Boston Scientific Corp (BSX) 2013 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Boston Scientific second quarter 2013 earnings conference call.

At this time, all participants are in a listen-only mode.

Later, we will conduct a question-and-answer session.

Instructions will be given at that time.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Michael Campbell.

Please go ahead.

Thank you, Greg.

Good morning everyone and thanks for joining us.

With me on today's call are Mike Mahoney, President and Chief Executive Officer, and Jeff Capello, Executive Vice President and Chief Financial Officer.

We issued a press release earlier this morning announcing our Q2 results for 2013 which include a reconciliation of the non-GAAP measures used in the release.

We have posted a copy of that release, as well as reconciliations of the non-GAAP measures used in today's call, to the Investor Relations section of our website under the heading financial information.

The duration of this morning's call will be approximately one hour.

Mike will begin our prepared remarks with an update on our business progress and his perspectives on the quarter and for the remainder of 2013.

Jeff will then review our Q2 financial results and business performance, as well as Q3 and full-year 2013 guidance.

We will then open the call up to questions.

During today's Q&A session Mike and Jeff will be joined by our Chief Medical Officers, Dr. Dawkins and Dr. Stein.

Before we begin I'd like to remind everyone that this call contains forward-looking statements within the meaning of federal securities laws which may be identified by words like anticipate, expect, believe, estimate and other similar words.

They include, among other things, statements about our growth and market share, new product approvals and launches, procedural volumes and pricing, clinical trials, cost savings and growth opportunities, our cash flow and expected use, our financial performance including sales margins earnings and other Q3 and full-year 2013 guidance, as well as our tax rates, R&D spend and other expenses.

Actual results may differ materially from those discussed in our forward-looking statements.

Factors that may cause such differences include those described in the risk factors section of our most recent 10-K and subsequent 10-Q's and 8-K's filed with the SEC.

These statements speak only as of today's date and we disclaim any intention or obligation to update them.

At this point I'll turn it over to Mike for his comments.

Mike?

Thank you, Michael, and good morning, everyone.

I'll begin today with some comments regarding our second quarter performance and Jeff will review the financials in more detail later in the call.

So overall it was a strong quarter for Boston Scientific.

Our team is beginning to build momentum and we're executing against our global strategy.

Some key highlights for the second quarter include the following.

We delivered both sales and adjusted EPS above our stated guidance range and above consensus.

We delivered net sales of $1.809 billion, down 1% on a reported basis and we grew positive 2% year-over-year on an operational basis, which excludes the impact of foreign exchange in the divested neurovascular business.

In terms of sales on an operational basis neuromodulation grew at an impressive 21%, endoscopy grew at 8%, PI 5% versus the same period in the prior year.

In addition, we are encouraged with the improved performance of our CRM and IC businesses.

We're strengthening our global position in the EP market to the signing of a definitive agreement to acquire CR Bard's EP business, our internal R&D efforts and the recent approval of the rhythmia platform.

We continue to see strong returns on our investments in the emerging markets.

Our second quarter sales in the BRIC countries grew 29% year-over-year.

Turning to our earnings highlights, we delivered adjusted EPS of $0.18 which was above both the high end of our guidance range and street consensus.

On a year-over-year basis we delivered adjusted EPS growth of 6%, while absorbing a full $0.01 impact in the quarter due to the med device tax.

We also generated solid cash flow, used $100 million to buy back approximately 12.5 million shares of stock in the quarter.

And so with that I'll move into the business unit performance for the second quarter.

The revenue growth figures that I'll highlight are all on a constant currency basis so let's start with the MedSurg businesses.

In endoscopy, we had another strong quarter with 8% worldwide revenue growth.

We experienced consistent growth across all of the endoscopy franchises.

Our hemostasis franchise led the way driven by continued global adoption of our Resolution Clip for GI bleeding.

Our biliary device franchise grew faster than market, fueled by our endoscopic ultrasound platform and the recent launch of the TrueTome biliary access device.

And again, our metal stent franchise growth is primarily driven by our industry leading WallFlex platform.

In addition, our Alair bronchial thermoplasty platform is building momentum.

We continue to see an increase in sites during the quarter, exceeding 300 centers across 23 countries.

And during second quarter the five-year data from the Air2 clinical trial were presented, confirming that Alair continues to show therapy benefits in adult patients with severe uncontrolled asthma.

BT was shown to provide long-term asthma control demonstrated by a sustained reduction in the rate of severe exacerbations and emergency visits over a five-year period of treatment.

So we anticipate publications of five-year safety and efficacy data during the third quarter of '13 and we continue to execute a focused coding coverage and payment strategy.

So turning to urology women's health, we achieved modest growth in the quarter with solid growth in urology, offset by challenging pelvic organ prolapse market in women's health.

In urology we delivered solid International growth resulting from our global commercial expansion and new product launches.

In the women's health we did successfully launch two new products in the US during the quarter.

And we do expect the women's health division to return to growth in the second half of '13 given the refreshed pipeline and the anniversary of the pelvic organ prolapse market decline in comparison.

So in neuromodulation, our team continues to execute extremely well.

We gained market share during the quarter and firmly established ourselves as the number two global player in the neuromodulation market.

We delivered impressive growth at 21% on a worldwide basis driven by positive physician response to our recently launched Precision Spectra Spinal Cord Stimulation platform.

This really is a highly innovative, next-generation spinal cord stimulator that's designed to deliver more coverage and provide a new level of flexibility and advanced control.

It's a great example of our internal innovation that enables us to provide differentiated technology to our patients.

In deep brain stimulation we recently reported interim data from the European Vander study that demonstrates significant improvements in motor scores of approximately 60% in patients with Parkinson's disease using the Precise platform at six months.

We also commenced enrollment in Intrepid which is our pivotal US clinical trial for use of Precise in Parkinson's disease and launched the Guide DBS system in Europe.

