Boston Scientific Corp (BSX) 2019 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Boston Scientific Q2 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.

Thanks, Kevin.

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

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

We issued a press release earlier this morning announcing our Q2 2019 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 Financials & Filings.

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

Mike will provide strategic and revenue highlights of Q2 '19.

Dan will review the financials for the quarter and then provide Q3 '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, Augmenix and Vertiflex in the relevant periods for which there are no prior period-related net sales.

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 Q3 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.

Mike?

Thank you, Susie.

Good morning, everyone.

Boston Scientific continues to grow above market, improve profitability and drive meaningful innovation to address unmet patient needs as showcased at our recent Investor Day.

In the second quarter, our team delivered 8% operational revenue and 6.3% organic growth with another quarter of strong balance across our businesses and geographic regions.

In addition, we delivered adjusted EPS of $0.39, which is at the high end of our guidance range, while generating $406 million in adjusted free cash flow.

We do have clear line of sight to high single-digit organic growth for 2019, and we reiterate our full year '19 organic revenue growth guidance of 7% to 8% and adjusted EPS of $1.54 to $1.58.

We had increased our expected contribution from acquisitions from 110 basis points to 140, resulting in operational revenue growth guidance of 8% to 9% for the full year.

I'll now detail some of the key aspects of our second quarter results and thoughts on our second half '19 prospects.

All growth rates refer to organic sales growth versus the prior year unless mentioned.

So we'll start first with MedSurg.

Sales continued on the solid high single-digit performance and increased 7% or 8% organic once you adjust for the onetime mesh recall impact.

As Endoscopy continued its trend of 8% organic growth quarters, it's fueled by more than a dozen product launches over the past 18 months such as SpyGlass DS II, Jagwire and ORISE Gel.

We've also recently launched ORISE in a single-syringe version to address a broader range of procedure types, including polyps.

Infection prevention sales were also up very strongly, driven by strong kit sales in the U.S., and going forward, we look for continued momentum in all these product lines as well as AXIOS and improved supply in OrcaPod single-use valves.

We do remain on track for year-end launch of EXALT-D single-use duodenoscope, which is used in ERCP procedures.

We're very encouraged by physician enthusiasm for this platform and continue to believe this represents a significant opportunity in 2020 and beyond.

Urology and Pelvic Health grew 15% operationally in the quarter and 6% on an organic basis despite the 2-point organic headwind from the market withdrawal and customer returns of the mesh treatment for pelvic organ prolapse.

This growth was led by mid-teens growth in our core stone franchise with strong LithoVue single-use ureteroscope sales across all regions and particularly strong emerging markets growth.

SpaceOAR Hydrogel also delivered in the quarter and is tracking to $100 million for full year '19, which is above our original deal model as mentioned at our Investor Day.

We also expect acceleration in UroPH sales in the second half of the year from continued LithoVue and SpaceOAR strength, the 1-year anniversaries of the acquisitions of NxThera in May and Augmenix in October, and new product launches such as the Tactra implant in Men's Health, where trends have improved now that we fixed our sterilization challenges.

Rhythm and Neuro grew 3% in the quarter, which we believe represents above-market growth in CRM at 3% while EP sales grew 9%.

Neuromodulation sales were flat year-over-year but we continue to build momentum, and of note, sequential growth was 7%.

While neuromod's flat year-over-year sales results slowed from first quarter's, which were 9%, we did face a 31% comp in second quarter versus our Q1 comp of 17%.

So on an operational basis, neuromod sales were plus 2% year-over-year and reflect excellent brain growth from our Vercise DBS Systems, which offset the weaker Spinal Cord Stimulation results.

We continue to see excellent momentum in DBS due to market receptivity to our Cartesia Directional Lead in the U.S. and Europe, and we anticipate full-body MRI labeling for our Vercise systems in the second half of '19 in the U.S.

In our pain franchise, Vertiflex closed on June 11, and we're excited to offer the full continuum of care for patients suffering pain, now with an option focused on those diagnosed with moderate lumbar spinal stenosis.

Vertiflex remains on track to generate full year '19 sales of $60 million.

In SCS, we continue to see some softness in the overall market, and we face tough comps as mentioned due to our WaveWriter spinal cord stim system launch in the U.S. early last year.

While we continue to be optimistic about the long-term 7% to 10% growth potential of this market, we do expect some continued softness in 2019 given the 21% second half comp.

We do expect second half improvement in SCS post our recent WaveWriter real-world data presentations at INS, WaveWriter software enhancements and initial release of the COMBO randomized clinical trial data.

Global Cardiac Rhythm Management sales grew 3% and was led by mid-single-digit growth in defib sales driven by our RESONATE platform and its HeartLogic heart failure alert as well as strong EMBLEM S-ICD sales.

Our replacement cycle tailwind also remains on track, and pacer sales declined low single digits, which is an improvement from recent quarters, but we continue to anticipate a modest pacer headwind for the full year 2019.

EP sales did grow 9% in the quarter, which is led by good sales of DirectSense in Europe, RHYTHMIA HDx mapping and navigation platform and LUMIPOINT software, which was fully launched in the second quarter.

