Boston Scientific Corp (BSX) 2013 Q4 法說會逐字稿

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  • Operator

  • Ladies and gentlemen, thank you for standing by and welcome to the Boston Scientific Q4 2013 earnings conference call.

  • (Operator Instructions).

  • As a reminder, this conference is being recorded.

  • I would now like to turn the conference over to our host, Susie Lisa.

  • Please go ahead.

  • Susie Lisa - IR

  • Thank you, Roxanne, and good morning everyone.

  • Thanks very much for joining us.

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

  • We issued a press release earlier this morning announcing our fourth-quarter and full-year results for 2013 which included reconciliations of the non-GAAP measures used in the release.

  • We have posted a copy of that release as well as reconciliations of the non-GAAP measures used in today's call in 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, the year and the outlook.

  • Dan will then review our overall fourth-quarter and full-year 2013 financial results and then discuss goals for full-year and first-quarter 2014.

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

  • Before we begin, I would 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, clinical trials, cost savings and growth opportunities, our cash flow and expected use, our financial performance including sales, margins, earnings and other Q1 and full-year 2014 guidance as well as our tax rates, R&D spend and other expenses.

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

  • Factors that may cause those differences include those described in the risk factors section of our most recent 10-K and subsequent 10-Qs and 8-Ks filed with the SEC.

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

  • At this point I will turn it over to Mike for his comments.

  • Mike?

  • Mike Mahoney - President and CEO

  • Thank you, Susie.

  • Good morning, everyone.

  • I will begin today with some highlights regarding our fourth-quarter and the full-year performance for 2013 and then provide some thoughts on our 2014 outlook.

  • Dan will then review the financials and 2014 guidance and then we will take your questions from there.

  • So please note that throughout the commentary all growth rates discussed are on a constant currency basis and represent fourth-quarter 2013 year-on-year growth unless otherwise specified.

  • So overall fourth-quarter was a very good quarter for Boston Scientific.

  • We are pleased that we are delivering on our commitments and building momentum.

  • In fourth quarter, we exceeded our guidance and delivered 5% operational revenue growth.

  • We also exceeded our EPS guidance in the fourth quarter delivering adjusted EPS of $0.21.

  • We estimate that most of our business units grew faster than the market.

  • For 2013, we committed to turn around our performance and return to positive growth and we have achieved that goal early by posting 2% operational growth in second quarter and then improving upon that with a 4% growth rate in third quarter and now 5% in fourth quarter.

  • Throughout the year, we returned cash to shareholders with $225 million worth of stock repurchased in the fourth quarter and $500 million for the full year or 43% of our adjusted operating cash flow for the year.

  • I will turn now to a few highlights from the fourth quarter and provide some commentary on 2014.

  • Our MedSurg business which now represents 33% of Company sales are growing faster than the market and driving a balanced portfolio mix led by impressive growth in Neuromodulation plus continued above market growth in both our Endoscopy, Urology & Women's Health business.

  • In Endoscopy, we had another strong quarter and we continue to grow faster than the market.

  • Our key growth drivers include our hemostasis franchise, biliary devices and our endoscopic ultrasound needle platform.

  • We are also really excited about the progress we're making with our spyglass direct visualization system that has recently been launched in China.

  • The spyglass system was launched earlier in 2013 and this platform allows GI physicians to visualize the inside of the biliary tree and it has been very favorably received.

  • Also within Endoscopy, Alair, our bronchial thermoplastic platform delivered 28% full-year growth as we surpassed 350 worldwide treatment sites.

  • We also continued to experience improving reorder rates and consistent case-by-case approvals by large commercial insurers.

  • So in 2014, we expect Endoscopy division to continue to deliver solid growth across all regions fueled by a very strong pipeline and broader emerging market expansion.

  • Now turning to Neuromodulation, which is also within our Medical Surgical reporting sector, Neuromodulation during fourth quarter sustained excellent momentum from the previous quarter and grew at 33%.

  • Our team in Neuromodulation is really performing at a very high level and we continue to strengthen our leadership position and gain significant market share particularly in the US spinal cord stimulation market.

  • Physicians have enthusiastically adopted our next-generation Precision Spectra spinal cord stimulator platform which is designed to improve pain relief to a wide range of chronic pain patients.

  • Also at the North American Neuromodulation Society annual meeting last month, we presented compelling clinical outcomes data using the Precision Spectra SCS system.

  • Although preliminary, these real-world results affirm the advantages of using this novel platform to treat pain patients.

  • Precision Spectra validates our focus on developing other clinically meaningful innovations such as the Vercise Deep Brain Stimulation System, which is available in Europe.

  • So turning to Urology & Women's Health, this division also grew 5% in the quarter and this growth was led by our international expansion efforts and several new product launches.

  • We expect to deliver above market growth also in this business in 2014 as we continue to build momentum.

  • Now turning to Interventional Cardiology, our IC business did not grow in fourth quarter primarily due to softness in drug eluting stents.

  • However, the business is stabilizing and we are well-positioned to improve our DES performance in 2014.

  • We are excited about our newly enhanced IC portfolio and capabilities including the recent approval and launch of the PROMUS Premier drug eluting stent in the US.

  • Premier will deliver excellent outcomes, offering physicians a custom architecture that improves actual strength while providing outstanding deliverability.

  • So in 2014, we expect PROMUS Premier to be a catalyst for our global DES franchise and we anticipate Premier approval in Japan in the second half of the year.

  • In addition, adoption and physician training for our BridgePoint chronic total occlusion platform continues to expand.

  • Internationally, our next-generation SYNERGY stent continues to perform well.

  • We've see good results from the limited launch we began in Europe and we are expanding it to a broader EU launch this year.

  • Supported by a comprehensive SYNERGY clinical evaluation portfolio which includes almost 28,000 patients, SYNERGY is priced at a premium to our Premier platform and SYNERGY has done very well in targeted markets in Europe and it's becoming a first choice for physicians for tackling complex coronary cases.

  • Moving to our core IC business, we continue to see strong performance.

  • Our IC business ex-stents grew faster than the market in fourth quarter, up double digits.

  • The growth is driven by the revitalization of our complex PCI product portfolio including the Emerge Balloon and the OptiCross Coronary IVUS catheter as well as emerging market expansion.

  • We continue to expect this business to grow faster than the market in 2014 as we expand our commercial rollout of seven new products.

  • Next I would like to highlight WATCHMAN, which is our left atrial appendage closure device.

  • We are very pleased with the favorable December FDA panel vote.

  • The panel supported WATCHMAN 13 to 1 across the three areas of device safety, efficacy and benefits that outweigh the risk.

  • This is really a significant milestone for the therapy in bringing this innovative technology to the US.

  • We also continue to expect US approval in the first half of 2014 and we believe we have a significant timing advantage over our competitors.

  • We also continued to show good progress with our Lotus TAVR program.

  • In the fourth quarter the final endpoint data for the REPRISE II CE Mark trial was presented at the TCT conference and this demonstrated excellent results.

  • Highlights of the 120-patient study include that 83.6% had no or trace paravalvular aortic regurgitation at 30 days, 1% had moderate aortic regurgitation and zero had severe aortic regurgitation.

  • We also received Lotus CE Mark approval and initiated commercial sales in Europe in the quarter.

  • So the impressions from the commercial accounts we have launched into thus far has been very positive and we look forward to expanding the rollout of the second-generation Lotus Valve platform in the international markets and initiating the REPRISE III US IDE trial in 2014.

  • Also within cardiovascular is our Peripheral Interventions division.

