Boston Scientific Corp (BSX) 2015 Q1 法說會逐字稿

Thank you, ladies and gentlemen, for standing by.

Welcome to the Boston Scientific Q1 2015 earnings call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I will now turn the conference over to our host.

Ms. Lisa, please go ahead.

Thank you, Karen.

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 Q1 2015 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 approximately 45 minutes, slightly shorter than usual, due to our upcoming Investor Day this Friday, May 1. 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 Q1 2015 financial results, as well as guidance for full-year 2015 and Q2 2015.

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'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 Q2 and full-year 2015 guidance, as well as our tax rate, 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 started off 2015 with solid results in the first quarter, as the Company continued to deliver and build global momentum.

We delivered 6% operational revenue growth and 18% year-over-year adjusted EPS growth, excluding the $0.02 negative impact for foreign exchange.

We believe that we're poised to continue the strong execution; and in first quarter, we announced several new important product approvals and M&A transactions.

These include the acquisition of the AMS Urology Portfolio and the endoscopic ultrasonic capabilities of Xlumena, and our recently announced China joint venture with Frankenman Corporation.

We're also pleased with the recent FDA approvals of our WATCHMAN Left Atrial Appendage closure platform and the next generation EMBLEM S-ICD platform.

All of these things reinforce our belief that Boston Scientific is well positioned to deliver at or above market revenue growth and, despite the increased currency headwinds, we maintain our goal of consistent double-digit adjusted EPS growth through our ongoing operating margin improvement initiatives.

I'll provide some brief highlights of first quarter, but I'll save the comments on our longer term outlook for the Investor Day this Friday.

Dan will review the financials and second quarter 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 basis, constant currency unless otherwise specified.

In terms of the few highlights for the quarter, we delivered 6% operational revenue growth, strong operating margin expansion of 250 basis points versus first quarter 2014, and delivered adjusted EPS growth, excluding currency, of 18%.

Lastly, we strengthened and diversified our portfolio through new product approvals and M&A.

Our results were driven by strong operational revenue growth in all three of our reporting segments, Cardiovascular, up 10%, Rhythm Management, up 4%, and MedSurg, up 4%.

In addition, we saw balanced operational revenue growth from all of our primary regions, led by Asia at 7%, and the US and Europe at 6% growth.

And China continues to be our emerging market standout, with revenue growth of 25% in the quarter.

So once again, we're also encouraged by the strong results across most of our businesses.

But I'd particularly like to point out another strong quarter in Interventional Cardiology, which grew at 8% after growing 9% in the second half of 2014.

Growth in Interventional Cardiology was balanced across all franchises and regions, with 7% global DES growth, led by strength in Asia.

DES growth also was solid in Europe where the SYNERGY stent now represents more than 25% of our European DES sales.

Our PCI guidance business also continues to deliver strong results, particularly in Japan, with their OptiCross IVUS catheter and ongoing launch of our integrated Polaris imaging system.

Finally, our IC performance was supported by our emerging Structural Heart business, including Lotus Percutaneous Aortic Valve and WATCHMAN LAAC platforms.

So beyond IC, we're also pleased with our broad based growth of our MedSurg businesses and particularly encouraged by the ongoing strength of our Neuromodulation division.

Neuromodulation grew 6% in the quarter versus a 23% 2014 quarterly growth comp.

And since 2011, the Neuromod division has risen from number 3 to number 1 market share in the US spinal cord stimulation market.

Turning to Rhythm Management.

Our Rhythm Management, our EP business 6%, and our CRM business grew 4% in the quarter and likely ahead of the market growth rate.

Our CRM performance, albeit against a favorable first quarter comp, represents another quarter of above market revenue growth on the strength of our portfolio and global commercial execution.

Note, for the balance of 2015, we expect to see CRM perform more in line with the overall market growth rate, given tougher quarter-over-quarter comparables and replacement cycle headwinds.

So turning now to profitability.

We expanded adjusted operating margins to 22.5% in the quarter, a 250 basis point improvement year-over-year and 180 basis point improvement sequentially.

This drove 18% year-over-year adjusted EPS growth, if you exclude the $0.02 negative impact of foreign exchange.

Importantly, we remain committed to expanding our operating margins and we are making consistent progress in marching towards our target of 25% adjusted operating margin in 2017, which would represent a 620 basis point improvement from 2012 actual.

In terms of EPS, despite the significant currency headwinds, we remain committed to our target for double-digit EPS growth and we're delivering on our financial goals, with eight straight quarters of operational revenue growth, and we're ahead of the revenue growth and adjusted EPS targets provided at our February 13 Investor Day.

We look forward to updating those targets with you on Friday.

So moving to some other highlights.

Our first 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.

A great example of this from our PI business is the exciting Eluvia Drug-Eluting Stent data that was released just this morning at the Charing Cross Symposium in London.

Eluvia is a drug-eluting stent that's purpose-built for the superficial femoral artery, or SFA.

We're extremely excited about our breakthrough trial results.

