Boston Scientific Corp (BSX) 2018 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Boston Scientific First Quarter 2018 Earnings Conference Call.

(Operator Instructions) As a reminder, this conference is being recorded.

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

Please go ahead.

Thank you, Greg.

Good morning, everyone, and thanks 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 2018 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 the morning's call will be approximately 1 hour.

Mike will provide strategic and revenue highlights of Q1 '18.

Dan will review the financials for the quarter and then give Q2 '18 and full year 2018 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 Symetis 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 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 2018 guidance as well as our tax rates, R&D spend and other expenses.

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

Factors that may cause such differences include those described in the Risk Factors section of our most recent 10-K and subsequent 10-Qs 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.

Good morning, everyone.

Boston Scientific continues to build on our consistent and strong track record.

After 3 years of top-tier results, we've begun 2018 with another quarter of strong revenue growth and increased profitability while continuing to invest for a very exciting future.

In first quarter, our team delivered 6.2% operational revenue growth and 5.2% organic revenue growth with another quarter of excellent balance across our businesses and geographic regions.

The 5.2% organic growth was also notable against our highest growth comp for the year as we grew 9.4% organically in Q1 '17.

We leveraged our first quarter revenue growth to deliver 14% adjusted EPS growth to $0.33 and generated $283 million in adjusted cash flow.

We're also excited about 2018 and our plans to build upon our global momentum and drive sustainable long-term growth and differentiated financial performance.

So given our confidence on the outlook for the balance the year, we are raising the high end of the full year 2017 (sic) [2018] organic revenue growth guidance.

Our prior range of 5% to 6% is now 5% to 7%, plus an additional approximate 40 basis point contribution from the Symetis acquisition.

I'm also pleased that as a result of our first quarter performance plus the improved full year revenue outlook, we're raising our full year 2018 adjusted EPS guidance from $1.35 to $1.39 to a range of $1.37 to $1.41, representing 9% to 12% year-on-year growth.

Importantly, we also continue to invest in meaningful innovation to further strengthen our category leadership strategy and drive organic revenue and EPS growth over the long term.

During the quarter, we announced 4 compelling tuck-in acquisitions and one investment: NxThera and nVision in urology and pelvic health, EMcision in Endoscopy, Securus in EP and Millipede in structural heart.

These acquisitions will strengthen our faster-growth core-oriented business and enable over $16 billion in exciting new market expansion opportunities by 2021.

So before I discuss the business results, I'd like to review the changes we also announced earlier today in our reporting segment, which reflected better alignment in our geographic regions and businesses.

Geographically, we've now combined our Middle East and Africa organizations with Europe to create the EMEA region, which results in a stand-alone Asia Pac region that no longer includes the Middle East and Africa.

Additionally, we've also realigned our global Neuromodulation business to now be included with our Rhythm Management reporting segments, which includes Cardiac Rhythm Management and EP.

We are renaming the segment Rhythm and Neuro, and we see benefits of bringing our active implantable devices closer together across both the cardiac and neuro markets as this is better aligned with our shared manufacturing facilities and can drive further capabilities and best practices.

As a result of this move, our MedSurg segment now includes endo and uro/pelvic health.

And after 29 years at Boston Scientific, Mike Phelan has retired.

And we wish him the very best and thank him for his great contribution to BSC over these many years.

I'll now provide some highlights of first quarter results and thoughts on our full year '18 outlook.

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

So regionally, in first quarter, we delivered strong and balanced growth, with both EMEA and Asia Pac growing 6%; U.S., 5%; and emerging markets gaining 17%.

Strength in the Asia Pac region was broad-based, and China once again delivered 23% growth.

We also delivered balanced growth across all of our businesses.

As they're realigned, the MedSurg business grew 7%, Rhythm and Neuro grew 6% and Cardiovascular was up 3%.

So I'll now share some details on some of the drivers.

In endo, we posted 6% growth, fueled by strong pathology and infection prevention performance as well as sales of our SpyGlass DS visualization platform, AXIOS stent and continued adoption of Resolution 360 hemostasis.

In addition, we're excited about the early launch of our endoluminal surgery portfolio, including the Orise platform, which provides a novel means of diagnosing and treating cancer to the GI tract solely through natural orifice.

In early March, we also acquired EMcision, which offers an endoscopic bipolar RF device that coagulates tissue and relieves obstruction, which helps improve quality of life in patients living with pancreaticobiliary cancers.

Our uro and pelvic health business continued strong performance trend, growing sales 9% in first quarter, led by sales of LithoVue, our single-use digital ureteroscope, as well as products for men's health, core stone and BPH.

Emerging market sales in uro and pelvic health were strong, growing 30%.

And our GreenLight therapy for BPH posted solid growth, particularly internationally as we continue to invest in training while leveraging BSC's strong global infrastructure.

We also intend to strengthen and expand our leadership position in BPH with the recent acquisition of NxThera.

And NxThera has developed the Rezûm system, which uses water vapor to remove excess prostate tissue, thereby alleviating obstruction to urine flow and reducing BPH-related systems.

This is a very strong complementary offering to our existing GreenLight laser therapy.

Minimally invasive therapies are expanding the market beyond pharmaceuticals for the estimated 110 million worldwide diagnosed with BPH, and Rezûm's key advantages are that its simple, in-office procedure provides differentiated relief from symptoms.

And data to date indicates superior durability of results and thus, limited need for reintervention.

