Boston Scientific Corp (BSX) 2014 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Boston Scientific Q3 2014 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.

Thank you, Roxanne.

Good morning, everyone, and thanks for joining us.

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

We issued a press release earlier this morning announcing our Q3 2014 results, which included reconciliations of the non-GAAP measures used in the release.

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

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

Mike will begin our prepared remarks with an update on our business progress, and his perspectives on the quarter.

Dan will then review our overall Q3 2014 financial results, as well as guidance for full-year 2014 and Q4 2014.

During today's question-and-answer session, Mike and Dan will be joined by our Chief Medical Officers, Dr. Keith Dawkins and Dr. Ken Stein.

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

They include, among other things, statements about our growth and market share, new product approvals and launches, clinical trials, cost savings and growth opportunities, our cash flow and expected use, our financial performance, including sales, margins, earnings and other Q4 and full-year 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 such 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'll turn it over to Mike for his comments.

Mike?

Thank you, Susie, and good morning, everyone.

Boston Scientific delivered excellent results in third quarter, as the Company continues to strengthen and build global momentum.

Our results were driven by above-market revenue growth across almost all of our seven divisions, with mid-to-upper single digit growth in all three of our business groups.

8% in cardiovascular, 7% in rhythm management, and 5% in medical surgical.

We expanded operating margins to 20.5%, representing 120 basis point improvement year-over-year, and a 70 basis point improvement quarter-over-quarter.

And we delivered 20% year-over-year adjusted EPS growth.

Our third-quarter results reflect our sharp focus on delivering meaningful innovation to our patients and physicians, while also providing clinical and economic value to our customers.

Third-quarter results built on our first half momentum, and through nine months, we have achieved 5% operational sales growth, and 20% adjusted EPS growth, demonstrating strong execution of our strategic plan, continued momentum of our diversified product portfolio, improved positioning in our core markets, and strong progress on our growth initiatives.

We continue to believe that Boston Scientific is uniquely positioned to drive sustainable double-digit EPS growth, given our reinvigorated culture, our strong pipeline, global expansion, and significant opportunities for margin improvement.

I'll now provide some brief highlights on third quarter, and thoughts on our outlook.

Dan will review the financials and fourth-quarter 2014 guidance, and then we'll take your questions.

So please note that in my remarks, all references to growth are on a year-over-year constant currency basis.

In terms of highlights for the quarter, first we delivered balanced revenue growth.

All three of our business groups and regions grew above market.

Second, we delivered exceptional performance in interventional cardiology, and third, we continued to build on track record of consistent revenue growth and expanding operating margins.

Starting with our balanced revenue growth, our 6% reported gain in sales after normalizing for foreign exchange and acquisitions represents 5% organic revenue growth.

I'll discuss the excellent growth delivered by our IC division shortly, but I'd also like to note that cardiac rhythm management group delivered strong 4% growth for the second quarter in a row, led by S-ICD, our new MINI ICD, and our X4 quadripolar CRT-D system in Europe, and pulse generator in the US.

Patient and physician demand for our S-ICD, the only defibrillator that doesn't require leads in the heart, has been very strong.

We now have a full-year goal of achieving $100 million in S-ICD revenue in 2014.

The breadth of the S-ICD clinical data set continues to grow, as the IDE and EFFORTLESS show low complications rates with no lead failures and no systemic infections.

And we continue to make progress on payer coverage, with Aetna recently announcing broader coverage for S-ICD patients.

We continue to gain share in de novo ICD implants, and we believe that we now have the number two US share position in de novo ICD implants, non-CRT-D.

We also believe that we're being rewarded for the clinical and economic value of our battery longevity.

Two very recent new independent contemporary longevity studies were presented at last month's Heart Failure Society of America, and have added to a growing body of evidence that demonstrates the superiority of BSC longevity.

These de novo share gains are offsetting replacement headwinds that will likely persist for another 18 to 24 months, given our superior battery longevity.

In CRT-D, we believe we have gained at least 1 point of de novo share since launching our X4 quad pulse generator in US this spring, but still face longevity replacement headwinds in this segment.

Our MedSurg division continues its consistent performance, which is led by endoscopy accelerating 7% growth, due to the depth and breadth of its product portfolio, and strong global leadership position.

Urology and women's health also grew above market as our strategy to invest in key international geographies fueled double-digit growth in all international regions for the fifth consecutive quarter.

Key to this growth has been the new product registrations, with more than 130 year-to-date globally, and a strong focus on physician training.

And once again, Europe delivered impressive results, with sales growth of 11%, which we view as a confirmation of our reinvigorated portfolio and strategic approach.

Within Europe, IC, urology, women's health, and Neuromod all grew double digits, while CRM and Endo sales were up mid-single digits.

We will continue to diversify our portfolio in key segments, such as the recently-closed acquisition of the interventional division of Bayer AG, while we expand geographically.

Emerging markets grew 19% and now represent 10% of our total sales.

Now turning to IC, we delivered sales growth of IC of 8% in interventional cardiology, driven by continued strong performance of our Promus PREMIER DES, where we believe we have maintained US market leadership, and gained meaningful share in Japan.

Other drivers included our next-generation Synergy stent platform, our newly-launched REBEL bare metal stents, the unparalleled breadth of our complex PCI portfolio, and strong growth off of a small base from our structural heart franchise, which now includes the Lotus percutaneous valve, and WATCHMAN left atrial appendage closure.

So looking forward, we're bullish on a rejuvenated IC pipeline, including Synergy, Lotus, and WATCHMAN, to name a few, as well as our improved global sales execution.

Our clinical programs are also progressing, as we recently enrolled our first patients in REPRISE III, a 1,000 patient clinical trial designed to support US regulatory approval for the Lotus valve system.

REPRISE III is a head-to-head randomized TAVR trial in the US, that is powered to show a possible benefit with Lotus, and the reduction of moderate or severe aortic regurgitation.

At the American Heart Association meeting, the EVOLVE II, our pivotal trial designed to support Synergy US approval, will be a late breaking clinical trial presentation in November 19.

We're also in active discussions with the FDA on WATCHMAN, following the favorable vote at the October 8 advisory panel, and we continue to target a first-half 2015 FDA approval.

Finally, our continuing track record of consistent revenue growth and expanding operating margins now extends to six straight quarters of operational revenue growth.

We're delivering on our financial commitments, and we're well ahead of the total revenue growth and EPS commitments provided at our February 2013 investor day.

For the first nine months of 2014, operational sales growth was 5%, and we've expanded adjusted operating margin over 100 basis points from our full-year 2013 rate.

For the first half of 2014, BSC grew adjusted EPS 19% year over year, which is well above our peer group's adjusted EPS growth.

We remain committed to double-digit adjusted EPS growth, and we believe this represents attractive scarcity value, given our revenue growth and margin expansion opportunities, relative to peers.

We continue to manage our litigation risk, and we are confident in our legal strategies.

We believe we are appropriately reserved, and have strong liquidity, and a very manageable cadence of events, should our legal strategies have unfavorable outcomes.

In summary, strength and execution improved results in our core business, and are more than offsetting some of the promising yet delayed adjacencies.

Our European results are evidence of our promising pipeline, and we continue to diversify our portfolio in key segments, and expand geographically.

And we have delivered constant revenue growth for six straight quarters, while driving adjusted operating margin expansion.

A key driver of our consistent track record is the cultural transformation we fostered over the past three years, which is found in our core values.

I'd like to thank our employees for their winning spirit, and their commitment to Boston Scientific, and also extend a warm welcome to our new members from Bayer Interventional.

So now, let me turn the call over to Dan.

Thanks, Mike.

I'll start with some overall perspective on the quarter, before diving into the details.

We generated adjusted EPS of $0.20 compared to $0.17 in Q3 of 2013, representing 20% year-over-year growth, and achieving the high-end of our guidance range of $0.18 to $0.20.

The improved performance in Q3 was driven primarily by operational revenue growth, and gross margin expansion.

These improvements were partially offset by SG&A spending related to our acquisition of Bayer Interventional, core product launches and variable employee-related benefits.

We posted an adjusted operating margins of 20.5%, which represents improvement of 120 basis points over Q3 of last year.

We believe we're on track to meet or exceed our profitability goal of roughly 100-plus basis points of annual operating margin improvement, which would result in an adjusted operating margins of 20% for the full year 2014.

In addition, we generated adjusted free cash flow of $330 million, and operating cash flow of $346 million in the quarter.

We continue to execute against our goals of consistent revenue growth and operating margin expansion, and believe we are uniquely positioned to drive double-digit adjusted earnings per share growth.

Now, I'll provide a detailed review of our Q3 business performance, and operating results.

Unless stated otherwise, references to quarterly results increasing or decreasing are in comparison to the third quarter of 2013, and all year-over-year revenue growth rates are given on a constant currency basis.

