Boston Scientific Corp (BSX) 2017 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Boston Scientific Q1 2017 Earnings Call.

(Operator Instructions) As a reminder, today's call is being recorded.

Your hosting speaker, Susie Lisa.

Please go ahead.

Thanks, Kevin.

Good morning, everyone, and thank you for joining us.

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

We issued a press release earlier this morning, announcing our Q1 2017 results, which included reconciliation of the non-GAAP measures used in the release.

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

The duration of this morning's call will be approximately 1 hour.

Mike will provide strategic and revenue highlights of Q1 '17.

Dan will review the financials for the quarter, and then provide Q2 '17 and full year 2017 guidance, and then we'll take your questions.

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

Before we begin, I'd like to remind everyone that on the call, organic revenue growth is defined as excluding the impact of changes in foreign currency exchange rates and sales from the acquisition of EndoChoice over the relevant prior year period.

Also of note, this call contains forward-looking statements within the meaning of federal securities laws, which may be identified by words like anticipate, expect, believe, estimate and other similar words.

They include, among other things, statements about our growths 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 2017 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 these differences include those described in the Risk Factors section of our most recent 10-K and subsequent 10-Qs filed with the SEC.

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

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

Thank you, Susie.

Good morning, everyone.

After an outstanding 2016, Boston Scientific continued the strong momentum and began 2017 with another quarter of strong results.

I'm proud to report the team delivered our sixth straight quarter of 10% or greater operational revenue growth with first quarter '17 sales up 10.3%.

On organic basis, this 9.4% revenue growth represents another quarter of outstanding growth across our various businesses and regions.

At the same time, we continue to invest in meaningful innovation to build out our category of leadership across all businesses and drive double-digit adjusted EPS growth over the long term.

Also we're able to meet our commitments and deliver adjusted EPS of $0.29, which is within our guidance range despite $0.03 of a one-time EPS hit from inventory charges related to Lotus field action as well as losses incurred before we discontinued sales of the acquired EndoChoice Fuse system.

Adjusted EPS grew 9% year-over-year excluding the $0.02 negative impact of FX, which came in as expected.

If we were to exclude both the FX and one-time inventory charges, adjusted EPS would have grown 18% versus prior year.

Our strategy of category leadership in key markets and diversification into high-growth adjacencies continues to work as we are delivering consistent above-market growth.

In parallel, we continue to invest in new innovative platforms via our internal programs like M&A, the Symetis structural heart acquisition we just announced last month.

We believe Boston Scientific continues to be uniquely positioned to drive shareholder value due to our strong growth profile, significant opportunity to improve operating margins and our track record of consistently delivering double-digit adjusted EPS growth.

We're excited about 2017 and our plans to build upon our global momentum and drive sustainable long-term growth.

We're also raising the low end of our full year 2017 operational revenue growth guidance from 5% to 7% to 6% to 7%, which includes an approximate 70 basis point contribution from the EndoChoice acquisition, consistent with our expectations coming to the year.

Despite the Lotus inventory charge and Fuse cost that clipped $0.03 of EPS in Q1, there is no change to our full year adjusted EPS guidance of $1.22 to $1.26.

And this represents 10% to 13% earnings growth and includes an expected $0.08 negative impact or approximate 700 basis points headwind from foreign exchange.

I'll now provide some quick highlights of first quarter '17 results and the thoughts on our full year '17 outlook.

In my remarks, all references to growth are on organic year-over-year constant currency basis unless otherwise specified.

Our first quarter revenue growth of 9% was once again broad-based across businesses and regions with strong execution by our global teams.

And most of our businesses continue to post consistent organic revenue growth that is faster than the market with MedSurg growing 12%; Cardiovascular, 8%; and Rhythm Management, 8%.

We also delivered strong, balanced growth across geographies, led by 11% revenue growth in the U.S., 8% in EMEA and 7% in Europe.

Now while emerging market revenue growth slowed to 12% due to several factors, our businesses in China turned in another great quarter of 20% growth.

And we remain bullish on our emerging markets outlook both in the near and long term.

Turning to MedSurg.

The MedSurg businesses delivered organic growth of 12% in the first quarter '17 and 15% including EndoChoice.

In Endo, we posted 9% organic growth in the first quarter and 14% including EndoChoice.

Endo growth is fueled by the strength of our franchise in hemostasis, pathology and imaging to name a few.

And EndoChoice acquisition closed late in November '16 and we're pleased with the early results.

We pursued strategic alternatives for the Fuse business that was acquired with EndoChoice, and ultimately decided to discontinue sales of the Fuse system in mid-March.

In other commercial milestones during the quarter, our Frankenman joint venture shipped its first locally sourced endoscopy product for the Chinese market.

And we began a collaboration with Northgate to jointly commercialize products to treat gallstones in conjunction with our SpyGlass platform.

Our Urology and Pelvic Health business continued its strong performance, growing 15% in first quarter, led by sales of products for men's health, kidney stones and pelvic floor.

Emerging market sales in Urology and Pelvic Health were very strong and ongoing launch of LithoVue continues to go extremely well.

LithoVue is now in over 700 accounts worldwide and provides single-use digital visualization and navigation capabilities to diagnose and treat stones and other conditions of the kidney, ureter, where avoiding the need for repairs or sterilization that can be challenged for reusable scopes.

We look forward to the presentation of additional clinical and cost-effectiveness evidence supporting LithoVue at the AUA Annual Meeting next month.

For Neuromodulation, revenue grew 17% in the first quarter, led by strong growth in the U.S. and the international markets.