  • This division continued the strong consistent performance.

  • The PI business delivered above market growth for the eighth consecutive quarter.

  • Our market leading balloon stent and interventional oncology franchises continue to lead the way with a particularly strong performance in the US and Latin America and Canada.

  • During the quarter, we strengthened our peripheral embolization business with multiple US launches and we are advancing our drug coated technologies and expect to achieve important clinical and commercial milestones later in 2014 including our drug coated balloon platform which we expect to launch in certain international markets in the second half of this year.

  • Turning to hypertension, we are selling our Vessix platform in Europe and remain enthusiastic about both its clinical impact and long-term business potential.

  • It is important to know that Vessix is the second-generation balloon expandable multi-point renal denervation platform.

  • We believe Vessix is highly differentiated from the competitor's product that recently announced missing its efficacy endpoint in the US pivotal trial.

  • We recognize that this is an important development in the market yet potentially an opportunity for BSC.

  • Regarding our US trial, we will carefully examine the forthcoming available data and work collaboratively with the scientific community to determine the next steps for our Vessix clinical program.

  • Let me now discuss our Rhythm Management segment.

  • I'm really encouraged by the improved revenue performance of this business and its return to operational growth over the last two quarters.

  • However, we are not satisfied with the margins within our Rhythm Management group and we are focused on improving those in 2014 and throughout our multiyear strategic plan.

  • So in terms of the market, we believe that worldwide CRM market continues to stabilize over the course of 2013 with year-over-year market growth rates likely flat to low single digits in the fourth quarter.

  • In our defib business, we estimate our worldwide Q4 market share to be up sequentially from the third quarter driven by improved share in our international core defib business and worldwide growth of the highly differentiated S-ICD platform.

  • During the fourth quarter, we expanded the worldwide launch of the S-ICD platform and continued to observe high demand for the system in our physician training programs.

  • The S-ICD franchise is delivering on our manufacturing ramp up objectives and training is proceeding on plan.

  • We remain very excited about S-ICD's ability to provide sudden cardiac death protection without touching the heart.

  • To date physicians have used the S-ICD to treat primary and secondary prevention patients.

  • While it is still very early in the launch of the system, recent publications such as the one by Doctors [Poole] and Gold in circulation clearly articulate the value of and the rationale for implanting S-ICD in various indicated patient populations.

  • In addition in December, we initiated the European launch of our new Quadripolar X4 CRT-D pacing system.

  • Our X4 quad lead offers three different lead options and the most pacing vectors in the industry.

  • The system also builds upon the longevity advantages of our CRT-D devices with nearly twice the battery capacity thus reducing the risk of additional hospitalization and clinical complications associated with early change out including infection.

  • We are also expected to begin our X4 Quadripolar IDE trial in the US in the first half of 2014.

  • Turning now to our pacer business, this franchise delivered good results in both the US and international markets and we believe continued to drive worldwide pacer share gains in the fourth quarter.

  • In first quarter, we plan to launch our MRI technology more broadly with the approval of the INGEVITY pacemaker lead in Europe and system approval in Japan.

  • We expect these new opportunities will build upon our differentiated RF remote monitoring capabilities that are designed to assist patients and physicians in detecting [clinical] events sooner.

  • In EP, we closed the acquisition of Bard's EP business on November 1, an important acquisition that expands our portfolio of EP technologies and brings stronger global capability to our EP division.

  • We expect to improve our performance in EP in 2014 through new product launches and synergies from our broader Rhythm Management capabilities.

  • So I will wrap up the fourth quarter and 2013.

  • Overall we are really pleased with the fourth quarter, our full-year results and the momentum we are building as a Company.

  • Last year we committed to turn around our performance and return to positive revenue growth and we did exactly that.

  • We returned to growth faster than anticipated and we improved our quarterly revenue growth rate on an operational basis throughout the year.

  • We continue to focus on margins, we are targeting significant improvements.

  • We are strengthening both our portfolio and new adjacencies through meaningful innovation that delivers unique value to patients and savings to the healthcare system.

  • We delivered full-year adjusted EPS above our guidance range and we continued to deploy a balanced capital allocation strategy throughout the year with a strong emphasis on returning cash to shareholders.

  • As we look forward to 2014, we are pleased but we are hardly satisfied with our performance.

  • We believe we have numerous growth opportunities in front of us and there is significant room for improved execution and performance across many of the businesses and regions.

  • We remain focused on executing our strategic plan and in 2014, we expect to continue to improve our performance, expand operating margins and accelerate full-year revenue and earnings growth.

  • In terms of the broader market, the global markets are dynamic and certainly challenging.

  • However, we see relative stabilization of market growth rates in most regions and slight market growth rate improvements from a year ago in CRM and IC.

  • Our aim in 2014 is to grow our core business faster than the market and to grow our operating income faster than sales.

  • In addition, we plan to continue to devote our R&D and commercial investments and deliver meaningful innovation in new products, new solutions and new commercial models.

  • Our pipeline of new products such as S-ICD, WATCHMAN, Premier, Alair, SYNERGY, Lotus and Vessix are advancing and we expect them to generate a more meaningful revenue contribution in 2014.

  • Our organization is developing stronger global capabilities.

  • We now operate, measure and reward our business unit leaders and leaders from a global perspective.

  • As a result, we are improving our customer focus, registering more products internationally, and more purposefully investing our commercial resources for growth.

  • But today we are still underpenetrated in the emerging markets relative to some of our peers and however, we are making great strides to narrow the gap and we're developing capabilities more fully in emerging markets.

  • Our emerging markets sales increased to 9% of our total Company operating sales in the fourth quarter 2013 and we anticipate emerging market sales will grow to an estimated 15% of our mix by 2017.

  • So as a result of these plans, we expect to continue to generate strong cash flow which we believe will support a balanced capital allocation strategy that is aligned with our strategic priorities while enabling us to maintain sufficient flexibility.

  • So overall, we have numerous opportunities to create value for shareholders by accelerating both our sales and earnings growth in 2014.

  • And finally, I really would like to thank our employees around the world for their winning spirit and their commitment to Boston Scientific.

  • Now let me turn the call over to Dan for a more detailed review of our financials and 2014 guidance.

  • Dan Brennan - CFO

  • Thanks, Mike.

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

  • We generated adjusted EPS of $0.21 compared to $0.18 in Q4 last year and our guidance range of $0.18 to $0.20.

  • This improved profitability from the prior year was primarily driven by our operational revenue growth, continued gross margin expansion which was up 190 basis points year-over-year, and a lower effective tax rate.

  • This was partially offset by investments in our strategic growth initiatives and our core infrastructure, variable expenses associated with higher sales levels as well as a $0.01 impact from the medical device tax.

  • In addition, we generated operating cash flow of $268 million in the quarter and used over 80% of that to repurchase approximately 19 million additional shares in the quarter.

  • While we are pleased with our execution against goals, particularly with respect to the return to operational revenue growth for the year and growth in Q4 against tougher year-over-year comps, we believe we still have substantial future potential operating leverage.

  • Now I will move to a more detailed review of our business performance and operating results in the quarter.

  • For the fourth quarter of 2013, consolidated revenue of $1.838 billion represented growth of 1% compared to the prior year on an as reported basis.

  • On an operational basis which excludes the impact of foreign exchange and the divested neurovascular business, we grew revenue 5%.

  • This 5% operational revenue growth includes approximately $15 million in revenue from these C.R. Bard Electrophysiology business we acquired effective November 1 or approximately an 80 basis point contribution to growth.