So now moving to interventional cardiology.

While our worldwide IC results for the second quarter improved and we maintained our global share position, we have work to do in this important area.

Our worldwide IC revenues declined 3% in a market that we estimate declined in the low to mid-single digits.

We did deliver sequential revenue improvement in second quarter driven by operational growth in the International markets.

While we expect the global market headwinds to persist, we continue to believe that the market will moderate over time due to underlying patient demographics and the proliferation of differentiated premium technologies such as our SYNERGY Stent platform.

In Europe and Asia, our IC growth was driven by the successful execution of new launches.

In mid-second quarter we launched Promus PREMIER in Europe.

Customer feedback has been very positive and our European team has been successful in using the product to open up new accounts.

Data from the first human use trial was presented at late breaking trial at Euro PCR in May and the results reflected the outstanding outcomes we continue to demonstrate in our robust Platinum clinical trial program.

We also anticipate US FDA approval for Promus PREMIER in the fourth quarter of 2013.

Our next-generation SYNERGY Stent also continues to perform very well.

The limited launch we began in Europe has been progressing according to plan and we are expanding it in anticipation of a full European launch in 2014.

Enrollment in the SYNERGY US IDE trial is tracking ahead of schedule and we expect to complete enrollment in third quarter of 2013.

We believe we have stabilized our DES share and expect to grow DES share in the second-half through continued focus on commercial execution, a strengthened overall IC portfolio and the continued favorable clinical evidence of our DES platforms.

In our core IC business, we improved our performance with worldwide sales growth of 3%.

We recently received clearance of our Guidezilla guide extension catheter and OptiCross.

We also accelerated the commercial rollout of BridgePoint medical suite of coronary CTO devices.

We expect this growth in our core IC business to continue as we expand our commercial rollout of these new products in the second half of the year.

So now a quick update on our TAVR program.

We presented a 30-day results on the first 60 patients from our REPRISE II CE Mark trial at Euro PCR in May.

We met our primary endpoint and we believe that the results affirm the clinical advantages of the second generation platform, including both precise control and very low paravalvular leakage rates due to its unique adaptive seal and differentiated positioning capabilities.

We continue to anticipate CE Mark and commercialization of Lotus in the fourth quarter of 2013.

And we're in discussions now with the FDA to finalize plans for our US ID trial which we look forward to starting in mid-2014 subject to FDA approval.

Now I'll turn to our PI business, our peripheral intervention division.

This division continues to deliver consistent, above market result and in second quarter global revenues grew 5%.

Sales of our leading stent and balloon platforms were particularly strong in the International markets.

We are advancing our core PI pipeline including our drug balloon platform in Europe which we expect to launch in 2014.

In addition, we are excited about the International launch of the Vessix renal denervation system which came several months earlier than planned.

While we're very early in the launch, the feedback from customers has been encouraging.

At Euro PCR we reported the interim results from the Vessix Reduce HTN clinical trial.

In the interim results show the significant and sustained reduction in the blood pressure patients treated with Vessix after 1 year.

We look forward to continued progress as we drive toward the expected start of the US IDE trial for the Vessix platform in first quarter '14.

So now let me turn to our rhythm management segment.

We are encouraged by the improved performance of this business.

In the second quarter our worldwide CRM revenues declined 2%, exceeding the high-end of our guidance range.

We believe the worldwide CRM market continues to be a challenge but they have stabilized in the negative low to mid-single digits versus prior year.

In our defib business we estimate our worldwide second quarter market share remains stable despite the impact of the S-ICD supply constraints.

These results were driven by the continued momentum of our ICD de novo share, improved performance across our replacement business and continued elevated lead per port ratios.

Our CRTD share remains under pressure; however, we believe we are on track to launch our quad lead in Europe in first quarter 2014.

Regarding the launch of the S-ICD, as discussed in the first quarter, our sales outpaced our ability to supply the market and we've seen significant supply constraint since March.

We continue to manage this with our customers and we're making progress toward resuming our controlled S-ICD launch in late third quarter.

In addition, we expect that our GEN 1.5 device will become available in fourth quarter to further address the increasing global demand for this highly differentiated therapy.

Turning now to our pacer business, we are now at our one-year anniversary of the launch of our INGENIO family of pacemakers.

And we're through our first four quarter of LATITUDE which we believe will continue to drive pacer share gains in the quarter with growth of 1% on a worldwide basis and 7% in the US.

We're pleased with the performance of this platform which includes a number of new design features, including wireless RF telemetry and LATITUDE and XT remote patient management systems with cellular capabilities.

Now turning to left atrial appendage closure, the WATCHMAN product line continues to show strong growth in International markets on both a sequential and a year-over-year basis with International revenues and implants growing by more than 50% compared to the second quarter last year.

We submitted the final PMA module to the FDA in May and expect US approval in the second quarter '14.

Our long-term PROTECT AF full-year follow-up data presented at HRS showed the WATCHMAN device was statistically superior to Warfarin for preventing cardiovascular death, all cause stroke and systemic embolization, as well as all cause mortality and cardiovascular mortality.

We continue to be encouraged by the long-term efficacy data from PROTECT AF, coupled with safety results of PREVAIL and CAP which provide strong evidence that WATCHMAN is a viable alternative to chronic Warfarin for stroke reduction in non-valvular AF patients.

And finally, we continue to make progress in expanding the capabilities of our global EP business.

The Rythmia EP mapping and navigation system achieved CE Mark approval in late second quarter and FDA clearance just earlier this week.

We expect the US launch along with the new Stearable Sheath and ablation catheter in the back half of the year.

As mentioned earlier, we're excited about entering into a definitive agreement to acquire Bard's EP business.

This business generated sales of about $110 million in 2012 and we expect it to be accretive to BSE in 2014.