The U.S. growth rate of patients trialing our spinal cord stimulation technology remained solid and European uptake of our Vercise Deep Brain Stimulation system has been very promising.

We continue to expect to launch in the U.S. DBS market by year-end '17.

Our Cardiovascular groups grew 8% in the first quarter '17 against tough double-digit comps in first quarter '16.

Peripheral Interventions grew 7% in the quarter, led by sales of our stent portfolio, drug-eluting Eluvia stents, WALLSTENTs and next-gen SFA Innova Stents.

AngioJet, our thrombectomy device used to treat deep vein thrombosis, also grew nicely in the quarter.

Importantly, in drug-eluting technologies, we executed on 2 preclinical milestones in the quarter.

First, we completed enrollment for the IMPERIAL IDE for our Eluvia drug-eluting stent.

And secondly, we began enrollment in the IDE for our Ranger Drug-Coated Balloon.

And just this week on Tuesday, we presented 12-month results from our Ranger DCB first-in-human trial at the Charing Cross meeting with a compelling 12-month primary patency rate of 86% and 91% freedom from TLR.

Our Interventional Cardiology business continued its above-market growth trends delivering 8% growth in the quarter.

IC growth was led worldwide by continued strength in drug-eluting stents, PCI Guidance, Complex PCI and structural heart.

And despite a 13% year-over-year comparison, global DES sales grew low single digits globally in the quarter, led by our differentiated SYNERGY platform.

PCI Guidance grew double digits with particular strength in IVUS.

And we're encouraged by customer response to our COMET wire and fractional flow reserve platform.

IC performance is also fueled by our structural heart business, which includes the Lotus aortic valve and WATCHMAN Left Atrial Appendage Closure Device.

It's expected to contribute approximately $250 million in revenue in 2017.

Importantly, our Lotus remediation work remains on track, and we are reiterating our guidance for a fourth quarter '17 return to the European market and submission of our U.S. PMA as well as an estimated mid-2018 U.S. launch.

We look forward to presenting, REPRISE III pivotal study results at EuroPCR in just 2 weeks.

And this year, we will present RESPOND extension data on Lotus with Depth Guard, which we expect will provide insight into further reducing Lotus pacemaker rates.

We also remain on track to close the Symetis acquisition by the end of this quarter.

And we're extremely excited to add this highly innovative and complementary valve to Lotus and provide a broader TAVR portfolio for varying physician and patient needs.

We truly believe that our company will be uniquely and ideally positioned to address the needs of both TAVR physicians and patients with this comprehensive portfolio offering.

The WATCHMAN program also had a strong quarter and continues to build global momentum.

We ended '16 with more than 200 U.S. WATCHMAN centers and expect to close '17 with approximately 350 centers.

We also achieved 2 important clinical milestones of WATCHMAN.

First, we enrolled our first patients in both ASAP TOO, a study examining the use of WATCHMAN in warfarin-ineligible patients, and in SALUTE, a trial specifically designed to pursue regulatory approval in Japan.

So overall, we're pleased with our progress in structural heart.

And please join us for an update and webcast on our structural heart programs at EuroPCR on May 16 at 10 a.m.

Eastern.

Shifting to Rhythm Management.

Global CRM sales grew well above market at 8% with Brady up over 20% and Tachy delivering low single-digit global growth.

This strength reflects continued share gains with our ACCOLADE MRI Brady platform, strong global growth in EMBLEM S-ICD and promising early uptake of our new RESONATE platform in Europe.

The RESONATE family of ICDs and CRT-Ds now launched in Europe brings multipoint pacing to our CRT products as well as updated best-in-class longevity labeling via our EnduraLife batteries across all families of high-voltage devices.

The RESONATE platform also offers compatibility with the first and only validated heart failure predictive diagnostic in HeartLogic.

And while the battery longevity of our competitors' products often limit physician appetite to program multipoint pacing due to the associated battery drain, we have seen strong early European adoption in our RESONATE launch as patients can benefit from the programming right at implantation, given our superior longevity capability.

Turning to Electrophysiology.

We grew sales 9% in the quarter, led by improved uptake of our new RHYTHMIA HDx platform.

We continue to roll out the HDx platform in Europe and expect to launch in the U.S. late second quarter.

And this year, we're continuing to expand the toolkit that supports RHYTHMIA, writing ablation technologies that match the excellence of our mapping system and adding tools that expand the reach and utility of RHYTHMIA in different procedure types.

Finally, I'd also like to point out the significant gross margin drop-through in Rhythm Management from the sales upside with a 530 basis point year-over-year improvement in adjusted operating margin for the Rhythm Management segment.

Also please join us for an update and webcast on our Rhythm Management programs at HRS on May 11 at 5 p.m.

Eastern.

And finally, before turning the call over to Dan, I want to thank our employees for their winning spirit and commitment to advancing science for life.

Dan will now provide a detailed review of our financials.

Thanks, Mike.

First quarter consolidated reported revenue of $2,160,000,000 represents 10% growth on both an operational and reported basis.

The contributions on the EndoChoice acquisition was approximately 90 basis points, which was higher than our guidance of 70 basis points as a result of over-performance of the pathology business.

Even adjusting for this additional contribution from EndoChoice, we nicely exceeded our revenue growth guidance range of 6% to 8%.

This strong top line also reflects a $7 million headwind from foreign exchange, which is $13 million or approximately 65 basis points less than the $20 million headwind expected at the time of guidance.