For the third quarter of 2014, consolidated revenue of $1.846 billion exceeded the high-end of our guidance range, and represented operational revenue growth of 7%, which excludes the impact of foreign exchange and the divested neurovascular business.

On an as-reported basis, revenue grew 6% year-over-year.

Excluding an approximate [165] basis point contribution from the Bard EP and Bayer Interventional acquisitions, organic revenue growth was 5% in the quarter (company corrected after the call).

The foreign exchange impact on sales was a $10 million headwind compared to the prior-year period, about $19 million worse than we had assumed in our guidance range.

I'll now provide more details on the revenue results for our seven divisions, which roll up into the three business groups.

I'll start with medical surgical, where total group sales of $588 million grew 5%, and group adjusted operating income increased 120 basis points to 32.4%.

Endoscopy sales grew 7% worldwide, with strong new product contribution driving growth in all franchises, most notably biliary, tissue acquisition, and metal stents.

All regions posted growth as well, and Latin America was particularly strong, growing 21% for the second quarter in a row.

Urology and women's health worldwide sales continued to outperform the market and grew 5%, with particular strength internationally, at an impressive 57% emerging market sales growth.

To close out the MedSurg results, our worldwide Neuromodulation business was flat in the quarter, which we believe is better than the overall SCS market performance.

As we previously discussed, changes to Medicare reimbursement for physician office trialing of spinal cord stimulation systems went into effect on January 1, and is negatively impacting market growth in 2014.

We are facing particularly difficult comparisons in the second half of 2014, given the anniversary of our Precision Spectra launch, coupled with the acceleration of physician office trials into Q4 of last year, in anticipation of the reimbursement change.

Our goal remains to grow faster than this market given the strength of our technology, and we are encouraged by early physician feedback on our newly-launched CoverEdge 32-contact paddle.

Turning now to the cardiovascular group, which consists of the interventional cardiology and peripheral interventions divisions, global sales for the group totaled $723 million and grew 8%.

Cardiovascular group adjusted operating margins for the quarter of 27.5% represented a 150 basis point improvement year-over-year.

Within cardiovascular, worldwide interventional cardiology sales of $508 million grew 8%.

Globally, DES sales grew 10%, with US DES sales up 13%, and OUS DES sales increasing 8%, led by an impressive 12% growth in Europe.

We continued to execute our market segmentation strategy, and increased our mix of synergy in select markets to 20% of total Europe DES sales.

Despite the reimbursement cut headwind in Japan, Asia's DES results were up 6%, and we believe we gained share sequentially in Japan.

Worldwide complex PCI solutions, or other IC, grew 2%, and includes all legacy interventional cardiology product lines outside of DES.

Including bare metal stents, core IC products which include guidewires, balloons and other accessories, and imaging products, such as intravascular ultrasound.

The 2% growth in complex PCI solutions was led by imaging, with 6% growth, and core IC with 3% growth.

Overall, we're very pleased with our IC performance in the quarter, and believe it validates our strategy to drive above market growth by providing interventional cardiologists with the broadest portfolio of technology, and differentiated products to treat the most complex coronary cases.

In structural heart, our Lotus percutaneous valve posted solid sequential growth on a constant currency basis off a small base, and WATCHMAN continued its strong growth, with revenue up 40%.

Peripheral interventions delivered worldwide revenue growth of 9%, which includes roughly one month of revenue from the acquired Bayer Interventional business.

Excluding the contribution from Bayer Interventional, worldwide PI grew 5%.

US growth of 16% was led by strength in the interventional oncology franchise, as well as the addition of the Bayer Interventional products, and revenue synergies within the legacy BSC PI business.

Excluding the contribution from Bayer Interventional, US PI grew 8%.

Partially offsetting this weakness was weakness in Asia, where we saw some procedural softness, particularly in Japan.

Finally, I'll discuss our rhythm management group, which consists of our electrophysiology and cardiac rhythm management divisions.

Worldwide rhythm management sales in Q3 of $534 million grew 7%.

Rhythm management's adjusted operating margin for Q3 of 14.1% represents a 160 basis point improvement year-over-year.

The third consecutive quarter where rhythm management margins have improved at least 100 basis points over the prior year.

Worldwide electrophysiology revenue was up 57%, with legacy BSC EP sales roughly flat.

We entered into limited market release for our Rhythmia Mapping and Navigation system, with six sites now up and running in the US and Europe, and strong physician feedback, given the system's higher fidelity images acquired in a fraction of the time required by the competitor systems.

For the cardiac rhythm management division, Q3 worldwide sales increased 4%.

Growth in CRM was led by Europe, which grew 6%.

On a worldwide basis, defib sales of $348 million grew 5%.

US defib revenue posted solid growth of 4%, driven by continued S-ICD momentum and the first full quarter of contribution from our MINI ICD and our X4 quad pulse generator, as we continued to gain de nova ICD share.

Worldwide pacer sales were flat, totaling $132 million.

International growth was strong at 8%, led by adoption of our INGENIO family of pacemakers.

We believe we continued to gain share in the OUS pacer market.

I'd like to reiterate that our belief is that CRM trends are best analyzed over multiple quarters.

This was the second consecutive quarter of 4% worldwide CRM growth, and CRM sales are up 2% on a rolling 12-month basis, which we estimate to be faster than the underlying combined pacemaker and defibrillator markets.

We continue to believe we will be a net share gainer in worldwide CRM in 2014.

Turning now to the P&L, adjusted gross profit margin for the third quarter was 71.1%, up 40 basis points year-over-year and 80 basis points sequentially.

The increase was largely attributable to benefits from our value improvement programs, partially offset by price erosion.

We continue to believe our full-year adjusted gross margin will be in the range of 70% to 71%.

Once again, the impact of foreign exchange upon gross margin was immaterial, as a result of our hedging program.

Adjusted SG&A expenses were $701 million, or 38% of sales in Q3 of this year.

Note that this excludes acquisition and divestiture-related charges of $34 million, that are included in our GAAP results.

Our Q3 2014 adjusted SG&A rate represents an 80 basis point increase in SG&A spending as a percentage of revenue, compared to Q3 of last year, due to higher spend to support product launches and one-time items related to variable employee-related benefits and our acquisition of Bayer Interventional.

We expect SG&A to decrease in Q4 of this year as a percent of sales, and we now believe our full-year SG&A spend will be in the range of 37% to 38% of revenue.

Adjusted research and development expenses were $212 million in the third quarter, or 11.5% of sales.

As a percent of sales, this represents a 100 basis point decline in year-over-year spending, due to efficiency gains and the timing of projects.

We now believe our full-year R&D spend will be in the range of 11% to 11.5% of revenue.

Royalty expense was $21 million in the quarter, or 1.1% of sales, down 50 basis points year-over-year, due to a more favorable than expected royalty structure, and we expect our royalty rate in Q4 of this year to be roughly flat to Q4 of last year.

On an adjusted basis, pretax operating income was $379 million in the quarter, or 20.5% of sales, up 120 basis points year-over-year, and 70 basis points sequentially.

Adjusted pretax operating income grew 13%, with all three of our reportable segments contributing to the improvement.

GAAP operating income, which includes GAAP to adjusted items of $315 million in the quarter, was $64 million.

The GAAP to adjusted items in the quarter include litigation charges of $139 million, acquisition and divestiture-related charges of $38 million, restructuring and other charges of $29 million, and amortization expense of $109 million.

Our total accrual for all legal matters was $945 million, as of September 30, 2014.

Now, I'll move on to other income and expense, which primarily consisted of interest expense.

Interest expense for the quarter was $54 million, which is $83 million lower than Q3 of last year, and this is primarily due to the refinancing of our public debt in Q3 of 2013, which included a pretax one-time charge of approximately $70 million.

Our tax rate for the third quarter was negative on a reported basis, due primarily to the litigation-related charges that negatively impacted reported pretax income.

Our effective tax rate was 14.4% on an adjusted basis, and we expect our Q4 2014 adjusted tax rate to be in the range of 12% to 14%, and our full-year 2014 adjusted tax rate to be in the range of 12% to 13%.

Finally, Q3 2014 adjusted EPS of $0.20 per share represents 20% year-over-year growth.

Included in the adjusted EPS calculation is an approximately $7 million lower royalty expense, almost equally offset by a higher tax rate resulting from a different geographic mix of earnings.

On a reported GAAP basis, Q3 2014 EPS was $0.03, and includes net charges and amortization expense totaling $230 million after-tax.

The $0.03 of GAAP EPS in Q3 of this year compares to breakeven in the prior-year period.

Moving onto the balance sheet, DSO of 61 days decreased 5 days compared to September of 2013, due primarily to strong collections in Europe.

Days inventory on hand of 165 days was up 4 days compared to September of last year, and up 17 days compared to December of 2013, due to higher inventory in advance of launches, and lower cost of goods sold driven primarily by standard cost improvements and favorable product mix.