  • The actual headwind from foreign exchange on sales was approximately $42 million as compared to the prior year and was fairly consistent with the $40 million impact we assumed in our guidance range.

  • Now let me provide a little more granularity on our sales for our three business groups comprised of our seven divisions.

  • To start with MedSurg, this group once again grew at a double-digit rate in constant currency and faster than its underlying markets while contributing strong operating income as well.

  • Total MedSurg sales of $613 million in the quarter were up 12% with all regions growing double digits over the prior year period on a constant currency basis.

  • MedSurg operating income for the full-year was 31.5% representing a 120 basis point increase over 2012.

  • MedSurg performed well across all its businesses led by global constant currency revenue growth of 33% in Neuromodulation, 8% Endoscopy, and 5% in Urology & Women's Health.

  • To dive into the details just a bit, Endoscopy sales grew 8% worldwide on a constant currency basis with a very strong international performance with high single-digit growth in Europe and low double-digit growth in Asia.

  • Urology & Women's Health worldwide sales grew 5% on a constant currency basis compared to the prior year quarter and this performance was driven by strong international sales up 15% year-over-year constant currency with particular strength in Europe and Latin America as we continue to build our global infrastructure in this business.

  • To close out the MedSurg highlights, we are pleased to report a second straight quarter of 30% plus year-over-year sales growth in Neuromodulation with 33% worldwide growth in the fourth quarter on a constant currency basis.

  • This predominantly US business saw 30% domestic sales growth and 70% international sales growth on a constant currency basis for the quarter compared to the year ago period as the launch of our Precision Spectra system continues to help BSC gain share and drive market growth.

  • Turning now to cardiovascular, global cardiovascular group sales which consist of our Interventional Cardiology and Peripheral Interventions divisions was flat for the quarter on a worldwide constant currency basis with sales of $705 million.

  • Cardiovascular full-year 2013 operating margin of 25% was essentially unchanged from the 2012 levels.

  • Within cardiovascular, worldwide interventional cardiology sales of $500 million declined 3% compared to fourth-quarter 2012 on a constant currency basis.

  • Outside of drug eluting stents, worldwide other interventional cardiology delivered very solid sales growth of 7% as compared to Q4 2012 in constant currency terms driven by gains in IVUS, atherectomy and continued adoption of our WATCHMAN left atrial appendage closure device in international markets.

  • Worldwide drug eluting stent revenue of $272 million was down 10% year-on-year in constant currency and below the low end of our guidance range.

  • US DES revenue of $108 million and O-US DES revenue of $164 million declined approximately 9% and 11% respectively compared to Q4 2012 on a constant currency basis.

  • We estimate that our US DES share was relatively stable both sequentially and compared with Q4 2012 in the low to mid 30s.

  • Internationally, the DES sales decline reflected disruptions in Germany following the OrbusNeich settlement in late Q3 as well as competitive product launches.

  • The WATCHMAN left atrial appendage closure product continued to show strong growth in international markets with sales up 76% for the quarter on a constant currency basis when compared with prior year Q4 which put full-year international sales growth at just over 50%.

  • Full-year WATCHMEN sales were at the low end of the $20 million to $30 million goal we outlined at our February 2013 Investor Day due to the reimbursement delays in the UK and Korea.

  • Lotus Percutaneous Valve sales with just four weeks of limited launch post European approval in Q4 did not meaningfully contribute to our revenue in the quarter.

  • Peripheral Interventions worldwide sales of $205 million in the quarter grew a very strong 7% year-on-year in constant currency led by consistent 6% constant currency growth across the US, Europe and Asia and low double-digit growth in Latin America compared to the prior year period.

  • That brought full-year global PI sales growth to 6% on a constant currency basis.

  • Now I will discuss our Rhythm Management group which consists of our Cardiac Rhythm Management and Electrophysiology business units.

  • Worldwide Rhythm Management sales in Q4 of $518 million grew 5% year-over-year on a constant currency basis with year-on-year growth in all regions.

  • Excluding the $15 million contribution from the C.R. Bard Electrophysiology acquisition closed on November 1, Rhythm Management Q4 sales grew 2% year-on-year on a constant currency basis.

  • Full-year 2013 operating margin for the group of 11% was roughly flat with 2012 levels as a result of several one-time items in Q4 2013.

  • We had incremental expenses associated with the return of the S-ICD to the market, inventory reserves related to our upcoming CRT-D and quad lead introductions, Bard integration costs and expenses related to the Rhythmia manufacturing ramp.

  • Increasing our Rhythm Management profitability is a key component of our goal of 25% operating margins by 2017 and we remain focused on achieving that objective.

  • Worldwide CRM revenue of $468 million in the fourth quarter grew 2% year-on-year as reported and 3% on a constant currency basis exceeding the high end of our guidance range and improving upon the 1% year-on-year constant currency growth we posted for the third quarter.

  • Sales grew in both the US and internationally which was led by Europe turning in high single-digit year-on-year growth for the quarter offset by slightly weaker sales in Asia.

  • To break down CRM a bit further, on a worldwide basis, defib sales were $333 million in the fourth quarter which was up 1% in constant currency from Q4 2012 on strong international core defib sales and very encouraging S-ICD sales for the quarter which brought full-year S-ICD sales above the low end of the $25 million to $45 million goal we provided at our February 2013 Investor Day despite having very limited market presence during the year.

  • Worldwide pacer sales grew 7% on a constant currency basis as compared to Q4 2012 as both our US and international pacing businesses posted 7% year-over-year growth for the quarter.

  • We continue to see strong performance in the US and improved O-US results due to the adoption of our INGENIO family of pacemakers.

  • Within Electrophysiology, the quarter's 35% year-on-year growth on a constant currency basis includes $15 million in revenue from the closing of the Bard EP acquisition.

  • Excluding the Bard EP contribution, global EP sales were down 5% primarily to share loss in therapeutic catheters.

  • Importantly, we believe the Bard EP acquisition meaningfully expands our product portfolio and commercial capabilities and we look forward to improved results in this newly strengthened franchise in 2014 and beyond.

  • Let me now briefly recap full-year 2013 revenue.

  • On a reported basis, consolidated 2013 revenue was $7.143 billion which represents a 1% decrease from the prior year on a reported basis.

  • In constant currency and excluding the impact of the neurovascular divestiture, operationally sales increased 2% compared to 2012.

  • For the full year, foreign currency negatively impacted reported full-year sales growth by approximately 215 basis points or about $156 million.

  • Moving on from sales, adjusted gross profit margin for the fourth quarter was 70% or 190 basis points higher than Q4 2012.

  • The increase was largely attributable to benefits from our value improvement programs, favorable product mix which was partially offset by price erosion.

  • For the full-year 2013, adjusted gross profit margin was 69.7% compared to 67.8% for the full-year 2012.

  • The 190 basis points net full-year gross margin improvement stemmed from improvements in standard costs, lower sales of divested businesses and the PROMUS profit share and Abbott true ups, partially offset by price as well as volume and mix.

  • Foreign exchange continued to have a very minimal impact upon gross margin as a result of our hedging program.

  • Adjusted SG&A expenses were $704 million or 38.3% of sales in Q4 2013 compared to $630.3 million or 34.6% of sales in the fourth quarter of 2012.

  • During Q4 2013, the impact from our cost savings programs were offset by several one-time investments in our strategic growth initiatives, strengthening execution in our core markets, and costs associated with expanding in emerging markets in Europe all with the goal of driving consistent topline growth.