We delivered Q1 adjusted earnings per share of $0.29, representing 3% year-over-year growth and at the low end of our guidance range of $0.29 to $0.31.

Importantly, this includes approximately $0.03 of charges related to our Lotus Valve System voluntary field action and net operating losses related to the Fuse business.

Excluding these $0.03 of inventory and other charges, we would have otherwise been at or above the high end of our guidance range.

And I'll provide more details on the charges shortly.

Adjusted gross margin for the first quarter was 70.6% compared to 72.3% in Q1 last year and includes a year-over-year negative 140 basis point impact from foreign exchange.

As a result of the global voluntary recall of the Lotus Valve System initiated in February, we recorded inventory-related and other charges in the first quarter.

In addition, while we pursue strategic alternatives for the Fuse business acquired with the EndoChoice acquisition, we incurred net operating losses associated with Fuse until we chose to discontinue all Fuse system sales in mid-March.

These 2 items negatively impacted the gross margin line by approximately 180 basis points in the first quarter.

Absent these charges, gross margin would have been nearly at the midpoint of our guidance range despite the higher-than-expected FX headwind.

We continue to implement the identified solution to fix the manufacturing process related to the Lotus Valve deployment pin, which includes a combination of minor process and specification changes.

We believe we are on track to reenter the European market and submit our U.S. PMA in the fourth quarter of this year.

As you would expect, the field action will create negative absorption headwinds in our gross margin, but we plan to offset the impact going forward and now expect our full year gross margin to be in the range of 72% to 72.5% as a result of the Lotus and Fuse drags this quarter.

This guidance range now assumes a negative FX impact of 90 basis points for the full year.

Adjusted SG&A expenses were $780 million or 36.1% of sales in Q1, up 60 basis points year-over-year.

Recall that in Q1 2016, our SG&A rate of 35.5% of sales was lower than the remainder of 2016 as the medical device excise tax was suspended and we had not yet begun to reinvest it fully in Q1.

Although we spent the entire amount of the benefit in 2016, the majority of that reinvestment took place in Q2 through Q4.

As a result, the low Q1 2016 SG&A rate reflected essentially a timing benefit of delayed reinvestment spend and operating margin rates thus benefited.

In the quarter, our SG&A includes additional commissions as a result of the strong sales performance, accelerated levels of investment for the U.S. DBS launch plan for the end of the year, investments in our structural heart commercial capabilities and slightly higher-than-planned litigation charges, among other factors.

Though we're not pleased with our SG&A rate of 36.1% for the quarter, we expect the rate to decline over the course of the year as we continue to realize the benefit of our targeted initiatives focused on reducing SG&A and make progress on our margin expansion targets.

As a result, we continue to expect our full year 2017 adjusted SG&A rate to be in a range of 35% to 36%, which at the midpoint would represent a decrease of 60 basis points versus the full year 2016.

Adjusted research and development expenses were $232 million in the first quarter or 10.8% of sales, which is roughly flat year-over-year.

We now expect full year adjusted R&D in a range of 10% to 11%.

Royalty expense was 0.8% of sales in Q1, down slightly from 1% in the first quarter of last year.

We expect our royalty rate to remain at approximately 1% of sales for 2017.

Q1 2017 adjusted operating margin of 23% decreased 210 basis points year-over-year and was below our guidance range of 25% to 26% due primarily to the 190 basis points of charges recorded in connection with the Lotus Valve System voluntary field action and Fuse business as well as the pattern of medical device excise tax reinvestment in 2016 that I mentioned.

We do not expect any additional charges related to the Lotus field action.

And the losses incurred in Q1 2017 for the Fuse business will not recur going forward.

Excluding these charges, operating margin would have been 24.9%.

And if we had delivered at the midpoint of our SG&A guidance range, adjusted operating margins would have been at the midpoint of our guidance range.

Now turning to segment operating margin results.

The Rhythm Management team delivered an adjusted operating margin of 18.8% for Q1.

This represents a very strong year-over-year adjusted operating margin increase of 530 basis points.

Note, this comparison is to restated segment margins due to changes in our constant currency reporting.

To give you more detail on this restatement, we use an internally derived standard currency exchange rate for our constant currency sales and reporting segment results.

This standard FX approach is designed to give a more consistent long-term view of results.

Given the recent periods of volatile exchange rate fluctuations, we've seen larger differences between these internal standard FX rates and the actual foreign exchange rates.

As a result, we updated our internally derived standard currency exchange rates beginning on January 1, 2017, to align more closely with current actual rates.

While this update obviously does not impact total company margins, it does impact our segment margin results as the process basically reallocates FX impacts away from our corporate expenses and currency exchange line and into the operating income allocated to the reportable segments.

Operationally, the Rhythm Management team continues to make strong progress in gross margin, focus on expense control and leverage the improved top line performance of the global business as evidenced by the more than 500 basis point improvement year-over-year this quarter.

The rate of improvement for Rhythm Management for the full year 2017 remains unchanged as we continue to look to add over 200 basis points to the segment's adjusted operating margin with a restated full year adjusted operating margin target of 18%.

Operational improvements in the Cardiovascular segment adjusted operating margin were more than offset by the Lotus-related charges in the first quarter for a net decrease of 340 basis points year-over-year.

For MedSurg, the adjusted operating margin decreased over prior year by 90 basis points, driven by the Fuse net operating losses and forward investments as we prepare for our expected U.S. Deep Brain Stimulation launch at the end of the year.

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

Interest expense for the quarter was $57 million, roughly flat to Q1 of last year.