Adjusted free cash flow for the quarter was $330 million, compared to $291 million in Q3 of last year, and we continue to expect our full-year 2014 adjusted free cash flow to be approximately $1.2 billion.

Capital expenditures were $57 million in Q3 of this year, compared to $56 million in Q3 of 2013.

There were no share repurchases in the quarter, as we issued a net cash payment of $414 million, to acquire the interventional division of Bayer AG.

We value returning cash to shareholders.

Share repurchase and M&A remains our top to capital allocation priorities.

Any continuation of our share repurchase program in 2014 would be subject to business development opportunities, market conditions, our stock performance, regulatory trading windows, and other factors.

I'd like to conclude with our guidance for Q4 and full-year 2014.

For the full year 2014, we expect consolidated revenue to be in the range of $7.37 billion to $7.42 billion, which represents year-over-year growth of 5% operationally, and 3% to 4% on a reported basis.

We now expect foreign exchange to be a $55 million headwind for the full year 2014.

And we expect adjusted EPS for the full year 2014 to be in the range of $0.81 to $0.83.

On a GAAP basis, we expect EPS to be in a range of $0.22 to $0.24.

Now turning to the fourth quarter, we expect consolidated revenues to be in a range of $1.875 billion to $1.925 billion.

If current foreign exchange rates hold constant, the headwind from FX should be approximately $27 million or 150 basis points, relative to Q4 last year.

On an operational basis, we expect consolidated Q4 sales to grow year-over-year in a range of 4% to 6%.

For the fourth quarter, adjusted EPS is expected to be in a range of $0.20 to $0.22 per share, and reported GAAP EPS is expected to be in a range of $0.09 to $0.11 per share.

I encourage you to check our Investor Relations website for our Q3 2014 financial and operational highlights, which outline Q3 results and 2014 guidance.

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

Thanks, Dan.

Roxanne, let's open it up to questions for the next 30, 35 minutes or so.

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

Roxanne, please go ahead.

(Operator Instructions)

Bruce Nudell, Credit Suisse.

Very clean impressive quarter.

Just in terms of the stent number, which was very impressive and well above the market, is it possible to continue that momentum with a contribution of Synergy, perhaps offset by lapping of the German issue, et cetera?

Thanks, Bruce.

It's Mike.

Good morning.

We're certainly pleased with our total DES performance, not only in the quarter, but also for the full year-to-date.

Year-to-date, our performance in DES about 4%.

In the quarter, it was 10%.

Big share gains in the US in Promus PREMIER and also Japan, and also, we continue to see strong growth in Europe.

So really balanced across the globe.

And as we look forward to -- we're not going to provide guidance, but as we look forward to 2015, we continue to see positive momentum there in the portfolio.

We anticipate large vessel product to be approved in Japan.

We expect to expand the reimbursement for Synergy in Europe, beyond the countries that we're currently selling it in.

And we continue to maintain a disciplined tiered pricing strategy that offers innovation to physicians and patients.

And we also expect to further strengthen that business, based on the adjacencies and a hopeful WATCHMAN approval in the first half of 2015, and the ongoing progress of Lotus, all of which provide a halo over to our core interventional cardiology business.

And just speaking of WATCHMAN, congratulations.

Third time's the charm.

It looks like, in my view, approval's going to happen.

It just seems that given the messiness around the panel et cetera, reimbursement may be more of an issue.

Do you -- how should we be thinking about that?

Should we be thinking about national coverage determination?

New technology add-on payment?

How should we be thinking the pace of adoption?

Because it's clearly needed in certain populations.

Yes.

So we're very encouraged by the progress.

I think whenever you bring a unique, and you're the first one to do it, innovation to market takes a while.

And we're pleased with the panel and we're hopeful to the FDA approval.

A lot of the questions you asked there, our views really haven't changed.

We still believe this is a large unserved market.

We are still confident in the $500 million market opportunity that we've talked about, and we laid that out in our investor day.

Even at that $500 million, represents just 3% to 5% penetration of afib patients with elevated stroke risk, who are eligible for warfarin.

So we feel like we've been quite conservative candidly in terms of sizing the market, and also, we've appropriately built the WATCHMAN approval timeframes as we look at our guidance for fourth quarter, and we'll provide guidance in 2015.

As you look at BSC beyond WATCHMAN, I think I would stress the strong performance in our core businesses.

And some of these adjacencies, like WATCHMAN, which are unique and innovative, have been a bit slower to market, but they are all still in play, and we look forward to the positive growth in the future.

Thanks so much.

Rick Wise, Stifel.

Thanks for the excellent quarter.

CRM, Mike, operating margins at 14.2%, obviously excellent.

Can you give us a little more color?

Is this a new sustainable operating margin level, maybe talk in a little more detail about what drove that performance?

Was it volume?

Was it cost-cutting?

And help us understand maybe looking ahead, should we expect continued sequential expansion in CRM operating margins?

Rick, this is Dan.

I'll take that one for you.

I think the key is the last part of your question, which is, that's our goal, is the continued sequential improvement in that.

For that group, operating margin expansion is their top strategic imperative, and it informs all their strategies.

So in terms of the Q3 specifics, the 160 basis point improvement to 14.1, the good news is it's not one specific thing that did it.

It's all up and down the P&L, throughout cost of goods and SG&A and R&D.

And our goal is to continue to do that in a very thoughtful and measured fashion over time, as part of our goal of -- as the total company to get into 25% by 2017.

Just as a follow-up on S-ICD, clearly you have raised your goals to the $100 million target now.

Can you talk about the roll-out?

How many -- again, any more details on how many accounts, the account penetration you're seeing, and maybe talk as well about reimbursement?

We've had some pushback from physicians who have been concerned about reimbursement.

Mike, you highlighted Aetna.

Maybe talk about the Medicare and commercial reimbursement progress.

What's needed to see another dramatic step forward in S-ICDs in 2015 and beyond, frankly?

Thanks.

We look at this as a long-term platform that's uniquely differentiated, and we continue to build on.

And so we haven't changed our market opportunity forecast, which we call the $750 million.

We'll continue to provide guidance on that in the future.

I would just say, overall, we are encouraged by the uptake of S-ICD a in the US and Europe.

The adoption of therapies being driven by growing clinical experience for the system and continued flow of positive data, and we're really supporting it, Rick, with a lot of ongoing clinical work, and we think that clinical work will build a strong unique platform for a long time.

We're supporting that with the EFFORTLESS data set.

In terms of the guidelines, the European Society of Cardiology has added the S-ICD and the recommendations for treating patients with cardiomyopathy.

And as you mentioned on the reimbursement side, we expect positive reimbursement changes in the US, and we're encouraged by the recent coverage its expansion of Aetna.

So we think all those things.

The ongoing building of evidence, the training that we're providing, the training that our sales reps receive, the experience that physicians have, and backed by robust clinical data that we continue to build on will continue to extend the lead that we have in this category.

Thanks.

David Lewis, Morgan Stanley.

Mike, a question for you, and one question for Dan.

You've been saying all year that the second half is going to accelerate.

There obviously have been concerns about that, but certainly that is the place.

And you basically said the global business is going to start looking a lot more like Europe as you get this broader pipeline being enhanced.

So I guess, I wonder if you could talk about this quarter as it relates to relative inflection and then the sustainability of these results, as you head into 2015 when you consider Synergy, WATCHMAN, and obviously what you commented on as it relates to S-ICD?

And then I had a quick follow-up.

Yes.

We want to build a high-performance company and that's a company that does it consistently.

And we measure ourselves by growing faster than the market, expanding operating income margins, and driving double-digit EPS growth, and building a winning culture and a global mindset that's unique.

So that core culture's a big part of what we do, and I think the international growth is a strong leading indicator.

The Company's had six quarters of consecutive growth, and we're very comfortable with our outlook for fourth quarter, to extend that to seven quarters.

As you mentioned, our international performance in the third quarter was 9%.

More specifically our European results were 11% growth, where we have most all of these new adjacencies that have been further matured in terms of their rollout.

So we won't give 2015 guidance, but we have a lot of exciting opportunities in 2015.

We'll continue to expand our interventional cardiology platform, like I mentioned before.

We'll continue to broaden our CRM platform in terms of S-ICD utilization and clinical work.

We're hopeful for the WATCHMAN approval.

We continue to make strong progress with our Lotus, which we just recently started our trial in the US, and we're driving momentum there in Europe.

And our MedSurg businesses, time to time, we have some fluctuations in the quarter, but overall if you look at that group of businesses, they continue to drive mid-single digit growth, excellent margin improvement and really continue to provide great balance of our portfolio.

So we are encouraged about the future but we're certainly not satisfied.

Okay.

Dan, GMs were very strong in the quarter, you obviously reiterated you were on pace for 100 basis points of op margin expansion this year, but the one thing we have seen consistent this year is you're still investing a fair amount in SG&A.

