Boston Scientific Corporation (BSX) Q1 2012 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you very much for standing by, and welcome to the Boston Scientific Q1 Earnings Call. [Operator Instructions] Also as a reminder, today's conference is being recorded. I would now like to turn the conference over to your host, Mr. Sean Wirtjes. Please go ahead.

Thank you, Perky. Good morning, everyone. Thanks for joining us. With me on today's call are Hank Kucheman, Chief Executive Officer; and Jeff Capello, Executive Vice President and Chief Financial Officer. We issued a press release earlier this morning announcing our Q1 2012 results, which included key financials and reconciliations of the non-GAAP financial measures used in the release. We posted a copy of that press release as well as reconciliations of the non-GAAP financial measures used in today's conference call to the comparable GAAP measures and other supporting schedules to the Investor Relations section of our website under the heading Financial Information. The duration of this morning's call will be approximately one hour. Hank will begin our prepared remarks with an update on our business progress and his perspectives on the quarter. Jeff will then review our Q1 financial results and business performance, as well as Q2 and updated full year 2012 guidance. We'll then open the call up to questions. During today's Q&A session, Hank and Jeff will be joined by our President, Mike Mahoney, as well as our Chief Medical Officers, Dr. Dawkins and Dr. Stein. Before we begin, I'd like to remind everyone that this call contains forward-looking statements within the meaning of federal securities laws, which may be identified by words like anticipate, expect, project, believe, plan, estimate, intend and similar words. These forward-looking statements include, among other things, statements regarding our growth; market share; markets for our products; product pipeline and quality systems; new product approvals, launches and performance; clinical trials; cost reduction and growth initiatives; investments in emerging markets and business development opportunities; the timing and volume of share repurchases; free cash flow and its uses; our future financial performance including sales, margins, earnings and other guidance for the second quarter and full year 2012; and future tax rates, R&D spending and other expenses. Actual results may differ materially from those discussed or implied in these forward-looking statements. Factors that may cause such differences include those described in the Risk Factors section of our most recent 10-K filed with the SEC. These statements speak only as of the date hereof, and we disclaim any intention or obligation to update them. At this point, I'll turn it over to Hank for his comments. Hank?

Thank you, Sean, and good morning, everyone, and thanks for joining us. I'll begin today with some comments on the first quarter financials and then move on to update you on the progress we continue to make on our key initiatives to drive revenue and EPS growth. First quarter revenue of $1.866 billion was down 3%, both on a reported basis and in constant currency and excluded the Neurovascular divestiture. This was in line with both Street consensus and the midpoint of our guidance range. Our PI, Endoscopy, Urology and Neuromod businesses all delivered mid- to high-single-digit growth in the quarter. We expect to see continued good growth from these businesses and improvement in our other businesses over the balance of the year. We continue to see global pricing pressure in our IC and CRM businesses and lower defib procedure volumes in the U.S. compared to a year ago due to the factors you are already aware of by now. However, the positive signs we saw in the U.S. last quarter suggesting possible stabilization in de novo implant volumes in the defib market and some easing of the pricing pressures in DES continued in the quarter. With significant new products coming into the market in both of these businesses in 2012, we remain optimistic about our future outlook. From an earning standpoint, we delivered adjusted EPS of $0.15 in the quarter. This was above Street consensus and exceeded the high end of our guidance range of $0.11 to $0.14 and was driven by good gross margin improvement, continued cost control and lower-than-expected tax rate. Let me now move on to the progress we're making with new products. We continue to be excited about our rejuvenated product pipeline, which we expect will help us return to growth later this year and…

