Boston Scientific Corp (BSX) 2019 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Boston Scientific Q1 2019 Earnings Call.

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

I will now turn the call over to your host, Susan Lisa.

Please go ahead.

Thank you, Kevin.

Good morning, everyone.

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 2019 results, which included reconciliations of the non-GAAP measures used in the release.

We 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 Financials and Filings.

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

Mike will provide strategic and revenue highlights of Q1 '19.

Dan will review the financials for the quarter and then provide Q2 '19 and full year 2019 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, operational revenue excludes the impact of foreign currency fluctuations, and organic revenue further excludes the impact of certain acquisitions, including NxThera, Claret and Augmenix, in the relevant periods for which there are no prior period related net sales.

Also 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 2019 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.

Thank you, Susie.

Good morning, everyone.

Boston Scientific continues to grow above market, improve our profitability, invest for the long term to address unmet patient needs and deliver differentiated financial performance.

In the first quarter, our team delivered 7.8% operational revenue growth and 6.3% organic growth with another quarter of balance across our businesses and geographic regions.

In addition, we leveraged our first quarter revenue growth to deliver 7% adjusted EPS growth to $0.35 within our guidance range despite a $0.01 charge related to the mesh market withdrawal while generating $437 million in adjusted free cash flow.

We have high visibility to a high single-digit organic growth for 2019 even with recent unforeseen regulatory headwinds this year related to paclitaxel, transvaginal mesh and sterilization in Men's Health.

While we work diligently to offset these issues, the cumulative effect makes delivering on the high end or beating our original full year '19 revenue guidance of 7% to 8.5% organic growth a lower probability.

As a result, we're lowering the top end of our growth guidance range by 50 basis points, and our full year 2019 operational revenue growth guidance is now 8% to 9%.

And organic revenue growth guidance is now 7% to 8%.

We're pulling up the bottom of our full year adjusted EPS guidance from a range of $1.53 to $1.58 to a range of $1.54 to $1.58, which represents a 10% to 13% year-on-year growth excluding the benefit of the 2018 IRS settlement.

With this 2019 growth outlook, we're excited for the rest of the year and our plans to build upon our global strengths and drive sustainable long-term revenue gains, double-digit EPS growth and to continue our momentum in 2020 and beyond.

Although we're proud of our results this quarter, we're disappointed that our first quarter operational growth of 7.8% and organic of 6.3% were 70 basis points below our guidance range or approximately $15 million shortfall with $5 million of that related to the mesh.

I'll briefly address where we had some revenue softness in the quarter versus our plans as well as our plans to accelerate growth from here.

First, although our PI business had strong growth this quarter at 11% organic, we did feel the impact of the paclitaxel concerns, particularly in the second half of the first quarter after the release of the FDA's advisory letter.

While the Eluvia launch in Japan remains on track, we do expect slower adoption of Eluvia to persist in the U.S. and Europe in second quarter and potentially throughout the second half.

The June FDA Advisory Committee panel meeting will be a key next data point, and we'll continue our dialogue with FDA and Eluvia's unique design characteristics, which include controlled local release of low-dose paclitaxel from a safe and proven polymer as well as clinical superiority data.

However, we are assuming ongoing headwinds and cut in half our Eluvia revenue expectations for '19 to reflect the current landscape.

In UroPH, we plan to overcome some of the recent headwinds.

We delivered a decent quarter for our urology public health business at 14% operational and 5% organic growth despite 2 unanticipated events.

In the first quarter, we're impacted by an unexpected Illinois South state-mandated shutdown of a third-party sterilizer used for our Men's Health product lines.

Fortunately, the U.S. situation has been resolved, and we did receive the FDA approval in late March to conduct sterilization of these products at our own in-house facilities, but we do expect softness in global supply during the second quarter.

And we will return to full supply by the end of the second quarter.

Regarding transvaginal mesh for pelvic organ prolapse, last week news will result in a full year '19 negative impact of $30 million to global revenue and the $0.02 charge to adjusted EPS.

A portion of this was booked in the first quarter, including the $5 million sales reserve and related inventory write-offs for nearly $0.01 impact to adjusted EPS.

The mesh market withdrawal represents a 30 basis point drag to both first quarter and full year '19 organic growth.

And lastly, we did see some softness in our U.S. SCS business versus our internal plans.

Global Neuromod delivered a strong quarter with 12% organic growth, and we believe the SCS remains a very strong and underpenetrated market.

In the second half of this year, we're excited to release new clinical data on WaveWriter and launch additional enhancements to both the SCS and DBS platforms.

So now I'll provide some additional highlights in the quarter and our full '19 outlook.

So recently, we delivered a strong and balanced operational growth with Asia Pac, up 10%; Europe, up 8%; and the U.S., up 7%.

Emerging markets revenue grew 22% operationally, led once again by strong China growth.

We also delivered balanced organic growth across all our businesses, 7% in both MedSurg and Cardiovascular, 6% in Rhythm and Neuro.

Turning to some of the businesses.

We delivered 8% organic growth in Endoscopy, which is broad-based and fueled by infection prevention performance as well as excellent results in our biliary portfolio driven by the AXIOS Stent and the recent launch of SpyGlass Digital II.

In addition, the quarter reflects strong early launch results from ORISE Gel, a key component of our endoluminal surgery portfolio; and our new Jagwire Revolution guidewire.