  • Although it will be necessary to make trade-offs within the P&L in any given time period, we remain focused on achieving our goal of at least 100 basis points annual operating margin improvement and reaching an overall 25% plus OM operating margin, by 2017.

  • For the full-year 2013, adjusted SG&A expenses were $2.63 billion or 36.8% of sales compared to 34.6% of sales in 2012.

  • Recall that SG&A expenses in Q4 and for the full year 2013 include the negative impact of approximately 100 basis points from the medical device tax.

  • Adjusted research and development expenses were $215 million for the fourth quarter or 11.7% of sales.

  • This compares to $241 million or 13.2% of sales in the fourth quarter of 2012.

  • For the full-year 2013, adjusted R&D expenses were $859 million or 12% of sales.

  • Royalty expense was $24 million in the quarter or 1.3% of sales compared to $28.3 million in Q4 last year and for the full-year 2013, royalty expense was $140 million or 2% of sales.

  • On an adjusted basis, pretax operating income was $342 million in the quarter or 18.6% of sales, down only 10 basis points from Q4 2012 despite a negative 100 basis point impact from the medical device tax and investments in our strategic growth initiatives which were partially offset with targeted cost reduction initiatives and higher gross margins.

  • GAAP operating income which includes GAAP to adjusted items, was $126.6 million in Q4 2013.

  • The primary GAAP to adjusted items included in operating income for the quarter were pretax restructuring charges of $45.6 million, pretax litigation charges of $15 million, pretax loss on the neurovascular divestiture of $2.6 million, pretax contingent consideration expense of $21.8 million, and pretax amortization of $106.2 million.

  • Now I will move on to other income and expense which primarily consisted of interest expense.

  • Interest expense for the quarter was $58 million as compared to $64 million in Q4 last year due primarily to the refinancing of our public debt in Q3 of 2013.

  • Our average interest expense rate in Q4 2013 was 5% or approximately 50 basis points lower than Q4 last year.

  • For the full-year, interest expense on and as reported basis was $324 million or $63 million higher than in 2012 primarily due to a pretax one-time charge of approximately $70 million associated with our third-quarter debt refinancing.

  • Our tax rate for the fourth quarter was a negative 82.7% on a reported basis and negative 5.7% on an adjusted basis.

  • The difference between our reported and adjusted tax rates for the quarter is attributable to charges excluded in determining our non-GAAP results.

  • In addition, our Q4 adjusted tax rate includes approximately $20 million of net favorable discrete items.

  • Excluding these discrete tax items, our operational tax rate was 1.5% for the fourth quarter and 10.6% for the full-year 2013.

  • Our full-year tax rate is lower than our previous expectations due to a favorable geographic mix of earnings.

  • For the full year, we reported adjusted earnings per share of $0.73 per share.

  • On a reported GAAP basis, 2013 EPS was a loss of $0.09 per share.

  • GAAP results were 2013 included after-tax charges of $1.112 billion or $0.82 per share related to goodwill and intangible asset impairments, acquisition and divestiture related costs, litigation, restructuring related expenses and amortization of intangible assets.

  • As a reminder, full-year 2013 adjusted EPS of $0.73 includes a $0.01 one-time benefit associated with the final adjustment related to our PROMUS profit share agreement and a $0.02 benefit for the 2012 R&D tax credit which was recorded in Q1 of 2013 and certain other discrete tax items which we don't expect to reoccur.

  • Moving on to the balance sheet, DSO of 66 days increased three days compared to December of 2012 due primarily to slower collections in Europe.

  • Days inventory on hand of 149 days was up nine days compared to December of last year due to higher inventory in advance of many of the launches we have mentioned and lower cost of goods sold driven by standard cost improvements and favorable product mix.

  • Adjusted free cash flow for the quarter was $316 million compared to $361 million in Q4 of 2012.

  • The decrease is due primarily to investments in inventory to support new product launches as I just mentioned as well as an increase in capital expenditures related to our previously announced restructuring programs and infrastructure optimization initiatives.

  • For the full-year, adjusted free cash flow was $1.158 billion consistent with 2012.

  • Capital expenditures were $85 million in Q4 2013 compared to $63 million in Q4 2012 and for the full year, capital expenditures were $245 million compared to $226 million in (technical difficulty).

  • Turning to share repurchases.

  • We repurchased approximately 19 million shares for $225 million in the fourth quarter of 2013 as Mike mentioned.

  • For the full-year 2013, we repurchased approximately 51 million shares for roughly $500 million.

  • Since July 2011, we have now repurchased 238 million shares or approximately 15% of our outstanding shares.

  • We currently have $660 million of capacity remaining under our share repurchase authorization.

  • We believe buying back our stock is a good use of our cash and a key part of a balanced capital allocation strategy that values returning cash to our shareholders.

  • We plan to continue our share repurchase program into 2014 subject to business development opportunities, market conditions, our stock performance, regulatory trading windows, and other factors.

  • To summarize, Q4 was another strong quarter for Boston Scientific as we continued to make solid progress on our global strategy and we remain focused on driving profitable revenue growth.

  • I would also like to take a minute to benchmark against our February 2013 Investor Day guidance where we called for 2013 operational revenue growth of minus 2% to up 2% and delivered up 2%; adjusted operating margin of 18% to 19% and achieved 18.9%; and adjusted EPS of $0.64 to $0.70 achieving adjusted EPS of $0.73, which includes the $0.03 a nonrecurring benefits I previously mentioned.

  • We also believe that we continue to have opportunities to enhance profitability and expect to continue to generate strong cash flow.

  • Let me know walk you through our guidance for full-year 2013 as well as the first quarter.

  • For full-year 2014 revenue guidance, we estimate consolidated revenue to be in a range of $7.300 billion to $7.500 billion, which represents growth of 2% to 5% on and as reported basis.

  • Holding current foreign exchange rates constant, we expect the full-year impact of FX to be relatively neutral although we do expect a $20 million headwind in the first quarter.

  • On an operational basis which excludes the impact of foreign exchange and the divested neurovascular business, we estimate that consolidated 2014 sales will grow in a range of 3% to 5% compared to 2013 and we encourage you to model to the midpoint.

  • Included in this revenue guidance is an estimated 100 plus basis point contribution from our adjacencies including the WATCHMAN left atrial appendage closure device, Lotus Percutaneous Valve, Alair System for bronchial thermoplastic, Rhythmia mapping system, Vercise Deep Brain Stimulation system, and the Vessix Renal Denervation system.

  • Our guidance also assumes continued strong revenue growth contribution from emerging markets as we remain underpenetrated in these markets relative to some of our peers.

  • We expect our adjusted gross margin for the year as a percentage of sales to be in a range of 70% to 71%.

  • Although we expect to see continue downward pricing pressure, we expect this headwind to be offset by improved price management [specifically] through market segmentation and tiered offerings and our manufacturing value improvement programs.

  • We believe that the impact of these benefits will increase as we progress through the year.

  • As we forecast SG&A expense for 2014, we expect to continue to make necessary investments in our strategic growth initiatives to improve our core execution and to enhance our capabilities in emerging markets in Europe.

  • However, we believe the cost of these investments should be partially offset by restructuring savings.

  • For the full-year we expect adjusted SG&A as a percent of sales to be between 36.5% and 37.5%.

  • We continue to transform our R&D organization and refocus our spending to drive innovation and growth.

  • In 2014, we expect R&D spending as a percentage of sales to be in a range of 11.5% to 12%.

  • We currently expect 2014 royalties to be relatively consistent with 2013 while interest and other expense is expected to be $20 million to $25 million lower year-on-year primarily due to lower interest rates as a result of our refinancing in Q3 of last year.