We expect that Bard EP will strengthen our global commercial footprint and further enhance our emerging EP product offering by adding a strong base of diagnostic catheters, other diagnostic tools and EP recording systems to our portfolio.

We are confident that this transaction will improve our ability to better serve the global EP market.

So we look forward to welcoming the new Bard EP team to Boston Scientific and we estimate the closing of this transaction in fourth quarter pending the completion of regulatory approval processes and other customary conditions.

So to wrap this section up, overall we're pleased with our second quarter results and the momentum we're but beginning to build.

We returned to growth on an operational basis in the second quarter and we're making progress on our strategic growth imperatives.

Our MedSurg and PI businesses continue to grow faster than market.

We're beginning to improve our global execution in both the IC and CRM markets, and we're aiming to grow IC and CRM share in the second half of '13 with continued focus on sales execution, a differentiated portfolio and an improved S-ICD supply chain.

We are expanding globally as demonstrated by our overall growth in International revenue and growth of nearly 30% in the BRIC countries.

We're also focused on delivering meaningful innovation to our customers and our pipeline reflects this core value.

We are advancing our efforts to expand into high-growth adjacencies.

Our long-term PROTECT AF data demonstrated the WATCHMAN device is statistically superior to Warfarin, including all cause mortality.

We are advancing our Lotus valve program, including favorable 30-day data from REPRISE II CE Mark trial, and we anticipate CE Mark approval later this year.

The interim data from the Reduce HTN clinical trial showed positive results and we're able to launch our Vessix renal denervation platform in Europe earlier than planned.

We are continuing to focus on continuous improvement while we drive our previously outlined productivity and restructuring programs in order to fund our journey and to improve our operating margins.

We expect to continue generating strong cash flow which enables us to fund more share repurchase in the second half and to evaluate appropriate acquisitions to improve our future growth profile.

In terms of third quarter guidance, we anticipate the normal seasonality but we do expect year-over-year revenue performance to accelerate.

With third quarter we're providing sales guidance of positive 1% to positive 4% growth on an operational basis and adjusted EPS from $0.14 to $0.16 per share.

For the full-year '13 guidance we anticipate delivering sequential quarterly year-over-year revenue improvement.

For the full year we are increasing both our sales and adjusted EPS guidance.

The full year '13 sales guidance is a range of flat to positive 2% growth on an operational basis and adjusted EPS of $0.67 to $0.71 per share.

Finally, I really want to thank our employees for their winning spirit and their commitment to Boston Scientific.

So now let me turn the call over to Jeff for a more detailed review of our second quarter financials.

Thanks, Mike.

Let me begin by providing some overall perspective on the quarter before getting into the details.

We generated adjusted earnings per share of $0.18, which was above the higher end of our guidance range of $0.14 to $0.17 and above consensus.

This represents improved profitability from the prior year which was primarily driven by continued gross margin expansion, including a $0.01 benefit associated with an adjustment related to our Promus profit share agreement, lower operating expense and fewer shares outstanding.

This was partially offset by increased investments in our strategic growth initiatives and a $0.01 impact to the medical device tax.

In addition, we generated adjusted free cash flow of $388 million and used $100 million to repurchase approximately 12.5 million more shares in the quarter.

Now I'll move to the detailed review of our business performance and operating results in the quarter.

For the second quarter of 2013 consolidated revenue of $1.809 billion represents a decrease of 1% on a reported basis and excluding the impact of foreign exchange and the divested neurovascular business, we grew the business 2% this quarter.

The actual headwind from foreign exchange on sales was approximately $40 million as compared to the prior year and was $10 million higher than what we had assumed in our second quarter guidance range.

In interventional cardiology, worldwide revenue came at $520 million in the second quarter, representing a constant currency decrease of 3% compared to the second quarter 2012.

Total International IC revenue grew by 4% with Europe and Asia-Pacific each growing 5%, including China and India growing by 75% and 41% respectively, all on a constant currency basis.

Worldwide DES revenue came in at $287 million in the second quarter, representing a constant currency decrease of 7% compared to the second quarter of last year.

US DES revenue was $117 million in the quarter, representing a decline of 16% compared with second quarter of last year.

This decrease was primarily due to lower share due to competitive products, softness in PCI volumes and lower ASPs.

We estimate that our US DES share was stable sequentially in the mid-30s for the second quarter.

International DES sales of $170 million remained flat in constant currency compared to second quarter of last year, driven by over 60% growth in the emerging markets of China and India, primarily offset by pricing declines in Europe.

Worldwide non-stent interventional cardiology was up 3% in constant currency.

With the recent launches of several new products, along with the ongoing success of our BridgePoint medical suite of CTO devices, we expect to see continued improvement in this business over the course of 2013.

Now moving on to CRM, worldwide revenue was $475 million in the second quarter, representing a constant currency decrease of 2% compared to the second quarter of last year.

In the US, CRM revenue of $282 million was down 1% as compared to second quarter of last year.

International CRM sales of $193 million were down 3% in constant currency compared to the prior-year quarter.

On a worldwide basis defib sales were $342 million in the second quarter which is down 3% in constant currency from last year.

In the US, defib sales were $213 million.

This was down 3% compared to the second quarter of last year.

International defib sales of $129 million represented a 3% decrease in constant currency from Q2 of last year.

Worldwide pacer sales increased 1% on a constant currency basis as compared to Q2 2012, driven by continued strong performance from our INGENIO family of pacemakers and CRT-P devices.

In the US, pacer revenue of $69 million was up 7% compared to Q2 last year, while International revenue declined 4% in constant currency for the quarter.

Additionally, our worldwide electrophysiology business remained relatively flat on a constant currency basis compared to Q2 last year.

Our peripheral interventions business delivered growth above the market with worldwide revenue up 5% in constant currency compared to Q2 2012.

