticoagulants.

Yes. So obviously, the clinical safety and efficacy is the primary driver, and that's why Dr. Stein commented first. And then on the business model, that was obviously one of the reasons we switched to the consignment model, was to continue to build a strong moat supported by our clinical efficacy and also the easy to use and just the penetration that we see globally. And the consignment model changeover allows us to drive longer-term, high committed share contracts at the appropriate price uplift. So we think that's a smart move for us.

On EXALT-D, I mentioned before, with the Breakthrough status, we did get the additional reimbursement in the outpatient setting, which is very, very helpful. And we believe with the -- in the inpatient setting and the outpatient setting, there's room in that DRG that makes sense for the EXALT-D platform.

So our Endoscopy team will continue to drive health care economic studies with EXALT-D. It's clear that physicians see the benefit of reducing the risk of infection. And our team is gaining more and more capabilities in terms of how to drive utilization of EXALT-D as each month passes. So we think this will be a nice growth driver, and we know it will be a nice growth driver for us in 2021.

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

Thank you, Andrew, and thanks, everyone, for joining. We appreciate your time, and we'll now turn it back to Andrew for the replay details.

Thank you. This concludes today's conference call. A replay for this call may be accessed in 1 hour until November 4, 2020, by dialing 1 (877) 344-7529 or 1 (412) 317-0088 and use access code 10147673. You may now disconnect your line at this time. Thank you.