  • This implies a full-year operating margin goal in the range of 20%.

  • We expect our adjusted tax rate for the full-year 2014 to be between 13% and 15%.

  • This does not assume an extension of the US R&D tax credit in 2014.

  • It does assume a more normalized geographic mix of earnings and also excludes any discrete tax items that may arise during the year.

  • We are subject to tax authority examinations in many jurisdictions that are scheduled to conclude in 2014.

  • The final resolution of these exams may result in additional favorable or unfavorable discrete tax items during the year that are difficult to forecast but may impact our full-year adjusted tax rate.

  • As a result, we expect adjusted earnings per share for the full-year 2014 to be in a range of $0.75 to $0.80 and we encourage you to model to the midpoint of the range.

  • On a GAAP basis, we expect EPS to be in a range of $0.35 to $0.40.

  • So again, to reference our February 2013 Investor Day goals, for 2014 we project low single-digit operational revenue growth, a 100 basis point improvement in operating margin, and mid to high single-digit adjusted EPS growth and believe that our guidance measures up favorably against these goals.

  • Lastly for 2014, our guidance assumes adjusted free cash flow of approximately $1.2 billion, capital expenditures of approximately $250 million, pretax amortization expense of approximately $450 million, stock comp expense of approximately $100 million, and a share count of approximately 1.345 billion fully diluted weighted average shares for our EPS calculations for the full-year subject to the conditions I mentioned earlier.

  • We hope you find this level of detail helpful for your modeling.

  • Now turning to Q1 2014, we expect consolidated revenues to be in a range of $1.755 billion to $1.805 billion.

  • If current foreign exchange rates hold constant, the headwind from FX should be approximately $20 million as I mentioned or 115 basis points relative to Q1 of 2013.

  • On an operational basis, we expect consolidated Q1 sales to grow year-over-year in a range of plus 3% to plus 5%.

  • For the first quarter, adjusted EPS is expected to be in a range of $0.16 to $0.18 per share and reported GAAP EPS is expected to be in a range of $0.06 to $0.08 per share.

  • So with that I will turn it back to Susie who will moderate the Q&A.

  • Susie?

  • Susie Lisa - IR

  • Thanks, Dan.

  • Roxanne, let's open it up to questions for the next 20, 25 minutes or so.

  • In order to enable us to take as many questions as possible, please limit yourself to one question and one quick related follow-up.

  • Roxanne, please go ahead.

  • Operator

  • (Operator Instructions).

  • David Lewis, Morgan Stanley.

  • David Lewis - Analyst

  • Good morning.

  • Just two quick questions on S-ICD in CRM more broadly, maybe one for Mike and one for Dan.

  • So Mike, obviously S-ICD is the key focus for us and investors here in 2014.

  • I wonder, could characterize fourth-quarter S-ICD traction in commentary that you were above the low end of your expected range so does this reflect capacity?

  • Can you give us any color on 1Q trends and maybe quantify the 2014 outlook for S-ICD and then a quick follow-up for Dan.

  • Mike Mahoney - President and CEO

  • Yes, absolutely.

  • So on S-ICD, we expanded our ID sites really in the fourth quarter here.

  • So as we go into right now the first quarter 2014, the full year, we do not have limitations in supply for S-ICD at this point so the operational improvements have been made.

  • What we are focused on is physician training and ensuring that we have the right excellent outcomes with S-ICD and so to this point, we are really delivering on expectations operationally.

  • In terms of the results overall for CRM, you saw strong pacer results and we also saw strong de novo ICD results.

  • The pulldown continues to be with our CRT-D results which impacted some of the headwinds of our CRM results.

  • But overall, ICDs have been strong, pacers have been strong and we anticipate S-ICD to be a significant share taker for us for de novo ICD implants as we head into 2014.

  • We are not going to provide specific guidance as to the carveout of the S-ICD number at this point but we are comfortable with S-ICD in combination with the quad lead that we will be launching in Europe will drive share gains in CRM in 2014.

  • David Lewis - Analyst

  • Thank you.

  • Dan, we were encouraged by the margin outlook for the total corporation in 2014 but you did mentioned several times in the script here CRM margins being a specific focus for 2014.

  • So can you give us a sense of what type of progress can be made in the CRM margins in 2014 and/or what are the key drivers of margin expansion for the Company in 2014?

  • Dan Brennan - CFO

  • Yes, David, the Rhythm Management profitability, as Mike mentioned, was essentially flat year-over-year driven mostly by the cost in Q4 which were what we believe one time in nature and driven by launches and bringing S-ICD back to the market.

  • So we look to make considerable progress in 2014 on Rhythm Management margin and still remain committed that we get that up to the mid-20s by that 2017 timeframe and obviously it is a big piece of how we get to our [25] as an overall Company.

  • In terms of how we do that, it is really it is throughout the P&L.

  • As you look at these new product launches that we talk about with quad and the quad lead and the CRT-Ds, those are higher margins than some of the technologies they have been replacing and that is a theme that will continue over the next few years with CRM.

  • As we launch new technologies, they will be margin accretive so that is one piece.

  • We get operating leverage from increasing sales so we plan to increase sales within CRM and that gives us the ability to drop through more relative to that sales increase.

  • And then within SG&A and R&D, it is continuing to optimize and drive the most efficient structure that we can.

  • So we are a little disappointed that we stayed flat in 2013 but remain committed for the future increases the Rhythm Management profitability.

  • David Lewis - Analyst

  • Thank you very much.

  • Operator

  • Mike Weinstein, JPMorgan.

  • Mike Weinstein - Analyst

  • Just could you spend a minute on margins?

  • One, was the sequential step down in the gross margin line if there was anything unusual that drove that?

  • Second, just want to make sure I understand your operating margin targets for 2014 relative to your long-range plan?

  • Thanks.

  • Dan Brennan - CFO

  • So in terms of Q4 versus Q3 gross margins, really the thing that impacted it the most was the transition related inventory charges that we had.

  • So we were at 70.7% gross margin in Q3, we were at 70% gross margin in Q4, and that is worth about 50 basis points in the step down from Q3 to Q4.

  • Relative to the overall margins for us going forward from an operating margin standpoint, if you heard for 2014 we are looking at something approaching 20% for an operating margin and going forward, we would be in that 100 basis point plus range now through 2017 with increasing revenue growth to really drop through more leverage and get to that goal or better by 2017.

  • So we still remain committed to the 2017 25% operating margin at this point.

  • Mike Weinstein - Analyst

  • And then on the S-ICD relaunch here, I think we were a bit surprised that we didn't see more initial progress in the US business in the fourth quarter and it is obviously tough for us outside here to judge the supply ramp over the course of the quarter.

  • So as you are thinking about the first half of this year, would you be surprised if you didn't show sequential share gains just based on having full availability at this point?

  • And do you want to give guidance for ICDs for the first quarter which I think you didn't give for the first time.

  • Thanks.

  • Mike Mahoney - President and CEO

  • Yes, so we couldn't be more enthusiastic about S-ICD and its ability to treat primary and secondary prevention patients and really the differentiation that we have with it.

  • So strategically we think it is very unique and powerful for BSC's CRM story.

  • We do think we will gain de novo ICD implant share in the first half of the year.

  • The CRT-D mix that we keep talking about is what is watering that down so our de novo ICD share we believe has increased in fourth quarter and we believe that will continue to increase in the first half of 2014 driven by the strength of ICD and the S-ICD.