Global growth was driven by stents, balloons and renal denervation.

Our endoscopy business continued to grow faster than the market and had another solid quarter with worldwide sales up 8% in constant currency, led by 11% revenue growth internationally.

In constant currency, our worldwide urology women's health business had growth of 1% during the quarter.

However, sales growth was particularly strong internationally at 7% compared to the second quarter of last year.

Our urology business maintained a leadership position with 3% worldwide constant currency growth in the quarter, driven by strong International revenue growth of 5%.

Our women's health revenues declined 6% on a worldwide constant currency basis as compared to the prior year.

However, our International business delivered 6% growth on a year-over-year basis.

We continue to see pressure in elective procedures due to concerns around the use of surgical mesh for pelvic organ prolapse, specifically in the US market.

However, we expect this market to begin to stabilize as we move past the second anniversary of the July 2001 FDA safety notification.

Our neuromodulation business delivered a solid 21% worldwide sales growth, driven by strong market uptake of the Precision Spectra Spinal Cord Stimulation system and very strong commercial execution strategies.

We expect to build on this momentum in the second-half 2013 when we expect Precision Spectra to be fully launched.

Now moving on from sales, adjusted gross profit margin for the second quarter was 70.8%, or 230 basis points higher than the second quarter of last year.

The increase was largely attributable to benefits from our value improvement programs and a one-time benefit of approximately 90 basis points associated with an adjustment related to our Promus profit share agreement.

These benefits were partially offset by price erosion and product mix.

Looking forward, we expect adjusted gross margins to be between 69% and 70% for the second half of the year.

Adjusted SG&A expense were $650 million, a 35.9% of sales in the second quarter 2013, compared to $641 million, or 35.1% in the second quarter 2012.

During Q2 2013 the impact of our cost-saving programs were offset by continued investments in our strategic growth initiatives and costs associated with expanding in emerging markets.

In addition, SG&A expenses in Q2 2013 include the impact of approximately 100 basis points from the medical device tax under the US Affordable Care Act.

Currently the accounting treatment for the medical device tax is not consistently applied across the industry.

We expect to absorb the first full-year impact of the medical device tax during 2013.

Looking ahead, we expect adjusted SG&A as a percentage of sales to be between 36.5% and 37.5% in the third quarter of this year as we expect the continued investing in our strategic growth initiatives in preparation for the commercialization of several new technology platforms and build our capabilities in emerging markets.

Adjusted research and development expenses were $223 million for the second quarter, or 12.3% of sales.

This compares to $213 million in the second quarter of 2012.

We expect R&D spending to be in the range of 12% to 13% of sales in the third quarter this year as we continue to transform our R&D organization and refocus our spending to drive innovation and growth.

Royalty expense was $47 million, or 2.6% of sales, compared to $48 million in the second quarter of last year.

Consistent with the prior year, we expect royalty expense to step down in the second half as we reach lower per-unit growth rate tiers on our annual volume-based arrangements.

On adjusted basis pre-tax operating income was $361 million, or 20% of sales, up 70 basis points from the second quarter of last year.

The increase in adjusted operating margins was primarily due to higher adjusted gross margins, partially offset by an increase in R&D expense and the impact of the medical device tax.

It is important to note that the medical device tax negatively impacted our operating margins by 100 basis points this quarter.

GAAP operating income, which includes GAAP to adjusted items that had a net negative effect of $141 million on a pre-tax basis, was $220 million in the second quarter 2013.

The primary GAAP to adjusted items in the quarter were -- pre-tax restructuring charges of $31 million; pre-tax intangible asset impairment charges of $53 million; pre-tax acquisition and divestiture related credits of $44 million and pre-tax amortization expense of $101 million.

Now I'll move onto other income expense.

Interest expense was $65 million in the second quarter which was similar to the second quarter of last year.

Our average interest expense rate in Q2 '13 was 5.7% or about 30 basis points higher than the second quarter of last year.

Our tax rate for the second quarter was 14.3% on a reported basis and 15.8% on an adjusted basis.

The difference between our reported and adjusted tax rate for the quarter is attributable to charges excluding determining our non-GAAP results.

We estimate our Q2 adjusted tax rate will be similar to Q2 and will be lower in Q4 to arrive at a full-year adjusted tax rate of approximately 12% to 13%.

This excludes any other discrete tax items that may arise during the year.

Moving onto the balance sheet, DSO of 64 days increased two days compared to June of 2012, primarily due to lower collections in EMEA, particularly in southern Europe.

Despite lower inventory levels, days inventory on hand of 144 days was up three days compared to June of last year due to lower cost of goods sold, primarily driven by the pivotal Promus profit share adjustment and the impact of foreign exchange.

Adjusted free cash flow for the quarter was $388 million, compared to $386 million in the second quarter of last year.

Capital expenditures were $51 million in Q2 '13, compared to $52 million in Q2 '12.

We continue to expect our full-year 2013 adjusted free cash flow to be approximately $1.2 billion.

Turning to share repurchases, we repurchased 12.5 million shares for the quarter for approximately $100 million.

Since July 2011 we have now repurchased 212 million, or approximately 14% of our outstanding shares.

We currently have $960 million of capacity remaining on our share repurchase authorization.

We continue to believe that our stock price is undervalued and we currently expect to continue on our share repurchase program in 2013 subject to business development opportunities, market conditions, our stock price, regulatory trading windows and other factors.

Let me now walk you through our guidance for the third quarter, as well as updated guidance for the full year.

As we look ahead over the remainder of the year, we expect pricing pressure and procedural softness in the US to persist but moderate as the IC and CRM markets continue to stabilize.

We have launched many new key products in most of our businesses and continue to make solid progress on our strategic growth initiatives.