The Majestic trial enrolled 57 patients at 15 European centers and met its primary endpoint, with an impressive [94.4%] patency rate at nine months.

In addition to the 94.4% patency rate, Eluvia also demonstrated a low target lesion revascularization rate, at 3.6%, and an excellent safety profile, with a 3.6% major adverse event rate, with no deaths and no amputations.

We expect Eluvia will begin its global IDE in the second half of the year.

We expect to receive CE Mark in the first half of 2016.

We're also pleased with the early days of our distribution agreement with CR Bard and their Lutonix Drug Coated Balloon for peripheral artery disease.

And Jeff Mirviss will highlight these PI vascular solutions on Friday.

We also strengthened our Endoscopy portfolio and emerging market capabilities.

In China, our Endoscopy business announced a strategic alliance with Frankenman Medical.

The Frankenman joint venture combines the expertise of a global medical device leader and the local market expertise of a recognized leader in the China surgical device market.

This JV will allow both players to reach more clinicians to reach more patients.

There were 1 million bile duct stone removal procedures being done annually in China as open surgical procedures.

Converting these procedures from open surgical procedures to endoscopic procedures is expected to lead to better patient outcomes and healthcare economics, as well as drive enhanced Endoscopy growth.

Also in Endoscopy, we announced the acquisition of Xlumena, which will enhance the position of Boston Scientific in the field of interventional endoscopic ultrasound, called EUS Therapeutics.

Interventional EUS is a nonsurgical, minimally invasive procedure that uses high frequency sine waves to produce digital -- sorry, to produce detailed images of the GI tract and the adjacent organs.

To complement EUS, our recently approved fine needle aspiration platform is often used to collect tissue samples for cancer diagnosis.

These solutions complement our recent launch of the SpyGlass Digital System and Advanix Pancreatic Stent.

Dave Pierce will provide more insight into the rationale and opportunity for both Frankenman and Xlumena on Friday.

Finally, we're excited about the transformational potential of our recent acquisition, the AMS Urology portfolio.

Upon closing, the AMS asset acquisition will nearly double the size of our Uro business to $1 billion.

Urology devices represents an attractive global market of $4 billion, with large unmet patient needs and considerable international expansion opportunities.

Upon closing of AMS, the combined business will create a comprehensive portfolio of leadership positions across five major segments.

The deal also offers strong financial returns, with an ROIC that exceeds our cost of capital by 2017 and an estimated adjusted EPS impact of $0.03 of accretion in 2016 and $0.07 of accretion in 2017.

The AMS deal is also strategically compelling for BSC overall, as it further our goal of category leadership in each of our businesses.

Overall, we've been demonstrating strong execution of our strategic plan, and we continue to believe that Boston Scientific is uniquely positioned to drive double-digit adjusted EPS growth, given our strong pipeline, global expansion, and significant opportunities for margin improvement.

I would like to thank all of our employees 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.

Thanks, Mike.

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

We generated adjusted EPS of $0.21, achieving the high end of our guidance range of $0.19 to $0.21 and representing 6% year-over-year growth.

Unfavorable foreign exchange impacted Q1 adjusted EPS by $0.02, versus the $0.01 we had assumed in our Q1 guidance range.

Excluding this unfavorable foreign exchange impact, Q1 adjusted EPS grew 18% year-over-year.

The strong performance in Q1 was driven primarily by operational revenue growth and gross margin expansion.

Our Q1 2015 adjusted operating margin of 22.5% achieved the high end of our full-year adjusted operating margin guidance range and represents improvement of 250 basis points over Q1 of 2014.

We continue to execute against our goals of consistent revenue growth and operating margin expansion and, despite the significant FX headwinds, our goal for full-year 2015 remains double-digit adjusted EPS growth.

Now I'll provide a more detailed review of our Q1 business performance and operating results.

Unless stated otherwise, references to quarterly results increasing or decreasing are in comparison to the first quarter of 2014, and all revenue growth rates are given on a year-over-year constant currency basis.

For the first quarter of 2015, consolidated revenue of $1.768 billion represented operational revenue growth of 6%, which excludes the impact of foreign exchange and the divested Neurovascular business.

On an as reported basis, revenue was flat year-over-year.

Excluding an approximate 160 basis point contribution from the Bayer Interventional acquisition, organic revenue growth was 5% in the quarter.

The foreign exchange impact on sales was a $117 million headwind compared to the prior year period, about $27 million worse than we assumed in our prior guidance range.

I'll now you provide more details on the revenue results for our seven businesses which roll up into our three reporting segments.

I'll start with MedSurg, where total group sales of $542 million grew 4% and adjusted operating margin was 29%, a decrease of 150 basis points over Q1 of 2014.

Endoscopy sales grew 4% worldwide, with continued strength in Asia and Latin America.

And looking ahead, we believe the recent launch of our Digital SpyGlass and the acquisition of Xlumena, a leader in the field of endoscopic ultrasound therapies, will help drive above market growth in Endoscopy for the full year 2015.

Our recently announced Frankenman JV in China should also drive growth longer term.