  • The weighting of the CRT-D is what has been dragging that piece down which will be resolved in Europe and will start at the X4 Quad CRT-D trial in the first half of 2014 here.

  • Mike Weinstein - Analyst

  • So, Mike, in your internal modeling, do you assume that between those pluses and minuses obviously S-ICD being a plus and then the CRT-D competitiveness and replacement cycle being negatives, do you view yourselves as share gainers in ICDs in 2014?

  • Total ICDs?

  • Mike Mahoney - President and CEO

  • In total ICD, we believe for the full-year we should gain share.

  • The second half should accelerate with the quad lead being ramped up in Europe.

  • So for full-year, we believe we will be a share taker.

  • We believe we will definitely be a share taker in single chamber ICDs driven by S-ICD.

  • Mike Weinstein - Analyst

  • Okay.

  • Thanks, Mike.

  • Dan Brennan - CFO

  • And then Mike had asked one other question on the no guidance for ICDs and really the driver there is we believe now we are a much more diversified company, less reliant on one product line so we are going to be much more reticent to provide franchise specific guidance at this point.

  • Operator

  • Bob Hopkins, Bank of America.

  • Bob Hopkins - Analyst

  • Thanks for taking the question.

  • Wanted to ask two things.

  • One on the tax rate and again back on margins.

  • So obviously the tax rate was a source of upside for this particular year and I think you got about the lowest tax rate of any company that I follow.

  • So Dan, I just wanted to get your sense stepping into the role for the first time how sustainable kind of a 13% to 15% tax outlook is for the Company in light of the fact that long-term some of the intercompany loans might fade away.

  • So how long do think you can enjoy this low of a tax rate and as we model longer-term, should we model some upward pressure?

  • Dan Brennan - CFO

  • I think what we have been on record before as saying is 15% for 2014 and 2015.

  • Based on some of the geographic mix that we are seeing, I think we are comfortable saying 13% to 15% for next year and 13% to 15% for 2015 as well.

  • I would be reluctant to go further out than that at this point but I think we were very comfortable that we can have the 13% to 15% for this year and next year as well.

  • Bob Hopkins - Analyst

  • Okay, that is helpful.

  • And then on the margin front and I apologize if I have my numbers wrong here but it also looks like the cardiovascular segment margins in Q4 were down sequentially and I was wondering if you could just comment broadly on what you saw in terms of pricing across your franchises this quarter?

  • And any particulars on what drove the cardiovascular margin weakness this quarter if I've got my numbers right.

  • Mike Mahoney - President and CEO

  • So we had a slight dip down in margin in our cardiovascular reporting segment there.

  • A couple -- one is we are now preparing for the launch of our Premier platform so we have quite a bit of stock in inventory to get Premier ready to launch which we are fully launched in the first quarter 2014.

  • So a lot of inventory movement there to prepare for that which we believe will be a share taker for us in DES in 2014.

  • Also we have in terms of improvement areas our international DES performance is not -- quite frankly, our global DES performance in 2015 is not where we want it to be.

  • So we did lose a little bit of share in Europe and we were off the mark in Germany as well as Japan and a Premier approval was late.

  • We just received it shortly after TCT.

  • So it was a challenging your overall for DES.

  • It was a very positive year for our IC other business that grew 7% and that is a mix that IC other business is almost the same size of our DES business now.

  • But going into 2014, we expect improvement in our margins in the cardiovascular segment given the preparation and inventory available now for both SYNERGY and Premier.

  • Bob Hopkins - Analyst

  • Anything going on with pricing that is noteworthy relative to recent trends?

  • Mike Mahoney - President and CEO

  • Nothing significantly different.

  • We like the position just going forward in 2014, we have a three-tiered strategy with our SYNERGY price to premium and then our PROMUS Premier, that a PROMUS line.

  • So we believe that we will be able to hopefully improve the pricing impact that we have observed over the past few years but we called kind of a mid-single-digit overall price headwind in DES.

  • Bob Hopkins - Analyst

  • Great.

  • Thanks for taking the questions.

  • Operator

  • Rick Wise, Stifel.

  • Rick Wise - Analyst

  • Good morning, everybody.

  • If I could follow up on a couple of product points -- Alair it sounds like had a terrific quarter from a small base.

  • Mike, can you update us on where you are with insurance.

  • You were still hoping to get some of the large insurers.

  • What is next and maybe if you could frame the growth and continued rollout a little bit there?

  • Mike Mahoney - President and CEO

  • Yes, on Alair, we continue to make progress here.

  • We have higher reorder rates for the platform.

  • The payers continue to reimburse although on a one-off basis and we also as you know had the five-year data that was published in the second half of 2013.

  • So we remain bullish about it although we are disappointed that we haven't had a major payer reimbursement platform thus.

  • So in 2014, we are going to go through another cycle of these major payers to determine whether they are going to reimburse the platform and we have appropriate guidance, appropriate projections built into the platform and we continue to expect strong growth although it won't be breakthrough growth until we can knock down one of these payers and that is what our team is focused on in 2014.

  • Rick Wise - Analyst

  • And two quick follow-ups.

  • Now on the S-ICD, supply ramp is clearly picking up based on our work.

  • When are you at full launch there?

  • And maybe if you could also just quantify the impact of the OrbusNeich impact, what kind of a drag was it on the fourth-quarter DES sales and I assume that is this back now?

  • Thanks.

  • Mike Mahoney - President and CEO

  • On the S-ICD just state the obvious, this is not like a drug eluting stent launch.

  • So we don't just stock it and replace Premier like we would PROMUS with DES and move it into 1000 labs in a few weeks.

  • So this is really a very controlled thoughtful platform launch that requires training for physicians and the proper amount of clinical work to support it.

  • So it is not like a DES launch.

  • So the S-ICD will continue to ramp.

  • We have moved beyond our IDE centers.

  • There is really a queue of physicians that we are successfully training right now and that queue is quite extensive and so there is a lot of enthusiasm for it.

  • And we think it will really be a share taker for us for our de novo ICD implants.

  • And the awareness of the therapy continues to build and the support of it.

  • So we think this is really a unique opportunity for us and we don't see ourselves being supply constrained.

  • It is more of a constraint on the training and effective rollout of the product.

  • Dan Brennan - CFO

  • Yes, the OrbusNeich, what the OrbusNeich in Europe did was basically limit us in terms of hitting Q4 running relative to some of the tender cycles that would take place in Europe and such.

  • That is why we called that out as kind of a bit of a challenge ramping up in Q4.

  • We think in 2014 we can put some of that behind us.

  • Rick Wise - Analyst

  • Thank you.

  • Mike Mahoney - President and CEO

  • Dr. Stein, did you want to make any other comments on S-ICD rollout?

  • Ken Stein - Chief Medical Officer CRM

  • I think I would just say -- reiterate what you said, Mike, that we are not any longer capacity constrained, production has ramped up.

  • Now it is really a matter of getting physicians through the training both in terms of how to select patients, how to screen patients as well as the implant technique.

  • And what we have found are that physicians' view of the role of the device where it fits in, particularly primary prevention patients, really changes once they have actually been exposed to the training and once they have gotten a few implants under their belt.

  • Rick Wise - Analyst

  • Thank you.

  • Operator

  • Glenn Novarro, RBC Capital Markets.

  • Glenn Novarro - Analyst

  • Thanks.

  • Just a follow-up on the sub (inaudible) ICD training.

  • In the percutaneous valve market, the companies have been giving us how many centers they think they can train per quarter per year.

  • Is that something that you can share with us?

  • In other words, how many centers you are in today?