We returned to growth on an operational basis in the second quarter and we remain focused on accelerating top line growth in the second half of 2013.

We also believe, despite the medical device tax, that we continue to have opportunities to enhance profitability and expect to continue to generate very strong cash flow.

We expect Q3 consolidated revenues to be in a range of $1.7 billion to $1.760 billion.

If current foreign exchange rates hold constant, the headwind from FX should be approximately $30 million or around 180 basis points relative to Q3 2012.

On an operational basis, we expect consolidated Q3 sales to be in the range of up 1% to up 4% compared to Q3 last year.

On a worldwide basis, we expect DES revenue to be in the range of $265 million to $285 million.

And CRM revenue to be in a range of $445 million to $465 million in the third quarter.

We expect Q3 adjusted EPS to be in a range of $0.14 to $0.16 per share and we encourage you to model to the midpoint.

And we expect reported GAAP EPS to be in a range of $0.03 to $0.05 per share, which includes an estimated $0.06 per share impact from amortization expense.

We also wanted to remind folks that historically Q3 has been our lowest quarter due primarily to seasonality, typically lower than the second quarter and we expect Q4 to be our strongest quarter given the seasonality and the timing of some of our expected new and expanded product launches.

Now moving to the full year, we now estimate that consolidated 2013 sales will be between $7.05 billion and $7.17 billion.

Assuming the current foreign exchange rates hold constant, we expect the full-year headwind from FX to be approximately $145 million.

On an operational basis, consolidated sales should be in a range of flat to up 2% and we encourage you, once again, to model to the midpoint.

The range assumes that the IC and CRM markets continue to stabilize and our revenue performance improves sequentially throughout the year, driven primarily by improved performance in our IC and CRM businesses, more meaningful contribution from the emerging markets and our strategic growth initiatives, plus benefits of new or expanded product launches across our divisions.

From an earnings standpoint, we are moving up our guidance and expect adjusted earnings per share for the full year 2013 now to be in a range of $0.67 to $0.71 and once again, we encourage you to model to the midpoint of the range.

This range takes into consideration an estimated impact of approximately $0.04 per share from the medical device tax.

On a reported GAAP basis, we expect EPS for the year to be a net loss in the range of $0.01 to $0.07 per share, primarily driven by the goodwill impairment charge we recorded in the first quarter.

Please note that today's guidance does not include the impact of the recently announced agreement to acquire the electrophysiology business of CR Bard.

That's it for guidance.

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

Michael?

Thanks, Jeff.

Great.

Let's open it up to questions for the next 20 minutes or so.

Thank you.

(Operator Instructions)

Glenn Novarro, RBC Capital Markets.

Two questions on the spend side.

By our modeling it looks like spend share, both US and globally, has finally stabilized.

And I'm wondering, what this is a function of.

Is it a function of resolute integrity of the trial ending there?

Is it PROMUS Premier?

I'm wondering if it's all the new products that you're launching into the Cath Lab like CTO that's just driving overall momentum?

So if you can give us some additional color.

And on a separate note, what would the impact of Germany be going forward?

I think in terms of the overall worldwide DES market, we see the market in the low single-digits in terms of our performance.

Again, on the market we see the price volume in the 7% to 8% range and then price impact for the overall market in low mid-single-digits.

In terms of our performance with DES market, we're really encouraged by our European performance.

So in Europe we're launching our new platforms.

So we have SYNERGY and we also have PROMUS Premier.

And we actually had growth both in Europe and in the AsiaPac markets for the first time in a number of years.

That's an encouraging trend as we grow share in Europe and also those products will be coming to the US.

And they also reflect the broader portfolio strategy that we have in our other IC businesses with our CTO devices that you mentioned, and also the additional platforms that we're launching in IVUS.

So we're encouraged by the momentum we're seeing outside the US where we're launching our first products.

And in the US, we've essentially stabilized our share and we are benefiting from the annualization of the comparables of the launches that you mentioned earlier.

And then --

Glenn, let me jump in for a minute to add to what Mike had said, I think the other dynamic that's really starting to benefit is the emerging markets.

We talked about investing aggressively in areas like India and China and some of the other areas and those areas are growing very well.

So if you look at Asia-Pacific as a whole, we are probably up mid single-digits plus within DES.

So we continue to believe, depending on what happens from a pricing perspective, that the unit growth, the emerging markets subject to pricing results, is really going to help the market and us disproportionately as we start to get more of our fair share of the market share in those areas.

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

A couple of comments on the German side.

So the German market, we had made some conscious decisions based upon pricing and based upon our portfolio which we think is differentiated not to place heavily in Germany this year and a lot of that's price driven.

As a result, our inability to sell in Germany hasn't impacted as much as people may have thought and in a previous exchange somebody had asked me how big could Germany be?

I think we landed it's less than $40 million for the full-year.

So we're able to grow through that and, of course, we think that our intellectual property position is well-positioned and we intend to vigorously defend ourselves and try to get that appealed and reversed.

So despite the impact on Germany, which is not really that significant, the business is performing pretty well.

Can I just ask one question to Dr. Dawkins on SYNERGY?

I get a lot of push back on SYNERGY relative to Absorb with investors asking is SYNERGY just an incremental gain over current DES?

And why would a doc put in SYNERGY when you could put in Absorb that will fully disappear?

So SYNERGY is in Europe and I'm wondering if Dr. Dawkins can give us some feedback on how the doctors are viewing SYNERGY.

Is it a slight incremental benefit or gain from a technology standpoint over our current DES or are they viewing this as a major leap forward?

Thank you.

I think the majority of physicians still put acute performance top of their list of metrics when they judge a stent and obviously with a modified element platform, the acute performance of SYNERGY, we're very -- we like a lot, as do the physicians.

They also like the concept of the polymer and the drug disappearing at the three-month time point.