And I wonder as the pipeline expands, and you head into 2015 and that growth rate is 5% -- perhaps even higher than 5%, talk to us about that SG&A investments that's necessary in 2015 and 2016.

Does it stay at the levels that we're seeing here in 2014, or do you begin to get some leverage on that SG&A investment as you cycle into the next two years?

Thank you.

Thanks, David.

As opposed to giving specific guidance within the P&L, I think we can be clear that the SG&A rate will go down as part of us achieving our overall operating income margin targets.

As we've said in the past, there are certain times where you need to make investments and be opportunistic, and obviously there's pieces of that, that have driven the growth that we've been able to put on the board.

But overall, if you think of us getting to 25%, you should see SG&A be a lower percentage of sales on the way to 25%.

Great.

Thanks, Dan.

Mike Weinstein, JPMorgan.

Thank you, and first off, congratulations on a really nice quarter.

Mike, I wanted to get your thoughts on broader sector landscape, with the consolidation we've seen this year.

And wanted to get your thoughts on how that impacts Boston Scientific, and how you see your role playing out in it?

Great question.

Thank you.

We're very comfortable with the business units that we play in today.

We play in three big sectors.

Interventional cardiology, rhythm management and our MedSurg.

We continue to provide acquisitions and tuck-in acquisitions that strengthen our unique profile in those businesses.

We plan a lot of R&D to strengthen those.

So we're very comfortable with the business that we sell in today.

And also, we believe that cut across these different business units, it's very rare in a hospital system that a hospital will contract for our Neuromodulation products and our cardiology products and, say, our EP products, so that happens very rarely.

For customers who want to do that, we certainly can enable that, but we don't see that type of bundling across multiple sectors occur very frequently.

So we don't think that portfolio in terms of bundling really is an added value.

We don't see much benefit in that.

The benefit that we see is delivering unique innovation to physicians in certain categories.

And I think our six quarters of growth, and the performance we have in the third quarter would point to that strategy as working, and I would also point to the unique margin improvement opportunity that we have.

So I think our portfolio's positioned well, we have a lot of opportunities to improve it.

But we don't see some of the consolidation that's taking place, maybe other than cost benefits and some cost synergies.

We don't see a growth benefit with bundling across those multiple sectors, that are very disparate from each other.

Let me ask you with the performance we're seeing here, it's really being driven, as you outlined, by the base business, that you're taking share and obviously juggling stents and S-ICD and a couple of other businesses going well.

But these are challenging core markets underneath that.

So do you feel the need to add more pipeline assets?

Obviously this is a really good quarter, but you are betting on markets that aren't growing, and I know you prefer to better markets that are growing.

So given the questions on layer, WATCHMAN, and some of the pipeline stuff, do you want to add more pipeline to the portfolio today?

I think we always -- we're always looking for new capabilities.

We just acquired the Bayer technology.

But just taking a step back, I think in med device, most of the markets are fairly challenging.

So it's a very competitive business.

We feel comfortable and we strive to outperform our peers, and to grow faster than market, and you're seeing that.

But in terms of our thirst for innovation, we clearly want to drive down the SG&A that Dan commented on.

We're committed to doing that, but at the same time, we're very aggressive in looking at portfolio alternatives that will continue to strengthen our business units.

Thank you, Mike.

Bob Hopkins, Bank of America.

Two quick things.

First, on Synergy in Europe, can you give us a sense as to market share right now for your stent franchise overall in Europe, relative to the last couple quarters?

And what I'm particularly curious about is, are you gaining share while holding the price premium, or have you come off the price premium that I think you initially launched with?

Good question.

So we're very selective.

Our study hasn't changed.

We're very selective in the countries that we sell Synergy in.

And we're also very selective in terms of the price point, because we think to establish a long-term market that's strong and healthy, that type of discipline is needed.

And so we haven't come off that strategy.

So we're very careful about it.

We talked about potential reimbursement improvements potentially in France next year, which way may make Synergy more attractive in that country.

So we're disciplined about what countries we move to, and we do have a pricing premium for Synergy.

So I wouldn't articulate the share gains as a result of dropping price in Synergy.

It's something we could do, but it's not something that we feel's a long-term -- the best for BSC or for the market.

In terms of the market share specifically, where you are in Europe today, where you think you've been?

We haven't broken out the specific share of Synergy of our overall marketplace.

Okay.

And then one question on litigation.

Mike, can you give us any update on timing on when you think we'll hear something from the J&J bench trial?

If there's anything you can say generally would be helpful to folks on this topic, I'm sure people would be interested, if there's anything to say.

But mostly looking for a timing update.

Sure, Bob.

This is Dan.

I think as many folks might know, it's a bench trial.

It starts November 20, runs through the 25th, and if there's more time needed, there's some time set aside the week of the 15th to wrap it up.

We feel confident in our position heading into that.

Feel like it's a high bar that needs to be proven in that.

And since it's a bench trial, post the completion of the trial, then the judge will issue his decision at some point post the trial.

Great.

Thanks very much.

Glenn Novarro, RBC Capital Markets.

Two questions.

First, for you, Mike, in the US, a very strong ICD quarter.

You raised your guidance on the S-ICD, so that was a contributor, but you also called out the quad can and that performance.

In the fourth quarter here, Medtronic will be in the market with their quad can and quad pole.

So I'm wondering if you can discuss how we see the market dynamics playing out for Boston Scientific in the fourth quarter and going forward, with Medtronic on the market with both a quad can and quad pole?

Thanks.

Sure.

When we look at CRM, we're really pleased with our performance globally, particularly in Europe.

Again, we have more of our most recent portfolio.

In terms of the market overall, we think the market's stabilized a bit, so it's probably flat to maybe down slightly in 2014.

And as Dan mentioned, when you look at the 12 month rolling average, we're up 2%, so we're growing faster than the underlying market, and we still have quite a bit of portfolio to bring to the US.

In terms of just our performance, I think when you look at our position in it, we'll continue to accelerate the S-ICD developments, and I think that will continue to get more clinical traction and more comfort level with physicians, so we're positive about that.

We'll also, as we go into 2015, have our full year of our MINI platform, as well as our quad generator.

So in CRT-D, pointing to your question there, we feel like we've gained share on de novo implants.

We continue to lose a little bit of share on replacement headwinds, and I think despite Medtronic coming to market there, I think physicians really value the battery longevity capabilities that we offer on our products, and so, we're very comfortable with the momentum that the CRM business has, as we look forward to 2015.

Okay.

And Dan, can you give us an update on the mesh litigation, how much is reserved, and did you add to any of those reserves in the third quarter?

Thanks.

Sure, Glenn.

As you know, we don't disclose specific components of our reserve.

We obviously review our reserve every quarter, and believe it reflects what's probable and estimable at that time.

Our accrual for all legal matters, of which mesh is a portion, is $945 million as of the end of September, but as you can appreciate, we're not going to break that out specifically by any individual litigation manner.

Can you tell us if that $945 million at the end of September was at an increase from 2Q or 1Q?

It was an increase.

We had a $139 million increase in litigation from Q2 to Q3.

$139 million charge.

Okay.

Thank you.

Kristen Stewart, Deutsche Bank.

Good job on the quarter.

Dan, I couldn't help but ask a tax question, because I know you love how I ask task questions.

So can you walk us, through I know you gave some helpful comments at Morgan Stanley in September, just on the tax outlook.

Maybe just go over the tax position again, and comment on to what extent you have any exposure or utilize the double Irish situation?

Sure.

And also I have a second follow-up after that.

Sure.

I'll start with the double Irish, so we don't anticipate that the double Irish would have any impact on our structure.

And then, relative to overall broader tax commentary, so in our prepared remarks, I had mentioned that we think Q4 tax rate would be between 12% and 14%.

Overall, this year, 12% to 13%.

Sticking next year with 13% to 15% overall.

Again, all that assumes that the R&D tax credit is not reenacted.

And that's worth up to 200 basis points on our overall rate.

And then beyond 2015, as we look to balance all of the elements of our structure, you would see movements in that 100 basis point range increase from 2016 outward.

100 basis points each year going out?

Correct.

Okay, and then can you review with us too, just the IRS litigation and dispute that you have with the total amount that they're asserting that you owe them and in the context of the broader liability picture with the 945, what the total cash potential outflows could be, over the next three years or so?

Sure.

So just in summary on the Guidant transfer pricing matter, what the IRS has asserted for the period that's in question now is $1.162 billion, which is in our SEC filings, plus interest.

What we have total for all of our tax controversies is $1.5 billion, of which the Guidant TPV is a portion of that and we obviously don't disclose the specifics of that reserve.

From a timing perspective, it's moved more slowly than we would have anticipated, and the next event will be scheduling a trial date, which could be in 2016 or later.

And with ultimate resolution in 2017 or beyond.

So it's moved at a pretty slow pace overall relative to the expected timing.

Perfect.

Thanks very much.

Brooks West, Piper Jaffray.