Thanks, Hank. Let me begin by providing some overall perspective on the quarter before getting into the details. We generated adjusted EPS of $0.15 in the first quarter. The solid earnings performance in the quarter was driven by higher gross margins due largely to the launches of PROMUS Element in the U.S. and Japan, continued strong attention to cost control and a lower-than-expected tax rate. As a reminder, the adjusted EPS of $0.22 we reported in Q1 last year included $0.10 in positive onetime items, including a true-up on our PROMUS supply agreement, bad debt recoveries in Greece and discrete tax benefits. Consolidated revenue in the first quarter of $1,866,000,000 represents a decrease of 3% on both a reported basis and an operational basis, the latter of which excludes impacts from foreign exchange and the divested Neurovascular business. The actual headwind from foreign exchange on sales was $6 million compared to the $10 million headwind assumed in our first quarter guidance range. And the divested Neurovascular business contributed $5 million less in sales in the first quarter of 2012 compared to the same quarter last year. Let me now move to the detailed review of our business performance and our operating results in the quarter, Starting with DES, I'd like -- I'd first like to remind you that our results for the first quarter last year included a $10 million negative impact from a sales returns reserve related to the launch of TAXUS Element ION in the U.S. In comparison, DES sales for the first quarter of 2012 and the fourth quarter of 2011 included a $6 million positive impact and an $8 million negative impact, respectively, related to the launch of PROMUS Element Plus in the U.S. These reserves impact comparisons of worldwide and U.S. DES revenues and market…

Thanks, Jeff. Perky, let's open it up to questions for the next 20 minutes or so. [Operator Instructions] Perky, please go ahead.

[Operator Instructions] And our first question comes from the line of Mike Weinstein with JPMorgan. Michael N. Weinstein - JP Morgan Chase & Co, Research Division: First, a guidance question and then maybe a follow-up. I think the one thing in the guidance that kind of caught me was you guided to a sequentially down CRM performance in the second quarter. You did $535 million. You guided to $500 million to $525 million, and that's despite your comments about potential stabilization in the ICD market and obviously, more importantly, all of your product launches in ICDs and pacers. Could you just maybe walk us through that? And why would CRM revenues be down sequentially?

Well, Mike, let me go back and clarify. So we did $500 million in the first quarter, and we're guiding to a range that's higher than that, so I'm not sure what... Michael N. Weinstein - JP Morgan Chase & Co, Research Division: I apologize. So you're -- when you guided to that, you were excluding your -- the EP business.

That's correct. Michael N. Weinstein - JP Morgan Chase & Co, Research Division: Okay, so you're excluding the -- so you're looking at it, okay. So that makes more sense to me. That's perfect, that's fine. Let me ask you a couple of pipeline questions, if I can. You gave a little bit more clarity on the pathway for a couple programs. One was Synergy, you said approval late this year. Could you just talk a little bit about the time line between approval and actually launching Synergy and what the factors might be there?

Mike, this is Hank and I'll ask Dr. Dawkins to comment as well, but we expect approval earliest late '12 on Synergy. Then we'll go into what we refer to as a limited launch for a period of time in Europe, and then from there a full launch. Now the exact timing of how long the limited launch would be and when we do full launch is to be determined and would be driven by the clinical protocol. Keith, do you have anything you want to add to that?

Just add to that even with a limited launch, which will be limited to certain accounts, we will have the full matrix of Synergy products, both in terms of length and diameter of stent. And that will then be followed by a formal investigation of a short DAT regimen 3 months against 12 months in a very large trial. Michael N. Weinstein - JP Morgan Chase & Co, Research Division: Okay. And then one other pipeline question, and I'll let others jump in. On the Lotus program, the CE Mark trial that you'll move into, could you just or tell us what sizes you'll be evaluating and whether that will just be a transfemoral study or will there be a transapical component?

Yes. So REPRISE I, that's the feasibility trial we'll complete tomorrow. And the result of the 23-millimeter valve used in that trial will be reported at EuroPCR next month. REPRISE II, which is the CE Mark trial, will commence in Q3 this year. And we'll be investigating the 23- and 27-millimeter valves using the transfemoral approach in 4 countries: Australia, U.K., France and Germany. That will lead to CE Mark in the second half of 2013.