Our average interest expense rate was 4% in Q1 of this year compared to 3.9% in Q1 of last year.

In January, we used our existing credit facilities to refinance the $250 million of our senior notes due in January 2017 and we have no remaining debt obligations for 2017.

Other expense was $2 million in the first quarter.

Our tax rate for the first quarter was 4.9% on a reported basis and 9.2% on an adjusted basis.

In the quarter, we recorded an income tax benefit of $28 million related to the adoption of the new stock compensation accounting standard, which was a greater benefit than previously anticipated due to the upward movement of our stock price.

We expect this benefit represents the majority of excess tax benefit in 2017 due to the annual vesting of our awards during the first quarter.

We're now expecting 175 basis point benefit to our full year effective tax rate from the change in stock compensation accounting, which is 50 basis points greater than previously anticipated.

Excluding this benefit, we still expect our operational tax rate to be approximately 14%.

But given the 50 basis point favorability from the change in stock compensation accounting, we now expect the full year adjusted tax rate to be in a range of 12.5% to 13%.

Finally, Q1 2017 adjusted earnings per share of $0.29 includes approximately $0.02 of unfavorable foreign exchange and represents 3% year-over-year growth or 9% growth excluding the impact of foreign exchange.

This $0.29 also includes the approximate $0.03 from charges related to our Lotus Valve System voluntary field action and Fuse net operating losses.

On a reported GAAP basis, which includes net charges and amortization expense totaling $107 million after tax, Q1 2017 EPS was $0.21.

Adjusted free cash flow for the quarter was $171 million compared to $250 million in Q1 last year.

In the quarter, we used cash primarily to fund previously agreed-upon legal settlements as well as business development activities.

And as of March 31, 2017, we had cash on hand of $156 million.

Capital expenditures for the first quarter totaled $112 million as we execute on our plans to make additional investments in SYNERGY manufacturing equipment due to higher volumes as well as campus consolidation and plant network optimization activities.

We continue to expect capital expenditures for the full year to be approximately $300 million.

In addition, during the quarter, we continued working through the mesh litigation-related settlement evaluation process and have reached conditional final or near final settlement now on over 37,000 of our approximately 43,000 known claims.

Having now settled or reached agreement in principle with over 3/4 of all outstanding claims, we continue to reduce the risk on our balance sheet and are targeting a resolution of the majority of our remaining mesh claims in 2018.

Our total legal reserve, of which mesh is included, was $1,751,000,000 as of March 31, 2017.

We ended Q1 with 1,390,000,000 fully diluted weighted average shares outstanding.

And we expect a fully diluted weighted average share count of approximately 1,390,000,000 for Q2 and 1,392,000,000 for the full year 2017.

I'll now walk through guidance for Q2 and the full year 2017.

For the full year, we now expect consolidated revenue to be in the range of $8,800,000,000 to $8,900,000,000, which represents year-over-year growth of 6% to 7% on an operational basis, including an approximate 70 basis point contribution from EndoChoice, and 5% to 6% on a reported basis.

We expect foreign exchange to be a headwind of approximately $85 million for the full year 2017.

We continue to expect full year 2017 adjusted earnings per share to be in a range of $1.22 to $1.26, representing 10% to 13% adjusted earnings growth and continue to assume the full year negative impact of FX will be approximately $0.08.

On a GAAP basis, we expect earnings per share to be in a range of $0.81 to $0.86.

Now turning to Q2 2017.

We expect consolidated revenue to be in a range of $2,185,000,000 to $2,215,000,000.

This represents year-over-year growth in a range of 5% to 6% operationally, including the approximate 70 basis point contribution from EndoChoice.

We expect the foreign exchange impact on Q2 revenue to be a $35 million headwind.

For the second quarter, adjusted earnings per share is expected to be in a range of $0.30 to $0.32 per share, representing 11% to 18% adjusted earnings growth.

GAAP earnings per share for the second quarter is expected to be in a range of $0.18 to $0.21 per share.

Please check our Investor Relations website for Q1 2017 financial and operational highlights, which outlines Q1 results as well as Q2 and full year 2017 guidance, including P&L line item guidance.

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

Thanks, Dan.

Kevin, let's open it up for the next 30 minutes or so.

Please go ahead.

(Operator Instructions) First question, David Lewis, Morgan Stanley.

Mike, just a quick question for you, and then a follow-up for Dan.

So Mike, just I wonder if you could focus this morning on the 2 businesses which saw the greatest acceleration from our model.

And those basically were U.S. interventional and endoscopy.

I wonder if you could just talk about the factors underpinning that performance and the sustainability across the balance of the year.

And then Dan, for you, I think you did a great job talking about the factors impacting first quarter margins.

But could you talk to us about second quarter gross margin trends just to give people some confidence that the margin plan is back on track here as we get to the second quarter and beyond post Lotus?

Thanks, Dave.

Just broadly on Interventional Cardiology, then I'll touch on endo.

We've discussed at a few different Investor Days and with Kevin Ballinger just our overall goal of continuing to diversify and strengthen in the faster-growth markets at Interventional Cardiology business.

And we're really seeing the benefit of that with our DES business continuing to grow faster than market despite very difficult comps, the broadening and a further impact of our complex coronary IVUS and FFR business.

And then the third leg of the stool there in cardiology is our structural heart, where we remain on track to deliver the $250 million this year, really fueled by WATCHMAN, given the impact of the Lotus recall.

And we look forward to getting that product back in the market.

So really, that stronger balance of businesses within that cardiology business are leading us to markets that we view in a combined basis are quite healthy.