And for the balance of the year, we expect continuous strength in Endoscopy sales due to the ongoing ramp of these new product launches as well as the OrcaPod single-use valve.

Importantly, we remain on track for our year-end 2019 launch of our EXALT-D single-use duodenoscope, which is used in ERCP procedures.

We believe the EXALT-D can help meet a significant unmet need for hospitals and patients.

And 2 weeks ago, the U.S. FDA issued a safety communication regarding scope reprocessing.

Preliminary results of the FDA report indicated higher-than-expected levels of contamination, up to 5.4% of samples, tested positive for organisms of high concern such as E. coli and multidrug-resistant pathogens.

The FDA also stated that there continues to be a need for improvement of the safety of reprocessed duodenoscopes and noted that in addition to its March 18 warning letters to reusable scope manufacturers, the agency continues to encourage the development of new technology and design features.

The EXALT model D single-use scope has been designed to address this exact issue by eliminating scope disinfection challenges completely.

This platform represents a significant opportunity in '20 and beyond.

As mentioned, urology and public health grew 14% operationally and 5% organically in the first quarter and reflects an approximate 200 basis point negative impact from mesh sales reserves recorded in the first quarter, and LithoVue led sales in our core stone portfolio.

And importantly, the urology acquisitions of Augmenix and NxThera are both executing to plan.

Rezûm results were reinforced by a publication of 4-year trial data with a low of 4.4% surgical retreatment rate and no new adverse events noted between years 3 and 4 as well as initiation of a Rezûm-specific TPT (sic) [CPT] code for physician reimbursement on January 1.

As mentioned, we expect softer UroPH revenue in second quarter given the Men's Health sterilization impact and the remaining $25 million expected negative revenue impact in Q2 to Q4 due to the global removal of mesh products for pelvic organ prolapse.

However, we do expect UroPH revenue growth to be accretive to the company average in the second half and full year '19 as core growth remains robust and Men's Health sterilization matters resolved and recent acquisitions of NxThera and Augmenix anniversary and become organic as of May and October, respectively.

Rhythm and Neuro grew 6% in the quarter led by 12% growth in Neuromod, 10% in EP and 3% in Cardiac Rhythm Management, which are all organic.

The 12% Neuromodulation revenue growth was driven by continued gains in the U.S. by our WaveWriter spinal cord stimulation and Vercise deep brain stimulation platforms.

Global SCS sales were up 7% as WaveWriter's unique ability to offer combination waveform therapies, both with paresthesia and subperception, continues to resonate with physicians and patients.

And we look forward to improved growth with upcoming new product enhancements and the presentation of updated 1 year real-world data on WaveWriter at INS later this quarter.

And in DBS, we anticipate continued Vercise momentum as we roll off the Cartesia Directional Lead in the U.S. and expect MRI labeling in the second half.

Global Cardiac Rhythm Management sales grew above market at 3% organic led by a mid-single-digit growth in defib sales against a double-digit comparison, reflecting ongoing uptake of our RESONATE platform and its HeartLogic Heart Failure alert as well as strong growth of EMBLEM S-ICD.

Our device replacement cycle is also tracking to expectations.

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

Pacer sales did decline mid-single digits, which is a significant improvement compared to 2018 trends, which were low double-digit declines.

We anticipate a modest pace or headwind for full year 2019.

And importantly, we aim to more than offset this with the continued global presentation of our defib portfolio in both CRT-D and ICD, resulting in another year of above-market worldwide CRM growth.

EP sales grew 10% organic in the quarter led by the RHYTHMIA HDx mapping and navigation platform as well as uptake of our DirectSense catheter in Europe and enthusiasm for RHYTHMIA's LUMIPOINT software.

In the AFib single-shot market, we are excited about the progress made by both our cryo and our balloon programs.

We're working to secure a CE Mark approval for these technologies and begin U.S. IDE enrollments by year-end 2019 pending completion of program deliverables and discussions with FDA.

And last month, we presented a compelling Apama data set, AF-FICIENT I, demonstrating the excellent balloon performance, no adverse events and attractive procedure times.

Turning to the Cardiovascular group.

They grew 7% organic in first quarter '19.

Peripheral Interventions grew 11% organic in the quarter led by the Eluvia DS launch in the U.S. and double-digit growth in Interventional Oncology and arterial.

We're also excited about the anticipated upcoming FDA approval and launch of the VICI VENITI (sic) [VICI VENOUS] stent, which comes from the VENITI acquisition of last August.

And despite the paclitaxel headwind, we also expect our PI business will deliver full year '19 organic growth that's well accretive to the company's overall growth rate.

To update you on the BTG acquisition, we remain on track for a midyear closing having received shareholder approval in February, and we're excited for the opportunity to expand our PI and Interventional Oncology portfolio.

And lastly, BTG reported results for the first 12 months ended March 31.

Oncology and vascular sales grew 15% to 17%, in line with BTG's guidance.

Spec pharma sales grew double digits ahead of guidance, and the royalty revenue was broadly flat versus the prior year period, reflecting the launch of U.S. generic competition for Zytiga.

Our Interventional Cardiology business grew 6% operationally and 5% organically in the quarter.

Growth in Q1 was led by a strong structural heart results and mid-teens growth in Complex PCI products, offset by a softness in drug-eluting stents.

We expect overall Interventional Cardiology growth to accelerate from first quarter on due to strong growth in complex coronary products, easing DES comps, the launch of Promus ELITE and U.S. approval of LOTUS Edge and the continued momentum in structural heart with our broader portfolio capabilities and scale.