Our next question comes from the line of Rick Wise with Leerink Swann.

I also wanted to focus on the pipeline a little bit, if I could. Hank, you sort of provocatively said that the INGENIO launch, maybe the opportunity is underappreciated. Can you just remind us where your share is now, in your opinion? And where can a strong INGENIO launch take share over the next couple of years?

Yes, Mike Mahoney's been spending a lot of time focused on the CRM business. So Mike, I'm going to let you take that one.

Sure. On the INGENIO launch, we're excited about that. It just got launched in Europe very recently, and this is our first pacer platform launch in about a decade. And this is really an important market for us given our low share position, as you said about 15%, and also the growth of the pacer business along with our investments in emerging markets. So as you know, it's about a $4 billion market, and we have a number of platform products that will continue to come out over the next 3 years. We'll be launching new pacer platform along with a new CRT platform, CRTP platform, and also incorporate remote patient monitoring. And also MRI compatibility will be available in Europe in the second half of 2012. And also we're looking for a U.S. launch later in the second quarter of 2012, when the MRI clinical trial will also take place. So this is a big market. It's our first meaningful launch, significant investment. And with the commercial capabilities that we have in Europe and in emerging markets in the U.S., we expect to take share in this market with the product.

And, Rick, the only thing I would add to that is the appetite for our commercial team to get their hands on this product is high.

I bet. If I could follow up on Cameron. Of course, I'd love to ask you whether you think the panel will be positive and when approval will come. But I'll skip past that and ask, can you frame the opportunity -- I just had a recent doc call who -- the doc said he thought initially once approved, that Cameron could take 8% of the market and long term maybe more like 10% to 12% of the market. So do you think that this expands the opportunity -- the ICD market opportunity? Does this cannibalize existing sales? Just frame that just with your latest thoughts.

Yes, in Cameron -- that's a great question. We view the defib market today at about $6.5 billion. The team from Cameron has reported in their announcements that they believe the S-ICD, given its unique characteristics, can potentially address up to 40% of that market. And as you said, when you spoke with your EP physician, he believed it was 5% to 10%. The Cameron team would say it's up to 40%. So we believe that this will be clearly a $1 billion market opportunity for us because we believe it meets unmet patient needs with young patients, patients who have difficulty with their venous system, patients prone to infection. And also with the growing concerns of a lead reliability, which thankfully, as Hank articulated, we do have the most reliable lead in the business today. But having a solution that has a S-ICD platform that does not have the lead dropping into the heart, combined with our new platform, really positions us very strongly in the ICD marketplace. So the marketplace overall, we're calling, at minimum, a $1 billion market opportunity going forward.

And our next question goes -- comes from the line of David Lewis with Morgan Stanley.

Jeff, I wonder -- there's a dramatic number of dynamics going on right now in the DES market, from discussion around obviously PROMUS Element conversion, stent impression, pending RESOLUTE as well as kind of pricing. As you think about your business across the quarters, is it safe to assume your guidance basically sticks kind of flattish DES growth in the second quarter, flattish absolute dollar growth? Is it safe to assume that, that quarter in your mind will represent a trough for your DES business? Or is that not as visible right now?

Well, I think we came into the year, David, kind of knowing that with Medtronic, Integra, RESOLUTE coming into the market, it was going to be a quarter or 2 where we would have some disruption in terms of share. And I think that's happening earlier than we anticipated. We originally anticipated that to hit the market in the second quarter. So we're going through kind of that air pocket, so to speak, earlier. That'll probably kind of take us the next couple of quarters to kind of see where all the share shakes out. But ultimately, look at the back half of the year. We feel pretty good about our product and its attributes and think we can kind of be in a good position from a share perspective. But we'll have to see how that plays out.

And David, this is Hank. The other thing I would add to that, which I agree with entirely in terms of what Jeff just said, is don't underestimate the impact of the long stent, the 38s and 32s. Those are sizes that aren't available to all competitors. Now once we have those in our hands, I think that will enhance, as I said in my script, our share position.