Question for Keith, on Lotus, just trying to get any anecdotal feedback on the clinical performance, with the expanded offering.

I know you had data at London Valves.

Just any update on the program in Europe would be helpful.

Then I've got one follow-up.

Sure, Brooks.

So as you know, at London Valves we presented the 250 patients out of REPRISE II extension, which confirms excellent acute performance.

And importantly an adjudicated moderate perivalve leak rate of 0.6%, which I think is best in class at 30 days and no severe leaks.

We're continuing the investigation of Lotus in Europe with the RESPOND trial which is 1,000 patient post-market study.

And that's on track in terms of recruitment.

And also in that trial, unlike REPRISE II extension, there's the addition of the third valve size, 25-millimeter valves.

So there's 23, 25, and 27.

And we knew from the REPRISE II CE Mark trial that there were a number of patients that fell within that 25-millimeter range who didn't get the valve, because we didn't have it and had a 27.

And that negatively affected the pacemaker rate.

So it's too early to say yet whether the pacemaker rate has fallen, with the additional 25 millimeter valve, but we'll know that from the RESPOND study.

Also, we had three strong live cases at TCT and another three strong live cases at London Valves.

And one of those three at London Valves was a direct aortic implant from Saint Thomas's Hospital with an excellent result, and that's alternative access we're continuing to pursue with the Lotus valve.

And then just finally, of course, our pivotal REPRISE III trial has already started in this country, which is head-to-head comparison with CoreValve.

Just over 1,000 patients.

So that, plus our pipeline which is in development, makes us very confident about our TAVI offerings.

Thanks for that.

Maybe just a quick follow-up there.

When would we see the registry data in Europe, and get a read on the pacemaker rate?

And then just on the Bayer acquisition, maybe not as much of a focus for investors, but that is a piece of business that really hasn't been invested in, for the last couple years.

Just wondering, now that you've got a month or so under your belt there, if you could a little more clarity on the opportunity set, and how we could see the peripheral business grow at Boston Scientific looking forward?

So just to answer the first part of that question, we'll have an early cut of the RESPOND data before the 1,000 patients are recruited.

But we haven't made public the time point of that, as of yet.

Thank you.

Just a quick comment on our peripheral business.

Year-to-date, through third quarter, it's up about 6%.

And it's 9% in the quarter with Bayer and probably about 5% or so ex-Bayer.

But overall, our views on it, Brooks, haven't changed.

We have a nice addition there, where we have an excellent sales force that's already calling on those customers, and there are two segments that we had been playing.

And they're the clear leader in thrombectomy, and so that's a nice addition for us, and also in the athrectomy market, you have a market there that's growing and it's a market that will put additional investment in terms of the portfolio, in both in the cardiovascular side and also the peripheral side.

So it's a nice addition for us.

It leverages our current sales force and capabilities as well as our operations.

And we continue to invest in that peripheral vascular market and that should be a nice piece for it.

Great.

Thanks.

Larry Biegelsen, Wells Fargo.

I had one housekeeping question and two real questions.

Dan, on the 4% to 6% organic growth guidance for Q4, is that with or without acquisitions?

That's with.

And so the real organic so -- is that adjusted for acquisitions, I'm sorry, or not?

In other words, if you adjust for acquisitions, would it be more like 2 to 4, or not?

That's correct.

The Bayer and Bard are a little north of 150 basis points, so you would back that off of the 4 to 6. Yes.

So underlying, you're calling for basically about 2 to 4?

Is that correct?

And is there any reason why you would expect it to decelerate a little bit from Q3?

Yes.

So 2.5 to 4.5 is probably the way we would characterize it, and there's a couple things that would drive that.

Some that are Q3 this year related, and some that are Q4 last year related.

On the Q4 last year, a simple one, we grew 5% last year in Q4.

So that was our strongest quarter to date, so it's a little bit tougher comp overall.

Specifically in that comp is a really tough Neuromod comp of 33% growth, that they had last year in the fourth quarter.

And then when you think of Q3, we had some businesses that significantly outperformed their underlying market growth rates.

If you think IC, Endo, and CRM at 8, 7 and 4, so a more normalized growth rate there, and that puts you into the range that we've put out for the fourth quarter.

Okay.

That's helpful.

I wanted to ask one on Synergy and one on the J&J litigation.

So for Keith, prior bioabsorbable polymer drug-eluting stent trials haven't shown a clinical difference from durable polymer DES at one year.

How important do you think the clinical difference is at one year for the market acceptance of Synergy in the US?

And then on J&J, Mike, I appreciate your comments earlier, or Dan.

Maybe if you could, it's been obviously an overhang for the stock.

If you could lay out what you think the key issues are and facts on your side of the argument, and your ability to manage an unfavorable outcome, should that happen?

Thanks.

Thanks, Larry.

I think it's important to understand that all bioabsorbable polymer stents are not similar, so the data for some of the competitive products available in Europe have really related to a thick strut stent, with a thick layer of polymer, that is late to resorb.

So as you know, we'll be interested to see the results of the EVOLVE II pivotal trial which is a late breaker on the 19th of November at AHA.

And this will be the first bioabsorbable polymer pivotal trial in the US.

And we're anticipating FDA approval of Synergy in late 2015.

So I think the fact that the polymer and the drug synchronously disappears at about the three-month time point makes Synergy interesting, and obviously will give us the opportunity of formally exploring short dual anti-platelet therapy.

Couple that with the acute performance, which is I think well recognized, we're very confident of this as a product, and we'll be excited to bring it to the US.

Incidentally, as a note, so we will be holding an investor event in Chicago after the presentation on November 19, which will be at -- the event will be at 1:00 PM Central time and we can obviously discuss the details of the trial at that time.

And then Larry, on the J&J case, this is Dan, two parts to your question.

I don't think it would serve us well to get into all the specifics of why we feel confident, relative to our position there.

As you can certainly appreciate, the last piece, in terms of our ability to deal with any unfavorable outcome, we're confident that we can deal with that.

Thanks for taking the questions.

Josh Jennings, Cowen and Company.

I just wanted to first start with maybe some commentary, if you would, on the health of the US and international ICD markets from a pricing and volume perspective and then your outlook for these markets going forward?

And just on the subcutaneous ICD, increasing your guidance, it's nice to see, but maybe you could talk about where you're having the most success on the implant side.

Is it cannibalizing or gaining share in the single market segment?

Or is the subcutaneous ICD actually expanding the market, and having success in implants in patients who were previously contraindicated for an intravascular device?

Some comments on the market.

Just to reinforce what I mentioned a little bit earlier, it's still a challenging market, but we think it's improved slightly.

So we're calling the overall CRM market flattish to slightly down negative, and maybe zero to negative 2 in terms of the full year, when you roll together both CRM, including pacemakers and defibrillators.

As we indicated before, we're growing a little bit faster than the market.

Quite a bit faster in Europe, where we have all of our new products and slightly faster than the market in the US.

So overall, we are pleased with our performance.

On S-ICD, we're probably not going to give you all the information you wanted there.

I think as we talked about, we're being very thoughtful with the rollout of I S-ICD in terms of our training, the clinical build that we have with it.

We've given guidance earlier in the year of $75 million.

We've taken that up to comfortable with delivering against 100, and we'll likely provide additional insights in terms of our clinical strategy and growth prospects, as we point towards our January 2015 call.

In terms of the marketplace itself, we do think on occasion it clearly expands the market in some ways.

Some patients typically couldn't have an ICD, whether it be young patients, patients with venous access issues.

So in some cases it will expand the market.

But overall, I think, if you look at the BSC in our portfolio you have a market that's we think is more stable than it has in the past and we have a unique innovative platform that's multi-years ahead of the competition that we're committed to building clinical evidence from, and having that product is helpful.

It strengthens our full rhythm management business when you take into account our EP business and more traditional ICDs.

So Ken Stein, I'm not sure if you have additional comments you'd like to make, Dr. Stein.

Thanks, Mike.

And thanks, Josh.

I just want to reiterate what Mike said.

I think it's very hard to break down how many of these patients are getting the S-ICD, are patients who would otherwise have gotten a transvenous system, and certainly we are very happy with our transvenous system as well.

I think if you look at, our the really strong candidates?

The obvious candidates for the S-ICD today, these are patients who don't have vascular access or patients who have had recurrent or prior infected transvenous systems, patients with renal failure.

And so even though I don't think we have any way to break down how many of those would not have gotten a transvenous ICD, certainly there's a large number of them who are just completely new to the market.

Great.

If I could ask one follow-up for Dr Stein?

Mike, I heard your comments about, you're still comfortable with the $500 million market opportunity for the WATCHMAN.

I think there's been some consternation after the panel with a lot of panel members recommending a label of it being, quote-unquote, second-line therapy.

Just wondering if -- get some perspective from Dr Stein about what has changed in terms of that guidance by the panel as a second line therapy, and does that impact the overall market opportunity?