WATCHMAN had another excellent quarter as we continue to increase utilization and to expand WATCHMAN's international footprint.

And we're pleased with the March European launch of next-gen WATCHMAN FLX.

We also received Japan approval of WATCHMAN during the quarter.

So we remain on track for reimbursement approval and commercial launch in Japan during the third quarter for WATCHMAN.

Our ACURATE TAVR valve platform is the fastest-growing valve in Europe and delivered nearly 30% growth in the quarter.

We plan to begin enrollment in our U.S. IDE for ACURATE neo2 around midyear with similar European launch timing.

We also began a controlled commercial launch of LOTUS Edge in Europe late in the first quarter and also enrolling patients in the REPRISE IV intermediate risk study and also received FDA approval last night for LOTUS.

We will begin a controlled U.S. launch immediately, and we believe LOTUS Edge is a differentiated valve that will be sought after by physicians and operators, both as a workhorse valve as well as a valve that can be counted on to provide superior outcomes in complex cases such as heavy calcified native valves and bicuspid valves.

And finally, the Sentinel Cerebral Embolic Protection device continues to build excellent momentum.

We are now in more than 200 accounts with Sentinel where usage rates exceed 60%, and we believe that Protected TAVR is an emerging standard of care.

So the combined strength of WATCHMAN, ACURATE, LOTUS Edge and Sentinel position us well to deliver on our guidance for $700 million to $725 million in structural heart revenue in 2019.

So to close, I'd like to share again my enthusiasm for our outlook in 2019 and beyond, and we believe that Boston Scientific continues to be uniquely positioned to drive shareholder value due to our long-term growth profile, meaningful opportunity to improve margins, track record of recording double-digit adjusted EPS growth and our improving ability to deploy capital.

So we're looking forward to discussing this outlook and our exciting technology pipeline at our Investor Day, which will be June 26 in New York.

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

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

Thanks, Mike.

First quarter consolidated revenue of $2.493 billion represents 4.8% reported revenue growth and 7.8% growth on an operational basis, which excludes the impact of foreign currency fluctuations.

Our reported revenue reflects a $73 million headwind from foreign exchange, slightly unfavorable to the $60 million to $65 million headwind expected at the time of guidance.

Sales from the NxThera, Claret and Augmenix acquisitions contributed 150 basis points, roughly in line with our expectations at the time of guidance, resulting in 6.3% organic revenue growth for the quarter.

This 6.3% includes a negative 30 basis point impact from the mesh market withdrawal.

Q1 adjusted EPS of $0.35 grew 7% over the prior year and was within our guidance range.

While there were several puts and takes to the P&L in the quarter, on balance, they net to 0, resulting in that $0.35 EPS number.

To summarize quickly, we had $0.02 in charges related to the mesh withdrawal and an investment impairment, and they were basically offset by the $0.02 net litigation benefit while the costs of the make-hold call related to the February bond offering were offset by a lower tax rate.

None of these items was included in the Q1 2019 guidance.

The FX impact on adjusted earnings per share was immaterial as expected at the time of guidance.

Adjusted gross margin for the quarter was 71.4%, below our guidance range of 72% to 73%.

This represents a 90 basis point decline over the prior year driven by product mix, particularly lighter sales in Men's Health, Neuromodulation and coronary drug-eluting stents as well as mesh-related inventory reserves and unfavorable manufacturing variances.

Adjusted SG&A expenses were $855 million or 34.3% of sales in the quarter, down 120 basis points year-over-year and outperforming our guidance range of 35% to 36%.

The favorable result in SG&A was due to a combination of the operating expense reductions from ongoing optimization initiatives as well as an approximate net $25 million nonrecurring litigation-related benefit in the quarter, including a portion of the Edwards litigation settlement.

Adjusted research and development expenses were $271 million in the first quarter or 10.9% of sale at the high end of our range and up slightly year-over-year due to additional mesh accruals related to the mesh withdrawal.

Royalty expense was 0.6% of sales, roughly flat versus the prior year.

As a result, Q1 2019 adjusted operating margin of 25.6% increased 30 basis points year-over-year, near the midpoint of our guidance range of 25% to 26%.

If you normalize for the SG&A benefit from litigation, adjusted operating margin would have been approximately 24.6% but then normalizing for the 40 basis point negative impact from the mesh withdrawal places us back at the low end of our range.

We are reiterating our full year adjusted operating margin guidance of 26% to 26.5%, which represents a 50 to 100 basis point improvement over the 2018 rate of 25.5%.

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

Adjusted interest expense for the quarter was $83 million.

This is a $22 million increase from Q1 2018, largely due to exercising the make-hold call to retire early our 2020 notes given the favorable market conditions for our February public bond offering.

Our average interest expense rate was 4.7% in Q1 2019 compared to 4.1% in Q1 2018 and reflects the offering, which totaled $4.3 billion aggregate principal amount of senior notes, the proceeds from which will, in part, be used to finance a portion of the proposed BTG acquisition.

We remain committed to our BTG delevering goals, targeting $1 billion in debt repayment within 18 months post deal closing and a leverage ratio of 2.5x debt-to-EBITDA within 2 years.

Adjusted other expense was $28 million in the quarter and includes a minor investment impairment related to one of our venture holdings.