As we highlighted and Joe did at our Investor Day, we remain optimistic about the future for our EP franchise, specifically for the AFib single-shot market and our 2 platforms with this therapeutic approach.

We expect approval for our cryo-based system POLARx in Europe year-end '19, with LUMINIZE, our RF-based balloon platform, following in the first half of '20.

Shifting now to Cardiovascular.

The group sales were up 8% in the quarter.

Peripheral Interventions sales increased 8% in the quarter as well, led by the launches of our VICI VENOUS STENT in the U.S. and Eluvia DES in Japan as well as excellent regional growth in Interventional Oncology, particularly in Asia.

Post the June paclitaxel FDA panel, physicians continued to order Eluvia in line with our commentary at Investor Day.

We do expect over the next few weeks an updated summary and guidance document from the FDA.

We believe Eluvia remains well positioned if the guidance continues to recommend drug-eluting technologies only for patients with high risk of restenosis, which does represent 40% to 60% of the market.

And Eluvia has the potential to achieve higher share in this segment given its performance in these patient types.

For example, in the peer trial -- in the IMPERIAL trial 12-month data, which demonstrated half the rate of TLR compared with Zilver PTX, 40% of patients in the Eluvia arm had severe calcium, which is 4x the rate of severe calcium in the global pivotal trials of the 2 leading DCBs.

In addition, nearly 1/3 of the patients had total vessel occlusions in the Eluvia IMPERIAL study, which is a much higher rate than in the DCB studies.

Last month, we announced the proposed divestiture of our bland and drug-loaded bead business to Varian Medical Systems in conjunction with the proposed BTG acquisition.

We continue to make progress towards closing BTG in August and look forward to the opportunity to expand our Peripheral and Interventional Oncology portfolio and continue to execute our category leadership strategy.

Our Interventional Cardiology business accelerated from first quarter's 5% growth to 8% organic and 10% operational in the second quarter.

There was strong growth across all regions, led by Structural Heart sales and mid-teens growth in Complex PCI products, which is partially offset by DES.

WATCHMAN grew sales ahead of plan and is now at 600 accounts in the U.S. as this important therapy provides patients with atrial fibrillation, an alternative to life-long oral anticoagulants.

We successfully launched our national direct-to-patient TV campaign in late March and are encouraged by the early results.

WATCHMAN FLX transitioned from limited market release to full launch in Europe, and physicians are very pleased by the 95%-plus rate of implant success and seal and no device embolization.

We're targeting a mid-2020 launch in the U.S. for FLX.

We also remain on track to launch WATCHMAN in Japan in third quarter with reimbursement and continue to

advance the clinical evidence surrounding WATCHMAN as we begin enrollment in the OPTION trial in atrial fibrillation patients post-ablation.

ACURATE TAVR valve momentum continues in the second quarter with 30% growth and is now available in over 40 countries.

And importantly, the U.S. IDE for ACURATE neo2 was initiated, and we recently began enrollment of the 600-patient study in the second quarter.

Unfortunately, in Europe, we now do expect a mid-2020 launch for ACURATE neo2 as we have chosen to revise our approach and consolidate our regulatory submissions with fewer notified bodies due to challenges in the regulatory environment with a shift to European Medical Device Regulation or known as MDR.

The LOTUS Edge controlled launch is going extremely well.

Positive physician feedback highlights the benefit of this complete-control and drama-free TAVR.

We are on pace to open 150 accounts in the first 12 months that we cited in Investor Day, and we're very confident that our launch approach will position both LOTUS Edge and our entire Structural Heart portfolio for long-term leadership in this substantial market.

We see significant opportunity in the high-risk labeling we have today, and we're actively enrolling for our U.S. REPRISE IV clinical trial to expand the indication to intermediate-risk patients.

And finally, the Sentinel cerebral embolic protection device continues to enjoy strong growth rates as supply scales up.

We're now in over 400 accounts globally, and we believe that Protected TAVR with Sentinel is the emerging standard of care, and we expect momentum to continue as we launch new accounts and we anniversary the Sentinel acquisition this month.

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 Structural Heart revenue in '19.

So to close, once again, I'd like to share again my enthusiasm for our outlook in 2019 and beyond.

And as conveyed at our Investor Day, we believe that Boston Scientific continues to be uniquely positioned to drive shareholder value due to our differentiated long-term growth profile, meaningful opportunity to improve operating margins and track record of delivering double-digit adjusted EPS growth while also improving our ability to deploy capital.

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

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

Thanks, Mike.

Second quarter consolidated revenue of $2.631 billion represents 5.6% reported revenue growth and 8% growth on an operational basis, which excludes the impact of foreign currency fluctuations.

Our reported revenue reflects a $57 million headwind from foreign exchange, slightly unfavorable to the $45 million to $50 million headwind expected at the time of guidance.

Sales from the NxThera, Claret, Augmenix and Vertiflex acquisitions contributed 170 basis points, slightly higher than the 140 basis points expected at the time of guidance, which did not include the Vertiflex acquisition.

As a reminder, the operational NxThera contribution only represents 1 month as the acquisition is considered organic as of May 1 this year.

The resulting organic growth of 6.3% in the second quarter compared to our guidance range of 6% to 7% was driven by balanced top line performance across multiple businesses and regions, as Mike has already detailed.