Also, last week's announcement of the acquisition of nVision Medical is really an important and potentially game-changing opportunity for women at risk for ovarian cancer and for Boston Scientific.

nVision will become part of the surg/gyn business, and we're hopeful that the nVision platform can change the landscape of ovarian cancer, which is the fifth most deadly cancer among women given the lack of a reliable diagnostic and resulting late-stage detection.

We're also hopeful that the platform may one day limit the estimated 300,000 preventative surgeries done each year in the U.S. to remove ovarian and fallopian tubes, 90% of which prove to be benign -- ovaries, I should say.

Studies indicate that there are 400,000 women in the U.S. who are high risk who will be near-term candidates to benefit from the nVision diagnostic procedure.

We believe this diagnostic platform will also -- could ultimately result in a $500 million to $1 billion U.S. market opportunity.

We plan to make nVision commercially available in the first half of 2019, and we'll continue to invest in clinical work to support the widest possible adoption of this platform.

Rhythm and Neuro grew 6% in the quarter, led by 17% growth in neuro, 11% in EP and 2% in CRM.

Neuro revenue growth of 17% in the first quarter was driven by U.S. launches of our WaveWriter spinal cord stim system and Vercise Deep Brain Stimulation platforms.

In addition, our international investments in neuro are starting to pay off as we delivered 30%-plus growth outside the U.S. We're also very encouraged by the initial physician and patient clinical experience with the WaveWriter SCS launch and its unique ability to offer combined waveform therapies both with paresthesia and sub-perception.

In DBS, yesterday, at the American Academy of Neurology Annual Meeting, we presented the 1-year results from the landmark INTREPID study.

This is the first and only multicenter, double-blind, randomized, sham-controlled study in the field of Deep Brain Stimulation.

In the study, the use of Vercise DBS demonstrated a 49% improvement in motor systems in patients with advanced but responsive Parkinson's disease.

This represents a greater benefit when compared to other DBS systems researched today.

We look forward to ongoing strong growth in Neuromodulation and the launch of our next-generation DBS platform with directional lead in the second half of '18.

Global CRM sales grew above market at 2%, led by double-digit growth in defib sales, reflecting the very strong global launch of our RESONATE platform, which includes the HeartLogic heart failure alert, as well as continued double-digit growth of EMBLEM S-ICD.

The expected benefit from our device replacement cycle is also tracking to expectations.

We are now the #2 global share player in the high-voltage market.

Customer interest in HeartLogic is increasing as heart failure practitioners recognize the value of the only FDA-approved heart failure alert which doesn't require maintenance data monitoring.

We also continue to enroll patients in the first phase of MANAGE-AF (sic) [MANAGE-HF], which is a multicenter randomized trial designed to quantify the benefit of proactive heart failure management using HeartLogic.

S-ICD strong global growth continues, and we're pleased to announce that it's now included in physician society recommendations in both the U.S. and Europe, placing S-ICD on equal footing to transvenous ICDs for patients who don't need pacing or ATP therapy.

brady pacing grew below market in first quarter as we faced a tough comp and loss of modest share due to competitive launches.

While we expect brady pacing sales could remain likely a headwind for the full year '18, given the strong global momentum of our defib portfolio in both CRT-D and ICD, we are confident that our worldwide CRM business will continue to grow above market in '18.

EP sales grew 11% in the quarter, led by good growth in our RHYTHMIA HDx mapping and nav platform.

We also continue to strengthen our catheter portfolio with the upcoming European full launch of our DirectSense and IntellaMap MiFi ablation catheter.

We also announced a small EP acquisition in April, Securus Medical, which has developed a thermal monitoring system for continuous measurement of the esophageal temperature to avoid thermal injury during left atrial ablation procedures.

We expect to launch in mid-2019 post completion of manufacturing scale-up activities.

Also, please join us for an update webcast on our Rhythm Management and WATCHMAN programs at HRS on Friday, May 11, at 12:15.

And please note this is a scheduling change from Thursday to Friday.

Our Cardiovascular group grew 3% in first quarter 2018.

PI grew 6% in the quarter, led by strong growth in both Europe and Asia.

Europe in particular is delivering strong growth due to our innovative drug-eluting technologies with both Ranger DCB and Eluvia DES, as well as our JetStream atherectomy platform.

We're now targeting drug-eluting U.S. launches in first half '19 for Eluvia DES and in '20 for Ranger DCB.

Preliminary COMPARE-1 DCB data was presented in the first quarter at the LINC Congress in Leipzig, Germany.

This is the first randomized, controlled head-to-head trial of DCBs, and the preliminary results suggested similar patency with our next-generation lower-drug-dose Ranger DCB versus the higher-dose IN.

PACT DCB.

Our Interventional Cardiology business grew 1% in the quarter, led by strong sales in structural heart and Complex PCI products, offset by an expected challenging quarter in drug-eluting stents.

Complex PCI grew double digits for the second quarter in a row on continued momentum from multiple new launches in '17, and we remain on track for strong cadence in '18 with the WOLVERINE cutting balloon and our next-gen rotational atherectomy system ROTAPRO.

Offsetting this growth, drug-eluting stent sales were down mid-single digits in the quarter as declines in the U.S. and Japan due to tough comps and competitive trialing were offset by low single-digit growth in Europe.

Our structural heart programs continue to build momentum with increased capabilities and scale.

The strength of WATCHMAN and ACURATE position us well to deliver $400 million in structural heart revenue in 2018.

WATCHMAN had another very strong quarter and continues to build global momentum, having now surpassed the 50,000 global implants milestone.