The remainder of adjusted other consists of dilution from our equity method investments and exchange losses related to our hedging program.

Our tax rate for the first quarter was 7.1% on a GAAP basis and 6.9% on an adjusted basis, below our guidance range of approximately 11% for the quarter due to a higher-than-expected benefit from stock compensation accounting in the quarter as well as a reduction in our estimated annual effective tax rate, which I will discuss as part of the full year guidance.

Adjusted free cash flow for the quarter was $437 million compared to $283 million in Q1 of last year.

In the quarter, we used cash primarily to fund the closing of the Millipede acquisition.

We continue to expect full year adjusted free cash flow to be $2.2 billion.

We believe we're approaching the resolution of mesh litigation with over 95% of all known claims now settled or in the final stages of settlement.

Our total legal reserve, of which mesh is included, was $699 million as of March 31, 2019.

In the quarter, the known claim count was essentially flat at 53,000, and we made cash payments of $2 million into the qualified settlement fund and still anticipate full year payments into the fund to total $250 million, which would then resolve all significant existing contingencies.

As a reminder, this liability is released from our balance sheet as payments are made out of the qualified settlement fund to plaintiffs.

Capital expenditures for the first quarter of 2019 were $63 million, and we continue to expect capital expenditures to be in the range of $375 million to $400 million for the year as we build capacity, integrate acquisitions and position the company for continued growth.

We ended Q1 with 1.408 billion fully diluted weighted average shares outstanding.

I'll now walk through guidance for Q2 and full year 2019.

And as a reminder, the guidance I'm providing does not include the proposed BTG acquisition, which is not yet closed.

For the full year, we expect 2019 reported revenue to be in the range of approximately 7% to 8%, with year-over-year growth of 7% to 8% on an organic basis and an additional 110 basis points contribution from the NxThera, Claret and Augmenix acquisitions.

Given our Q1 result and Q2 guidance, which I will discuss shortly, we fully recognize the implied acceleration in second half organic revenue growth to deliver on our full year guidance.

There are several significant drivers of this acceleration, including multiple anticipated key product launches such as LOTUS Edge, which we received approval for last night; and VICI in the U.S.; Eluvia and WATCHMAN in Japan; and EXALT-D globally.

We have continued momentum in our core.

We'll have enhanced supply in the Men's Health and our Sentinel products.

We anniversary the -- some of our 2018 acquisitions, which, thus, turn organic in 2019.

We have the April anniversary of the 2018 price cuts in Japan and also the normalization of selling days in the first half versus second half of the year also has a meaningful impact.

And while we expect foreign exchange to be a $110 million to $120 million headwind to revenue for the full year 2019, we continue to expect FX to be neutral to EPS for the year due to our hedging program.

There's no change to our expectations for adjusted gross margin as a percentage of sales to be in the range of 72% to 73% for the full year.

We expect a positive mix shift as Men's Health supply stabilizes, SCS and DBS trends improve with new data and products, and coronary DES faces easier comps.

In addition, we'll continue to execute on our ongoing standard cost reductions and also expect a positive full year FX impact to adjusted gross margin of 50 basis points.

We continue to expect full year adjusted SG&A to be in the range of 34.5% to 35% of sale, a 40 to 90 basis point improvement versus full year 2018 but increasing slightly from Q1 due to the nonrecurring litigation benefit in Q1.

There's also no change to expectations for the full year adjusted R&D spend to be in a range of 10.5% to 11% and the full year royalty rate to remain at less than 1% of sales for 2019.

These target metrics imply a full year 2019 adjusted operating margin in a range of 26% to 26.5%, unchanged from prior guidance, up 50 to 100 basis points versus 2018, consistent with the improvement goals we outlined last September and positioning us well to deliver on our long-term goal of 30%-plus adjusted operating margin.

We now expect our full year 2019 adjusted tax rate to be approximately 10%.

This assumes an operational tax rate of approximately 11% before an approximate 100 basis points of benefit from the accounting standard for stock compensation, of which a significant portion was already recognized in Q1.

This compares to our original full year '19 tax rate guidance of 12% after stock comp.

The 200 basis point improvement in our full year adjusted tax rate reflects roughly 100 basis points of benefit from our current year geographic mix of profits and another 100 basis points of benefit resulting from refined estimates following a recently released proposed U.S. Treasury regulations implementing tax reform.

We now expect below-the-line expenses, which include interest payments, dilution from our venture capital portfolio and cost associated with our hedging program to be approximately $325 million to $350 million for the year, a slight increase from prior guidance primarily due to the earlier-than-expected refinancing of the 2020 bonds in February to take advantage of favorable market conditions and a minor investment impairment both recorded in Q1.

Note that along with other relevant aspects of the P&L, we will update our below-the-line expense guidance after we close the BTG acquisition as interest expense related to the acquisition is currently excluded from adjusted results.

We also expect a fully diluted weighted average share count of approximately 1.409 billion shares for Q2 2019 and 1.410 billion shares for the full year 2019.

As Mike discussed, we are raising the low end of our full year 2019 adjusted earnings per share guidance to $1.54 and maintaining the high end of $1.58.

The go-forward impact of reducing our Eluvia forecast by 50% basically offsets the Q2 to Q4 tax rate benefit, minus $0.02 for Eluvia, plus $0.02 for tax.

And we have plans to offset the $0.01 resulting from the lost mesh revenue in Q2 to Q4.