Q2 adjusted earnings per share of $0.39 was down 4% versus prior year, up 12% excluding the Q2 2018 net tax benefit of $0.06 and at the high end of our guidance range.

Earnings were driven by solid P&L metrics and also reflect a $0.01 discrete tax benefit in the quarter.

The FX impact on adjusted EPS was immaterial, as expected at the time of guidance.

Adjusted gross margin for the second quarter was 72.1%, at the low end of our guidance range of 72% to 73%, but represents an 80 basis point improvement over prior year driven by standard cost improvements, reduced scrap and FX.

Adjusted SG&A expenses were $936 million or 35.6% of sales in the quarter, at the midpoint of our range and up 90 basis points year-over-year as we continue to fund initiatives related to recent acquisitions and focus on key commercial launches.

Adjusted research and development expenses were $273 million in the second quarter or 10.4% of sales, at the low end of our guidance range and flat year-over-year.

Royalty expense was 0.6% of sales, also relatively flat over the prior year.

As a result, Q2 2019 adjusted operating margin achieved the midpoint of guidance at 25.5%.

We continue to reiterate 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 to -- below the line to interest and other expense.

Adjusted interest expense for the quarter was $66 million compared to $57 million in Q2 of last year.

Our average interest rate was 3.7% in the quarter, slightly higher than the 3.6% in Q2 of last year.

Adjusted other expense was $10 million in the quarter and primarily includes dilution from our equity method investments and transactional foreign exchange losses, including hedging costs.

Our tax rate for the second quarter was a negative 5.9% on a GAAP basis and 7.8% on an adjusted basis, below our guidance range of approximately 11% for the quarter due to a $19 million net discrete tax benefit.

This Q2 benefit will be reflected in our updated full year 2019 tax rate, which I will discuss shortly, with no additional benefit expected in the third or fourth quarter of this year.

Adjusted free cash flow for the quarter was $406 million compared to $558 million in Q2 of last year.

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

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

We continue to work to resolve fully the mesh litigation with over 95% of all known claims now settled or in the final stages of settlement, including additional settlements reached in Q2.

Our total legal reserve, of which mesh is included, was $604 million as of June 30, 2019.

This is a decrease of nearly $100 million versus March 31 and includes an additional $15 million reserve for legal fees.

While the anticipated cost to litigate has increased due to various judicial orders and is reflected in the incremental $15 million reserve, importantly, the known claim count remains flat at 53,000 as does the anticipated amount required for settlement.

Therefore, we continue to anticipate full year payments into the qualified settlement fund to total $250 million, which will then resolve substantially all significant existing contingencies related to mesh.

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

During the quarter, we made cash payments of $50 million into the qualified settlement funds, which leaves approximately $200 million to fund for the remainder of the year.

Capital expenditures for the second quarter were $91 million.

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 Q2 with 1.409 billion fully diluted weighted average shares outstanding.

And now I'll walk through guidance for Q3 and full year 2019.

As a reminder, the guidance I'm providing does not include the proposed BTG acquisition since it has not yet closed.

For the full year, we expect 2019 reported revenue growth to be in a range of approximately 7% to 8%.

We are reiterating our prior guidance of year-over-year organic growth of 7% to 8%, now with an additional 140 basis point operational contribution expected from the NxThera, Claret, Augmenix and Vertiflex acquisitions.

As discussed in Q1, our first half 2019 average organic growth rate of 6.3% implies a second half 2019 acceleration of organic revenue, and we remain comfortable with this outlook, as Mike discussed, given multiple anticipated key product launches; continued momentum in our core; the anniversary of 2018 acquisitions, which thus turn organic in the second half; and the normalization of selling days in the first half versus the second half of the year.

And while we expect foreign exchange to be a $170 million to $180 million headwind to revenue for the full year, we continue to expect FX to be neutral to earnings per share for the year due to our currency hedging program.

There's also 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 will continue to execute our ongoing standard cost reductions and also expect a positive full year FX impact to adjusted gross margin of 60 basis points.

Similarly, we continue to expect full year adjusted SG&A to be in the range of 34.5% to 35% of sales, a 40 to 90 basis point improvement versus full year 2018.

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%.

As a result, we expect to achieve 2019 adjusted operating margin in a range of 26% to 26.5%, unchanged from prior guidance and up 50 to 100 basis points versus 2018, consistent with the improvement goals we outlined last September and reiterated at last month's Investor Day.

Due to the discrete tax benefit within the second quarter, we now expect our full year 2019 adjusted tax rate to be approximately 9%.

This is based on an operational tax rate of approximately 11%, slightly more than 100 basis points of benefit from the accounting standard for stock compensation and nearly 100 basis points from the discrete tax benefit in the quarter, which will not impact our tax rate outlook beyond 2019.

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 $325 million to $350 million for the year and includes the make-whole call exercised in the first quarter.

We expect a fully diluted weighted average share count of approximately 1.413 billion shares for Q3 and 1.412 billion shares for the full year 2019.

Note that interest expense related to the proposed BTG acquisition is currently excluded from adjusted results, and we will provide updated guidance after we close the transaction.

We are reiterating our full year 2019 adjusted earnings per share range of $1.54 to $1.58.