And that obviously is not the case for BBS, as you brought up, where the stent struts and, therefore, the polymer is still visible in many patients at two to three years.

So that allows us to explore formally short [DAPT] and we know that the overall cost of DES procedure relates more to the medications than the stent itself.

And there is no study currently that is sufficiently powered to formally explore short DAPT and the impact of stent thrombosis bleeding and the financial consequences.

And we're going to explore that formally.

We have more than 14,000 patients planned for enrollment in registries and randomized trials looking at SYNERGY in a variety of complex patient subsets and this clinical portfolio will support the SYNERGY launch in a wide variety of patients.

So we think doctors like a key performance, they like the drug and polymer disappearing early and we will confirm that in a number of important clinical trials.

Okay.

Thank you.

Rick Wise, Stifel.

Jeff, can you talk a little bit more about gross margins?

It was especially strong above 70% and I appreciate there are a lot of moving pieces but can you give us -- help us understand a little more carefully the 90 basis point positive adjustment for PROMUS agreement?

A couple things, is that a one-time thing?

Is that going to be with us in some way in the future and can you sustain gross margins at the 70%-plus level or do we get a new high level sustainably going forward?

How do we think about it?

Thanks, Rick.

So let me take you through a bridge and as part of that I'll pick up your question on the Abbott true up.

So I would say the midpoint of our guidance range for gross margins for the quarter was about 68.5%.

We guided from 68% to 69%, so 68.5%, so we're 200 basis points higher than we guided to.

Clearly, one impact is the true up of the Abbott supply arrangement.

So I think most people know we were procuring PROMUS from Abbott and we estimated our price from them, the cost of the device.

And we had an arrangement where, on a retrospective basis, they looked at their actual cost base would true it up -- our estimate to the actual.

So we've now done, in this quarter, the final true up and that final true up we had a benefit of roughly 90 basis points flow through our gross margins.

That's a one-time benefit.

It would not recur going forward.

So there's a 90 basis point benefit in the gross margins for the second quarter where we not expect to recur.

So that explains a little bit of why the margins are a little bit stronger.

However, the other 100 basis points-plus was pretty good news for the business and it really comes into us in three different areas.

One, we had better performance in the manufacturing side, stronger delivery of our value improvement programs.

If you remember back to the Investor Day, we want to take out at least 5% of the standard costs, our manufacturing group delivered and I think that was very strong performance and we also had the benefit of building some inventories relative to some of the product launches that we helped.

So part of that survives going forward, part of that is a one-time benefit.

Pricing actually was better this quarter, both pricing and mix.

The pricing dynamics continue to get better.

They are still a challenge but they get better and as we continue to introduce new technology in the marketplace, it's more of a mix benefit than a price benefit.

We do better from a price perspective.

And then mix overall helped us.

That's the third factor.

So I think as we look going forward, I think our guidance for the second half was 69% to 70%.

I would hope it would be at the midpoint, if not the higher end of that, and I think we've got some momentum going into 2014.

That's very helpful.

And turning second question on the -- Mike, you talked about the subcutaneous ICD and your supply constraints.

It went by a little fast for me, I want to make sure I understood.

By the late third quarter you'll be fully supplied and did I hear you correctly fourth quarter GEN 1.5 launches?

But in general can you help us understand when will be subcutaneous ICD fully roll out and available to whoever wants it?

And it sounds like that 4Q GEN 1.5 is a little faster if I understood you, than you thought before?

Sure.

In third quarter we'll be re-entering the US with S-ICD [together] with our IDE sites.

So we'll begin shipments again of S-ICD, call it late third quarter.

And by fourth quarter we'll be able to ramp up more significantly and also expand our commercial presence in the US and globally beyond our trial centers.

So you'll see us ramp up in third quarter and fourth quarter we'll be able to drive significantly more supply into the marketplace and also in fourth quarter, we'll launch our 1.5 release which will further enable greater capabilities for supply going into 2014 and improve the cost profile of the platform.

The full rollout, Mike, again you think is going to take another 6 -- or 12 months beyond that, or how do we think about that?

We won't be supply constrained as we head into the fourth quarter.

So in third quarter we'll begin launching S-ICD again.

We will not be supply constrained as we move into the fourth quarter and into 2014.

Thank you.

David Lewis, Morgan Stanley.

Jeff, maybe a quick question for you and a follow-up for Mike.

One of the interesting things is the segment margins this quarter I think if you adjust for PROMUS it looks like stand out this quarter was MedSurg operating margin expansion.

Maybe help us understand what's the continued strength in MedSurg margins now, I think, up over 30%?

And the interesting thing is CRM margins obviously a focus for investors, CRM did a lot better this quarter guiding to improvement in the back half.

What are the catalysts for CRM margin improvement and what is that balance between top lines getting better but you're still investing in that business?

Okay, David.

Thank you.

So, yes, as you dig into the press release, our MedSurg margins 27.6% up to 32%, so pretty impressive performance within the quarter.

One thing to recognize in the MedSurg business is you've got some larger businesses like Endoscopy that are fairly profitable that were doing very well, that can continue to increase their profitability.

But Neuromodulation is a business that as it grows, pretty quickly, has significant leverage from a bottom-line perspective.

Because it's not currently at our average operating margins but it's coming up pretty quickly.

So I think what should continue to happen here this year and into the future is as Neuromodulation continues to grow, and we feel very good about the trajectory within the SCS -- the spinal cord stimulation, and the DBS side, that will grow and operating profit will grow much more quickly.

So that will help the margins as will Endoscopy and certainly the Urology/Women's Health has an opportunity to expand the margins as well.

So there is certainly opportunity to push up the margins on the MedSurg, we feel pretty good about that.

On the CRM side, the margins were down year-over-year, same story as the first quarter.