Urology and Women's Health worldwide sales grew 3%, as strong Urology performance in the US and Europe offset challenges resulting from a softer Women's Health market and lower capital sales.

Emerging markets revenue growth remained strong in the quarter, growing north of 20%.

To close out the MedSurg results, our worldwide Neuromodulation business posted solid sales growth of 6% versus a very difficult comparison in Q1 of last year, when the business grew 23% globally.

We believe our Q1 performance was in line with market and expect to grow faster than the market for the full year 2015, driven by the strong uptake of our 32-contact paddle and the strength of our pipeline, which we will discuss further at our upcoming Investor Day on Friday.

Turning now to the Cardiovascular group, which consists of the Interventional Cardiology and Peripheral Interventions divisions.

Global sales for the group totaled $712 million and grew 10%.

Cardiovascular group adjusted operating margins for the quarter of 30.6% represented an impressive 630 basis point improvement year-over-year on strong stent volumes and manufacturing favorability.

Within Cardiovascular, worldwide Interventional Cardiology sales of $495 million grew 8%.

Globally, DES grew 7%, with OUS DES revenue growing double digits.

DES growth was particularly strong in Asia, driven by Promus PREMIER stent uptake in China and the launch of the Promus PREMIER large vessel stent in Japan.

Worldwide Complex PCI solutions grew 4%, led by high teens growth in imaging.

We continue to see strong physician demand for our OptiCross IVUS catheter and ongoing launch of our Polaris Imaging System.

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

In Structural Heart, our Lotus Percutaneous Valve grew 31% sequentially on a constant currency basis, and WATCHMAN continued its strong growth, with global revenue up more than 60% versus Q1 of last year.

We look forward to highlighting our Structural Heart franchise more this Friday at our Investor Day.

Peripheral Interventions delivered worldwide revenue growth of 14%, driven by revenue from the acquired Bayer Interventional business which grew 6% overall and 9% in PI.

Excluding the contribution from Bayer Interventional, worldwide PI revenue grew 2%.

US legacy PI grew 5% in the quarter, partially offset by weakness in Japan and Latin America, where we saw some procedural softness.

Finally, I'll discuss our Rhythm Management group, which consists of our Electrophysiology and Cardiac Rhythm Management divisions.

Worldwide Rhythm Management sales in Q1 of $514 million grew 4%.

Rhythm Management's adjusted operating margin for Q1 of 14.3% represents a 160 basis point improvement year-over-year, the fifth consecutive quarter where Rhythm Management adjusted operating margins have improved 100 basis points or more over the prior year.

We would expect more modest Rhythm Management margin expansion in Q2 and then an acceleration in the second half of the year, given the launch timing and favorable gross margin profiles of the Emblem S-ICD and Accolade pacing product lines.

Worldwide Electrophysiology revenue was up 6%, with both the US and OUS achieving that same 6% growth rate.

As a reminder, Q1 is the first quarter where the acquired Bard EP business is fully in the base.

We continued the limited market release for our Rhythmia Mapping and Navigation system with strong physician feedback, given the system's higher fidelity images acquired in a fraction of the time required by competitor systems.

We are encouraged at the early sign of stabilization in EP that we saw in Q4 of 2014 have continued into Q1.

For the Cardiac Rhythm Management division, Q1 worldwide sales increased 4%.

Growth in CRM was led by Europe, which grew 6% for the third consecutive quarter.

On a worldwide basis, Defib sales of $335 million grew 5%.

US Defib revenue posted solid growth of 6%, admittedly against an easier comparison driven by continued S-ICD system momentum, EL ICD, MINI ICD and our X4 quad CRT-D pulse generator, as we continue to gain de novo ICD share.

Worldwide pacer sales totaled $121 million and grew 3%.

OUS, pacer revenue grew double digits, and we believe we continue to gain share in the OUS pacer market.

US pacer sales declined mid-single digits, due to shares losses to competitors with MRI capabilities.

We've consistently stated that our belief is that the CRM trends are best analyzed over multiple quarters.

The 4% revenue growth in worldwide CRM in Q1 brings our rolling 12-month growth rate to 4%, which we believe to be well in excess of the underlying combined pacemaker and defibrillator market.

And as Mike said, we would expect CRM growth to be more in line with the market for the balance of 2015, given tougher comps and competitors' launches.

Turning now to the P&L, adjusted gross profit margin for the first quarter was 71.3%, up 140 basis points year-over-year.

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

As a result of our hedging program, FX positively impacted gross margin by 80 basis points.

Adjusted SG&A expenses were $653 million, or 37% of sales in Q1 2015.

Our Q1 2015 adjusted SG&A rate was roughly flat to Q1 of 2014 and down approximately 90 basis points from the full year 2014 rate.

We are encouraged by this lower rate of spend, as we begin to better leverage revenue growth in our Structural Heart franchise and realize the benefits from a cultural shift in our approach to spending.

We continue to believe our full year 2014 SG&A rate will be in the range of 36.5% to 37.5%.

Adjusted research and development expenses were $192 million in the first quarter, or 10.8% of sales.