Although we received a $0.01 discrete tax benefit this quarter, we expect this to be largely offset by the divestiture of our embolic beads business to Varian upon the close of BTG.

As a reminder, we're also offsetting the residual $0.01 impact from the mesh withdrawal.

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 earnings per share to be in a range of $0.94 to $0.98.

Now turning to Q3.

We expect reported revenue growth to be in a range of approximately 8% to 10%.

This represents year-over-year organic growth in a range of 7.5% to 9% with an additional 180 basis points operational growth contribution from Claret, Augmenix and Vertiflex.

Note that the Claret acquisition is included in organic guidance as of August.

We expect the foreign exchange impact on Q3 revenue to be a $30 million to $35 million headwind.

For the third quarter, adjusted earnings per share is expected to be in a range of $0.37 to $0.39 per share, representing 7% to 13% growth, and we do not expect any adjusted earnings per share impact from FX.

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

Please check our Investor Relations website for Q2 2019 financial and operational highlights, which outlines Q2 results as well as Q2 (sic) [Q3] and full year 2019 guidance, including P&L line item guidance.

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

Thanks, Dan.

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

(Operator Instructions)

Kevin, please go ahead.

(Operator Instructions) First question is from the line of David Lewis, Morgan Stanley.

Just thinking about the back half of the year, Mike and Dan, to deliver an 8-ish like number for the third quarter, momentum needs to improve in the third quarter kind of at a similar rate as it did in the second quarter.

So what drives that confidence?

How much is predicated on business recovery versus selling days or certain deals going organic?

And then I had a quick follow-up.

Sure.

David, thanks for the question.

Yes.

So I'm really pleased.

Essentially, we're executing in line with what our annual plan was -- or is.

We knew that the second half required acceleration versus the first half, and that was well thought out when we gave our full year guidance as we've updated that.

So we're essentially in line with our plans, reiterating our full year 7% to 8% organic outlook, which does imply obviously acceleration in the third quarter and fourth quarter.

And it's pretty straightforward how we're going to deliver that.

The first 2 are more mechanical, the first one being we have 1 less selling day in the first half.

In the second half, we have 1 more selling day.

And another more mechanical solution is some of our acquisitions become organic: NxThera, Augmenix and Claret.

So those are kind of more the mechanical ones that certainly help accelerate the growth in the second half.

But importantly, in terms of the actual business, pleased to see that with the exception of EP, all of our businesses continue to grow faster than their peer group and we have a lot of momentum.

Specifically, in the regions, we're seeing Japan return to growth in the second quarter.

And we expect strong acceleration from our team in Japan based on the anniversary of price cuts that have recently occurred; new product launches with Eluvia, which is building momentum in Japan; and also the recent news of reimbursement and approval for WATCHMAN, which we anticipate selling in September.

So on a regional basis, we expect Asia to continue to accelerate, the U.S. and Europe continue to perform strong and emerging markets continue to have a lot of momentum.

And beyond that, just the impact of our full year launches.

You'll see greater acceleration of LOTUS Edge, which we're very pleased with the initial results of the second quarter; acceleration of our VICI stent; the WATCHMAN FLX approval in Europe; and as well as Sentinel enhanced supply.

And I would say broadly on supply, our team has done a very nice job of just -- of executing on our supply requirements.

So we have -- we're in very good position with supply across the company, momentum across our businesses, new product launches that impact the second half more greatly as well as the mechanical pieces of an additional day of selling and the operational to organic.

So all that gives us a lot of confidence in the third quarter and the implied fourth quarter guidance that you can derive from that.

Mike, very helpful and very, very clear.

Just one quick follow-up on LOTUS.

Thanks for the feedback on center traction and the number of centers.

Can you give us any sense of average center penetration from a case basis?

Should we still expect this rollout to be controlled through the end of 2019?

And did Sentinel -- frankly, was Sentinel capacity still an issue here in the second quarter?

Yes.

So Sentinel, we don't have -- we do not have the supply constraints within Sentinel that we had, call it, for the first half of the year, so the ops team has done a great job with that.

And so you'll start to see more Sentinel usage in Europe in combination with ACURATE and LOTUS.

So the European team has been more constrained, so you'll start to see some enhancements and growth in Europe with Sentinel and opening more centers in the U.S. So I think Sentinel will be a strong second half story for us.

Just anecdotally, I was at a couple of cases last week, a couple of live cases we saw with our TAVR valve, which performed very well with Sentinel, and also Sentinel being used with some competitor valves in low-risk patients.

And pretty shocking to see the amount of debris that some of these physicians received.

So I think physicians are becoming very comfortable once they use Sentinel in terms of its ease of use as well as the impact from that, so a lot of focus there.

On LOTUS, really pleased.

We're essentially delivering per our commitment.

The 150 accounts that we expect to open, we're on track to deliver that.

We're not going to provide kind of share data or usage data by account.

But I would say this has been a long time coming to bring this to market, and anecdotally, I would say doctors are pleasantly surprised by the unique features that it delivers.

The controlled use of the device, the ability to reposition and the elimination of the PVL is delivering on its promise.

And given the investment that we've made, the time that has taken, we're really focused on quality, strong patient outcomes and proctoring.