Really what you see there is investment, investment in areas like Rhythmia and Cameron are weighing a little on the margins, as are the investment in the EP business which is lumped in to Rhythm Management.

What we do expect, though, is over the next five years, that 600 basis points that we keep talking about a margin expansion for the whole company, CRM will disproportionately benefit from that because they've got a number of investment programs.

What you're seeing so far is all the OpEx.

You're not seeing a lot of sales.

And as we get back on the market with CRM, as we now have FDA approval for Rhythmia and with CE Mark, 2014 should be the inflection point from a growth perspective in terms of picking up a lot of sales at pretty good profit margins and so now you'll have the sales growth with a little bit less OpEx, that's a pretty good equation for us.

The other dynamic is we have restructuring programs that we've been running that we updated people on at the end of last year and certainly CRM will benefit from those as well.

Okay.

Very helpful and very clear, Jeff.

Mike, in terms of the AF opportunity, we didn't get as much time about this at the Analyst Day because that business has really come together in the last several months.

So as it sits today, including the recently acquired asset, how do you see the addressable market for AF and can you give us any sense about when is it appropriate to think about what's the market growth rate and whether Boston should be growing above or below that rate and by when?

Thank you.

It's an area we've invested quite heavily in over the last two years and we've done it because we like the size the market, $2.5 billion, it's growing essentially double-digits.

And there's a tremendous amount of synergy with our CRM business.

So we like the market and we like the synergies with our expanded CRM business, as well as the customer.

In terms of the portfolio, we'll have a much more meaningful business as we look at closing the Bard transaction, which will hopefully be fourth quarter.

So we'll be approaching a $250 million EP business with a much more global scale in terms of our commercial efforts in US, Europe, and AsiaPac and really a well-rounded portfolio with a mapping system, the recording devices, the diagnostic catheters and the therapeutic catheters we're continuing to develop internally here.

So our portfolio really will be highly competitive post the Bard close and we'll have a much stronger commercial footprint.

So we respect there's some very difficult and challenging competitors in that market but we believe the portfolio we've pulled together and the team is very innovative and very focused, and a lot of synergies to work with in our CRM business.

So we would anticipate ourselves will be improving the growth profile of that business.

Great.

Thank you very much.

Mike Weinstein, JPMorgan.

Congratulations on the quarter.

Let me just follow up quickly if I could on the gross margin piece.

Jeff, could you walk us through -- you said 90 basis points was the PROMUS catch up, which we understood.

The other, if we looked at last year, 220 basis points.

Could you break that down, how much of that was from as well like FX hedges and how much was from a Neurovascular running off and anything else you can give us?

That would be great.

Thanks.

So if you look from a year-over-year perspective, we're up a 200 basis points from 68.5 to 70.8.

If you look at the impact of -- I'm going to net pricing together with the IP improvements, cost improvements -- that was a net benefit of roughly 70 basis points.

Which is good news for us, that's what we want to see happen and is less pricing pressure and more ability to manage the cost side.

It was 100 basis points of the 90 basis points of improvement from the Abbott true up and about 50 basis points improvement from the Neurovascular divestiture.

And FX impact on gross margins?

FX wasn't that significant.

Unlike some other people in the sector, we hedge so the foreign exchange rates don't move us around as much.

And then the guidance for the full year, how does FX and the Neurovascular impact that full-year?

Just trying to find an organic basis here.

So from an FX perspective, we don't expect it to have a big impact in the back half of the year and then I believe the Neurovascular divestiture, there's a little bit of a benefit in the third quarter and then that's gone.

Okay.

Could you talk about the sustainability of two businesses which were very, very strong this quarter.

One, Neuromodulation which we understand with Precision Spectra launch and then the other, I looked at the Interventional Cardiology business, ex-coronary stents.

The business grew 3% reported this quarter.

I assume that's 5% constant currency and that sort of business I think was down 10% in the first quarter, was down 12% last year.

So how does it go from down 12%, down 10% to up 5%?

Let me start with your last question first.

So as you might recall, we targeted investing in the other Interventional Cardiology area a couple years ago and it started with looking at our balloon guide wires and then the IVUS franchise had been a net share loser for us.

And so those were some dynamics that we had that weighed on that side.

So what we've done over the past couple years is we revitalized pretty significantly that segment.

We came out with new balloons, new guide wires.

And the other thing that we've done is from an IVUS perspective, we came out with really our first new catheter in over 10 years and a new software platform, which we really think is going to allow us to reposition that business.

And that business was up mid single-digits and it's a good-sized business for us, and we think we're going to build momentum.

As we talked on the Investor Day, we talked about having FFR capability sometime in '14.

So we see that as a good opportunity for us to get back some of the share we've lost.

The other dynamic is BridgePoint.

The CTO acquisition, that was something we were pretty bullish on and we've been talking about at every public point.

We think that really positions us very well to be the provider of choice to treat difficult to treat legions and we think that's starting to play out and we think we're going to get more momentum going forward.

So credit to the management team and the various individuals running those businesses.

This quarter was a strong quarter and we think we can build on that based on all the factors I just listed.

The other dynamic I should point out as well is the emerging markets because the emerging markets in this other IC area is a great opportunity for us to continue to grow our share as well.

Bruce Nudell, Credit Suisse.

Very good quarter.

Now that the stock's revalued to more acceptable levels, I think people are looking at some of the longer-term growth drivers that may be somewhat under the radar.

So specifically with regards to the S-ICD, what percent of the patients do you feel who get ICDs today would have an equivalent shock burden with the S-ICD?

And might that make this a 10% to 20% category rather than a 5% to 10% category?

And secondly, with regards to the left atrial appendage, given the strong superiority result in Protect AF, you guys had pegged the market at around $500 million.

Might there be upside to that?

And secondly, are you going to need a panel given the compendium of evidence?

Thanks so much.