And we're growing faster than the market across those areas.

So we do have some tough comps coming up with DES for the remainder of the year.

But we continue to believe with some -- the competitive positioning in DES is really a strength of us.

Given some of the challenges we're seeing with others in the marketplace, we expect to continue to grow there while growing WATCHMAN, our complex bag as well as getting Lotus back in the market.

And we're excited to close the Symetis deal hopefully in June.

On endo, that business continues to really just deliver excellent performance.

You'll be excited to see at Investor Day the strategy to broaden that business out into exciting, new adjacencies going forward.

But again, as a strong growth market, we're taking share, led by SpyGlass, the EndoChoice acquisitions working well, moving us into pathology, strong growth in the emerging markets and really again just a strong cadence products with our Resolution hemostasis capabilities as well as our U.S. endoscopic ultrasound.

So the portfolio and expansion to global markets continues to fuel our endo business.

Sure, David.

And on your Q2 gross margin question, it's really pretty straightforward.

Q1 gross margin was 70.6%.

And at the midpoint of Q2 guidance, we'd be at 72.5%.

The delta there is 190 basis points.

And really, the elimination of the Lotus and Fuse charges of 180 gets you right to the midpoint of where we should be in Q2.

So good operational improvements in Q1.

Those should continue in Q2 and feel good about the guidance for Q2 in gross margin.

The next question is from the line of Michael Weinstein, JPMorgan.

So let me just start on a couple of the Endosurgery businesses.

Endoscopy and Urology both had fantastic quarters.

In both cases, the comps get harder from here.

So can you just give us your view on sustainability of growth rates?

And we're not necessarily talking about what you put up this quarter but these above-market growth rates we got used to in 2016.

Yes, so we've taken up the full year sales revenue guidance, as you know, 6% to 7%.

So we pulled up the lower end there based on the strength of second quarter.

Broadly across the company, we do face 10% growth comp headwinds really for the next 4 quarters coming up, second quarter through first quarter of '18.

But despite that, especially in endo and uro and across the board, one -- first of all, these are strong markets, endo and uro, that are healthy.

We have an excellent cadence of product launches, global expansion and acquisitions that are working quite well.

When you look at our Urology business, the acquisition of AMS has gone extremely well.

We're ahead of our synergy plan.

The stand-alone AMS business, legacy business, is growing about 8%, so much faster than it was as a stand-alone basis.

And really what's really disruptive in our Urology business is our disposable scope platform.

So we're seeing strong uptake with that, we're continuing to launch that globally and it pulls through our stone business.

Another big key growth driver for us at Urology is we've been underweight in the international markets historically.

So we've been disproportionately investing in those markets, and that's really bearing a lot of fruit.

So we see continued momentum with our uro business.

We do have some tougher comps, but we expect to continue to grow faster than market.

And it's kind of the same story rewound in endo.

Good growth market, we do have some difficult comps, but our portfolio cadence is quite strong.

And again, this business we're investing quite a bit in the emerging markets is paying off for.

So despite the tough comps, we expect to continue to grow faster than market in both those divisions.

Perfect.

Let me ask just one question related to Lotus and Symetis.

So when Lotus relaunches later this year, you're going to have the challenge of bringing a product back to market that's been off the market for 6 months.

Can you just give us your thoughts on where you think the balance between the 2 settles out for you as you go into 2018?

What do you think the respective positions are of those 2 products in Europe?

Yes.

So I'll make a comment, and then I'll let Ian jump in.

So the good news for us is our team in Europe isn't -- our TAVR team isn't on their hands in terms of the commercial team.

They're helping out with WATCHMAN.

They're helping out with cardiology.

And hopefully, if we close early -- in the second quarter here for Symetis, they'll begin selling that platform potentially in June or early -- June or July.

So we'll be back in the market in TAVR valves in Europe.

And then we'll follow that on with Lotus starting in the fourth quarter.

So we're pretty soon we will be back in the game in TAVR.

And I think, Ian, I'll turn it over to you in terms of what you see is the mix there.

Thanks, Mike.

I think that we will see that the dedicated Lotus users will quickly take up using Lotus once again when it's available back in Europe because of its complete repositionability and safety.

So I suspect that the mix will vary from site-to-site, depending on the patient population and physician preferences.

But it is likely that it will be a 50-50 mix, but it will vary from site-to-site.

And the next question is from the line of Bob Hopkins, Bank of America.

First of all, just a quick one for Dan, and then a bigger-picture question.

For Dan, just for the -- and I'm sorry if I missed this, but for the full year 2017, can you give us a sense as to what the earnings and margin impact will be for the Lotus recall?

Sure.

So on operating margin in Q1, it's 190 basis points for the Lotus and Fuse charges.

And then just basically divide that by 4 for the full year, so it's 45 basis points on the full year.

Okay.

And then from a bigger-picture perspective, when we think about the upcoming data release here in a couple of weeks, I was wondering if, Ian, I could just get you to comment on a couple of things because there's been some discussion on previous calls on kind of setting expectations for this trial, especially as it relates to stroke rates.

So if you could just sort of set the stage for us for REPRISE III and kind of any issues that you think you should point out in terms of comparability or what we've seen in previous trials and kind of, therefore, how we should be putting these results in perspective would be really helpful.

So just any comments on the upcoming data on REPRISE III and how we should be thinking about the trial data, given what we've seen from previous datasets.

Thank you.

It's a very good question.

Obviously, we cannot comment on the data release prior to the presentation at EuroPCR.