Very, very helpful. Maybe just 2 more quick ones. The first is just on Cameron. I know we've had some questions about market sizing. But in terms of margins, obviously critical component of the Boston story, in the first several quarters of launch or first year or 18 months of launch, do you think that Cameron can be gross margin accretive? And -- or conversely, can Cameron still be EBIT margin accretive when you consider potential cross-selling? And maybe just one quick follow-up.

Yes, that's a multipronged question because Cameron in and of itself, given its start-up nature, smaller company procuring components on its own, doesn't have the leverage that we have. So when their product comes out, the margins will not be at our corporate margins. However, I think as Mike clearly laid out, we think this would benefit, not only with that product but follow-on sales as well. So there's not only kind of the impact of getting their margins up higher, which we plan to do, and they have successive product generations in their pipeline to do that to address their gross margins, but we think we're going to get into incremental accounts we're not in today and get follow-on business. That will come at our variable margins, which will be accretive to our overall margins. So there'll be a mix issue. Net-net, that's going to be a pretty good deal for us. We're pretty excited about it.

Great, Jeff. And lastly, just on Asthmatx. I may have missed it, but can you give us any sense, absolute quantification, of what the contribution of Asthmatx can be either in terms of percent of growth or absolute dollars in '12?

I think we've been very clear from the beginning that we're very excited about Asthmatx. And Hank, in his script, laid out some of the positive reimbursement milestones. We expect those to accelerate as we go through this year, to pick up steam. I'm not going to be able to share with you an explicit dollar amount at this point in time, but we continue to believe that, that technology, in and of itself, has the capability in 2013 to nosebleed move the top line of the company. It's one of 7 technologies we have coming out in the next 2 years which we think can kind of move the top line of the company.

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

Two questions, guys. One, on U.S. ICDs. Your ICD number beat our expectations, and I'm curious how your business performed in the quarter. The reason I'm asking is, is a lot of the Riata noise really resurfaced in the month of March. So did you see a lot of growth coming in March because of the Riata issues? Or was growth just steady throughout the quarter? And then I had a follow-up on stents.

Glenn, it's Mike Mahoney. We have seen a increase over the past 30 to 60 days in the selling of our RELIANCE leads. So as we look -- we track our can [ph] sales as well as our lead sales, and over the past 45 days we have seen an uptick in our lead sales. One, based on the attributes and strength of the reliability and survivability of those leads, I think, given the public pressures of some of our competitors and the confidence that EP doctors have in our lead reliability. So we have seen an increase there and we continue to anticipate that lead performance will continue to grow in the second quarter. And combined on the heels of that, we'll continue the rollout of our new platform launches in the U.S. as we scale the operations up for that.

And then, Hank, you mentioned the importance in the stent market of the 38-millimeter and the 32-millimeter sizes. Can you remind us what percentage of the market are these longer stents? And will these stents be launched at a premium to help pricing in the second half of the year?

I don't know off the top of my head, and we can get it to you, Glenn, what percentage of the market the longs represent, but we'll follow up with you on that. And we're right in the middle of determining our pricing strategy for that, and I don't want to let the competition who's on the line know what we intend to do.

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

Jeff, it would be helpful, I think, to get an update from you on the $650 million to $750 million in cost savings cut by program and the timing of each, and then I just had one follow-up.

