Boston Scientific Corporation (BSX) Q1 2013 Earnings Report, Transcript and Summary

Michael Campbell Michael F. Mahoney - Chief Executive Officer, President and Director Jeffrey D. Capello - Chief Financial Officer and Executive Vice President Kenneth J. Pucel - Executive Vice President of Global Operations, Quality & Technology Keith D. Dawkins - Global Chief Medical Officer and Executive Vice President Ken Stein - Senior Vice President and Associate Chief Medical Officer of Cardiac Rhythm Management

Frederick A. Wise - Stifel, Nicolaus & Co., Inc., Research Division David R. Lewis - Morgan Stanley, Research Division Glenn J. Novarro - RBC Capital Markets, LLC, Research Division Michael N. Weinstein - JP Morgan Chase & Co, Research Division Matthew Taylor - Barclays Capital, Research Division Matthew J. Dodds - Citigroup Inc, Research Division Bruce M. Nudell - Crédit Suisse AG, Research Division Kristen M. Stewart - Deutsche Bank AG, Research Division Lawrence Biegelsen - Wells Fargo Securities, LLC, Research Division Brooks E. West - Piper Jaffray Companies, Research Division Jose T. Haresco - JMP Securities LLC, Research Division

Ladies and gentlemen, thank you for standing by, and welcome to the Boston Scientific Q1 2013 Earnings Call. [Operator Instructions] Also as a reminder, this teleconference is being recorded. And at this time, we will turn the conference call over to your host, Vice President of Investor Relations, Mr. Michael Campbell. Please go ahead, sir.

Thank you, Tony. Good morning, everyone, and thanks for joining us. With me on today's call are Mike Mahoney, President and Chief Executive Officer; and Jeff Capello, Executive Vice President and Chief Financial Officer. We issued a press release earlier this morning announcing our Q1 results for 2013, which included reconciliations of the non-GAAP measures used in the release. We have posted a copy of that release as well as reconciliations to GAAP of the non-GAAP measures used in today's call, along with 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 1 hour. Mike will begin our prepared remarks with an update on our business progress and his perspectives on the quarter and for the remainder of 2013. Jeff will then review our Q1 financial results and business performance as well as Q2 and full year 2013 guidance. We will then open the call up to questions. During today's Q&A session, Mike and Jeff will be joined by 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, believe, estimate and other similar words. These forward-looking statements include, among other things, statements about our growth and market share; our market-to-market trends; our products, including product approvals, launches and performance; procedural volumes and pricing; regulatory filings; clinical trials and results; cost savings and growth opportunities and their expected impact; our cash flow and expected uses; our expected financial performance, including sales, margins, earnings and other guidance for Q2 and the full year 2013; tax rates and tax impact, 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 and 8-Ks 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?

Sure. Thanks. Thank you, Michael, and good morning, everyone and thank you for joining us. I'll begin today with some comments regarding our first quarter performance, which Jeff will cover in more detail a little bit later. On an operational basis our sales performance came in at the midpoint of our stated guidance range for the quarter. We delivered net sales of $1.761 billion, which is down 6% on a reported basis and down 4% on an operational basis, and this excludes the impact of foreign exchange and the divested Neurovascular business. So as anticipated, the year-over-year comparisons in the first quarter were challenging from a top line perspective, primarily driven by DES comparisons and the impact of fewer selling days than in the prior period. We estimate the negative impact of fewer selling days in Q1 2013 to be approximately 200 basis points from a year-over-year growth perspective. And in addition, FX is more of a headwind than anticipated in our first quarter guidance range. However, 5 of our 7 businesses, after adjusting for the fewer selling days, continue to grow at or above the market during the quarter. The revenue growth figures that I will highlight on this call are all on a constant currency basis. On a worldwide basis, Neuromodulation grew at 6%, Endoscopy grew at 5% and Peripheral Interventions grew at 3% as compared to Q1 of last year. We continue to see strong returns on our investments in emerging markets during the quarter, with combined revenue in Brazil and Russia, India and China growing 35% as compared to first quarter '12. We're also pleased with improved performance of our CRM business relative to the market performance. In terms of EPS, we delivered adjusted EPS of $0.16, which is at the higher end of our guidance…