And that presentation, of course, will take place at 12:30 on the 16th of May.

We sincerely hope that you tune in for that.

I think it's fair to comment on the trial that it is the largest global randomized trial head-to-head platform of 2 TAVR devices with all the bells and whistles of a high-quality trial.

So drawing comparisons with other studies is probably not that wise.

And I think we should wait for the data to fully understand what this dataset means.

I think we could comment on what we expect the pacemaker rates to be.

As you know from previous trials, we have observed a higher pacemaker rate and one would expect that this trial having been completed in December 2015, 1 year follow-up to December 2016, before we were fully aware of all of the drivers that determined pacemaker rate, one would expect that the pacemaker rate would be in some ways comparable to what we've seen previously.

So with respect to all the other variables, I think we have to actually weigh this trial on its merits, given that it is a large head-to-head comparison randomized on an even playing field.

The next question is from Rick Wise, Stifel.

First, Dan, a question for you on SG&A.

You very clearly called out some of the moving pieces, litigation, some investments.

But I'm a little confused.

You said you weren't pleased with SG&A even when you normalized.

And you weren't pleased because of the higher investment.

You weren't pleased because of the timing or the impact of the cost reduction programs.

Just help us just understand your thinking and some of the drivers of the better SG&A going forward.

Sure, Rick, yes.

And I think you've delineated some of the reasons in Q1.

I think the reason for the dissatisfaction is we missed the range.

The range was 35% to 36%, we had 36.1%.

That doesn't add up to success from my perspective for that number in the quarter.

Now the reasons are there.

We're obviously happy to invest in U.S. Deep Brain Stimulation, we needed to pay the extra commissions, all the factors that are there.

And that number should come down over the rest of the year with the program that we have in place.

But the dissatisfaction comment is really just for the fact that in the quarter, I would have liked to have rather seen that at the midpoint, and it ended up a tick above the high end of the range.

Okay.

And Mike, just turning to back to CRM side of things.

Heart Rhythm Society is coming up.

Maybe you or Dr. Meredith want to talk about some of the messages there or key events there.

But maybe you could talk specifically, Mike, about growth.

I mean, you had amazing growth on CRM side, pacer growth outlook.

Now you're anniversary-ing that.

RHYTHMIA seems set with the HDx next-gen launch to be a growth driver.

But maybe talk us through some of the many moving pieces, and I'm just talking about a couple, that are going to sustain the kind of growth we're seeing or do you think could accelerate?

What are you focused on over the next 6 to 12 months?

Thanks, Rick.

And I'll have Dr. Stein comment on HRS.

But just a couple of comments on CRM, really proud of the team there, continued another quarter of above-market growth globally, plus 8% in a challenging market and really encouraged by a couple of points.

One is our brady platform continues to do extremely well based on the quality of that product, the deliverability, the quality of the leads.

So excellent job in brady.

Defib continues to gain share.

And really, we're seeing strong uptake continuing, especially in the international markets with S-ICD, particularly in Japan, excellent growth there.

And we launched a new product called RESONATE in Europe that is an excellent product that helps with the multipoint pacing capability, the extended battery longevity.

And also on top of that, what is a great proof point?

And we talk about health care economics and so forth.

The nice recommendation that came out in the U.K. that really proves out the exceptional longevity benefits that we have in our ICD, CRT-D platforms, the cost saving that delivers and the patient impact supported by 9 separate independent publications really shows the true economic benefit and the value of our CRM products.

And I think that data is well respected and making its way around the world, which is helping us.

So Dr. Stein, if you want to comment a bit on what's coming to HRS.

Yes, thanks, Mike.

And Rick, thanks for the question.

I think a couple of data releases that I want to highlight for HRS.

First, 2 late-breaking trial presentations.

One is the first readout on data from our S-ICD post-approval study in the U.S. So that was an FDA-mandated trial of over 1,600 patients implanted with the system post commercialization.

And we'll be presenting the acute safety data as well as a good look at the demographics of who's actually getting the device in the U.S. and their acute outcomes.

And then in addition, a WATCHMAN late-breaker, which presents the 1-year follow-up results of our [EVOLUTION] trial, which is a large 1,000-patient prospective registry of WATCHMAN implantation in Europe.

And I'd be remiss if I didn't also point out that we have a follow-on WATCHMAN late-breaker at EuroPCR, which focuses specifically on the warfarin contraindicated patients in that cohort.

And that may be very helpful as you look towards what we think we're going to see in our randomized ASAP TOO trial.

The only other things that I'd point out, a large number of abstracts from our EP group looking at some of the newer technologies that we're evaluating for ablation catheters and with RHYTHMIA and 2 more abstracts on our upcoming leadless pacemaker, looking specifically at how it works in concert with the S-ICD.

And the next question is from the line of Danielle Antalffy, Leerink.

Wondering if you could update us on the regulatory time lines for the MRI-safe high-power devices and how we should think about the share shifts that should occur there once they do come to market.

You've got a competitor that's supposed to be coming to market, but that's unclear, given some of their regulatory issues.

So just wondering how to think about that, you've been gaining share with MRI-safe pacer.

Should we see a similar type of shift when the high-power devices come to market?

Sure.

I'll take it, then Dr. Stein, please comment.

We talked -- Susie, fourth quarter...

By year-end.

By year-end.

Ideally, by year-end approval of our MRI compatibility with our ICD, which really will be combined on the RESONATE platform, which is really meaningful because now you have multi-point pacing, extended battery longevity and the future MRI compatibility and also a diagnostics tool called HeartLogic.