Okay, Larry, so let me go through each of the pieces. The first piece is PROMUS Element. So very we're very encouraged by 6-month earlier-than-expected approval in the U.S., full quarter earlier approval in Japan and a full year earlier in Canada. So that $200 million that we feel very good about. I think I said last quarter that we thought 2/3 of it would fall in 2012. I think that's probably a pretty good estimate, with the other 1/3 following in 2013. The next category is manufacturing VIPs, which is our plan to take out 5% of standard costs every year. That's on track. We have a world-class manufacturing group, and so we continue to do very well there. So that's $200 million spread over the 5 years pretty equally, and we're on track with that, and that will happen every year, the $40 million of that. Net corporate SG&A, we had $100 million to $200 million of savings in the $650 million to $750 million, as you'll recall. We announced a restructuring plan to take out $225 million to $275 million of costs in the second quarter of last year. So we actually have a plan to kind of exceed that by $25 million to $75 million. That's going well. I suspect we may even come up with incremental costs on top of that, that we can take out as we continue to kind of work on our cost structure. So we feel very good about that. Not much of that really benefits this year. Most of that benefits '13 and '14. So that's benefit ahead of us, which is good news. Project transformation is running the R&D function more efficiently. There's about a $200 million savings as we grow the top line of the company. We're on track for that. That's a multiyear approach, more '13 and '14 and '15. And then the last component is the Plant Network Optimization, and there we had a plan to save $100 million of costs, all hitting the gross margin line. We closed the last of the plants, the largest plant in Miami, at the end of the fourth quarter of last year. So those savings -- a lot of those -- some of the savings are already kind of occurred in 2011. There's a big chunk in 2012 and there's a small tail that happens in '13. And then, of course, we have the med tech tax going the other direction, and unfortunately that looks like it'll probably continue to be a challenge for us all unless something different happens. But we'll plan as though we have to work our way through it.

Jeff, lastly, could you remind us of your expectations for the U.S. ICD business growth in 2012? I mean, I think [ph] in the past, you've said you expect sequential improvement by quarter. Is that still the case?

So are you talking market? Or are you talking our business?

Your business.

Yes. So I'll do both because I think it's important for people to understand that -- just to reiterate what happened to the market as we look at the defib market last year, and the real air pocket happened relative to the market in kind of the back half of last year, Q3, Q4 where the market was down kind of the mid-teens. So as we look at our business, we've seen stabilization from a market perspective now for 2 quarters, almost 7 or 8 months in a row now, which is great news. What we expect to have happen is as the market stabilizes and we reach easier comparables with the back half of '12 compared to the back half of '11, we think that the market will kind of be down kind of mid-single digits to low single digits on a dollar basis and we think we can actually be flat to slightly positive on that on the benefit of taking some share with our new project in line.

Our next question comes from the line of Bruce Nudell with Credit Suisse. Bruce M. Nudell - Crédit Suisse AG, Research Division: Last year was such an awful year in the ICD market and -- but the JAMA article really kind of talked about 6% of overall units, like a 20% or 30% of primary prevention ICDs. And we looked at some data, and it really looked like a hidden factor in last year's market dynamics was destocking. Could you kind of put that in framework for us?

Yes, I think it's a good comment, and it's something that, I think, the whole -- looking at competitors' reactions and their commentary, they seemed to experience the same thing. So clearly, I think, what's happening is hospitals are being run differently from a working capital perspective, and they're not nearly as interested in carrying inventory they don't have to carry. And that has an impact on those that bulk or ship inventory at the end of the quarter. So that definitely has an impact. We have seen a decline in our bulk sales the last 2 or 3 quarters. It's had an impact on our growth. However, I will point out, though, that we have a fairly conservative approach where anything over a 30-day supply we defer from an accounting perspective, we don't count as revenue. That's not the same for the competitors. So when you're talking bulking and you're talking across the sector, you have to be very careful in terms of what's actually shipped versus what's recognized from a revenue perspective. But clearly, the customer group, it seems to be moving away from that concept, which is fine for us because we don't bulk a lot to start with, but we have seen less bulk sales in the past couple of quarters. Bruce M. Nudell - Crédit Suisse AG, Research Division: Perfect. And then turning back to Cameron. Like if 30% of the ICDs are primary prevention ICDs, we -- our survey said like about 25% of those patients really have low therapy burden, another 5% to 10% have high infection risk. So this is like just first pass is at least 10% of the market. So the question I have is, is the first-gen device optimized enough in terms of size and maybe SVT discrimination to really reach full potential? And where are you in the kind of design stages of next-gen devices that further optimize the concept?