And during the quarter, positive results from the Japan SALUTE trial were presented, and we remain on track to launch in Japan in second half of '19.

In the U.S., we expect to begin enrollment in the next-gen WATCHMAN FLX IDE this quarter, and we continue to invest in multiple WATCHMAN market development initiatives focused at physician training, referrer education and patient awareness.

Our ACURATE TAVR valve platform continues to build momentum in Europe and hit sales of $21 million this quarter, up from $16 million in fourth quarter '17.

We completed training of our European sales and clinical teams in fourth quarter, and we look forward to continued momentum as well as the launch of the next-gen ACURATE neo2 with an advanced seal in Europe in the second half of this year.

We're also expanding access to ACURATE in multiple markets and begun the process for reimbursement in France, which is expected in 2020.

Enrollment in the SCOPE1 and SCOPE2 studies is expected to be completed by the year-end, and we anticipate beginning enrollment in our U.S. IDE for ACURATE in the second half of the year.

Regarding our Lotus EDGE TAVR valve platform, there's no change to our commentary from earlier in the year.

And that pending our ability to clear certain technical and regulatory hurdles, our goal remains to launch Lotus EDGE in the U.S. and European markets in '19.

So to close, I'd like to share again my enthusiasm for outlook in '18 and beyond.

We really believe that Boston Scientific continues to be uniquely positioned to drive shareholder value due to our differentiated long-term growth profile, significant room to improve operating margins, our consistent track record of driving double-digit adjusted EPS growth and our improving ability to deploy capital.

I really want to thank again our employees for their winning spirit and commitment to advancing science for life.

And Dan will now provide a detailed review of our financials.

Thanks, Mike.

First quarter consolidated revenue of $2,379,000,000 represents 10.1% reported revenue growth and 6.2% growth on an operational basis, which excludes the impact of foreign currency fluctuations.

Our reported revenue reflects an $83 million tailwind from foreign exchange, which was slightly favorable to the $60 million to $70 million tailwind expected at the time of guidance.

Sales from the Symetis acquisition contributed approximately 100 basis points, which was slightly above our expectations at the time of guidance, resulting in 5.2% organic revenue growth for the quarter.

This strong top line exceeded the high end of our guidance range of 4% to 5% due to the outperformance across the majority of our businesses and regions.

We leveraged this strong sales performance and delivered Q1 adjusted earnings per share of $0.33, which represents 14% year-over-year growth and is above the high end of our guidance range of $0.30 to $0.32, driven by solid metrics throughout the entire P&L.

Our adjusted earnings per share includes approximately $0.01 of negative FX impact in the quarter, which was in line with what we expected at the time of guidance.

Adjusted gross margin for the quarter was 72.3%, slightly above our guidance range of 71.5% to 72% and represents a 170 basis point improvement over the prior year.

However, Q1 2017 adjusted gross margin included approximately 180 basis points of net charges associated with the voluntary recall of the Lotus platform and the discontinuance of the Fuse business acquired from EndoChoice.

Excluding this charge, first quarter 2018 adjusted gross margin was roughly in line with prior year.

But importantly, Q1 of 2018's result reflects our ability to offset a negative 190 basis point year-over-year impact from foreign exchange with operational improvements, manufacturing cost reductions as well as favorable product mix, particularly in our CRM high-voltage, WATCHMAN and men's health franchises.

Adjusted SG&A expenses were $846 million or 35.5% of sales in Q1 2018, down 60 basis points year-over-year and within our guidance range of 35% to 36%.

We remain committed to and continue to realize the benefit of our targeted initiatives focused on reducing SG&A like end-to-end business process streamlining and automation, expansion of global shared services and leveraging global sourcing.

Adjusted research and development expenses were $254 million in the quarter or 10.7% of sales, which was relatively flat to Q1 of last year.

Royalty expense was 0.7% of sales in Q1 this year, also roughly flat year-over-year.

As a result of the strong sales and solid performance throughout the P&L, Q1 2018 adjusted operating margin of 25.3% increased 230 basis points year-over-year and slightly exceeded our guidance range of 24.75% to 25.25%.

Normalizing for the onetime charges incurred in the first quarter of 2017 related to Lotus and Fuse that I just mentioned, adjusted operating margin improved operationally by 40 basis points year-over-year.

There is no change to our full year adjusted operating margin guidance of 25.5% to 25.75% as we continue to deliver against our goal and remain on track for our adjusted operating margin goal of 28% in 2020 and 30%-plus longer term.

The underlying year-over-year improvement in our Q1 2018 adjusted operating margin rate was driven by gains in all 3 of our segment operating results.

The new Rhythm and Neuro segment delivered an operating margin of 20.8%, which on a comparable basis, represents a 450 basis point increase over the prior year.

The addition of Neuromodulation to what was the Rhythm Management stand-alone segment to create Rhythm and Neuro does not materially change the current profile or future outlook for these businesses.

The teams continue to leverage strong top line results in all 3 businesses and make strong progress on gross margin through favorable S-ICD and Resonate portfolio product mix in CRM, focused Plant Network Optimization as well as manufacturing efficiencies.

In addition, we are seeing results from the strong focus on expense control and leveraging ongoing commercial synergies.

The addition of Neuromodulation is slightly dilutive now to the segment, but over the next couple of years, margins are expected to be similar to where Rhythm Management margins were.

And as a result, the prior goal of increasing Rhythm Management operating margin by 300 to 400 basis points by 2020 is still a reasonable goal for this combined segment.