This $1.54 to $1.58 range represents 10% to 13% adjusted earnings growth excluding the 2018 net tax benefit of $0.07 in the base.

On a GAAP basis, we expect EPS to be in a range of $1.09 to $1.13.

While there are a lot of moving parts and some noise in the quarter, our trajectory and targets for 2019 remain strong: 7% to 8% organic revenue growth, 50 to 100 basis points of margin expansion and double-digit adjusted earnings per share growth at all points in our guidance range.

Now turning to Q2 2019.

We expect reported revenue growth to be in a range of approximately 5% to 7%.

This represents year-over-year organic growth in a range of 6% to 7% with an additional 140 basis point operational growth contribution from NxThera, Claret and Augmenix.

Note that the NxThera acquisition anniversary is in April and therefore, revenue from May and June is included in the organic guidance.

We expect the foreign exchange impact on Q2 revenue to be a $45 million to $50 million headwind.

For the second quarter, adjusted earnings per share is expected to be in a range of $0.37 to $0.39 per share, representing 6% to 12% growth excluding the Q2 2018 net tax benefit of $0.06 in the base, and we do not expect any adjusted EPS impact from foreign exchange.

GAAP EPS for the second quarter is expected to be in a range of $0.23 to $0.25 per share.

Please check our Investor Relations website for Q1 2019 financial and operational highlights, which outlines Q1 results as well as Q2 and full year 2019 guidance, including P&L line item guidance.

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

Thanks, Dan.

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

(Operator Instructions) Kevin, please go ahead.

(Operator Instructions) First question is from the line of Bob Hopkins, Bank of America.

So just one housekeeping item to start.

Just to clarify, was there a selling day difference in Q1?

There was a slight selling day difference.

We had it included in our forecast, but there was a slight selling day difference if you look at it.

We did mention that as part of the acceleration into the second half because there's a difference there where there's about a day fewer in the first half and a day more in the second half.

So it's a reason for the acceleration going first half to second half.

But there was one in Q1, but we didn't mention it.

Okay.

And then more importantly, just on the Q1 growth rate, that was a little lower than your guidance.

I think you called out stents and Men's Health and Neuromod were the kind of the primary culprits, if you will.

I was just wondering if you could give a little more color on these issues and whether or not these issues impacting growth in Q1 are temporary or lasting.

So just a little more color on those 3, please.

Sure.

Yes.

So obviously, don't take this slight revenue miss in first quarter lightly.

I think it's the first time we've missed in close to a decade.

We pride ourselves in delivering the commitments and very excited about the future.

But specific to a couple of those comments, one, Interventional Cardiology, you're seeing that strong diversification with Structural Heart and complex coronary growing well and DES has been softer for us.

We do anticipate some improvement in DES as you look at the second half of the year in particular, based on improved comps for drug-eluting stents as well as new product portfolio with a product called Elite as well as really just the ongoing diversification to high-growth markets for that basket in cardiology overall.

So -- and then you obviously have the LOTUS approval.

The second one was paclitaxel.

We're seeing some usage in the U.S. but some IDNs are not using it based on the upcoming panel.

So we saw some softness there.

We took that revenue down for the full year as highlighted, but to date, the Japan launch is right on track.

You mentioned Men's Health.

That issue has been resolved, that supply issue.

So we'll be back to full supply call it in mid-June.

So that'll be strong for the second half of the year.

And then the other one is spinal cord stim.

We did grow nicely at 12% in Neuromod.

We do feel like the market was a bit lighter in first quarter than we anticipated.

But overall, we see that as a strong growth market going forward, and we continue to take share.

So there were clearly some onetime events in the first quarter.

Dan mentioned the selling days impact as well, but we have full confidence in the second quarter guidance and the 7% to 8% organic for the full year.

And we'll be a stronger company at the end of the year heading into 2020.

Next question is from the line of David Lewis, Morgan Stanley.

Mike and Dan, I just want to start with the forward outlook here.

I think 2019 guidance is pretty consistent with our view.

It's the second quarter.

A lot of conversation this morning on the second half.

But just if you think about the second quarter, how risk-adjusted is the second quarter?

And what factors sort of provide the confidence given Eluvia and mesh get a little worse in the second quarter, a pretty significant momentum step up just into 2Q.

So one, what is that -- what is your confidence in the second quarter?

What are factors that drive that?

And then 2019 guidance, broadly, is the reflection, the reduction simply Eluvia and mesh?

Or does it also reflect kind of a slower start to the year?

Then I had a quick follow-up.

Yes.

So just on the second one in terms of the full year guidance.

It's simply, I said in the words carefully, if you look at our history, we typically are in the higher end of the range, if not be on revenue.

If you look at -- and, of course, you guys track all that stuff.

And so we essentially lowered it to 7% to 8% because we didn't feel the high end of the guidance we're beating, the 8.5% was -- as feasible as it was 4 months ago.

So that's why we felt it was prudent to reduce the guidance at the top end from 7% to 8% so we can kind of carry on our tradition.

So -- and the reasons for that were stated, and we're confident that second half acceleration per Bob's earlier question.

I think in terms of the second quarter, we obviously have some visibility here near the end of April.

We spent a lot of time on our second quarter guidance because we don't plan on making this a habit, and we plan on continuing a longer streak of hitting our guidance commitments.

But specific to second quarter, we do have good momentum across the regions.

Our emerging markets are very strong.

Dan mentioned there is a little bit of selling day favorability in second quarter as well.