Thanks, Mike. Let me begin by providing some overall perspective on the quarter before getting into the details. Despite challenging year-over-year comparisons, we generated adjusted earnings per share of $0.16, which is at the higher end of our guidance of $0.14 to $0.17 and at consensus. This represents improved profitability from the prior year, which is driven by continued gross margin improvement, lower operating expense, a favorable tax rate and fewer shares outstanding, partially offset by a $0.01 impact from the medical device tax and increased investments in our strategic growth initiatives. In addition, we generated adjusted free cash flow of $166 million and used $100 million to repurchase approximately 13 million more shares in the quarter. As noted in the earnings release and consistent with our strategic imperatives to focus on global opportunities, we completed the reorganization of our businesses from geographic regions to global business units effective January 1, 2013. As a result, we now have 3 reportable segments consisting of: Cardiovascular, which is comprised of our Interventional Cardiology and Peripheral Interventions businesses; Rhythm Management, comprised of our Cardiac Rhythm Management and Electrophysiology businesses; and MedSurg, which is comprised of Endoscopy, Urology/Women's Health and Neuromodulation. We have restated prior-period segment information to conform to the current year presentation within the exhibits attached to this earnings release. In conjunction with the interim goodwill impairment testing required following the change in composition of our segments and reporting units, we recognized an estimated $423 million pretax goodwill impairment charge associated with our new global Cardiac Rhythm Management business unit. It is important to note that our assumptions on the CRM market and our expected operational results remain unchanged from year end, and that the primary driver of this charge was the reorganization to global business units, which changed the composition of…

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

[Operator Instructions] Our first question will come from Rick Wise with Stifel. Frederick A. Wise - Stifel, Nicolaus & Co., Inc., Research Division: So many questions here. Let me just start with 2 product questions, since that's key to the reacceleration story. SYNERGY and the S-ICD. SYNERGY in Europe, why the limited launch? The U.S. trial is enrolling ahead of schedule. Talk about, if you would, what accelerates the launch in Europe and the impact on -- of that accelerated enrollment on U.S. filing and potential approval, if you would.

Yes. So thanks, Rick. Overall, we're pleased with where -- how we positioned SYNERGY right now. We have a 2 stent platform, as you know, at SYNERGY, and then we've also launched in Europe Promus PREMIER, which we think offers a differentiated portfolio. And with SYNERGY, we're rolling ahead of schedule in terms of our enrollment in the U.S. And in Europe, we believe we're being smart in terms of how we positioned the product. We do believe that this product deserves and warrants a pricing premium, and so we're being selective in terms of markets and customers that we're approaching with SYNERGY. And we will have a full-blown launch. We'll expand that launch in first quarter 2014 in Europe, and we'll continue to enroll. But we believe that two-tiered position is the way to go, and we'll launch in the first quarter 2014 and we'll continue to do the controlled launch in the appropriate markets that justify the premium price points that the product deserves. Frederick A. Wise - Stifel, Nicolaus & Co., Inc., Research Division: Yes. On the S-ICD front, Mike, the demand ahead of supply. I understand that with gen 1 especially. But with gen 1.5 that you're going to launch this summer, it sounds like on track. Are you -- how quickly are you going to be able to supply the demand that's there? Is it going to take 6 months or 2 years? Help us understand how quickly gen 1.5 can launch.

Sure. Well on the -- in Investor Day, we talked about the S-ICD in quite a bit of detail. And we expect to continue to deliver the revenue that we discussed at Investor Day in 2013 for S-ICD. The revenue will be more heavily weighted to what we delivered in the first quarter and more heavily weighted to the back half of '13 based on the supply, but we expect to deliver that. So the -- it's not an issue of demand. As you know, the product was approved early, and so for a number of months, since we've acquired the company, we've been focused on boosting the supply chain and the capabilities with this device, so we can deliver at quality and at the right quantities. And this 1.5 release really is focused on that. And as you said, this 1.5 release will occur during the second half of the year. And we believe that we'll be able to really deliver the demand that's needed in the fourth quarter of 2013 and clearly as we go into 2014. So we'll begin to take the foot off the brake a little bit more in the third quarter. But you'll see us be able to increase our capabilities to supply in fourth quarter and clearly in 2014. And we expect to deliver the overall S-ICD guidance that we provided at the Investor Day.

Our next question in queue will come from David Lewis with Morgan Stanley.

Jeff, just one interesting thing on guidance, we thought, was R&D. I thought that you had talked about R&D actually being heavier in the first half of the year. And now it looks like it's going to be lighter. And it sounds to us that, that trend probably continues. So can you just talk to us about what is a good number for R&D for the year? And specifically, is this is more of a strategic structural change with how the company's going to spend and organize innovation?

Yes. David, thanks for the question. So I'd say that in the first quarter, R&D was probably a little lighter than we anticipated. And a lot of that just has to do with kind of timing and when things happen in terms of trials and activities. Our guidance indicates that R&D, as a percentage of sales, will be between 11.5% to 12.5% kind of for the rest of the year. So that would be a bit of a step-up sequentially because we're at 11.6% in Q1. So I'd expect R&D would tick up here in the second and third quarters. Those tend to be slightly lighter quarters revenue-wise and then probably be kind of at the lower end of that 11.5% to 12.5% in '14 -- in Q4 as kind of revenue picks up in the fourth quarter.