The MedSurg segment, now comprised of Endoscopy and urology/pelvic health, also realized significant year-over-year operating margin improvement of 290 basis points in the quarter, delivering 36.4% on a comparable basis.

Even as we made investments in commercial capabilities for ongoing launches across both businesses, these were more than offset by leverage from strong top line performance and cost-containment initiatives.

In the Cardiovascular segment, operating margin increased 380 basis points year-over-year, but when you consider the Lotus charges in Q1 last year, it's actually down slightly, primarily due to the investment in our structural heart franchise.

Now I'll move below the line to interest and other expense.

Interest expense for the quarter was $61 million compared to $57 million in Q1 of last year.

Our average interest expense rate was 4.1% in Q1 this year, slightly higher than the 4.0% in Q1 of last year as a result of our recent public offering of $1 billion aggregate principal amount, 4% senior notes due March 1, 2028.

With the proceeds of this offering, in the quarter, we repaid certain short-term commercial paper balances and $600 million of 2.65% notes that were coming due in October 2018.

Adjusted other expense was $18 million in the first quarter and primarily included dilution from our equity method investment, adjustments to our available-for-sale investments as well as foreign exchange losses related to our hedging program.

Our tax rate for the first quarter was 8% on a reported basis and 13.2% on an adjusted basis, which was at the low end of our guidance range of 13% to 14%.

As expected, our underlying operational tax rate was approximately 16%, and we realized a net benefit from stock compensation accounting of approximately 260 basis points in the quarter and still expect the full year benefit from stock comp to be approximately 100 basis points.

Finally, Q1 2018 adjusted earnings per share of $0.33 includes approximately $0.01 of unfavorable FX and represents 14% year-over-year growth or 19% growth excluding the impact of foreign exchange.

On a reported GAAP basis, which includes net charges and amortization expenses totaling $157 million after tax, Q1 2018 earnings per share was $0.21.

We ended with 1,397,000,000 fully diluted weighted average shares outstanding.

Adjusted free cash flow for the quarter was $283 million compared to $167 million in Q1 2017.

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

We continue to expect 2018 adjusted free cash flow to be approximately $1.9 billion.

We continue to make good progress on our mesh litigation and still expect to make cash payments of approximately $800 million to fund the settlement of the remaining legal reserves related to the mesh litigation.

We have now reached conditional final or near-final settlement on approximately 95% of all known claims as we continue to reduce the risk on our balance sheet and target a resolution of the majority of our mesh claims in 2018.

Our total legal reserve, of which mesh is included, was $1,511,000,000 as of March 31, 2018.

As a reminder, this liability is released from our balance sheet as payments are made out of the qualified settlement fund, into which we've already made payments in prior quarters.

In addition, finalizing the IRS stipulation of settled issues for the 2001 to 2010 tax years remains on track, and we currently believe that it will be finalized during Q2 2018.

We still expect to make net cash payments of approximately $600 million around midyear, and we will also adjust our balance sheet to reflect the final settlement in the quarter in which that occurs.

If our time line holds, we would expect to record a tax benefit in Q2 for both GAAP and adjusted earnings, consistent with the manner in which the tax reserves were originally booked.

However, to the extent that we have a tax benefit for adjusted earnings, we are exploring strategies to reinvest that tax benefit into our tax structure, with the goal of reducing our overall operational tax rate in 2019 and beyond below our previously announced goal of 15%.

As a result, we do not expect that any tax benefit resulting from finalizing the IRS settlement will cause a modification to our full year adjusted EPS guidance.

This $800 million estimated payment for mesh settlements, combined with our expected $600 million payment as a result of finalizing our disputes with the Internal Revenue Service, requires approximately $1.4 billion of cash flow for the year to settle our remaining significant existing contingencies.

Capital expenditures for the first quarter 2018 were $60 million.

We continue to expect capital expenditures of approximately $325 million for the year as we build capacity, integrate acquisitions and drive growth.

I'll now walk through guidance for Q2 and full year 2018.

For the full year, we expect consolidated 2018 revenue to be in the range of $9,750,000,000 to $9,900,000,000, which represents year-over-year growth of 5% to 7% on an organic basis with an additional 40 basis point contribution from the Symetis acquisition.

We expect foreign exchange to be a tailwind of approximately $200 million to $225 million for the full year 2018.

We continue to expect our adjusted gross margin for the year as a percentage of sales to be approximately 72% for the full year, which now assumes a negative FX impact of 120 basis points or 10 basis points greater than prior guidance.

We have also considered the recent proposed tariffs between the U.S. and China in our adjusted gross margin guidance.

We do not manufacture in China, but we do purchase a small percentage of component inventory from China, so there may be slight pressure on our cost of goods sold if U.S. tariffs are applied to Chinese manufactured goods.

However, we also may have the ability to substitute some of those products, and we expect we can manage the impact.

For goods imported to China, it appears there will not be an impact from the China 301 list because there are no devices currently on that list.

We will continue to monitor developments, but as of today, we do not expect a significant impact to our business.

We continue to expect full year adjusted SG&A to be in the range of 34.5% to 35% of sales as we're seeing the benefits of operating expense control programs currently underway, and there's also no change to expectations for full year adjusted R&D spend in a range of 10% to 11% and full year royalty rate to remain at slightly less than 1% of sales for 2018.

This implies a full year 2018 adjusted operating margin in a range of 25.5% to 25.75%, which remains consistent with the improvement goals we outlined at an investor conference on January 9 and sets us up well to deliver on our long-term goal of 28% adjusted operating margin in 2020.