  • How many centers you think you can train per quarter because I would imagine that is going to be a big driver of the revenue growth in 2014.

  • Mike Mahoney - President and CEO

  • This is Mike here.

  • Today we haven't, that is certainly something we could consider going forward 2014 but to date we haven't publicly stated how many physicians we have trained or how many centers going forward.

  • Glenn Novarro - Analyst

  • Okay.

  • Let me ask just two quick follow-ups.

  • On the stent side, the O-US number did come in lower.

  • You highlighted Germany.

  • Were there any other sources of weakness outside the US?

  • Mike Mahoney - President and CEO

  • For drug eluting stents, yes.

  • The weakness again, 2013 wasn't a great year for us in drug eluting stents.

  • It was a very strong year in our other interventional cardiology business that grew 7%.

  • So the weakness in DES really was Japan with some competitive product launches; Europe, where we were off the market, in Germany for a significant part of the year.

  • And quite frankly in the US where we anticipated approval of our Premier product early in fourth quarter and didn't receive it until the very end of the year.

  • Glenn Novarro - Analyst

  • When does Japan reverse?

  • Mike Mahoney - President and CEO

  • So in Japan in 2014, we will launch PROMUS Premier pending approval in Japan we believe the second half of the year.

  • So we believe we will get back to share taking and a leadership position which we traditionally enjoyed in Japan as we move toward the back half of 2014.

  • We do have a -- as does our competition -- a pricing headwind in Japan this year for drug eluting stents if the pricing comes down but overall, we believe we will get back to a share taking position in the second half of the year in Japan and we should be in a share taking position in the US now as we move into the first quarter.

  • Glenn Novarro - Analyst

  • Great.

  • Then just one quick one.

  • The price read in the US trial for Lotus, when in 2014 does that start -- first half, second half?

  • Mike Mahoney - President and CEO

  • So we haven't locked that in yet with the FDA but we are projecting a second half of the year IDE initiation.

  • Glenn Novarro - Analyst

  • Okay, great.

  • Thank you.

  • Operator

  • Brooks West, Piper Jaffray.

  • Brooks West - Analyst

  • Good morning.

  • Thanks for taking the question.

  • Mike, we have been much more focused on Electrophysiology as a potential growth driver for your CRM franchise and I wonder if you would give us a little bit of color on where are you with the Bard EP integration?

  • Where are you with the Rhythmia launch?

  • And as we think about how that franchise within CRM kind of performs, I imagine you are spending pretty heavily right now.

  • Is it fair to assume that as we see revenues ramp, we are also going to see operating margin contribution pretty significantly ramp in EP?

  • Mike Mahoney - President and CEO

  • Absolutely.

  • Dan touched on it earlier -- thanks for the question first of all.

  • Our operating income margin in the Rhythm Management group is clearly not where we want it to be and we have been purposely making investments in that business because we see the size of the market and the growth potential and we have talked about it today with S-ICD, with WATCHMAN, with our Quad and all of the moves we made to your point in EP, with the acquisition of C.R. Bard, the acquisition of Rhythmia.

  • So we really like the market profile of this, we don't like our current operating income margin.

  • And as you indicate as we go through 2014 here and we deliver consistent topline growth, that will help because the business has suffered historically not growing.

  • So we believe we will grow the business.

  • You will see the reverse of the negative dilution of the acquisitions, the short-term negative dilution of Bard and the negative dilution of WATCHMAN and Rhythmia.

  • All of those kind of acquisitions that have been dilutive will reverse themselves as we move through 2014 and 2015.

  • If you combine that with improved gross margins of new products that we are launching, new S-ICD will be launch, new Quad, new platforms of our primary ICD and CRT-Ds will all be launched with improved gross margins.

  • So growing consistently, the reversal of the dilution of these adjacencies and improved gross margins of new products and smarter SG&A spend will really contribute to significant margin improvements and Rhythm Management.

  • That is really the backbone of the strategy for the overall corporation's improvement in operating income margin.

  • Dan Brennan - CFO

  • And I think it is an important point, Brooks, as well that you bring up which is EP is kind of sometimes forgotten as a piece of that Rhythm Management group but we are looking for that to contribute much more significantly to operating income going forward.

  • Brooks West - Analyst

  • Thanks for that and then on neuro, guys, better than expected growth in Q4 again.

  • I know there is a reimbursement change coming next year.

  • Can you talk about how we should think about the growth of the neuro franchise as you look to anniversary some of the really good performance this year?

  • Dan Brennan - CFO

  • Yes, we haven't provided specific guidance but we grew over 30% the second half of 2013 and we have taken a clear leadership position and gained significant share in a market that is nicely profitable.

  • So we really like the platform that we have and the capability advantages that we have and how we can extend that platform into other therapies that we are either in trial in or are considering.

  • So we would anticipate that that growth is going to come down in 2014 given the comparables that we are going to have that start really the second quarter and also some of the pricing pressure.

  • So we do believe that that business will continue to grow faster than market and gain share but not at the levels of 30%.

  • Brooks West - Analyst

  • Great.

  • Thanks, guys.

  • Operator

  • Josh Jennings, Cowen and Company.

  • Josh Jennings - Analyst

  • Good morning.

  • Thanks for taking the questions.

  • I guess first just want to start off with the international drug eluting stent question.

  • Just with that franchise and looking at the full European launch of SYNERGY, it seems there would be some meaningful opportunity there to improve on that performance.

  • Can you just take us through again what your strategy is there, pricing as well as what the opportunity is there with your fully bioabsorbable polymer technology platform?

  • Mike Mahoney - President and CEO

  • I will make a few comments and then I will have Dr. Dawkins comment as well.

  • So we believe we have been disciplined in trying to come out with a new tiered product portfolio to address what has historically been a challenging pricing market.

  • So still a large business but in drug eluting stents now, we have strategy where we have we believe a highly differentiated bioabsorbable stent with SYNERGY that we are pricing at a premium.

  • We are only launching that product in markets that will support a premium price so that is not the entire European market.

  • So our strategy to date has not been to drive that price down in workhorse level, try to gain short-term shared at the cost of eroding a market.

  • So we have been keeping that at a price premium because we think it is the best product and we are only launching that product in geographies that will support that price.

  • The second product that we have is Premier which likely will have a greater mix in terms of overall mix of DES internationally.

  • We believe that is the second best stent in the marketplace behind SYNERGY in terms of its ability to be a workhorse stent and treat complex coronary arteries and we will launch that product throughout Europe.

  • And essentially that is being done now.

  • And then we have a couple of countries that are very, very price sensitive and we have another brand just called PROMUS that we will continue to sell into those geographies.

  • So that is the strategy.

  • The fact that we are off the market in Germany which is the largest market hurt us in 2013, we will get back in the market in 2014 and we hope to use that strategy not only to gain share but to gain share thoughtfully while managing price effectively.

  • Keith Dawkins - EVP and Global Chief Medical Officer

  • I would just add, Josh, that not only do we want a premium synergy but we want to support the product with a very wide clinical trial portfolio and you will have heard in Mike's comments earlier on the call that we have now almost 28,000 patients in both Boston Scientific studies and investigator sponsored research exploring SYNERGY in complex coronary disease and a variety of other scenarios including short DAPT.

  • So we want to underpin the launch not only from the premium price point of view but also with clinical data.

  • As you know, we have now two-year published data for the first human use EVOLVE study.

  • We have completed the EVOLVE IDE trial and we in 2014, have already started a number of investigator sponsored trials which will give us additional data on the platform.