But more importantly, the launches, and we finally got FDA approval for LOTUS, which we're excited about.

Eluvia's beginning to sell in Japan, FLX in Europe, this BT stent we have for Neuromod -- for PI, and we just had very good momentum with ACURATE and Sentinel.

And as I mentioned, also the DES comps.

So we spent a lot of time on the second quarter as you could imagine and on the full year guidance even more than normal to ensure that we have the right confidence and conviction.

So at the end of the year, we still believe that 7% to 8% organic and 8% to 9% operational, double-digit EPS is very good and sets us up for a bright future.

Next question is from the line of Rick Wise, Stifel.

Turning to LOTUS, and talk to us a little bit about the LOTUS launch from 2 angles.

I think if I remember correctly, there were 60 original pivotal U.S. sites.

Is that where you start?

Is that what you're targeting?

Talk a little bit about how you're going to address the U.S. market.

And I'll just go ahead and ask a separate related question.

When might we see some more data on LOTUS Edge that specifically addresses where the technology is now?

And last, just on Sentinel.

You said you were in 200 accounts.

I mean is this the place you start with LOTUS?

Again, any color on the launch would be great.

Sure.

Thanks, Rick.

And I'll have Ian jump in on some of the data questions in a few minutes.

We're really excited about getting LOTUS over the goal line here with the FDA and the LOTUS Edge.

LOTUS Edge is a terrific platform.

We have begun our launch in Europe, and essentially we'll be primarily initially focused on many of the customers that were -- have been involved in our clinical trials.

And they have more experience with LOTUS, and LOTUS Edge is a lower-profile delivery system.

So obviously, we would spend quite a bit of time with those customers who have been part of the REPRISE studies and are part of the current intermediate risk study.

And those represent a significant slice of the TAVR market.

So that'll be our focus.

And then we'll expand out from there.

We want to obviously do this very well.

We think this is unique product, and we want to have great outcomes.

And so we'll initiate there, then we'll expand to the large centers beyond that.

And our clinical team and sales force is obviously excited to bring this on.

Sentinel is doing very well.

Quite frankly, our operations and manufacturing team have done a great job of increasing supply.

We bought a smaller start-up company, and we are significantly increasing the supply capacity, which has really been a limiter so far because the demand of Sentinel is quite high.

And so we'll continue to grow Sentinel, likely at a faster rate in the second half given increased supply and launch it a little bit more outside of the U.S.

And as we talked about in the past, we have to win with the clinical benefits of our TAVR as a stand-alone platform with the safety and efficacy of it, and then we have all the other components surrounding LOTUS, which are compelling like the Safari wire, like Sentinel and our other products that meet the needs for interventional cardiologist.

But really excited about getting LOTUS approved.

And Ian, if you're on unmute, maybe you could provide some views on the upcoming data.

Thanks very much, Mike.

And thanks, Rick, for the question.

So as you alluded to, we have the REPRISE IV study, which is the intermediate risk study, 896 patients.

That trial is now underway in the U.S., and that will provide very important data as to the safety and efficacy of the LOTUS Edge platform in intermediate risk patients.

That trial should recruit pretty quickly.

It's a single-arm study.

There is a nested registry within that for 100 patients with bicuspid valve disease, and so we very much look forward to those results.

That'll probably be mid-next year.

As well as that, we have the RESPOND Edge trial, which will be 200 patients and 16 sites in Europe.

That trial is just getting underway.

And of course, we have the REPRISE III nested registry, which was the U.S. initial experience with LOTUS Edge, which is underway and continues to recruit.

So we should have, towards the end of the year and next year, a significant body of data about the -- confirming the safety and efficacy that we've actually seen from the original LOTUS Edge 30-day data from the REPRISE Edge and [FIMS-A] trials, of course, which showed, as you know, very good results on low pacemaker rates.

And next question is from the line of Bruce Nudell, SunTrust.

I guess for Mike and Ian.

I attended the CRT panel meeting at -- in I think February or January, and it really didn't -- the paclitaxel peripheral vascular arguments really didn't seem to have a coherent mechanism of action.

I was just wondering what your thoughts about that might be.

And secondly, is the product family forever tainted irrespective of the merits of the meta-analysis that really caused this whole thing?

And then I have a follow-up.

So Mike, can -- I'd be happy if I take that one.

Sure.

So thanks, Bruce.

So I think it's an important question.

It's disappointing to say the least.

Paclitaxel's had a pretty stellar 25-year history since its approval.

And as you know, from the TAXUS stage, we have an extraordinary body of data there in the coronary circulation where there were more than 5,000 patients in randomized trials, 36,000 patients in registry.

So it was never an all-cause mortality signal at 5 and even the Sirtex trial after 10 years.

So there was, from time to time, a signal for Cardiovascular mortality related to stent thrombosis, but the overall mortality suggesting a noncardiac cause just wasn't there and it doesn't seem to be a plausible explanation.

So it is disappointing, but we will work very assiduously alongside the FDA and VIVA and NAMSA to make sure that we thoroughly analyze this signal in the available trials.

But we still have considerable confidence in paclitaxel as an antirestenotic agent.

And I think we should point out that Eluvia is, in a sense, a very differentiated product here.

It's controlled focal release at a dose [1/20] that is being used in the DCB products.

So we are facing this, and we will work alongside the FDA, NAMSA and VIVA to elucidate this.