We continue to expect our 2018 operational tax rate to be between 14% and 15% and our adjusted rate to reflect an additional approximately 100 basis points of benefit from the accounting standard for stock compensation, of which the majority was recognized in our Q1 tax rate.

We expect below-the-line expenses, which include interest payments, dilution from our venture capital portfolio and costs associated with our hedging program, to be approximately $300 million for the year and a fully diluted weighted average share count of approximately 1,398,000,000 shares for Q2 and 1,401,000,000 shares for full year 2018.

As a result of the improved revenue growth outlook and Q1 outperformance, we are raising full year 2018 adjusted earnings per share from a range of $1.35 to $1.39 now to a range of $1.37 to $1.41, representing 9% to 12% adjusted earnings growth.

On a GAAP basis, we expect EPS to be in a range of $0.90 to $0.94.

Now turning to Q2 2018.

We expect consolidated revenue to be in a range of $2,450,000,000 to $2,500,000,000.

This represents year-over-year organic growth in a range of 5% to 7%, with an additional 70 basis point operational growth contribution from Symetis, which we will anniversary at the end of May.

We expect the foreign exchange impact on Q2 revenue will be a $60 million to $70 million tailwind.

For the second quarter, adjusted earnings per share is expected to be in a range of $0.33 to $0.35 per share, representing 3% to 10% growth, and GAAP EPS is expected to be in a range of $0.21 to $0.23 per share.

Please check our Investor Relations website for Q1 2018 financial and operational highlights, which outlines Q1 results as well as Q2 and full year 2018 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.

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

(Operator Instructions) Greg, please go ahead.

(Operator Instructions) Your first question comes from the line of David Lewis from Morgan Stanley.

Maybe one for Dan on guidance and then maybe one for Mike on some segments.

Dan, just beyond the quarter, it does look like getting back to 6% organic growth across the next several quarters does look very achievable by our model.

So how do you see the rest of the year playing out across the quarters?

And what could drive the low end of the 5% to 7% guidance for the second quarter as the comps get easier?

And then a quick follow-up for Mike.

Yes.

I would say the momentum coming out of the first quarter is solid, as we said, across the majority of the businesses and regions, which is the biggest reason that led us to take the increase up to 5% to 7% for the second quarter and 5% to 7% for the year.

So we're very comfortable with that range as we look at the quarter and the full year.

As Mike outlined, some of the areas that we see pressure in, DES and in pacer, those are probably some of the things that could put you towards that low end of the range if those didn't go our way, but that's not what we're anticipating based on the ranges that we have and the momentum that we have in the global diversified business that is Boston Scientific.

Okay, very clear.

And then, Mike, there are 2 segments that stuck out this quarter from a momentum perspective: they, obviously, were neuro, which is very good; and IC, which is a little less so.

But you gave some great detail on neuro, so I guess I'll focus on Interventional Cardiology.

If there was one area of apprehension to the year, it was obviously in IC.

So can you discuss the pressures you're seeing in stents, if any?

And then relative to ACURATE, that's the other kind of tale of a different city.

ACURATE sequential performance was very strong, and the guidance implies, I think, another meaningful step up, frankly, in the second quarter.

So if you could talk about what you're seeing in stents and what you think is driving this pretty rapid change in momentum for ACURATE.

Yes.

So overall, I would say we're quite pleased with our first quarter IC performance.

It was really in line with what we expected.

Just a couple broader points.

Kevin and the team continue to rapidly diversify that business globally.

Our complex coronary business will likely be equal to the size of our DES business, probably in end of 2019.

And then you have a rapid-growing structural heart business on top of that.

So that business continues to diversify significantly beyond DES over the years here.

Within DES itself, it continues to be a key cash driver for the company to enable us to invest in structural heart and other initiatives.

I think the good news there is you've seen growth in Europe.

So after all the trialing of lots of competitive different offerings, you're seeing low single-digit growth in Europe.

We anticipated softness in the U.S. in first quarter and through the full year due to some tougher comps in DES but also competitive trialing.

But we like our long-term prospects in DES with new products coming plus the growth over in Europe.

I think the stars that are getting larger and larger, which continue to kind of reshape the composite mix of IC, are complex coronary and structural heart.

WATCHMAN continues to do extremely well.

We're on track to deliver the $400 million structural heart guidance.

The utilization of WATCHMAN continues to increase, and we also are enrolling our next-gen WATCHMAN device in Europe, and we'll start that in the second quarter here in the U.S. ACURATE, really pleased with that.

Up -- sometimes, you do acquisitions and this integration has been like 5 stars across the board.

Our supply chain team has tripled production.

We have next-generation ACURATE we'll launch in the second half with an advanced seal.

We'll enroll that at the full clinical trials, SCOPE1 and SCOPE2, and we'll launch the U.S. IDE shortly here.

So that team really is delivering, and that's against some markets where we're not approved yet.

We're not approved for reimbursement yet, in France.

So we're very bullish on ACURATE and WATCHMAN, complex coronary, and we feel like we'll manage the near-term headwinds in DES.

And if Europe's an indicator, that will get back to growth, but that's all solved and contemplated in the guidance.

Your next question comes from the line of Bob Hopkins from Bank of America.

I wanted to start with a product question, if okay, because one thing that stuck out to me was on the defibrillator or ICD side, very impressive results despite a tough comp.

So I guess my question on the ICD side is, is the market getting better at all?

Or is this all your replacement cycle kicking in and share gains from things like HeartLogic and just the new platforms?