Thanks a lot.

I'll take that.

Thanks, Josh.

I'm just glad I think what you recognize is what's important out of the panel and beyond the vote, are the commentary and the explanations the panel members have made for the vote, and we really are very pleased with the overall outcome of the panel.

I think if you looked at what the comments are and what they said, is that they really wanted us just to be more clear in our labeling about who are the appropriate patients for this.

And if you look at what we said, I think we are in full agreement with them.

We have never, ever thought that this device ought to be a broad replacement for all anticoagulant therapy.

This is a device for patients who are eligible to take warfarin, but who, for one reason or another, have valid clinical reasons to prefer a long-term alternative.

And while we can't get into the details of any of our discussions with FDA at this point, from our standpoint, really, what the panel was asking us to do was to clarify what we have always said we believe to be the appropriate patient population.

Okay.

Great.

With that, we'd like to conclude the call.

Thanks for joining us today.

We appreciate your interest in Boston Scientific.

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(Operator Instructions)

Bruce Nudell, Credit Suisse.

Very clean impressive quarter.

Just in terms of the stent number, which was very impressive and well above the market, is it possible to continue that momentum with a contribution of Synergy, perhaps offset by lapping of the German issue, et cetera?

Thanks, Bruce.

It's Mike.

Good morning.

We're certainly pleased with our total DES performance, not only in the quarter, but also for the full year-to-date.

Year-to-date, our performance in DES about 4%.

In the quarter, it was 10%.

Big share gains in the US in Promus PREMIER and also Japan, and also, we continue to see strong growth in Europe.

So really balanced across the globe.

And as we look forward to -- we're not going to provide guidance, but as we look forward to 2015, we continue to see positive momentum there in the portfolio.

We anticipate large vessel product to be approved in Japan.

We expect to expand the reimbursement for Synergy in Europe, beyond the countries that we're currently selling it in.

And we continue to maintain a disciplined tiered pricing strategy that offers innovation to physicians and patients.

And we also expect to further strengthen that business, based on the adjacencies and a hopeful WATCHMAN approval in the first half of 2015, and the ongoing progress of Lotus, all of which provide a halo over to our core interventional cardiology business.

And just speaking of WATCHMAN, congratulations.

Third time's the charm.

It looks like, in my view, approval's going to happen.

It just seems that given the messiness around the panel et cetera, reimbursement may be more of an issue.

Do you -- how should we be thinking about that?

Should we be thinking about national coverage determination?

New technology add-on payment?

How should we be thinking the pace of adoption?

Because it's clearly needed in certain populations.

Yes.

So we're very encouraged by the progress.

I think whenever you bring a unique, and you're the first one to do it, innovation to market takes a while.

And we're pleased with the panel and we're hopeful to the FDA approval.

A lot of the questions you asked there, our views really haven't changed.

We still believe this is a large unserved market.

We are still confident in the $500 million market opportunity that we've talked about, and we laid that out in our investor day.

Even at that $500 million, represents just 3% to 5% penetration of afib patients with elevated stroke risk, who are eligible for warfarin.

So we feel like we've been quite conservative candidly in terms of sizing the market, and also, we've appropriately built the WATCHMAN approval timeframes as we look at our guidance for fourth quarter, and we'll provide guidance in 2015.

As you look at BSC beyond WATCHMAN, I think I would stress the strong performance in our core businesses.

And some of these adjacencies, like WATCHMAN, which are unique and innovative, have been a bit slower to market, but they are all still in play, and we look forward to the positive growth in the future.

Thanks so much.

Rick Wise, Stifel.

Thanks for the excellent quarter.

CRM, Mike, operating margins at 14.2%, obviously excellent.

Can you give us a little more color?

Is this a new sustainable operating margin level, maybe talk in a little more detail about what drove that performance?

Was it volume?

Was it cost-cutting?

And help us understand maybe looking ahead, should we expect continued sequential expansion in CRM operating margins?

Rick, this is Dan.

I'll take that one for you.

I think the key is the last part of your question, which is, that's our goal, is the continued sequential improvement in that.

For that group, operating margin expansion is their top strategic imperative, and it informs all their strategies.

So in terms of the Q3 specifics, the 160 basis point improvement to 14.1, the good news is it's not one specific thing that did it.

It's all up and down the P&L, throughout cost of goods and SG&A and R&D.

And our goal is to continue to do that in a very thoughtful and measured fashion over time, as part of our goal of -- as the total company to get into 25% by 2017.

Just as a follow-up on S-ICD, clearly you have raised your goals to the $100 million target now.

Can you talk about the roll-out?

How many -- again, any more details on how many accounts, the account penetration you're seeing, and maybe talk as well about reimbursement?

We've had some pushback from physicians who have been concerned about reimbursement.

Mike, you highlighted Aetna.

Maybe talk about the Medicare and commercial reimbursement progress.

What's needed to see another dramatic step forward in S-ICDs in 2015 and beyond, frankly?

Thanks.

We look at this as a long-term platform that's uniquely differentiated, and we continue to build on.

And so we haven't changed our market opportunity forecast, which we call the $750 million.

We'll continue to provide guidance on that in the future.

I would just say, overall, we are encouraged by the uptake of S-ICD a in the US and Europe.

The adoption of therapies being driven by growing clinical experience for the system and continued flow of positive data, and we're really supporting it, Rick, with a lot of ongoing clinical work, and we think that clinical work will build a strong unique platform for a long time.

We're supporting that with the EFFORTLESS data set.

In terms of the guidelines, the European Society of Cardiology has added the S-ICD and the recommendations for treating patients with cardiomyopathy.

And as you mentioned on the reimbursement side, we expect positive reimbursement changes in the US, and we're encouraged by the recent coverage its expansion of Aetna.

So we think all those things.

The ongoing building of evidence, the training that we're providing, the training that our sales reps receive, the experience that physicians have, and backed by robust clinical data that we continue to build on will continue to extend the lead that we have in this category.

Thanks.

David Lewis, Morgan Stanley.

Mike, a question for you, and one question for Dan.

You've been saying all year that the second half is going to accelerate.

There obviously have been concerns about that, but certainly that is the place.

And you basically said the global business is going to start looking a lot more like Europe as you get this broader pipeline being enhanced.

So I guess, I wonder if you could talk about this quarter as it relates to relative inflection and then the sustainability of these results, as you head into 2015 when you consider Synergy, WATCHMAN, and obviously what you commented on as it relates to S-ICD?

And then I had a quick follow-up.

Yes.

We want to build a high-performance company and that's a company that does it consistently.

And we measure ourselves by growing faster than the market, expanding operating income margins, and driving double-digit EPS growth, and building a winning culture and a global mindset that's unique.

So that core culture's a big part of what we do, and I think the international growth is a strong leading indicator.

The Company's had six quarters of consecutive growth, and we're very comfortable with our outlook for fourth quarter, to extend that to seven quarters.

As you mentioned, our international performance in the third quarter was 9%.

More specifically our European results were 11% growth, where we have most all of these new adjacencies that have been further matured in terms of their rollout.

So we won't give 2015 guidance, but we have a lot of exciting opportunities in 2015.

We'll continue to expand our interventional cardiology platform, like I mentioned before.

We'll continue to broaden our CRM platform in terms of S-ICD utilization and clinical work.

We're hopeful for the WATCHMAN approval.

We continue to make strong progress with our Lotus, which we just recently started our trial in the US, and we're driving momentum there in Europe.

And our MedSurg businesses, time to time, we have some fluctuations in the quarter, but overall if you look at that group of businesses, they continue to drive mid-single digit growth, excellent margin improvement and really continue to provide great balance of our portfolio.

So we are encouraged about the future but we're certainly not satisfied.

Okay.

Dan, GMs were very strong in the quarter, you obviously reiterated you were on pace for 100 basis points of op margin expansion this year, but the one thing we have seen consistent this year is you're still investing a fair amount in SG&A.

And I wonder as the pipeline expands, and you head into 2015 and that growth rate is 5% -- perhaps even higher than 5%, talk to us about that SG&A investments that's necessary in 2015 and 2016.

Does it stay at the levels that we're seeing here in 2014, or do you begin to get some leverage on that SG&A investment as you cycle into the next two years?

Thank you.

Thanks, David.

As opposed to giving specific guidance within the P&L, I think we can be clear that the SG&A rate will go down as part of us achieving our overall operating income margin targets.

As we've said in the past, there are certain times where you need to make investments and be opportunistic, and obviously there's pieces of that, that have driven the growth that we've been able to put on the board.

But overall, if you think of us getting to 25%, you should see SG&A be a lower percentage of sales on the way to 25%.

Great.

Thanks, Dan.

Mike Weinstein, JPMorgan.

Thank you, and first off, congratulations on a really nice quarter.

Mike, I wanted to get your thoughts on broader sector landscape, with the consolidation we've seen this year.