  • With regard to your comment about bioabsorbable, we are interested in the total bioabsorbable space and as you know we made an investment in a start up Amaranth.

  • We don't think the currently available DES technology which has a sub 5% market share is a workhorse product.

  • We think the structure (inaudible).

  • We think the delivery is inferior and we think that the large polymer load lasts too long and we will be working both internally and externally on a platform.

  • But right now the focus is SYNERGY because the key performances works.

  • (inaudible) want and they polymer in the drug to disappear early and that is exactly what (inaudible) .

  • Josh Jennings - Analyst

  • Great.

  • Just a quick follow-up.

  • Obviously from the questions on the call here, there is a big focus on the Street in the subcutaneous ICD franchise.

  • Was just hoping you could maybe give us some insight into some advancements in that technology platform and maybe some timelines in terms of getting the generator size down, battery life and what can be improved there and when should we see generation 2.0?

  • Thanks a lot.

  • Mike Mahoney - President and CEO

  • We can always improve on our platforms and right now with S-ICD, what we are really focused on is excellent training and excellent outcomes to carve out what we think will be a significant category.

  • And for physicians today, the S-ICD is the finished device and the longest lasting battery for subcutaneous ICDs.

  • And so we think it is uniquely positioned today and if they want a lead solution, we have many of those, a new platform that we are just launching.

  • So we think it is uniquely differentiated in its existing platform.

  • We think we have a generation a head lead in terms of the competition and we will continue to work on new features and capabilities as we look at generation 2.0 and we will certainly give more color on generation 2.0 as we go through 2014.

  • But right now our focus really is on training and delivering excellent outcomes for a very differentiated device in its current generation.

  • Operator

  • Larry Biegelsen, Wells Fargo.

  • Larry Biegelsen - Analyst

  • Good morning and thanks for fitting me in.

  • Guys, a couple of housekeeping items.

  • So the R&D tax credit, Dan, is not in the guidance so that is worth roughly 200 basis points or $0.02.

  • I just wanted to confirm that.

  • And then there were 2 I think less selling days in the first quarter of last year.

  • Is there a difference in the day count in the first quarter of this year or any quarter in 2014 that you would call out?

  • Lastly, on the Japan cuts, there were some significant cuts in 2012.

  • What are you guys expecting this year as kind of overall -- high single digits, mid to high single digits for the company?

  • And anything that you would call out on the FAP cuts for 2014?

  • Then I will drop.

  • Dan Brennan - CFO

  • Great, Larry.

  • This is Dan.

  • I can probably take those pretty quickly.

  • So the tax, you are correct, so we have not assumed the R&D tax credit in 2014 because it has not yet been enacted so and that is worth about 2 points so I think you are correct there.

  • So if that were to get enacted, that is a 2 point benefit for us.

  • On days, there should be really no change in days for us relative to Q1 or the full year.

  • And then relative to the Japan price cuts, was your third question, we don't really know.

  • That hasn't been released yet obviously so we don't know the specifics of that but that will be certainly a headwind of growth for Japan and for the Company in total depending on where the number comes in.

  • But really don't have a sense yet as to what that will be and we will be obviously more forthcoming once the Japanese government finalizes those numbers.

  • Larry Biegelsen - Analyst

  • Thanks for taking the question.

  • Operator

  • Matthew Dodds, Citigroup.

  • Matthew Dodds - Analyst

  • Just a follow-up on the last question that Larry asked, for the Japan price cuts, you have modeled in though a price cut for 2014 just waiting for the final number, right?

  • Dan Brennan - CFO

  • Yes, we certainly have modeled that in and we have all of our assumptions on share and volume and the whole bit.

  • And so in Japan, it certainly will be more of a headwind for us in 2014.

  • We think it will be offset by some volume benefit that we have especially in the second half of the year.

  • As we look at overall mix globally of DES pricing, we still kind of call it in the negative mid single-digit range and hope that will be offset with our mix strategy that we have in Europe and the new launch with Premier in the US.

  • So we think globally it will be a slight headwind but we will make up a little bit of volume with some of our new portfolio.

  • Matthew Dodds - Analyst

  • And then just quickly, MedSurg didn't get a lot of attention today.

  • Endoscopy and Urology & Women's Health, is there any reason to assume that the growth rates would deviate a lot from this year.

  • I know you are not giving guidance but is there anything in particular that might change what has been going on the last couple of quarters?

  • Mike Mahoney - President and CEO

  • No, we feel very strong and thanks for asking about that.

  • Medical Surgical represents now 45% of our business mix and growing.

  • We continue to improve its operating income margins.

  • All three of those businesses Endoscopy, Women's Health & Urology, and Neuromodulation are growing faster than market.

  • We have a new refreshed pipeline that will launch in 2014.

  • They are expanding internationally and so we don't anticipate any slowdown in the performance of our Women's Health & Urology and vascular business.

  • Matthew Dodds - Analyst

  • Thanks, Mike.

  • Operator

  • Bruce Nudell, Credit Suisse.

  • Bruce Nudell - Analyst

  • Good morning.

  • Thank you for taking the question.

  • Just looking at your guidance for 2014, 4% constant currency middle of the range; 20% operating margin and tax at 15% at the high end of the range.

  • That gets you to kind of the high end of EPS guidance.

  • Should we be thinking about, how should we think about things if things go better than that with tax at the low end and you know maybe revenue at the higher end?

  • Should we be thinking about reinvestment or upside to numbers?

  • Dan Brennan - CFO

  • Bruce, this is Dan.

  • Good question.

  • I think if you look at the numbers we gave relative to the midpoint of all of that, it should actually come to the middle of our range which would be albeit not a round number but about $0.775.

  • So I think the math would get you there.

  • You can kind of take a tax rate of 14%, you take 4% revenue growth all the way down take the middle of those and you should get kind of that $0.775.

  • I think what we would do relative to if we saw upside in businesses would be to try and book some of that upside and get a head start on the 25%.

  • Mike Mahoney - President and CEO

  • I think we are very comfortable and quite frankly we want our SG&A to be down.

  • Fourth quarter SG&A is high end we have a focus on improving our operating income margin of the Company and so if we are fortunate enough to have some additional room, we want to sharpen the SG&A and operating income margin performance of the Company.

  • Bruce Nudell - Analyst

  • Terrific.

  • As you can judge by the questions on the call, the S-ICD is an area of extreme focus.

  • But just thinking about it more generally and more in the midterm, I think most Street models have S-ICD at least at 5% unit share and given the ASP that has -- and the fact that a lot of it is not cannibalizing your business, that has important share connotations as we go forward.

  • Could you just kind of express your overall goals in terms of ICD share on a global basis in the context of the S-ICD and CRT-D launches?

  • Mike Mahoney - President and CEO

  • I guess we are probably not giving enough color in that area.

  • We think as it is kind of back to the original question, we do believe that we will be a share taker in the ICD market in 2014 with this launch, with the S-ICD being broadly available as well as the current capabilities of our existing line with its battery longevity and lead reliability and remote patient monitoring.

  • So we believe we will take share and particularly in de novo ICD.

  • (multiple speakers) And we think our CRT-D will continue to suffer in the US until we launch our quad pole program.

  • Bruce Nudell - Analyst

  • Thanks so much.

  • Susie Lisa - IR

  • Thanks, Bruce.

  • With that we would like to conclude the call.

  • Thanks very much for joining us today.

  • We appreciate your interest in Boston Scientific.

  • Before you disconnect, Roxanne, could you please give the pertinent details for the replay?

  • Operator

  • Certainly.

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