And I guess my follow-up is on WATCHMAN.

Clearly, the product has continued very strong momentum given the guidance.

Could you just talk about the commercial factors either reimbursement or marketing initiatives?

Just kind of the state of play, and what will it take to really unlock the potential of what I think is a huge product opportunity.

Sure.

Yes, just -- again, just to reinforce Ian's point, we think Eluvia is a superior platform, and we think it's different than the class.

And so we're making the case on that, and obviously, we're supporting the industry in the whole paclitaxel theme with the upcoming panel.

But we're very -- we spend a lot on this platform.

We feel like it's a unique device for all the characteristics that Ian says.

We'll be pushing our point in that regard.

On WATCHMAN, it continues to do extremely well.

In the U.S., we're increasing utilization rates.

It's less about opening up new centers now in the U.S. because many -- so many have been opened up.

It's more about increasing utilization.

It's driving great outcomes.

It's increasing the physician awareness through our digital efforts and through working with the WATCHMAN coordinators at the hospitals.

And so we're continuing to see WATCHMAN utilization expand with our commercial organization, our clinical organization.

And then in Europe, you're seeing WATCHMAN FLX be launched, which we're really excited about to gain share, not a -- as big a market in Europe but also a lot of progress in China.

And we're really excited about the launch, which will impact the second half in Japan.

And Ken, do you want to maybe speak to some of the clinical efforts with WATCHMAN to expand the market in the OPTION trial?

Yes.

Thanks, Mike.

That's -- again, that's important to mention, Bruce, and talk about what unlocks it.

I think the next step that unlocks it is indication expansion, and so we are launching a trial called the OPTION.

It's a 1,600-patient randomized trial at roughly 100 centers globally.

And the trial is in patients following atrial fibrillation ablation who have indications for stroke prevention and will be randomized to WATCHMAN or NOAC.

And this would change the indication in that this will be the first trial where WATCHMAN would be used in patients who are explicitly candidates for either an oral anticoagulant or the WATCHMAN device.

Next question is from the line of Jason Mills, Canaccord Genuity.

With respect to the organic growth profile you laid out and the acceleration that you're anticipating through the end of the year, the tenets of that premise seem like they would continue into the first half of next year.

And I can appreciate that you're not ready to give guidance for next year yet, but as we digest that coupled with the metrics you laid out with respect to BTG, I assume your expectations for the organic growth that BTG will generate haven't changed given their strong results recently.

So it seems like it's setting up that this could accelerate further in the first half of next year.

What I'm getting at is as we look at a forward 15 to 18 months, can you give us any color or are you willing to give us any color as it relates to just beyond the end of this year?

Because it seems like it could accelerate further.

Yes.

I want to give first quarter of '20 and second quarter '20 guidance, but Dan was not.

He will not let me at this point especially after our little mess here, sales in the first quarter.

Dan laid out in his script clearly why we are confident in the second half momentum through the product launches that he rattled off, the anniversary of the M&A activities.

Another significant opportunity for us in the second half is Japan.

Japan will return to a strong growth in the second half because of new product launches and less pricing cuts than we've experienced in the past.

And the supply challenges are significantly better for some of those key products, and Dan also mentioned the selling days.

So that's the second half acceleration.

And then I'm not going to comment really much beyond that.

In 2020, what you will see is a full year benefit in 2020 of many of these different product launches that are happening kind of in different quarters throughout the year in '19.

But we -- our goal will be, continue to be a top-tier revenue grower in the future to deliver double-digit EPS growth, and we are excited about BTG.

They put up really nice results, very consistent with our thesis when we acquired the company.

So we look forward to closing that likely in the late June, July time frame.

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

I'll ask both of mine upfront.

On Eluvia, I can understand the 50% cut implied in the guidance.

But look -- and hopefully, the panel will go well.

But the question I have, I guess, is if things don't go as well as expected, what's your ability to offset a further reduction in Eluvia if things don't go well?

And then just secondly, I heard your comment on SCS and your business in the market, but you are the second company to report a meaningful deceleration in SCS growth.

So could you just put a little bit more meat on the bone on kind of around what's going on in the market and why you're confident that we won't see a further deceleration in SCS, which you kindly gave in the slides today grew about 7% year-over-year in Q1?

Yes.

So Eluvia is an important growth driver for PI, and we clearly aren't giving up on it because we think it's a uniquely good product that helps patients, and we're seeing many customers in the U.S. continue to use it.

Some have not but many are.

And in Japan, we're launching essentially right now.

So we remain optimistic but also smart.

That's why we saw -- you saw our stake on the guidance for Eluvia in terms of that impact, but there's just -- there's also many growth drivers within PI business on its own.

For example, this new VICI stent we'll be launching likely in the second quarter once the FDA approved and the full impact of BTG and all the synergies that come with that both revenue and cost.

So we clearly want Eluvia to do very well, but there's many growth drivers within PI and across the company that give us a confidence for the second half guidance that we -- or full year guidance that we gave as well as the outlook for 2020.

And the second question is on SCS.

It was a bit softer than we anticipated in the first quarter.

This has traditionally been a strong double-digit growth market, and we believe that will be the case although first quarter was a bit softer.

So we haven't seen any thematic reasons why SCS should be a bit softer this quarter given the unmet patient demand that we see out there.

One potential possibility where there's kind of fewer large product launches from BSC and our competitors over the past 6 months, I think you're going to see a ramping up of that clearly from us on the second half of this year with new enhancements to WaveWriter and some more clinical data.