This adjusted R&D rate is flat to Q1 of 2014 and slightly below our 2015 guidance, due to efficiency gains and the timing of projects.

We still believe our full-year R&D rate will be in the range of 11% to 12% of revenue and are expecting a sequential uptick in R&D spending as a percent of revenue.

Royalty expense was $17 million in the quarter, or 1% of sales, which is consistent with our guidance.

This royalty rate is down roughly 130 basis points year-over-year, due to the renegotiation of a royalty agreement in Q2 of last year.

On an adjusted basis, pretax operating income was $398 million in the quarter, or 22.5% of sales, up 250 basis points year-over-year and 230 basis points from the full-year 2014 rate.

Adjusted pretax operating income grew 12%, driven by a 38% increase in our Cardiovascular segment.

GAAP operating income, which includes GAAP to adjusted items of $374 million, was $24 million in Q1 2015.

The primary GAAP to adjusted items for the quarter included litigation related charges of $193 million, contingent consideration expense of $27 million, restructuring related charges of $22 million, and amortization expense of $113 million.

The $193 million in litigation related net charges were predominantly related to increase in our Transvaginal Surgical Mesh product liability reserves.

As a reminder, our reserves cover both known and estimated future cases and claims asserted against us, as well as cost of defense.

Earlier this morning as part of our earnings release filing, we disclosed a conditional settlement in the amount of approximately $119 million to resolve 2,790 cases and claims, including a case in the District Court of Dallas County for where there is an approximate $35 million judgment.

The settlement and the distribution of settlement funds to participating claimants are conditioned upon, among other things, achieving minimum required claimant participation thresholds.

If their participation thresholds are not satisfied, we may terminate the agreement.

We will fund the settlement with two payments to be made on or before October 1, 2015.

Our total legal reserve for all legal matters, of which Mesh is included, was $1.453 billion as of March 31, 2015.

But keep in mind that our total legal reserve also includes the second installment of the J&J settlement for $300 million, which was actually paid out in April.

Now I'll move on to other income and expense.

Net interest expense for the quarter was $56 million, which is $2 million higher than Q1 of 2014.

Other expense was $15 million, and this consisted primarily of foreign exchange losses incurred during the quarter.

Our tax rate for the first quarter was 97.5% on a reported basis, due primarily to the litigation related charges that negatively impacted reported pretax income.

Our effective tax rate was 13.1% on an adjusted basis, which includes slightly less than $2 million of discrete tax benefits in the quarter.

We continue to expect our full-year 2015 adjusted tax rate to be in the range of 13% to 15%.

Finally, as mentioned, Q1 2015 adjusted EPS of $0.21 includes $0.02 of unfavorable FX and represents 6% year-over-year growth, or 18% growth excluding the impact of foreign exchange.

On a reported GAAP basis, Q1 2015 EPS was breakeven and includes net charges and amortization expense totaling $287 million after tax.

Breakeven on a GAAP basis in Q1 2015 compares to GAAP EPS of $0.10 in the prior year period.

Moving on to the balance sheet.

DSO of 59 days decreased 3 days compared to March of 2014, due primarily to strong collections in Europe.

Days inventory on hand of 166 days was up 11 days compared to March of last year and up 10 days compared to December of 2014, 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 $118 million, compared to $161 million in Q1 last year.

The decrease is largely due to the collection of long dated European receivables in Q1 of 2014.

We continue to expect our full-year 2015 adjusted free cash flow to be approximately $1.3 billion.

Capital expenditures were $46 million in Q1 2015, compared to $59 million in Q1 2014.

The decrease is attributable to timing and we still expect CapEx to be roughly $260 million for the full year 2015.

There were no share repurchases in the quarter, consistent with our decision to temporarily suspend the share repurchase program following the announcement of the agreement to acquire AMS Men's Health and Prostate Health businesses.

Near term, our capital allocation priorities are debt repayment, maintaining flexibility and tuck-in M&A.

Beyond the 12- to 18-month suspension period, any continuation of our share repurchase program would be subject to business development opportunities, market conditions, our stock performance, regulatory trading windows and other factors.

We now expect to end 2015 with 1.360 billion to 1.370 billion fully diluted weighted average shares outstanding.

I'd like to conclude with guidance for Q2 and full-year 2015.

For Q2 2015, we expect consolidated revenues to be in a range of $1.8 billion to $1.85 billion.

If current foreign exchange rates hold constant, the headwind if FX should be approximately $140 million, or 750 basis points relative to Q2 of 2014.

On an operational basis, we expect consolidated Q2 sales to grow year-over-year in a range of 4% to 6%.

We expect adjusted gross margin for the second quarter to be in the range of 70.5% to 71.5%, prior to key new product launches in the second half of the year.

Assuming a more normalized adjusted R&D rate in Q2 of 11% to 12%, we expect adjusted operating margin in the second quarter to be between 21% and 22%.

Finally, 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.