And we're in this for the long run with 2 valves, and now we're going to deliver as planned our financial commitment and the rollout of LOTUS.

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

So 2 product-related questions, if okay.

First on Spinal Cord Stimulation, I was wondering if you could give us a sense for the growth rate of that business in the second quarter.

And then just broadly, any additional thoughts you have on underlying market growth trends in Spinal Cord Stimulation here in 2019?

Bob, thanks for the question.

Just high level before I get right to your question, that one thing we're happy about is the neuromod team has continued to diversify that business.

So we'll always be led by our spinal cord stim, I'll get to your question in a second, but our international growth is becoming more significant.

The team in Europe is doing an excellent job with both SCS and DBS, and then we've diversified with our RF platform and our Vertiflex.

So that gives us multiple product categories and more multiple regions that are contributing.

On the SCS market itself, from BSC standpoint, candidly, we faced some brutal comps, which is good from last year.

We had a 31% comp in neuromod in second quarter '18.

We did see sequential growth in the franchise within SCS in the U.S. from first quarter to second quarter, so that's encouraging.

And our team has amped up significantly more their patient awareness activities and other kind of fundamentals that we may have gotten away from a little bit in '18 because the volume was so strong, it really wasn't needed.

So in our view, this is a -- we call it an upper single-digit growth market.

We stick with that based on the unmet patient need that we see, the lack of alternatives and significant survey work that we've done.

So we have seen less volume in the first half of 2019, and we expect that to improve slightly in the second half.

And then we'll -- we believe we'll continue to grow faster than the market.

So when we look at our guidance for the second half of '19, we obviously are conservative and thoughtful about what our SCS projections are.

So I think that kind of tapered view is built into our guidance, but we have a lot of confidence in the long-term growth outlook of the market and the portfolio that we have.

Okay.

Great.

And then I'm sorry if I missed it, but was there a specific spinal cord -- I'm just curious as to the growth rate of the spinal cord stim Boston Scientific business in the second quarter, if you're willing to provide that.

And my second question was just quickly on peripheral and paclitaxel.

Just curious as to what happened to paclitaxel sales in kind of Q2 versus Q1.

Is there any noticeable change there?

Yes.

So just specific to your question, U.S. SCS did decline in the second quarter kind of upper single digits, and OUS was up.

And so again, that was -- we suffered there against the significant comp and some volume softness.

So we saw sequential growth in the quarter, but for the U.S. SCS, it did decline upper single digit.

On paclitaxel, really nothing new since Jeff outlined that at Investor Day.

We expect to hear from the FDA on their guidance document in August.

And we think as long as the guidance document's kind of written in line with their commentary at the panel, then we believe Eluvia will be a nice growth driver for us clearly in Japan and also in the U.S. So really nothing changed from Mirviss' comments at Investor Day.

Next question is from the line of Vijay Kumar, Evercore.

A couple of quick guidance questions.

The first one, very simple.

The base impact in back half, Mike or Dan, is that split equally between 3Q and 4Q?

Or is that more 3Q weighted?

It just rolls in over the 2 quarters.

I wouldn't point to one month or one particular quarter.

It just -- it rolls over the back half.

Understood.

And just on the EPS guidance, Dan.

Tax rates are a tad below.

I'm assuming this is being offset by higher OpEx spend, and I think I heard you mention support commercial launches.

Maybe highlight a couple of -- where the spend is going.

And BTG, given the August close, any changes in the $0.02 to $0.03 contribution for this fiscal?

Or does the math change?

Yes.

So I'd take the BTG one first.

Can't comment on that obviously, just based on the U.K. rules, until that deal actually closes, which we say should be some time in August.

Relative to SG&A, you think of the launches that we have.

You have LOTUS.

We're gearing up for WATCHMAN in Japan.

We have Eluvia going in Japan.

We have other momentum in endo and some of the MedSurg franchises.

And then one of the other things in SG&A in the quarter is if you look at the neuromod P&L, it's deleveraged.

And because of the growth -- again, Mike detailed that very nicely in terms of the 31% comp from last year.

So we're not making any fundamental changes to that business because we think that's a fantastic market, 7% to 10% as we've said.

So that has a little bit of impact in the quarter, that P&L deleverage.

We're fine with that because we're going to keep that engine going for the long term.

But that's probably the key reasons: the launches and a little bit of a deleverage in the neuromod P&L in the quarter.

Our next question is from the line of Joanne Wuensch, BMO Capital Markets.

I would like to just hit upon acquisitions.

Last year, you announced 10 in 2018, one so far in 2019.

Where -- what are you thinking in regards to continued capital deployment in this area?

Joanne, thanks for the question.

So we have -- we'll be closing our most strategic one, BTG, within the next -- in August here, what we're aiming for, which will be great.

And we've -- it's been longer than we thought given the bead divestiture, but the team is ready to deliver on that.

There's significant cost synergies and makes us the category leader in Interventional Oncology [tools and] products.

I won't go through all that, but we're excited about that acquisition.

In '19, you've seen us really do one deal thus far, the Vertiflex acquisition.

So our pace of acquisitions certainly slowed down with one acquisition through almost end of July here.

And so we do have capacity to do a couple more tuck-in-oriented acquisitions in '19 if we wanted to.