I think it's -- I think the market's been pretty consistent over the past probably 1 or 2 years.

I think we just have very strong portfolio in defib.

The product that gets the least amount of attention that continues to grow double-digit is S-ICD.

So that platform has become quite significant in terms of dollar revenue and is growing strongly in all major markets, U.S., Europe and Asia Pac.

And we have some additional enhancements to further simplify that product coming and have some additional clinical data.

So S-ICD, for some reason, floats a bit under the radar, but that's a terrific driver for us as well as a mix driver.

And then RESONATE, the new platform there, that was years in development, probably 7 years in development with our HeartLogic diagnostic tool, and that's providing a very unique competitive differentiation.

So that -- and then the replacement cycle, we talked about that contributing maybe 1 point of growth, and that's in line.

So I think it's very strong portfolio and execution by our global CRM team.

Great.

That's very helpful.

One other thing I wanted to ask about, obviously, one of the things that happened over the course of the last 3 to 4 months is that you guys have executed on a number of smaller but important transactions.

So I just wanted to ask, relating to those 3 or 4 deals, just when do you think we should -- we could start to see real revenue contribution from those deals?

Is that 2020?

Or will it take a little longer?

And then from a financial perspective, how do these deals impact the margin goals that you guys have laid out?

In other words, like how much dilution are you offsetting?

So just on the deals, when is the revenue growth contribution coming?

And just maybe talk about how -- the impact of those deals on margins.

Sure.

So Dan can touch on the margins.

So these are 5 deals: 2 that are more to further strengthen our core and these 2 are quite small, the EMcision deal in Endo and Securus.

And you'll see a little bit of revenue from those -- you'll see revenue from those, I should say, in 2019.

And then 3 maybe more strategic and larger opportunities, are all in either adjacent markets that are high growth or new whitespace.

And Millipede, clearly, a larger investment where we have the option to acquire that -- both parties do actually, that'll be a longer-term play given our -- the mitral repair market and the clinical requirements there.

So you're not going to see any revenue in '19 and '20 for Millipede.

But NxThera and nVision, 2 really exciting opportunities in, call it, either adjacent markets or whitespace.

You'll see some revenue with NxThera in 2018, and we expect some strong momentum out of NxThera in 2019.

And similarly, in nVision, there'll be a little bit of revenue in 2018 and stronger contribution in 2019.

And in terms of the margin, Bob, simply put, all of that's contemplated in the 25.5% to 25.75% for the year and also the 28% in 2020.

To the extent that we do a deal that has any dilution in it, we make the appropriate trade-offs to still deliver on the commitments and then, obviously, everything becomes accretive in the longer term.

So all contemplated within our goal that we established.

Your next question comes from the line of Glenn Novarro from RBC Capital Markets.

Mike, can you give us a little bit more color on WATCHMAN?

And the reason I'm asking is ACURATE is doing very well, but you didn't change your $400 million structural heart guidance.

So I just want to make sure that you're pleased with WATCHMAN here in the first quarter, given no change to the $400 million guide.

And then as my second question, can you just remind us of the trial design for ACURATE in the U.S. IDE trial?

Sure.

Couldn't be more pleased with the progress that WATCHMAN is making globally.

We didn't take our number up.

We do think there potentially could be some upside, so we'll see what happens later in the year with that number.

But that is doing extremely well.

The bulk of the growth is in the U.S., but we're also expanding into China.

And we're also excited about the clinical trial completion in Japan, which will be a very big market that will launch in the second half of next year.

So for us, what's -- the most important metric is utilization rates.

So we open up new centers, but the new center openings slowed down over time given the presence that we already have.

So it's really about the safety profile, great outcomes and utilization, and we continue to see an increase in utilization rates across our base of existing centers.

And then just some color on the U.S. trial for ACURATE, which I believe is going to start sometime in the second half.

Glenn, it's Ian Meredith here.

Thank you for the question.

So the U.S. ACURATE IDE trial will be a randomized trial of extremely high and intermediate risk patients, approximately 500 patients, and it will be a comparison against any commercially available valve, which will be either the Edwards SAPIEN 3 valve or, indeed, the Medtronic Evolut PRO platform.

So 500 patients randomized to either of those 2, and that will -- we will leverage the SCOPE1 and SCOPE2 datasets to put together a larger package as a consequence of that.

Your next question comes from the line of Bruce Nudell from SunTrust.

Mike, very nice quarter and I've really been impressed by the balance of the company.

One of the things that was really exciting to me at the investor conference was the opportunity you're exploring in endoluminal surgery.

BSX made an investment this quarter, and I was wondering whether you or Ian could comment on that particular technology that you purchased and the likely trajectory, the broader opportunity.

And I have a follow-up on TAVR.

Great.

Thank you.

So I think this was very consistent across all of our businesses.

It is growing our core markets, traditional ones in biliary and others, for example, and hemostasis and endo, but then branching off into faster-growth and new innovative markets.

And the acquisitions that we ticked through really support that in these new adjacencies and new whitespace so we can deliver significantly above-peer growth for the long term.

Specifically to Endoscopy, endoluminal surgery is an investment that we've been making for multiple years under Dave Pierce's leadership and now Art Butcher.

We see a large opportunity to, over time, move more general surgery procedures over to the less invasive interventional approaches.

The team, for lack of a better word, has pulled together a tool kit of internal organic R&D efforts as well as maybe 2 or 3 small tuck-in deals to do that.

And so this Orise product allows us to get after esophageal cancer and other cancer interventional techniques to hopefully avoid general surgery.