For the full year 2015, we now expect consolidated revenue to be in the range of $7.225 billion to $7.375 billion, which represents year-over-year growth of 4% to 6% operationally versus our initial 3% to 6% operational growth guidance for the year and down 2% to flat on a reported basis.

As a result of a stronger dollar, at current rates we expect foreign exchange to be roughly a $450 million headwind for the full year 2015.

Based on our strong Q1 and expectations for the second half of the year, we now expect our full-year 2015 adjusted operating margin to be between 22% and 22.5%, an improvement of roughly 200 basis points at the midpoint over full-year 2014.

Despite a more significant FX headwind than when we issued our initial 2015 guidance in early February, we're holding our full-year adjusted EPS range at $0.88 to $0.92 per share.

Previously, we assumed that unfavorable FX would negatively impact full-year 2015 adjusted EPS by $0.04, or $0.01 per quarter.

Based on current rates, we now expect FX to impact full-year 2015 adjusted EPS by $0.06 to $0.07, but are not changing our adjusted EPS guidance.

The high end of our adjusted EPS guidance range represents double-digit growth and, based on current rates, approximately 15% growth at the midpoint, when you exclude the impact of foreign exchange that I mentioned.

On a GAAP basis, we expect EPS to be in a range of $0.32 to $0.38.

I encourage you to check our Investor Relations website for Q1 2015 Financial and Operational Highlights, which outlines Q1 results, as well as Q2 and full-year 2015, guidance including P&L line item guidance.

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

Thanks, Dan.

Karen, let's open it up for questions for the next 20 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.

Karen, please go ahead.

Thank you.

(Operator Instructions)

And we'll go to Bob Hopkins, Bank of America.

Please go ahead.

Thanks.

I appreciate you taking the question.

So two quick things.

First, I heard a litigation update there on mesh.

And I was wondering -- I might have missed the numbers -- I'm just curious how many cases does that settlement represent and then how many cases remain outstanding?

Thanks, Bob.

What it represents is 2,970 cases that it will -- the conditional settlement would cover.

Next we'll go to Mike Weinstein, JPMorgan.

Please go ahead.

Wow, I hope I can get in my one question.

So ask maybe two questions before she cuts off.

So first, can you just talk a little bit about the absorption of FX over the balance of the year.

What are the offsets, as you're absorbing the FX headwind?

And then I think you gave a Lotus commentary really for the first time, you talked about 31% sequential growth for Lotus.

I know they're small numbers still, but can you give us a sense of where revenues stand today?

Thanks.

Sure, Mike.

I'll take the FX question.

So as I mentioned, initial guidance we gave was $0.04 of FX headwind at the EPS line.

And now we see that as $0.06 to $0.07.

Feel like it's important.

Our goal is still double-digit EPS growth.

So we hold the EPS range at $0.88 to $0.92.

And we'll look to make trade-offs in other parts of the P&L to offset that and still deliver within the $0.88 to $0.92.

Because at the high end of that range at $0.92, that's still double-digit for the year versus last year.

So basically, trade-offs within the rest of the P&L.

David Lewis, Morgan Stanley.

I'll just continue to comment, just briefly on the Lotus.

We'll have quite a bit of time devoted to that on Friday during the Investor Day.

And at Investor Day, we'll actually give our targets for 2015 in our Structural Heart business, as well as 2016.

So we'll provide some more financial detail, about an hour update there in terms of Lotus.

But overall, the program continues to build.

We're enrolling our US IDE trial, REPRISE III.

We expect to have the trial enrolled by year-end 2015.

And we continue to gain share in the accounts that we're selling in Europe, and we'll provide a more detailed update on Friday.

David Lewis, Morgan Stanley, please go ahead.

Karen?

Yes, ma'am.

Could you allow them time for one follow-up question?

Oh, sure.

Certainly.

I'm sorry.

That's okay.

Thank you.

Great.

Thanks.

Good morning.

So two questions.

Dan, the first one, coming back to margins.

Looking at the last two quarters, 200 basis points year-on-year in the fourth quarter, 250 basis points this quarter.

And I appreciate there's some currency in those numbers and hedging gains.

But you appear to be tracking well in excess of the more than 100 basis points you need to get to 25% in 2017.

Is that a fair estimation that based on the results of the last six months, you certainly are tracking above expectations that would get you to 25% in 2017?

Thanks, David.

I think the way I described that is that we have good visibility to getting to that 25%.

And you think, last year we ended at 20%, 20.2%.

And then 2017 is the 25%.

So we need to average more than the 100 basis points per year in order to get to that 25% number in 2017.

And obviously, very focused on doing that.

We did raise the low end of the operating margin guidance range for the full year to 22%, from 21.5%.

So now our guidance is 22% to 22.5% for this year, and feel like that's appropriate.

Q2 should be a little bit lower -- I mentioned that -- should be between 21% and 22%.

It's historically, as it was last year, the lowest OI quarter in a particular year, given a lot of incremental trade show and Congress spending, with HRS and PCR and DDW and a bunch of others.

So look for that to go down in Q2, and then feel comfortable with the 22% to 22.5% this year and good visibility to the 25% in 2017.