And wanted to get your thoughts on how that impacts Boston Scientific, and how you see your role playing out in it?

Great question.

Thank you.

We're very comfortable with the business units that we play in today.

We play in three big sectors.

Interventional cardiology, rhythm management and our MedSurg.

We continue to provide acquisitions and tuck-in acquisitions that strengthen our unique profile in those businesses.

We plan a lot of R&D to strengthen those.

So we're very comfortable with the business that we sell in today.

And also, we believe that cut across these different business units, it's very rare in a hospital system that a hospital will contract for our Neuromodulation products and our cardiology products and, say, our EP products, so that happens very rarely.

For customers who want to do that, we certainly can enable that, but we don't see that type of bundling across multiple sectors occur very frequently.

So we don't think that portfolio in terms of bundling really is an added value.

We don't see much benefit in that.

The benefit that we see is delivering unique innovation to physicians in certain categories.

And I think our six quarters of growth, and the performance we have in the third quarter would point to that strategy as working, and I would also point to the unique margin improvement opportunity that we have.

So I think our portfolio's positioned well, we have a lot of opportunities to improve it.

But we don't see some of the consolidation that's taking place, maybe other than cost benefits and some cost synergies.

We don't see a growth benefit with bundling across those multiple sectors, that are very disparate from each other.

Let me ask you with the performance we're seeing here, it's really being driven, as you outlined, by the base business, that you're taking share and obviously juggling stents and S-ICD and a couple of other businesses going well.

But these are challenging core markets underneath that.

So do you feel the need to add more pipeline assets?

Obviously this is a really good quarter, but you are betting on markets that aren't growing, and I know you prefer to better markets that are growing.

So given the questions on layer, WATCHMAN, and some of the pipeline stuff, do you want to add more pipeline to the portfolio today?

I think we always -- we're always looking for new capabilities.

We just acquired the Bayer technology.

But just taking a step back, I think in med device, most of the markets are fairly challenging.

So it's a very competitive business.

We feel comfortable and we strive to outperform our peers, and to grow faster than market, and you're seeing that.

But in terms of our thirst for innovation, we clearly want to drive down the SG&A that Dan commented on.

We're committed to doing that, but at the same time, we're very aggressive in looking at portfolio alternatives that will continue to strengthen our business units.

Thank you, Mike.

Bob Hopkins, Bank of America.

Two quick things.

First, on Synergy in Europe, can you give us a sense as to market share right now for your stent franchise overall in Europe, relative to the last couple quarters?

And what I'm particularly curious about is, are you gaining share while holding the price premium, or have you come off the price premium that I think you initially launched with?

Good question.

So we're very selective.

Our study hasn't changed.

We're very selective in the countries that we sell Synergy in.

And we're also very selective in terms of the price point, because we think to establish a long-term market that's strong and healthy, that type of discipline is needed.

And so we haven't come off that strategy.

So we're very careful about it.

We talked about potential reimbursement improvements potentially in France next year, which way may make Synergy more attractive in that country.

So we're disciplined about what countries we move to, and we do have a pricing premium for Synergy.

So I wouldn't articulate the share gains as a result of dropping price in Synergy.

It's something we could do, but it's not something that we feel's a long-term -- the best for BSC or for the market.

In terms of the market share specifically, where you are in Europe today, where you think you've been?

We haven't broken out the specific share of Synergy of our overall marketplace.

Okay.

And then one question on litigation.

Mike, can you give us any update on timing on when you think we'll hear something from the J&J bench trial?

If there's anything you can say generally would be helpful to folks on this topic, I'm sure people would be interested, if there's anything to say.

But mostly looking for a timing update.

Sure, Bob.

This is Dan.

I think as many folks might know, it's a bench trial.

It starts November 20, runs through the 25th, and if there's more time needed, there's some time set aside the week of the 15th to wrap it up.

We feel confident in our position heading into that.

Feel like it's a high bar that needs to be proven in that.

And since it's a bench trial, post the completion of the trial, then the judge will issue his decision at some point post the trial.

Great.

Thanks very much.

Glenn Novarro, RBC Capital Markets.

Two questions.

First, for you, Mike, in the US, a very strong ICD quarter.

You raised your guidance on the S-ICD, so that was a contributor, but you also called out the quad can and that performance.

In the fourth quarter here, Medtronic will be in the market with their quad can and quad pole.

So I'm wondering if you can discuss how we see the market dynamics playing out for Boston Scientific in the fourth quarter and going forward, with Medtronic on the market with both a quad can and quad pole?

Thanks.

Sure.

When we look at CRM, we're really pleased with our performance globally, particularly in Europe.

Again, we have more of our most recent portfolio.

In terms of the market overall, we think the market's stabilized a bit, so it's probably flat to maybe down slightly in 2014.

And as Dan mentioned, when you look at the 12 month rolling average, we're up 2%, so we're growing faster than the underlying market, and we still have quite a bit of portfolio to bring to the US.

In terms of just our performance, I think when you look at our position in it, we'll continue to accelerate the S-ICD developments, and I think that will continue to get more clinical traction and more comfort level with physicians, so we're positive about that.

We'll also, as we go into 2015, have our full year of our MINI platform, as well as our quad generator.

So in CRT-D, pointing to your question there, we feel like we've gained share on de novo implants.

We continue to lose a little bit of share on replacement headwinds, and I think despite Medtronic coming to market there, I think physicians really value the battery longevity capabilities that we offer on our products, and so, we're very comfortable with the momentum that the CRM business has, as we look forward to 2015.

Okay.

And Dan, can you give us an update on the mesh litigation, how much is reserved, and did you add to any of those reserves in the third quarter?

Thanks.

Sure, Glenn.

As you know, we don't disclose specific components of our reserve.

We obviously review our reserve every quarter, and believe it reflects what's probable and estimable at that time.

Our accrual for all legal matters, of which mesh is a portion, is $945 million as of the end of September, but as you can appreciate, we're not going to break that out specifically by any individual litigation manner.

Can you tell us if that $945 million at the end of September was at an increase from 2Q or 1Q?

It was an increase.

We had a $139 million increase in litigation from Q2 to Q3.

$139 million charge.

Okay.

Thank you.

Kristen Stewart, Deutsche Bank.

Good job on the quarter.

Dan, I couldn't help but ask a tax question, because I know you love how I ask task questions.

So can you walk us, through I know you gave some helpful comments at Morgan Stanley in September, just on the tax outlook.

Maybe just go over the tax position again, and comment on to what extent you have any exposure or utilize the double Irish situation?

Sure.

And also I have a second follow-up after that.

Sure.

I'll start with the double Irish, so we don't anticipate that the double Irish would have any impact on our structure.

And then, relative to overall broader tax commentary, so in our prepared remarks, I had mentioned that we think Q4 tax rate would be between 12% and 14%.

Overall, this year, 12% to 13%.

Sticking next year with 13% to 15% overall.

Again, all that assumes that the R&D tax credit is not reenacted.

And that's worth up to 200 basis points on our overall rate.

And then beyond 2015, as we look to balance all of the elements of our structure, you would see movements in that 100 basis point range increase from 2016 outward.

100 basis points each year going out?

Correct.

Okay, and then can you review with us too, just the IRS litigation and dispute that you have with the total amount that they're asserting that you owe them and in the context of the broader liability picture with the 945, what the total cash potential outflows could be, over the next three years or so?

Sure.

So just in summary on the Guidant transfer pricing matter, what the IRS has asserted for the period that's in question now is $1.162 billion, which is in our SEC filings, plus interest.

What we have total for all of our tax controversies is $1.5 billion, of which the Guidant TPV is a portion of that and we obviously don't disclose the specifics of that reserve.

From a timing perspective, it's moved more slowly than we would have anticipated, and the next event will be scheduling a trial date, which could be in 2016 or later.

And with ultimate resolution in 2017 or beyond.

So it's moved at a pretty slow pace overall relative to the expected timing.

Perfect.

Thanks very much.

Brooks West, Piper Jaffray.

Question for Keith, on Lotus, just trying to get any anecdotal feedback on the clinical performance, with the expanded offering.

I know you had data at London Valves.

Just any update on the program in Europe would be helpful.

Then I've got one follow-up.

Sure, Brooks.

So as you know, at London Valves we presented the 250 patients out of REPRISE II extension, which confirms excellent acute performance.

And importantly an adjudicated moderate perivalve leak rate of 0.6%, which I think is best in class at 30 days and no severe leaks.

We're continuing the investigation of Lotus in Europe with the RESPOND trial which is 1,000 patient post-market study.

And that's on track in terms of recruitment.

And also in that trial, unlike REPRISE II extension, there's the addition of the third valve size, 25-millimeter valves.

So there's 23, 25, and 27.

And we knew from the REPRISE II CE Mark trial that there were a number of patients that fell within that 25-millimeter range who didn't get the valve, because we didn't have it and had a 27.

And that negatively affected the pacemaker rate.