And so we think we're leading the way in terms of physician training in Japan.

That's actually quite a bit more mature in this market.

And we'll do a lot of physician training in the U.S. I think, over time here, our goal is just to slowly help convert more general surgery procedures to less invasive interventional techniques, and we're pulling together the capabilities and the training to do that.

So that will continue to be another branch of growth for endo beyond our pathology and infection prevention, which are also recent new markets with endo.

And my question with regards to TAVR is we were struck by Edwards' commentary regarding step down in the ex-U.

S. market growth from low 20s in the fourth quarter to low teens this quarter, with a broader backdrop of price sensitivity in Europe.

We realized there could be dramatic quarter-to-quarter variation in both the U.S. and ex-U.

S. market growth, with no -- for no real fundamental reason.

We just wanted to check with you or Ian as to whether you perceive the secular shift in ex-U.

S. payer perspective as to their willingness to pay for TAVR amongst, largely, an elderly population that was historically not treated or to convert surgery, which tends to be cheaper ex U.S., to TAVR.

Any change that you've really seen?

Or is this just one of those quarters?

I'll make the first comment maybe on just the market, and then Ian can make some other comments.

Clearly, we see more price sensitivity in Europe than we do in the U.S. There's more competitors in Europe than there are in the U.S., and we see more price variation by country.

We're really on offense here.

We're launching into new markets.

We haven't been approved or reimbursed in some markets yet, so this is all new growth for us.

And we have a terrific platform with ACURATE, with the next-gen seal coming at a very nice gross margin rate, and then we're optimistic on the progress with Lotus as well.

But Ian, do you have any other comments?

Let me add, Bruce, that I don't think that there's really any evidence that there's a slowing of the uptake of transcatheter aortic valves for severe aortic stenosis in the elderly patients.

I think the evidence is growing stronger all the time and there's widespread understanding of the value of this technology in reducing morbidity and mortality.

So I see no reason to think that this would slow.

Your next question comes from the line of Larry Biegelsen from Wells Fargo.

So one on EP, one on TAVR, but let me start with EP for Dr. Stein.

So next month at HRS, Dr. Stein, we're going to see the long-awaited CABANA trial results.

What are your thoughts on that?

Do you think that if it misses the primary endpoint, it could hurt the Afib ablation market?

And if it makes the primary endpoint, do you think this market could even grow faster?

Just any thoughts on that study given its importance?

And I have one follow-up on TAVR.

Larry, I think we're all holding our breath to see what CABANA shows when it's released as a late-breaker at HRS.

I think it's always tough to speculate ahead of the data.

My feel on the trial -- it took so long for them to enroll and used such a variety of different technologies for mapping and for ablation that my own view is if it turns out to be positive, I think it would be an accelerator for the market.

I think if it's negative, it depends on how it's negative.

But if it's a neutral result, just given the age of the trial and the early generation of technologies and variety of different approaches that were used, I don't think it would have too much of an impact.

That's helpful.

And then on -- let me just ask on Lotus, Mike.

I did hear your comment a minute ago that you're optimistic on the progress with Lotus, but my question is really around, once you resolve, if you resolve the technical issues, you've stated that there are regulatory steps that you need to take.

So the question is really, if you resolve the technical issues, what steps do you need to take to launch Lotus in the U.S. and Europe?

I think last year, at TCT, you indicated that you plan to conduct additional implants on EDGE, I think, before launching.

Is that still the case?

And I just want to throw it out there.

In Europe, it seems you do have the upper hand on Edwards right now in the litigation.

So I know it's sensitive to comment on litigation, but what's stopping you from enjoining them there to kind of force a global settlement?

Sure.

On Lotus, there really is no change there.

We -- it's our intention and our goal is to bring Lotus back to market in Europe and the U.S. in 2019.

We're still -- we made the commitment that we wouldn't comment on that until we pass the technical and testing hurdles that we require of ourselves internally, so we'll keep you posted on that.

And really, I wouldn't comment any further on clinical requirements in Europe or U.S. until we get through the quality and testing that needs to be done.

On Edwards' litigation, really no further comments there.

We're pleased with the early strong outcomes that we've seen in Europe on the litigation front, but I wouldn't comment any further.

Your next question comes from the line of Danielle Antalffy from Leerink.

Okay, great.

I just had a question on -- can you give a little bit more color about the combination of the CRM and neuromod businesses and what this can ultimately do?

I know you said neuromod was dilutive to the operating margin, but does this make you feel incrementally better about improving margins in the CRM business as well?

And what is the new sort of bar set for that business from an operating margin perspective?

Yes.

Danielle, this is Dan.

I had a little bit of this in the prepared remarks around the overall goal.

So what we used to talk about was kind of a 23% for the old Rhythm Management segment, and that's kind of still -- 23%-plus is still where we would see the Rhythm and Neuro segment going.

It was a little over 20% here in Q1.

So there are some good synergies and advantages to bringing the active implantables together, as Mike had mentioned, to bring the Rhythm and Neuro segments together.

But at the margin level, I think we're on track for where we set this year and on track for the 28% for 2020.

Okay.

And then just a quick follow-up question.

I mean, obviously, in 2019, you'll be entering that year with a lot more flexibility on the balance sheet.

And I was just wondering if you could give any color at a high level on how you're thinking about potentially deploying that capital going forward.

Yes.

It definitely is an inflection point for us.

We'll have much better ability to deploy our capital than we would have over the last really 5, 6, 7 years as we get into '19 and '20.