Okay.

And then Mike, just a quick review.

This is an interesting quarter, because we saw multiple distribution deals out of the Company, Brainlab, Bard, Frankenman.

Are these all just one-off deals, or is this a trend in terms of where you want to spend your time and money across different products, different regions?

And is it related at all to how you think about your margin expansion goals over the next two to three years?

Thank you.

We want to grow faster than the market and expand our margins throughout double-digit EPS growth.

And I think when you look at the rationale for many of those deals, it's really about driving category leadership and being the preferred clinical partner to our physicians.

So take the Brainlab example.

We have a terrific spinal cord stimulation business, and we're very early with what we think is a disruptive deep brain stimulation portfolio that we're enrolling the IDE trial now in the US and we're approved in Europe.

But we don't have as much scale in the neuro industry.

So Brainlab has an excellent relationship with neurosurgeons.

They have excellent guidance and mapping capabilities, and so they would prove to be a smart distributor for us to align with to help build our commercial capabilities and broaden the depth of that portfolio.

Similar with Bard.

We believe the strongest portfolio in peripheral vascular.

We recently acquired the Bayer division, atherectomy and thrombectomy.

And you saw the breakthrough results in our early results of our drug-eluting stent trial, in terms of patency rates.

But we feel like the Bard alliance is a great complement to that.

It brings us into the US sales capability now with the drug-eluting balloon.

So we really use these JVs to help fill in potential areas in the portfolio that may be gaps, as we continue to drive category leadership.

Thank you.

Rick Wise, Stifel, please go ahead.

Good morning, everybody.

Maybe Dan, just to start with you, can you break down, give us a little more color on the operating segment performance?

Obviously, Cardiovascular outstanding sequentially year-over-year, Rhythm Management excellent year-over-year, a little lower sequentially, MedSurg, a little weaker.

I'm not sure I understand the drivers behind each.

Can you give us a little more there?

Sure.

I think starting with the Rhythm Management one, I think that's what you've seen over the last 12 to 18 months, and that's more than 100 basis points per quarter increases in Rhythm Management.

And again that's a huge focus for Gerald Fitzgerald and the team there.

So I think that's, for Q1, it's in line with what you've seen in terms of the activities that are driving that.

CV, obviously, with the more than 600 basis points, that's a bit of an anomaly.

That generally is in the mid- to high 20s.

That's driven by a favorable product mix within IC, as you would expect.

When drug-eluting stents do well and when overall the mix within IC does well, that drives more profitability within IC.

I wouldn't expect to see 30.6 going forward.

I'd expect that to go back into the more traditional mid- to high 20s.

But obviously pleased to see that, given the mix that we had in the quarter.

And the MedSurg, that's lower than you'd expect to see at the 29.

But overall, again, not a worry there.

The growth was a little bit slower in Urology, at 3%, and Endoscopy, at 4%.

They drive -- particularly Endoscopy drives a significant amount of the profitability in the MedSurg franchise.

As Mike and I both mentioned, we look for those numbers, from a growth perspective, to increase in Q2 and in the back half, and that should take care of the MedSurg.

I'm not worried about the MedSurg profitability.

Okay.

And Mike, just a strategic question, building on David Lewis' question a little bit.

You're talking about tuck-in M&A as a priority.

Obviously, you keep steadily adding to the portfolio in multiple ways.

Can you just give us your latest thoughts on -- are you looking for tuck-in deals?

Are you looking for technology?

Are you looking for OUS more than US?

How do we think about your priorities?

Are you just being opportunistic?

Hopefully, I think we're being pretty efficient.

The performance, the top line growth of core at 6%, EPS growth, ex-FX, at 18%, and strong margin improvement at 250.

And so it really goes back to the strategy of category leadership.

And so we want to make sure the acquisitions we look at fit our strategic rationale and deliver strong financial returns.

And the AMS acquisition certainly meets those criteria, in terms of nearly doubling the sales growth and a ROIC that hits our targets at year three.

And some of these alliances are a very cost effective way to extend our category leadership globally, whether it be the Bard alliance that we talked about or Brainlab.

The Frankenman JV, we're excited about it.

It's our first JV into China.

That business has been growing plus 25% and gives us stronger local capabilities.

It will build on our R&D and manufacturing capabilities, and we think it will accelerate the growth of Endoscopy.

So we're also very active in early private equity venture activity.

So all of these point towards either alliances, JVs or acquisitions that reinforce our category leadership goal and driving growth at or faster than market and driving margin improvement.

Thank you.

Bruce Nudell, Credit Suisse, please go ahead.

Hello, guys.

This is Matt in for Bruce.

Can you hear me okay?

Yes, Matt.

Hear you fine, Matt, yes.

Great.

So it looks like just on top line guidance, FX got worse.

Excluding that, you raised the top end $15 million, to $65 million, somewhere in there.

And I wonder if you can comment on what's driving that, specifically around what magnitude of sales you're expecting from these recent partnerships and acquisitions, Brainlab, Frankenman, Bard, Xlumena?