And some of the valuations are quite high, and we do have a very prolific, I would say, VC portfolio that you'll see us acquire companies from that portfolio over the coming 2 years, but really to be determined whether we do any more acquisitions this year or potentially 1 or 2, at the most, tuck-in acquisitions.

So you'll see significantly less volume in 2019 versus '18, and then we'll have additional capacity once we continue to delever as planned, as outlined at Investor Day.

So we'll have nice capacity in 2020 for more tuck-in acquisitions if the strategy works and the financials make sense for us.

And then on a specific product, the EXALT Model D single-use duodenoscope, you've submitted it to -- on April to the FDA.

Can you give us an update on the timing of that and how we should think about just your Endoscopy business in general?

So with the -- so the Endoscopy business in general is kind of firing on all cylinders.

They have a significant number of product launches throughout 2019 that they're executing on, and the supply chain team continues to deliver against the requirements there.

So we have a lot of confidence that, quite frankly, endo will accelerate growth in the second half of 2019 versus the first half.

On the duodenoscope, the team makes ongoing progress there, and we continue to put this in our physicians' hands and they continue to test the product through clinical trials that we're doing.

But we do expect approval of this product and launching it by the year-end.

So you'll see some impact of EXALT, the duodenoscope, in the fourth quarter, which also is another reason to support our second half acceleration.

So I would say it's on track.

The endo business in particular is executing at a high level, hitting the cadence of product launches, and the duodenoscope is kind of on track per our discussions at Investor Day.

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

One product question, one guidance question.

So Mike, on WATCHMAN Japan, do you have reimbursement yet?

And what is the rate there compared to the U.S.?

And how are you thinking about the trajectory in Japan?

And then I have one follow-up.

Yes.

We just -- we're pleased with that.

We just got a text like at 2 in the morning last night on WATCHMAN reimbursement approval.

And I'll let Dr. Stein talk a little bit about the clinical indications in a second, but just the economics look good.

It's, quite frankly, a little bit better than we anticipated.

The reimbursement will be in the U.S. dollar conversion in the $13,000 range for Japan reimbursement.

And we'll start our launch kind of, call it, the mid-September time period, so you'll see a nice benefit from that in the fourth quarter.

I don't know, Dr. Stein, if you have any comments.

Yes.

Thanks, Mike.

Again, as Mike said, right now, we have PMDA approval and now MHLW approval for reimbursement in Japan, tracking to launch in September.

Just sort of putting it all together, the guidelines for use are very similar to what we see in the United States, and we're very pleased by it.

And then, Mike, what gets you to the high end versus the low end of the guidance range for organic growth in 2019?

I think it's really -- I'm really pleased.

We just did the strat plan, and I would say the team is executing really per our commitments for the year.

This is -- was the schedule for the acceleration in the second half given the days and the portfolio cadence that we have.

I think in terms of within that range, the Structural Heart business is a nice lever there with WATCHMAN and now this Japan approval with WATCHMAN, the continued momentum with LOTUS, Sentinel and ACURATE.

So I think that's a pretty good-sized swing factor in terms of our overall within the range there.

And then I think that Japan and Asia -- I would say Asia broadly is doing extremely well, excellent China growth.

So we need to see that momentum sustained, which it has for a number of years.

Japan getting back to healthy growth is a big lift for us in Asia Pac.

So I think those are a couple.

And then you just have pretty strong -- with the exception of EP, where we're growing slower than market.

And we have some exciting new launches coming in Europe on single shot and hopefully in the U.S., our MiFi DirectSense therapeutic catheter launch, so we expect EP to get healthier in 2020.

So with the exception of that business in '19, there's a lot of momentum across them.

And so I think with that ongoing momentum, the kind of the swing point is the -- our execution in Structural Heart, which is kind of on plan, and I would say the Asia growth in particular is meaningful for us.

Next question is from the line of Josh Jennings of Cowen.

Mike, I just had a quick follow-up on the FDA paclitaxel panel and their upcoming recommendations.

Are you guys internally assuming that there will be a label change detailing a mortality signal with paclitaxel-coated devices?

And if you are, why wouldn't that potentially be more impactful to the market?

Dr. Meredith, if you're able to hear the question or answer that one, that would be helpful.

Thanks, Mike.

I did hear that.

I think the 24-hour summary from the FDA gives us some guidance as to what the likely outcome of the next guidance statement would be.

As you know, the panel unanimously agreed that there were short-term benefits to the paclitaxel-coated devices that outweigh these risks that we actually saw in the 4 U.S. IDE trials, which there were methodological reasons why that mortality signal might not have been that clear.

And the other thing that's very important here is that the panel couldn't describe a class effect to paclitaxel devices.

And Eluvia, of course, was not included in that analysis.

It behaves far more like a drug-eluting stent than a DCB in terms of the delivery mechanism and the targeted and focal way it's actually delivered.

So we feel that the panel guidance thus far actually points to a fairly reasonable outcome from the next statement.

So I suspect that it will bode well for Eluvia.

And just one follow-up actually with Dr. Meredith on LOTUS Edge.

Can you help us understand how you're marketing the pacemaker rate?

Clearly, there's a -- there are a lot of positive metrics to put on the table for some of your physician customers.