Hello Bruce.

Ken Stein -- or Dr. Stein, you on the phone?

Yes.

I am.

Thanks, Mike.

Bruce, let me deal first with the S-ICD question and then we can -- Mike, I don't know if you want me or if you want to take the left atrial appendage question.

So in terms of S-ICD, particularly if you're asking about where it fits long-term.

First of all, let's understand this is going to be used for de novo.

It's obviously only going to be used in selected cases for patients who reach need for replacement.

And within de novo it's clearly is not indicated for patients who need CRT, clearly not indicated for patients with a defined [brady] pacing indication.

But we do believe that over the long-term, particularly as we continue technical iterations to the device, that this can become the device of choice for the remaining patients who really have no defined need to have a lead within the heart.

There's accumulating data that we presented from MADIT-RIT, data that we presented as a late breaking trial at HRS this year from our ALTITUDE study really showing that there's no reason on earth to think that in patients without an indication for pacing that there's any long-term outcome benefit to having a lead in the heart.

And there are obviously a lot of advantages to not having a lead in the heart.

And as we went through our, even our early experience with the first launch of the S-ICD, we were frankly taken aback at how quickly that began to get expanded use within just a general primary prevention population and really how robust the demand was for it.

And obviously the product is only going to continue to improve as we start to iterate next-generation devices.

On left atrial appendage, Mike, do you want me to take that?

Why don't you comment on the clinical results that were presented and your thoughts on the approval timelines?

Yes.

So we were -- we couldn't be happier with the long-term four year results Protect AF study of the WATCHMAN device.

And I think being able to show for the first time that this is now not only equivalent in outcomes to use of Warfarin, but actually is superior to Warfarin.

Both in terms of preventing strokes and also obviously at least as important in improving all cause mortality, as well as cardiovascular mortality.

And we do believe that, that should have an impact on both the pace at which technology will be adopted, where it's approved today and assuming that it does get US approval, as well as I think the role that implanting physicians -- referring physicians are going to see for this, as an alternative to drug therapy.

In terms of timelines, as we've said, we've already submitted to the FDA.

It's always hard to predict where FDA is going to be.

We're looking towards approval in the first half of next year.

And obviously waiting to hear whether FDA is going to make this go to another panel or not.

Mike, just as a follow-up, is there upside to that $500 million that you've roughly scaled the market at?

We believe so.

We've taken the market view on S-ICD up to about $750 million.

So we'll be back in the market in full in fourth quarter and we do see upside longer-term in S-ICD.

Also, let me just expand more broadly on your question on the growth profile.

Think of three major buckets.

Jeff outlined our performance in our MedSurg across Neuromodulation, PI, and Endoscopy where we're growing 7%-plus and we have a number of new product launches and you see the momentum there in the second half.

The second piece is the improving performance of our IC and CRM businesses and you touched on S-ICD and WATCHMAN.

And then these adjacencies, we received quite frankly better than expected clinical results with TAVR hypertension S-ICD in the second quarter.

And then the expanding impact of our emerging markets.

So those four elements really delivered a lot of muscle to the long-term strategic plan that we outlined at Investor Day and give us great confidence in that, as well as the operational operating margin improvement opportunities that Jeff outlined.

Thanks so much.

Great.

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

Larry Biegelsen, Wells Fargo.

Congratulations on a good quarter.

Just two questions for me.

First, Mike, it would be helpful to hear from you your M&A focus at this point.

You did a lot of technology deals over the past few years and the Bard deal was a bit of a departure for you.

And then I had one follow-up question for Dr. Dawkins.

Sure.

Our M&A strategy, we're always looking for the right opportunities and as you mentioned, we've done a number of earlier stage deals in 2012.

And those were pointed at faster growing markets.

Where [also, markets that] are synergies with our existing Boston Scientific business that we can leverage and ultimately deliver a faster growth profile for the Company.

We're really in the middle of the investment phase of those acquisitions and we believe they'll have a growing impact on our revenue in ROI towards the back half of '13 and then '14.

So the EP deal, we want to clearly balance our acquisitions.

They all want to be in fast-growing markets where we drive synergies but we'll continue to look for properties like CR Bard EP business.

We have quite a bit of leverage with our existing EP business in Rhythm Management area.

It complements our businesses and it will be accretive in 2014.

So we'll continue to look for that right balance but ideally seek revenue seeking opportunities that are accretive at the Company.

Thank you.

Dr. Dawkins, this year you talked about the controlled rollout of SYNERGY in Europe, next year the full launch.

You've talked about developing some clinical data to show the need for less or shorter dual antiplatelet therapy.

Could you give us an update on where you are generating that data when we might see that and when we might see that data?

Thank you.

We've got a number of clinical trials, some that have already started.

Some registries, some comparing SYNERGY with other platforms.

And obviously, as you well know for the clinical outcomes, with clinical endpoints, you usually need to wait 9 to 12 months following completion of the trial but we have also invested in some OCT studies where we'll get an earlier endpoint in terms of strut coverage of SYNERGY, both alone and in comparison with other DES.

We're encouraged also of the fast recruitment in EVOLVE II, that's the IDE trial as you know comparing SYNERGY with PROMUS Element.

And we anticipate, as Mike said, the completion of EVOLVE II in the third quarter this year ahead of schedule.

So I think unlike some of the other platforms that we discussed earlier, we have randomized trial data and we have large randomized trials.

And of course, that's on the background of the EVOLVE use trial with just under 300 patients randomized.

So we're building steadily a data set to support SYNERGY, both at the experimental level, pre-clinical level and obviously the clinical level.

And so within the next 6 to 12 months we'll have increasing amounts of data to support SYNERGY worldwide.

Thanks for taking the question.

With that would like to conclude the call.

Thanks for joining us today.

We appreciate your interest in Boston Scientific.

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