We continue to see very strong growth in our core business.

The majority of our businesses are growing faster than market, based on recently approved pipeline.

We have, as you know, the EMBLEM product and CRM recently approved.

And we'll launch that in a more meaningful way in the second half of the year.

So we expect to see strong uptick of that.

The WATCHMAN approval.

So very strong cadence of product approvals in our core business.

We'll have SYNERGY approved, hopefully in fourth quarter in the US.

And then consistent with our strap plan, we're moving into some new adjacencies.

Our TAVR portfolio is beginning to pick up increased traction in Europe.

And we continue to strengthen our EP businesses.

As Dan talked about, we're not quite there yet, but we grew 6% in the quarter in EP.

And we're beginning to build our capabilities in mapping and make some advances in our therapeutic catheter line.

So you can kind of walk through all of our businesses.

But essentially, we're pleased that in most of our businesses we continue to grow faster than market, based on innovation and strong commercial performance.

And many of our exciting pipeline therapies will be discussed this Friday, and that gives us quite a bit of confidence as we look out to over the longer term period, the strap plan.

Okay.

Thanks.

Just one follow-up on the S-ICD.

You've talked in the past about commercial coverage.

Can you remind us how far along you are there, and when do you get to 100%, or as close to that as you expect to end up?

I'm not sure you ever get to 100%, Matt.

We've had some good wins as we exited 2014 and into the first quarter of 2015, so feel like that's becoming less of a headwind on that, relative to the S-ICD.

Thank you.

Larry Biegelsen, Wells Fargo, please go ahead.

Hello, guys.

Thanks for taking the question.

Just two numbers that you normally give us, I didn't see in the release.

US DES growth and emerging market growth this quarter.

And I had a follow-up.

Yes, Larry, this is Dan.

On the DES, I think that's a trend for us, just from a competitive perspective and the fact that we're obviously a lot more diversified than we were when we started that process many, many years ago, I think we'll give the global number and then potentially some growth rates, but not the specific number, similar to some of our competitors on the DES front.

So no US DES growth, Dan?

We did give -- we said it was low double-digits, I believe.

In double digits.

That's US?

That was OUS.

Got it.

All right.

And then emerging markets, Dan?

We didn't give the specific emerging market.

I know Mike quoted a couple of specifics within countries, with China in the mid-20s.

But nothing specific.

Think of a 7% global DES growth and very balanced across the regions.

That's helpful.

Then for my follow-up, I'm trying to understand what's in the guidance, Dan.

So you did 5% organic this quarter.

By my math -- and my math might be wrong -- we have 2% to 4% organic for the second quarter.

What is the full year organic growth -- what's included for acquisitions?

Is AMS in that new number, or is that excluding AMS?

And if it includes AMS, it looks like the organic growth rate that's implied for Q2 and for full-year 2015 -- I recognize AMS isn't expected to close until the third quarter -- would be below the 5% that you did this quarter.

So maybe if you could just bridge what's in the guidance and what your organic growth expectations are, that would be helpful.

Thanks.

Sure, Larry.

The easy one is we don't include AMS until that acquisition closes, so that is out of our guidance going forward until that acquisition would close.

As you think of the rest of the year, particularly as you get into Q3 and Q4, there are some much more challenging comps, particularly in IC.

So we grew -- overall as a company, operationally, we grew 7% in Q3 and 7% in Q4.

So the comps get a little more difficult as we get into the back half of the year.

So feel like that 4% to 6% operational growth, which would be 3% to 5% for the full year, is a good number for organic growth.

3% to 5% ex-Bayer.

Organic, which we describe as excluding the acquisition, excluding Bayer, would be 3% to 5%; and operational, 4% to 6% for the full year.

Thank you.

Bob Hopkins, Bank of America, please go ahead.

Sorry about that.

The one follow-up I wanted to ask was on the Endo business.

Obviously, that's been a very consistent grower for you guys.

It was maybe slightly below what we were looking for this quarter.

So maybe just some commentary this quarter.

And much more importantly, some commentary on do you think that this is a business that can sustain at least mid-single digit growth?

So just some comments on this division.

Thank you.

It's Mike here.

We have a lot of confidence in the Endoscopy business.

Dave will highlight it for about 20 minutes on Friday.

Last year, we grew 5%.

First quarter, we're down a little bit, 4%.

We have a number of new product launches that really are in process right now, with the Digital SPYGLASS being the primary one, which is beginning to ramp up in terms of its deliverability, and also some launches that Dave will discuss in the second half.

So we have quite a bit of confidence that our Endoscopy business will continue to be a strong mid-single digit grower and continue to drive operating margin improvement, potentially with some upside in the emerging markets with this Xlumena JV -- I'm sorry, Xlumena acquisition and the Frankenman JV.

Great.

We'll see you Friday.

Karen, we'll take two more, please.

Brooks West, Piper Jaffray, please go ahead.

Hello.

Thanks for taking the questions.

Just two quick ones from me.

Dan, you said AMS wasn't in the guidance.