But I think at TVT, we saw a LOTUS Edge combined cohort of 33 patients down in the low double-digit pacemaker rate at 30 days.

Is that the rate you guys are putting forward to physician customers?

And then I think you did do a 50 patient -- you need 50 patients to get the FDA approval with Edge.

Are we ever going to see that data?

Or how is that going to be brought forward?

Okay.

Thanks.

I'll answer the second one first and then come back to the first part of your question.

So the -- as you know, there was a nested registry.

The focus of the nested -- 50-patient nested registry was related to the pin-pull issue to show that, that actually didn't occur.

We've decided to continue enrollment in that study, and that study is ongoing so that we will ultimately have a significant dataset where we can actually assess the pacemaker rate.

We believe the pacemaker rate will be competitive and in that order of magnitude that you mentioned before from both the REPRISE EDGE and the [FIMS-Z] studies where we had that cohort of patients with the 12% pacemaker rate.

So that study is -- the nested registry is ongoing, and we'll report out probably when we have 150 patients in that study.

And along with that, we'll have REPRISE IV and other ISRs, which will give us a clearer indication of the pacemaker rate.

Thus far, that's how we're assessing the pacemaker rate, and the data that we have from that REPRISE EDGE and FIMS-Z studies suggest that we will have a competitive pacemaker rate along with all the other advantages that you alluded to, very -- the lowest -- best-in-class PVL and full repositionability, no need for valve in valve.

Next question is from the line of Matt Taylor, UBS.

I just want to ask one on the European regulatory environment.

You mentioned the delay to one of your programs there.

Do you think this is something that's going to be kind of a chronic issue?

Could you characterize it a little bit more in terms of the additional timelines or cost that you could incur with other EU programs?

Yes.

So I think the MDR process is certainly adding some resource requirements for Boston Scientific and others.

We think, in the long run, this will be good for Europe.

But clearly, over the -- in the short run, it's a significant investment from us and other companies to provide the requests that the MDR process is requiring.

So I would think in the near term, it's more of a financial expense item and resource allocation, but I think, longer term, in terms of our internal processes and capabilities, we're certainly equipped to do it.

I think it might have a small -- a greater impact on some of the smaller companies than the larger companies.

Specific to the ACURATE neo2 piece, the good news there is we've initiated our U.S. IDE clinical trial, so we're on schedule to bring that second valve to the U.S. market per our Investor Day.

We are seeing a delay of, I think, likely 6 months to 12 months in Europe for our ACURATE neo2.

Obviously, it won't impact our existing ACURATE and our embolic protection capabilities there.

But essentially, what we've tried to do is consolidate our regulatory submissions with fewer notified bodies in Europe.

And in doing that, we think we'll have better long-term performance working with fewer regulatory notified bodies and will help with future ACURATE portfolio expansion and approval timelines.

So it's not a product question with a specific valve, it's more us down-selecting on the number of agencies that we're working with.

A number of the agencies in Europe, given the number of them and the new MDR requirements, it's quite a challenge for them as well.

So we think working with fewer of them and following that process will best serve Boston Scientific, but we think in the near-term, obviously, there's some expense challenges and some minor delays in Europe with products.

Okay.

That's very clear.

And then emerging market growth continues to be really strong.

Is there anything to call out there?

And how long can you keep up this kind of 20% operational growth?

Yes.

We've been doing it for quite a while, and the good news is it's across a number of countries.

So China clearly is the largest catalyst there.

And the benefit there is we used to be primarily a Japanese company in Asia, and now, we're much more diversified with strength in Australia, the Korean team and the ongoing growth of China.

But China is really the key driver for us in the emerging markets, and so much of it's kind of our playbook of bringing all of our portfolio to China rather than just drug-eluting stents, which is what it was historically.

Our PI business is growing exceptionally well in China as is our complex coronary business and our WATCHMAN business, and endo and uro and other divisions are scaling up there.

So I think it's an ongoing diversification of our portfolio, getting our products approved there.

So we expect continued momentum in China.

So we don't see a slowdown in the second half in China or the emerging markets.

Also, our team in Latin America continues -- despite the challenges, that market continues to grow well above market and at nice profitable rates.

And we're seeing that nice growth in certain parts of Middle East/Africa and in the ASEAN countries.

So there's quite a stew within the emerging markets, but China is the biggest driver.

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

Mike, I just wanted to understand your comments on the FDA's updated guidance document coming out of the panel, and maybe Dr. Meredith can chime in here too.

Do you expect them to recommend that paclitaxel products only be used in high-risk patients?

I wasn't clear if you're saying that, that was something you thought would actually take place.

Do you want me to take that, Mike?

Sure.

Yes.

So we don't want to speculate on what the FDA's position will actually be.

But I was trying to draw from these statements that came from the 24-hour summary, and the -- in that 24-hour summary, the panel agreed that -- the FDA panel agreed that we should continue to approve devices for 12-month follow-up clinical data to assess the safety and efficacy.

And it is very likely that there will be a need for longer-term data to fully understand the -- that signal.

I think the fact that there was no clear class effect actually established and there is clear benefit, and Mike alluded to the TLR differences we saw with Eluvia at both 1 and 2 years, but the -- it's very likely that there will be continued use of paclitaxel as a prevention for restenosis.