But I don't think we change the playbook at that point.

It's still about category leadership.

It's still about being as deep in each of the verticals that we have and supporting that.

You've seen an example of that, as Mike ticked through the deals we've done here, and either closed or announced in Q1.

And just because there's more cash available relative to '19 and '20, I think the strategy remains the same.

Your next question comes from the line of Josh Jennings from Cowen.

Let's start on TAVR.

And just to follow up, Mike, on your (inaudible) territories where you have not received reimbursement.

To start out, I was hoping to just hear any type of cadence you can help us with.

You mentioned France, I think, in 2020.

What are the other key regions where you're seeking reimbursement approval?

And then also -- and then maybe (inaudible) with that.

And then also, just with the Symetis sequential improvement.

Can you just help us understand where you're having the greatest success?

Is that with going deeper into historic Lotus accounts?

Or is it a combination of that and new customer capture?

Sure.

Maybe to comment on the first one, there's really not much to say -- on the first one, there's really not much to comment on other than the France reimbursement coming in mid-2020.

Really, in Europe, beyond the French reimbursement, it's been a matter of us scaling up production, which we continue to do successfully, training our clinical team and commercial team on ACURATE.

And we continue to make a lot of progress there and build momentum, and we're confident we'll continue to see strong growth out of ACURATE.

But we'll be selling into most major markets in Europe with the exception of France without reimbursement.

And then we'll be hopefully enrolling as part of the U.S. trial, Japan as well in the future for ACURATE.

So that's probably the only comment I can make on it.

We just continue to invest on the platform, on the portfolio side, on the clinical capabilities, and we are seeing growth not only in existing customers who are using it more often but also in new customer accounts as well.

We've had particular success in the U.K. and the Nordics, and we're continuing to build up our capabilities in Germany.

And then just a question for Dan on the margin guidance, stronger-than-expected performance in Q1, increasing the top line guide.

I know you laid some of this out already in your prepared remarks, but I was hoping -- it might be helpful just to help us walk through, I guess, why you can't see even stronger (inaudible) '18 guidance range.

Yes.

Josh, you were breaking up a little bit at the end, but I think it's on 2018 guidance and why can't it be a little bit higher.

I guess, 25.5% to 25.75%, I feel like that's appropriate guidance.

Gross margin was a little high in Q1 at 72.3%.

You'll see from the guide we have that in the 71.75% for Q2.

There's a little bit more sequential pressure relative to FX on gross margins, so we still think 72% is the right number there.

So there's not, I don't think, a ton of upside on that front.

We did give the EPS upside from the additional sales of -- for the year of raising the range up to 7%.

There's a piece of that in the EPS guide up to $1.37 to $1.41.

So I feel like the 25.5% to 25.75% at this point in the year is an appropriate guide given the top line raise and the bottom line raise.

Your next question comes from the line of Rick Wise from Stifel.

Maybe I'll focus on some CRM questions at this point.

Mike, you highlighted S-ICDs as maybe being underappreciated.

And yes, we're 4, 5 years in, you're still growing solid double digits, the evolution of technology, more favorable guidelines.

How sustainable is this kind of growth?

What's next?

Maybe just update us on your thoughts about -- in some of the early days, the thought was S-ICDs would only be useful in maybe 10%, 15% of patients.

Do you see it as a larger opportunity?

And is it pulling through ICD business?

Is that helping that part of the business as well, just that double offering?

I can answer, but Dr. Stein is probably more qualified to answer.

Thanks a lot.

I'm not sure about that.

Yes, Rick.

I think the biggest opportunity for continued growth with S-ICD is continuing to penetrate into the traditional primary prevention market for single-chamber defibrillators.

And again, you're right.

The primary prevention market is the single largest market for ICDs in the U.S. and globally, and there are a number of upcoming data releases that are going to help us push that forward as well as product releases.

And so I'd highlight for everyone a late-breaking trial that's going to be presented at HRS in Boston that shows the impact of the new detection algorithm we have in the device on inappropriate shock rates.

Then we're going to have, eventually, the release of the PRAETORIAN head-to-head trial of S-ICD versus transvenous ICD as well as the results of our UNTOUCHED trial, specifically in primary prevention patients.

And then beginning in 2019, we'll be starting clinical trials of our modular CRM offering, leadless pacemaker that's capable to communicate with the S-ICD that, in our view, reduces a lot of the barriers among physicians who haven't yet adopted the device for primary prevention.

Yes, that's great.

And then just last for me on -- and sort of related.

Given, again, the strong ICDs, great products, S-ICD, I'm not sure I fully understand why brady was weak and why it remains weak for rest of the year.

I know you had a tough comp in the first quarter.

When -- what are you doing, Mike, to make it better?

And do we have to wait until '19 for better results there?

Yes.

So on brady, a bit in line with what we expected.

We do have some tough comps -- very tough comps in the first quarter.

We have tough comps again in second quarter, and they get a bit easier in the second half of the year.

So there's a lot of efforts there.

We have a couple of product gaps that we're trying to fill on CRT-P with MRI.

That's in process that we're confident we'll move forward with.

We are seeing a little bit of impact on leadless pacemaking in some markets.

So there's a few product gaps that we're working to fill and some difficult comps.

So -- but we really feel like when we give guidance, we give guidance to execute upon.

We have a really good track record on that.

And a bit softer pacemaker result is anticipated in that guidance and well offset by the defib performance.

Okay.

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

Thanks very much for joining us today, and we appreciate your interest in Boston Scientific.

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