So we don't really have a great response other than we feel like it's a long term, at minimum, high single-digit growth but more likely double-digit growth market given the unmet patient need.

And importantly, there's just a lot of innovation in this space, which I think will continue to excite patients to want to act.

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

So Mike, maybe just on Larry's question.

If I think about the first half versus second half, right, is -- I guess Sterigenics improved.

So the sterilization plant closure, do we know what the impact of that in Q1 was?

And I guess specifically if the ad com goes bad, is there a chance that maybe Eluvia needs to be cut again for the back half?

Well, we gave guidance assuming bad things.

So we gave what we felt is very conservative.

We built in our model a very conservative growth for Eluvia based on the paclitaxel panel.

That wouldn't be responsible to do otherwise.

So as I mentioned, we are seeing the launch in Japan.

We're seeing customers use it today, but we've assumed far less than planned Eluvia sales in our second quarter and full year guidance.

And we're not going to quantify the specifics of the sterilization issue in Men's Health in the quarter.

And next question is from Matt Taylor, UBS.

I just wanted to follow up on the earlier question on the LOTUS launch.

And it's sort of a 2-part thing, but wanted to understand how we should think about the pace of launch in Europe and the U.S. And you did hit the time lines for the timing of launch in each region.

I just wanted to make sure that you were still sort of on track with where you thought you'd be in the beginning of the year.

And then could you characterize how the Sentinel supply could improve through the year?

It sounds like where you can sell it, you're seeing good uptick.

Yes.

So consistent with our previous comments on LOTUS, we're selling our ACURATE valve extremely well in Europe, and we'll also -- we're also selling LOTUS.

You're going to see that mix likely be higher with the ACURATE valve versus LOTUS in Europe given the momentum that we have there, but there are many customers who want LOTUS in Europe.

So we'll be able to sell in both places.

But in terms of a mix, which we likely won't break out, it'll be quite a bit higher in the U.S. versus Europe.

And so that's why this is -- this FDA's approval is important for us.

It's kind of on schedule per our commitment, but you'll see greater weighting in the U.S.

And Sentinel is simply just that ops team has done a great job of enhancing supply because we've been more limited in our ability to open up new centers.

And so as this quarter goes on and second half we'll be opened up -- open up new centers and supply them with it.

And then we'll be able to expand it more in Europe and other countries, which, quite frankly, haven't had the benefit of using it given some supply capacity.

So it's not a -- our ops team did nothing wrong.

They simply bought a small company.

And now they're significantly increasing the capacity for it.

Next question is from the line of Chris Pasquale, Guggenheim.

Okay.

That question dropped.

Next question from the line of Danielle Antalffy, SVB Leerink.

Just a quick question, a follow-up on some of the TAVR conversation we've been having.

Can you talk about what you're seeing now that you've relaunched LOTUS from a pricing perspective in Europe?

And what you expect to see in the U.S.?

So now you're the -- it's going from a 2-player market to a 3-player market potentially since you're a 4-player market here in the U.S. So would just love to get your high-level thoughts and any color you can give on how you plan to price LOTUS Edge here in the U.S. relative to some of your competitors.

Yes.

We're probably not going to give as much as you want on the question.

I think in the U.S., we're very confident in the capabilities of LOTUS Valve.

This is not a low-tier segment offering.

And so you'll see LOTUS priced at competitive rates with the market in the U.S.

And in -- just a follow-up on that.

So is it priced competitively in Europe as well?

Or is it priced at a discount?

Well, we won't provide much thought there.

We offer -- now with LOTUS, we offer 2 different valves in Europe, and so they're both uniquely good, and it provides us some contracting capabilities along with Sentinel, which are helpful.

But at the end of the day, the valve does need to stand alone in terms of its clinical efficacy, safety and the benefits.

Doctors typically aren't going to choose a tacky valve just because it costs less money.

And so we're delivering very good outcomes with ACURATE.

You've seen a lot of the clinical data there and also LOTUS.

So pricing obviously is important, but it's not a -- it's a different environment than drug-eluting stents.

And next question is from the line of Matthew O'Brien, Piper Jaffray.

Two real quick here.

In the past, you said in the TAVR market, you thought you could get the 20% share then you kind of backed off that with the LOTUS withdrawal, and then now you have Sentinel, which is pretty differentiated.

So as you think about where your share can go over time with kind of this triple threat now, do you -- would you like to revisit where you think the share can get to?

And specifically, do you think you can get to 20%?

And then the second question is just on RANGER.

As you think about the launch next year with all the paclitaxel commentary, just how should we think about that launch now?

Should we dial back our expectations for it?

Yes.

RANGER is a smaller revenue contributor historically in Europe.

And RANGER will -- I think the panel will certainly have an influence on the potential for RANGER.

But again, I think our PI business is blessed with many growth drivers across the board and then also with BTG closing.

And we wouldn't comment on share.

Right now, we did just get 0 in the U.S., so it's all upside.

And so with the indication expansions, and we've seen it from clinical data and the size of this market and the uniqueness of LOTUS and our breadth of commercial coverage, we feel like we can do a nice job in this area.

But we're not going to provide a share goal publicly.

All right.

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

Thanks for joining us today.

We appreciate your interest in BSX.

Before you disconnect, Kevin will give you all the pertinent details for the replay.

Thank you.

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