Obviously, it's easy to suggest that it'll be -- they're for high-risk patients.

But I think one of the important comments that came out of this was that it should be up to the physician and the patients to decide who is appropriate for that treatment.

I think just also -- just for broad -- specific to BSC, when we look at our second half -- third quarter guidance and implied fourth quarter guidance, we're assuming growth significantly slower than planned originally for the year.

So we've derisked the Eluvia sales quite a bit in our guidance appropriately, but we do see strong uptake in Japan because this issue doesn't seem to be concerning in Japan.

But more importantly, I think just within our PI business, the other growth drivers in addition -- because there's questions around what happens with paclitaxel.

So we'll know more in the next 45 days.

But even if you remove Eluvia topic from the question, the closing of Interventional Oncology with BTG, the VENITI stent that we have -- recently are launching, there's a number of growth drivers within our PI business that will continue to strengthen that.

We'll know more in 30 days on the FDA piece.

That's helpful.

And then just following up on LOTUS.

REPRISE IV has been up and running now for a little while.

Can you give us an updated timeline?

We're not expecting a home run all in on paclitaxel when we gave our guidance.

That's not the assumption when we gave our second half guidance.

And then just quickly on REPRISE IV.

Just any update on the timing of enrollment completion there, when you guys expect that trial to get filled?

Just want to get a sense for when we could get label expansion and see that data.

Ian, you want to take that one?

Yes.

So the recruitment in the REPRISE IV trial is going well, and there's a lot of positive patient feedback on the REPRISE IV study and recruitment.

It's a single-arm study, as you know, and that study should be on track to sort of completion with 1-year follow-up probably early 2020.

That's completion of the patients in the study, early 2020.

And our next question is Jason Mills, Canaccord Genuity.

Two product-related questions, Mike, first on EP; and second on Neuromodulation, specifically SCS.

EP is a plus grower for you, notwithstanding that the growth has slowed.

You've talked about new product launches.

Is that what will drive growth higher sort of in the back end of the team's range commensurate with the market?

And what over the course of, let's say, the next couple of years do you envision will also augment that business profile?

Do you see it as a double-digit grower over the longer term?

And I'll just ask my second question now.

It's a short one with respect to SCS.

Based on your performance and one other competitor's, do you believe that you've lost share in the United States SCS market?

Or is the market sort of growing commensurate with what we've seen you report and one other competitor?

Yes.

On SCS, we just don't know yet.

We have some nice product enhancements coming in the second half of the year.

If you want to do our 2-year growth CAGR, it's 15% or so.

Tough comps this year.

And we haven't had some of the competitors report yet, so we'll know more in 45 days or so whether we lost any share or gained share or held share in the quarter.

But on EP, Dr. Stein can comment.

I think with EP, this is a long-term commitment that we have in this business given the size of the market and the growth profile and the overlap that we have on the call point and capabilities.

And so it's really a tale of 2 cities right now.

We have strong growth in Europe where we have RHYTHMIA.

It's doing extremely well, and our therapeutic catheter launch is doing quite well.

And so Europe, I would say, is growing above market, and U.S. is growing below market.

And in U.S., we don't have the portfolio -- all the portfolio pieces that Europe has.

So I think Europe's a good indicator for us for the future.

And beyond RHYTHMIA, which is doing well, and the DirectSense therapeutic catheter, we hope to bring a differentiated cryo balloon to the market by the end of the fourth quarter time period.

So that'll have a nice impact for us in 2020 in Europe, and we'll start our U.S. trial in the U.S. So I think you'll see Europe continuing to grow quite a bit faster than market second half of this year and in '20.

And the U.S. likely will lag until we can get the DirectSense approval in the U.S., which we hope will be in the first half.

So once we get that, then the U.S. will grow more effectively.

And then once we get single shots, I think you'll see, longer term, we'll be the only company with a full suite of mapping systems, therapeutic catheters and multiple shots on goal in single shot.

So the portfolio will be quite differentiated.

It just lags more in the U.S.

Dr. Stein, do you have any comments?

Yes.

Again, Mike, just to reiterate what you said.

I mean the key to our strategy is offering the most rounded, most comprehensive portfolio of tools that EPs need to treat complex arrhythmias like atrial fibrillation, so -- right?

It's 2 different single-shot techniques: cryoablation catheter, POLARx; and an RF balloon, our LUMINIZE catheter.

It is also having high-density, high mapping -- high-resolution mapping with RHYTHMIA; with DirectSense; and then with what's to come, our StablePoint catheter, which will be unique on the market having both force and DirectSense; and then in addition to that, things like our acquisition of Securus, which is an infrared monitor for esophageal temp monitoring and protection during ablation procedures.

There's no competitor that's able to offer that kind of a comprehensive portfolio.

And then as Joe and I have talked about at Investors Day and at HRS, the path then to double-digit growth is also moving our product mix from what had traditionally been in the low-growth segments of Electrophysiology into these higher-growth segments like complex mapping, like single shot for atrial fibrillation.

Great.

Okay.

Kevin, with that, we're going to conclude the call.

We thank everyone very much for joining us, and Kevin will now provide the replay details.

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