So it's really a differentiated platform for the long run for us.

And also we anticipate, as we talked in the past, in 2018, we've seen a slight improvement in our replacement headwinds in 2017 and we expect to see a bit more of it in 2018.

So overall, it's a tough market, but we continue to expect to grow faster than the market.

I don't know, Ken, if you had any additional comments.

Yes, thanks, Mike.

I think I'd just reiterate what Mike said.

We are on track according to that time line that Mike gave you in terms of when we're anticipating approval.

Obviously, we can't comment on when we think the competitor is going to get through their regulatory issues and get their approval.

Certainly on the low voltage, the pacing side, we've seen a very big impact and a very present impact from our MRI labeling with the INGEVITY device there.

One of the things that's unique about our regulatory strategy on the high-voltage devices is this backwards compatibility, where we expect once we get labeling that it would not only be for the new generation of devices, as Mike mentioned RESONATE, but for the vast majority of devices that are currently being implanted in the U.S. And I think as you look at what might happen once we get approval, it's important to recognize that already a good number of customers believe our backwards compatibility story and do believe that it is likely that with approval, we'll have the backwards compatibility for the systems they're implanting today.

We've been able to execute that strategy in Europe.

We've executed that strategy in the U.S. with the EMBLEM S-ICD.

So I think we have a lot of credibility when it comes to that.

Okay.

And then just one quick follow-up if I could.

We talked a lot about on the call the MedSurg, the growth, sustainability, a little bit in cardiology.

But just taking a step back and if you look across all the businesses, you've been growing above the market.

Granted comps get a little bit tougher over the course of the year, but quite frankly Q1 of last year was a tough comp as well across all of your businesses.

And actually, comps for CRM are not as tough.

So I'm just curious, and I appreciate you raised the low end of the sales growth guidance range.

But why can't you grow even faster?

What do you have coming in the pipeline that could continue this growth momentum?

Sure.

We're certainly pleased with our performance over the last few years.

And besides the top line, as we've noted multiple times, continued the opportunity to improve margins faster than our peers to combine with the top line growth.

So we're pleased with the 6% to 7% guidance for the full year.

It's faster than market.

And it does reflect the reality that we do have 10% growth comp headwinds for the next 4 quarters.

So I think that's a prudent and reasonable guidance range to give, given that comparison headwinds.

We do have some particular -- anniversary of some tough comps, particularly with SYNERGY, which will be 12% comps in 2016.

So really the bigger challenge is comps and some comps with Interventional Cardiology plus we're off the market in Lotus until our fourth quarter.

So that's a bit of headwind for us.

But despite that, we're pleased with the 6% to 7% guidance.

And then moving forward, we're having an Investor Day coming up in June.

And I think you'll like that event.

You'll see a strategy and a pipeline that will continue to drive revenue growth over the LRP time period faster than our peer group and OI improvement faster than the peer group.

And so I think you'll be really comfortable with the strength of Boston Scientific over the LRP program.

And consistent with past, we continue to beat those LRP commitments we've gotten historically.

And the next question is from the line of Chris Pasquale, Guggenheim.

First, just wanted to clarify, does the updated guidance include Symetis?

And if so, what are you assuming for a revenue contribution this year?

It does not include Symetis.

We wouldn't include that until the acquisition actually closes in Q2.

But look for that to be post close.

Okay, perfect.

And then peripheral had a solid quarter, but the U.S. piece of that business did slow a bit and continues to lag behind international.

You highlighted the progress you made in the Eluvia and Ranger clinical trials.

Could you just remind us what you're thinking in terms of potential FDA approval timing for these products?

And how do you sustain momentum in U.S. peripheral while you wait for them to get here?

Absolutely.

So in peripheral, we had a strong quarter overall at 7% growth.

We had tough comp at 14% growth comp comparison for last year but again grew 7%.

Stronger, as you pointed out, in the international markets, where we have our Ranger balloon as well as the Eluvia stents, which is really providing some significant differentiation for us in capabilities there.

And you saw the Ranger data just came out that we referenced.

In terms of approval times for Ranger, we just started enrolling that clinical trial just this quarter.

And so we'll likely have FDA approval in 2020 -- 2020, 2021, so depends on the enrollment speed.

In terms of at Eluvia, we expect that ideally the back half of '19 or 2020.

And the next question is from the line of Vijay Kumar, Evercore.

Just maybe, Dan, I had one on the guidance, the 2Q revenue guidance.

And I had one follow-up for Mike.

I guess if you look at the second quarter organic revenue guidance, so we're looking at a 400 basis points sequential deceleration.

I know that the comps are tougher.

But apart from the comps and maybe Lotus being pulled off, is there anything else that we should be looking for the 2Q organic guidance?

Vijay, I think Mike covered that pretty well relative to the comps.

So you think of Q1, we had an 8% comp for the total company, Q2, we have 10%.

So that's 200 basis points right there.

And then specific to some Q2 anniversary-ing launches from last year, the SYNERGY launch in U.S., France and Japan was Q1 really last year.

And then the CRM production launches in quad and MRI-safe brady were Q2 early and late.

And then we also had the uro pelvic health share gains from a competitor exiting the market in Q2.

So really happy to be taking share there.

And it's a very nice boost to the overall Urology business, but we anniversary that as well.

So I think it stacks up pretty well overall when you look at that guidance for Q2 and for the full year.

But it really is a story of comps as I think we still have good momentum in the business.

Does that comp, I guess, does it assume competition launching their own stents in the second quarter?

Does it assume, sorry?