If we did want to add that to our numbers, you talked about a Q3 close, should we just go ahead and throw in a one quarter of revenue for that business, about the scale you've described it?

Any guidance there would be helpful.

And then I'm hoping you can help us a little bit with how to think about the US WATCHMAN launch and how that might contribute in the second half.

Thanks.

Sure.

I'll take the first one.

On AMS, it's roughly $100 million a quarter.

So divide that by the month, and whenever we were to close, whatever your assumption is for close, just add that in.

Great.

And then anything incremental you can help us with how to think about the US WATCHMAN launch?

So incremental -- we'll spend some time on it Friday -- we're focused on our current 50 sites that did the original IDE trial and we're opening those sites up again with training programs.

We built up a significant capability with our training and proctoring, and we'll be really reopening those sites beginning this quarter and the second half.

And then after those first 50 sites are kind of re-engaged, we'll open up 50 new centers.

So we have quite a tremendous interest in the portfolio and the platform amongst electro physiologists and interventionary cardiologists.

A lot of backlog patients that are waiting for it.

So hopefully, by the end of the year, we anticipate about100 sites will be up and running with WATCHMAN; and then we see a market opportunity of about 400 sites over the next few years, as we continue to develop and open up new centers.

That's perfect.

Thanks, guys.

Lastly, we'll go to the line of Jayson Bedford, Raymond James and Associates.

Please go ahead.

Thanks for squeezing me in.

Wanted to ask about the Peripheral segment.

Growth accelerated nicely from back half 2014 levels, even if we exclude Bayer.

It seems like the rollout of, or the broader rollout, of drug-coated balloons didn't have much of an impact on the quarter.

So first, is that fair?

And then second, did the Bard agreement help out at all in the quarter?

Thanks.

The Bard agreement is early.

So we haven't seen the -- we'll see more benefit of the Bard deal back half, if you will, of second quarter and really in the second half of 2015.

So really just beginning of tying down the loose ends of that agreement, and we're excited about that.

But you didn't see any impact of the Bard agreement in the first quarter.

And the overall PI business, we're excited about that, because the Bayer integration is going quite well.

We've done the commercial integrations between the team.

And so we're excited about the second half opportunities with our PI business, given the portfolio, and very encouraged longer term as you look at the new Eluvia data that was highlighted this morning.

And encouraged with the 9% -- this is Dan -- the 9% in the quarter for the Bayer business.

Because one of the reasons we acquired that business was to get into the fast growing atherectomy segment and to get a leadership position in a thrombectomy market.

And with the integration ongoing and seeing that 9% overall growth for PI in the Bayer segment, that was nice to see, as well.

Karen, we'll take just one more please and then conclude.

Thank you.

We'll go to Kristen Stewart, Deutsche Bank.

Please go ahead.

Hello.

Thanks so much for allowing me in last moment.

I couldn't resist but ask Dan a tax question.

No, I'm just kidding.

Mike I was wondering if you could just talk very high level just with some of the dynamics that I was even seeing from an M&A perspective, with Cardinal buying the Cordis business.

I'm sure you know Don quite well from the J&J days.

Just thinking out strategically and what their strategy is from a PPI perspective, how do you view that, if at all, as any risk to the base Interventional Cardiology business, excluding, obviously, stents?

We've been competing with Cordis for a number of years.

Plus 70% of their business is outside the US.

And we've invested a lot in our Interventional Cardiology and Structural Heart and our Peripheral business to drive category leadership.

We have quite a bit of momentum.

So we're comfortable on a couple fronts.

We're comfortable, but we're certainly always pushing to grow harder.

One is I think we have some highly clinically differentiated platforms with Structural Heart, with SYNERGY, with atherectomy and thrombectomy, and our drug-eluting capabilities.

So we think we have very unique innovation there.

At the same time, the more commoditized products, which is where really Cordis was, are very good, extremely low cost, very excellent manufacturing processes for those capabilities.

So many of those product lines are already commoditized today.

Many of those products aren't driving the growth of the business.

And we manufacture them at great scale at very strong margins.

So we always want to be mindful of new competitors, but we continue to invest in not only innovation, but also in lean best practices and efficiencies to ensure that we can manage some of the pricing challenges that we typically run into.

Okay.

Perfect.

Then just I guess for clarification purposes on Friday, I know you mentioned in some instances you'd be giving aspirational goals for 2015 and 2016 for products.

Can you just maybe give us an outline of what to expect?

Will you be updating your longer term goals beyond 2017 or just going through product by product and giving the 2015 and 2016 outlooks?

I think that will give you a reason to come, Kristen.

I wouldn't want to tell you all the things that we'll show, but good opportunity for people to come on Friday and hear what we have to say.

All right.

Well, I'm coming irrespective.

(Laughter) See you on Friday.

Okay.

Thanks.

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

We look forward to seeing many of you on Friday and thanks for joining us today.

Appreciate your interest in Boston Scientific.

And before you disconnect, Karen will give you all the pertinent details for the replay.

Thanks again.

Great.

Thank you.

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Thank you.

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