Bruce, this is Jeff. Because the transaction hasn't closed, we're going to stay away from any more further detail relative to the transaction. But we certainly would be more than willing to kind of answer those questions after the transaction closes. Bruce M. Nudell - Crédit Suisse AG, Research Division: I guess then a follow-up is to Keith, is PCI volumes have really suffered since COURAGE, and it sounds like the FAME II trial is almost a anti-COURAGE trial, where it says if a lesion's physiologically important, it should be stented. What's your feeling about PCI volumes and maybe the import of FAME II?

Well, I mean, obviously, Bruce, we don't have the FAME II data yet. My personal feeling is that the pendulum has swung too far, seeing recently some cases where there's sort of 99% lesion and people measuring FFR on the assumption that they need another test to justify the treatment. It's always difficult to predict volumes and hit rates in different geographies. I think the FFR pendulum will swing back, and I think volumes will pick up, but it's very difficult to predict that. And it certainly is different in the U.S. compared with Europe and other markets. Clearly, we are emphasizing a lot of our growth opportunity in India, China and Brazil in markets that previously we've underpenetrated, where PCI volumes and PCI growth is in double digits.

And our next question comes from the line of Raj Denhoy with Jefferies. Raj Denhoy - Jefferies & Company, Inc., Research Division: I wonder if I could ask a bit on price. You mentioned a couple of times, I think both in relation to drug-eluting stents, but then also broadly as it impacted gross margins, that pricing was a little bit less impactful in the quarter. Perhaps you could give us a little more commentary around that.

Yes, Raj, this is Jeff. So we exited last year encouraged that pricing in the DES space in the U.S. was down mid-single digits versus down upper single digits, but it was kind of too early to kind of call the pricing dynamic. So we entered the year with the assumption that price was still kind of the upper single-digit compression for the DES business in the U.S. We saw a better performance, once again, in the first quarter, which is very encouraging. And we hope that, that would continue going forward. So that is encouraging. I would say pricing outside the U.S. was relatively unchanged in the DES world, kind of upper single-digit compression. And then pricing within the CRM market was pretty consistent with what it was in the fourth quarter. Raj Denhoy - Jefferies & Company, Inc., Research Division: Okay, great. On the product portfolio, you mentioned your renal denervation product you're moving into first-in-man, I think you said third quarter with a launch next year. When might we see some more detail around your program, what the technology is, any more detail?

We'd be more than happy to give you some of that detail. I think we're probably about a quarter away from uncovering that in more specifics, let's call it. So I'd say the next -- our earnings call we'll talk a bit more about specifically what that program is and some of the product features and benefits associated with. Raj Denhoy - Jefferies & Company, Inc., Research Division: Okay, fair enough. And just one last, if I could. It was very helpful to lay out kind of all the cost-saving plans you have outlined, the SG&A savings in '13, '14 and beyond. But I'm curious how you think of that net of the additional investments that a lot of these new programs are going to require and also the expansion internationally. Is there a chance that the costs for these programs could be offset in a sense to the benefits you think you'll see? Or are those numbers you're providing really net numbers?

Yes, that's a good question, Raj. It's important for people to understand those are gross numbers. Those are gross savings. And against that, we have kind of our planned investments relative to the emerging markets and new technologies and the acquisitions we've done. But to be clear, our expectation as of the Investor Day and as it stands today is to expand operating margins and to grow EPS of the company double digits, and we feel with this strong lineup of cost-saving opportunities, we have the capability to do that.

Okay. With that, we'll conclude the call. Thanks for joining us today. We appreciate your interest in Boston Scientific. Before you disconnect, Perky will give you all the pertinent dials for the replay. Thank you.

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