Does it assume [new competitive] in the stent market for the 2Q guidance?

Well, yes, we do see some competitive activity in the U.S. DES with some potential competitive launches.

Got you.

And then Mike, one quick one for you.

There's some speculation particularly on Lotus when it comes to the PMA submission.

And the debate is: what is the FDA's motivation to accept the PMA, given the recall?

Or would they ask for a small safety 30-day follow-up kind of study?

I'm just curious, have you had this conversation with the FDA?

And can you confirm whether they've asked you for such a safety study or not?

I'll turn it over to Dr. Meredith.

Thanks, Mike.

So we have a planned discussion with the FDA coming up.

It is inappropriate to foreshadow what the FDA will actually require.

But one suspects that there will be a small clinical study required to confirm that the clinical issue has been resolved.

But it's unlikely that, that study will be substantial.

The next question is from the line of Matt Taylor, Barclays.

This is Ian Mahmud on for Matt.

So I just wanted to ask about WATCHMAN.

And I know you've commented on some.

But just on the trials you highlighted, can you discuss what expanded label in the U.S. might mean for the market?

And have you provided any guidance in terms of timing of those 2 trials?

I can take that, Mike, if you let me.

So I think there are sort of 3 different trials we highlighted here over the [fall].

I think probably the one that's the most interest and the most direct to your question is the ASAP TOO trial.

And ASAP TOO is a large, global, multicenter, randomized trial looking specifically at the use of WATCHMAN in patients who are currently off-label in the U.S. And that is those who are deemed by their physicians to be ineligible for even short-term use of warfarin, which is required on a U.S. label post implant.

We've started enrollment in the trial.

I don't think we can go any further publicly at this point in terms of when we expect that enrollment to complete.

It is an adaptive trial design.

And so there is really a lot of play-around when that trial might complete its primary endpoint.

Now in terms of the impact, really what that would do would be to bring our labeling in the U.S. to be consistent with our labeling in our CE Mark countries.

So our CE Mark labeling device can be used both in warfarin-eligible and warfarin-ineligible patients.

And again, I can't get out ahead of the data, but I would point you to our [EVOLUTION] data release that's coming up at HRS and at EuroPCR, where I think you can get a better look at sort of different characteristics of those 2 cohorts.

The next question is from the line of Larry Biegelsen, Wells Fargo.

One on the quarter and one on structural heart.

So you initially guided to, I think, 5.3% to 7.5% in Q1 and you did 10%.

So my question is what was better than expected?

What drove that?

I mean, that's pretty impressive upside.

And second, Mike, big picture, do you still expect to accelerate in 2018 over the 5.3% to 6.3%, I think, organic guidance that you're giving for 2017?

And I did have one follow-up.

Thank you.

Yes, so we had a quarter that was quite strong.

I would say what surprised us, one is that the performance of the MedSurg business was very strong.

And that was quite frankly up more than we thought, given the strength of neuromod business, uro and endo, contributing 12% organic growth.

So that was a bit of a surprise to us, especially coming off a -- what was a 11% comp for that whole sector first quarter '16.

So just terrific execution across all 3 of those businesses and global expansion.

So that was a bit of a surprise.

The other one was we didn't -- we knew CRM and Rhythm Management was going to do well.

But we weren't planning on doing an 8%.

So kudos to that team.

They just delivered excellent results.

And they deserve to because they had the best battery longevity and excellent products.

So that was a surprise for us to the positive.

We're also really pleased with the -- very excited about the future with the Symetis acquisition in combination with Lotus.

And coming out of a meeting in California this week with a bunch of cardiologists, there's a lot of enthusiasm for the unique capability of Symetis and Lotus combined on how to help treat patients and also to serve customers, so very bullish on that.

In terms of going forward, given the strong outlook that we provided, the 6% to 7% for the full year, which is stronger than market, we'll clearly provide '18 guidance in the future.

And as I mentioned before, I think what you'll see at Investor Day is a company with a very clear strategy, with a deep pipeline that will continue to grow faster than market in our LRP period.

And we've got a lot of room to improve margins, as you know, and deliver the EPS growth.

So you'll see that at Investor Day.

And we'll continue to deliver on those 3 elements of our plan.

That's very helpful.

And then just for a follow-up for Mike or Ian.

We haven't heard much regarding your strategy on either mitral or tricuspid.

Do you have anything new to share in these fronts?

How are you thinking about those 2 areas, given the recent kind of doubling down with Symetis in the TAVR market?

Yes.

So we clearly doubled down in TAVR, given the strength of that market, the uniqueness of our products and the commercial capabilities that we have.

So that's the bet that we've made.

It's doubling down on what we think will be a $4 billion to $5 billion market in 2020.

And we clearly doubled down with our WATCHMAN platform.

You're going to see more, not only the clinical trials that Ken outlined but also more direct-to-patient marketing to continue to expand that marketplace.

We also, on the mitral and tricuspid area, we do have multiple minority equity bets in multiple companies.

But quite frankly, we see that mitral opportunities exciting but much slower to develop versus the TAVR market in a business that's likely segmented out in terms of the number of devices that would be acquired.

So we like to market.

We're going to continue to invest in it with VC bets.

But the primary focus is on TAVR and WATCHMAN.

Also I just want to clarify on the PI side on the Eluvia, we do anticipate that -- we estimate that the FDA approval will be second half of '19, potentially first quarter of '20, but we estimate second half of '19.

And on Ranger, we haven't given any timing yet, we just started enrolling this quarter.

Thanks, Mike.

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

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