So it's too early to say yet whether the pacemaker rate has fallen, with the additional 25 millimeter valve, but we'll know that from the RESPOND study.

Also, we had three strong live cases at TCT and another three strong live cases at London Valves.

And one of those three at London Valves was a direct aortic implant from Saint Thomas's Hospital with an excellent result, and that's alternative access we're continuing to pursue with the Lotus valve.

And then just finally, of course, our pivotal REPRISE III trial has already started in this country, which is head-to-head comparison with CoreValve.

Just over 1,000 patients.

So that, plus our pipeline which is in development, makes us very confident about our TAVI offerings.

Thanks for that.

Maybe just a quick follow-up there.

When would we see the registry data in Europe, and get a read on the pacemaker rate?

And then just on the Bayer acquisition, maybe not as much of a focus for investors, but that is a piece of business that really hasn't been invested in, for the last couple years.

Just wondering, now that you've got a month or so under your belt there, if you could a little more clarity on the opportunity set, and how we could see the peripheral business grow at Boston Scientific looking forward?

So just to answer the first part of that question, we'll have an early cut of the RESPOND data before the 1,000 patients are recruited.

But we haven't made public the time point of that, as of yet.

Thank you.

Just a quick comment on our peripheral business.

Year-to-date, through third quarter, it's up about 6%.

And it's 9% in the quarter with Bayer and probably about 5% or so ex-Bayer.

But overall, our views on it, Brooks, haven't changed.

We have a nice addition there, where we have an excellent sales force that's already calling on those customers, and there are two segments that we had been playing.

And they're the clear leader in thrombectomy, and so that's a nice addition for us, and also in the athrectomy market, you have a market there that's growing and it's a market that will put additional investment in terms of the portfolio, in both in the cardiovascular side and also the peripheral side.

So it's a nice addition for us.

It leverages our current sales force and capabilities as well as our operations.

And we continue to invest in that peripheral vascular market and that should be a nice piece for it.

Great.

Thanks.

Larry Biegelsen, Wells Fargo.

I had one housekeeping question and two real questions.

Dan, on the 4% to 6% organic growth guidance for Q4, is that with or without acquisitions?

That's with.

And so the real organic so -- is that adjusted for acquisitions, I'm sorry, or not?

In other words, if you adjust for acquisitions, would it be more like 2 to 4, or not?

That's correct.

The Bayer and Bard are a little north of 150 basis points, so you would back that off of the 4 to 6. Yes.

So underlying, you're calling for basically about 2 to 4?

Is that correct?

And is there any reason why you would expect it to decelerate a little bit from Q3?

Yes.

So 2.5 to 4.5 is probably the way we would characterize it, and there's a couple things that would drive that.

Some that are Q3 this year related, and some that are Q4 last year related.

On the Q4 last year, a simple one, we grew 5% last year in Q4.

So that was our strongest quarter to date, so it's a little bit tougher comp overall.

Specifically in that comp is a really tough Neuromod comp of 33% growth, that they had last year in the fourth quarter.

And then when you think of Q3, we had some businesses that significantly outperformed their underlying market growth rates.

If you think IC, Endo, and CRM at 8, 7 and 4, so a more normalized growth rate there, and that puts you into the range that we've put out for the fourth quarter.

Okay.

That's helpful.

I wanted to ask one on Synergy and one on the J&J litigation.

So for Keith, prior bioabsorbable polymer drug-eluting stent trials haven't shown a clinical difference from durable polymer DES at one year.

How important do you think the clinical difference is at one year for the market acceptance of Synergy in the US?

And then on J&J, Mike, I appreciate your comments earlier, or Dan.

Maybe if you could, it's been obviously an overhang for the stock.

If you could lay out what you think the key issues are and facts on your side of the argument, and your ability to manage an unfavorable outcome, should that happen?

Thanks.

Thanks, Larry.

I think it's important to understand that all bioabsorbable polymer stents are not similar, so the data for some of the competitive products available in Europe have really related to a thick strut stent, with a thick layer of polymer, that is late to resorb.

So as you know, we'll be interested to see the results of the EVOLVE II pivotal trial which is a late breaker on the 19th of November at AHA.

And this will be the first bioabsorbable polymer pivotal trial in the US.

And we're anticipating FDA approval of Synergy in late 2015.

So I think the fact that the polymer and the drug synchronously disappears at about the three-month time point makes Synergy interesting, and obviously will give us the opportunity of formally exploring short dual anti-platelet therapy.

Couple that with the acute performance, which is I think well recognized, we're very confident of this as a product, and we'll be excited to bring it to the US.

Incidentally, as a note, so we will be holding an investor event in Chicago after the presentation on November 19, which will be at -- the event will be at 1:00 PM Central time and we can obviously discuss the details of the trial at that time.

And then Larry, on the J&J case, this is Dan, two parts to your question.

I don't think it would serve us well to get into all the specifics of why we feel confident, relative to our position there.

As you can certainly appreciate, the last piece, in terms of our ability to deal with any unfavorable outcome, we're confident that we can deal with that.

Thanks for taking the questions.

Josh Jennings, Cowen and Company.

I just wanted to first start with maybe some commentary, if you would, on the health of the US and international ICD markets from a pricing and volume perspective and then your outlook for these markets going forward?

And just on the subcutaneous ICD, increasing your guidance, it's nice to see, but maybe you could talk about where you're having the most success on the implant side.

Is it cannibalizing or gaining share in the single market segment?

Or is the subcutaneous ICD actually expanding the market, and having success in implants in patients who were previously contraindicated for an intravascular device?

Some comments on the market.

Just to reinforce what I mentioned a little bit earlier, it's still a challenging market, but we think it's improved slightly.

So we're calling the overall CRM market flattish to slightly down negative, and maybe zero to negative 2 in terms of the full year, when you roll together both CRM, including pacemakers and defibrillators.

As we indicated before, we're growing a little bit faster than the market.

Quite a bit faster in Europe, where we have all of our new products and slightly faster than the market in the US.

So overall, we are pleased with our performance.

On S-ICD, we're probably not going to give you all the information you wanted there.

I think as we talked about, we're being very thoughtful with the rollout of I S-ICD in terms of our training, the clinical build that we have with it.

We've given guidance earlier in the year of $75 million.

We've taken that up to comfortable with delivering against 100, and we'll likely provide additional insights in terms of our clinical strategy and growth prospects, as we point towards our January 2015 call.

In terms of the marketplace itself, we do think on occasion it clearly expands the market in some ways.

Some patients typically couldn't have an ICD, whether it be young patients, patients with venous access issues.

So in some cases it will expand the market.

But overall, I think, if you look at the BSC in our portfolio you have a market that's we think is more stable than it has in the past and we have a unique innovative platform that's multi-years ahead of the competition that we're committed to building clinical evidence from, and having that product is helpful.

It strengthens our full rhythm management business when you take into account our EP business and more traditional ICDs.

So Ken Stein, I'm not sure if you have additional comments you'd like to make, Dr. Stein.

Thanks, Mike.

And thanks, Josh.

I just want to reiterate what Mike said.

I think it's very hard to break down how many of these patients are getting the S-ICD, are patients who would otherwise have gotten a transvenous system, and certainly we are very happy with our transvenous system as well.

I think if you look at, our the really strong candidates?

The obvious candidates for the S-ICD today, these are patients who don't have vascular access or patients who have had recurrent or prior infected transvenous systems, patients with renal failure.

And so even though I don't think we have any way to break down how many of those would not have gotten a transvenous ICD, certainly there's a large number of them who are just completely new to the market.

Great.

If I could ask one follow-up for Dr Stein?

Mike, I heard your comments about, you're still comfortable with the $500 million market opportunity for the WATCHMAN.

I think there's been some consternation after the panel with a lot of panel members recommending a label of it being, quote-unquote, second-line therapy.

Just wondering if -- get some perspective from Dr Stein about what has changed in terms of that guidance by the panel as a second line therapy, and does that impact the overall market opportunity?

Thanks a lot.

I'll take that.

Thanks, Josh.

I'm just glad I think what you recognize is what's important out of the panel and beyond the vote, are the commentary and the explanations the panel members have made for the vote, and we really are very pleased with the overall outcome of the panel.

I think if you looked at what the comments are and what they said, is that they really wanted us just to be more clear in our labeling about who are the appropriate patients for this.

And if you look at what we said, I think we are in full agreement with them.

We have never, ever thought that this device ought to be a broad replacement for all anticoagulant therapy.

This is a device for patients who are eligible to take warfarin, but who, for one reason or another, have valid clinical reasons to prefer a long-term alternative.

And while we can't get into the details of any of our discussions with FDA at this point, from our standpoint, really, what the panel was asking us to do was to clarify what we have always said we believe to be the appropriate patient population.

Okay.

Great.

With that, we'd like to conclude the call.

Thanks for joining us today.

We appreciate your interest in Boston Scientific.

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