Okay, very helpful. And then, Mike, maybe a question on the outlook. I think the theme of the call, and I think the focus for investors is improving organic growth rates and constant currency rates throughout the balance of the year. I guess some skeptics would say you benefited from a couple of areas, specifically in CRM and Neuromodulation where some of your peers have been a little weaker. And as they begin to get a little stronger or recover from their issues in the back half of '13, it's going to be harder for you to get to that back half of the growth improvement. Maybe just kind of talk about what expectations you've made for competitors re-basing their businesses and how confident you feel that you can still get to these improvements into the back half.

Yes, absolutely. We're actually pleased we delivered first quarter as we guided and the year looked -- we believe we're going to execute in 2013, similar to what we provide at the Investor Day were sequential quarterly growth. And we called the first quarter what we think will be our toughest growth, and improvement in the second quarter and a sequential improvement from there. The key factors of -- I don't want to go through the whole script, but the key factors, there's 4 of them, on why we believe we'll continue to improve the sequential growth. First one is our MedSurg and PI businesses. They continue to grow at or above market in markets that are healthier, led by Endo, the Spectra launch with Neuromod and the consistently growing PI and Urology business. And as a percent of overall BSC, that continues to grow slowly in terms of growth, in terms of the proportion of our revenue. So we think that will continue to make a positive impact each quarter in '13. The second big one, a wildcard, if you will, has been the performance of IC and CRM. And you saw a stabilization of share, we believe, in our global CRM business in the first quarter. And we expect that trend to continue, which is a strong turnaround from the previous years. Our IC business, we believe we had our worst quarter in the first quarter, and that will get better. We launched PREMIER in the second quarter in Europe. We had the full year for chronic total occlusion with our BridgePoint acquisition. And we believe a more efficient commercial organization to improve our performance in Interventional Cardiology. The adjacencies that you know about, we ticked through them during the call, the third point, are making progress in their milestones that we believe the adjacencies will deliver against the revenue that we called out at the Investor Day. And the fourth one is our BRIC. We continue to grow a solid 35% in that -- in those areas. So those are our 4-point plan there, and we believe we're executing to what we communicated at the Investor Day.

Okay. And then Jeff, just a real quick follow-up. Would you say the revenue guidance revision is entirely currency? And if it's not, 90% -- 95% currency, was there some other dynamic that would have driven the revision?

Yes. So if you go back and look at our original guidance for the year, I believe it's $7,050,000,000 to $7,350,000,000. So we've lowered that by $150 million, both the high end and the low end for FX. The FX rates, obviously because of the yen, predominantly have just hit everybody. So we've taken $150 million off both ends of the ranges. And then, in essence, we added $50 million of revenue to the lower end of the range, and we took $50 million off the higher end of the range. So from a percentage basis, the guidance is predominantly affected by the FX, which affects everybody. So we still, as Mike laid out, are very focused and confident on our ability to kind of return to growth. And I think we've got a lot of positive things going for us in the back of the year.

Our next question in queue will come from Glenn Novarro with RBC Capital Markets.

I had a question on the CRM guidance for 2Q. I think you mentioned guidance would be $450 million to $470 million. And I think you just did $478 million for the first quarter. So is that conservatism or is there something in the markets that you're concerned about? Then I have a follow-up.

Well, thanks, Glenn, for the questions. So our -- the worldwide CRM business was down 4% on a constant currency, organic basis. And our guidance would imply a low of down 7% to a high of up 3%, so the midpoint somewhere around 4% or 5%, so somewhat consistent with the first quarter. So I think we expect kind of more of the same, Q1 to Q2, being off the market in S-ICD. Obviously, it hurts us a little bit, but we see a lot of positive things, particularly in the pacer area with the INGENIO launch. So the performance is expected to be similar to the first quarter. And as I said earlier, given everything going on in the markets, I think we've leaned a little bit more conservatively on guidance and hopefully, we can exceed that.

Okay, and just as a follow-up, just to flesh out the U.S. market a little bit more. You're actually -- your IC number came in better than we thought here in the first quarter. Is that a function of maybe the market doing a little bit better? Was pricing not as bad? Were there share gains? Can you comment on those?

Yes. So from a market perspective, Glenn, I think we continue to be somewhat optimistic about the pricing trends. As we identified back in mid-2012, we walked away from some business which was very price-sensitive. And given our portfolio and all the new technology we have coming to market that's differentiated, we intend to continue to be disciplined from a price perspective. We did see, in the first quarter, pricing activity that was better from a percentage basis than the fourth quarter and better than kind of the trend, so that's encouraging. So that's good news. The PCIs are kind of similar, kind of down, kind of low- to mid-single digits, so unchanged on that front. So overall, we were pleased with the sequential stabilization, if not, a slight uptick in share from Q4 to Q1. But the real interest is in the back half the year when we get Promus PREMIER and we continue to roll out our CTO devices and the rest of our technology kind of takes off.

And then just one quick follow-up. The share comment that you thought you may have picked up sequentially, were you referring to ICDs and not enough pricing?

No.

Okay. So you think pricing -- share on ICDs is stable?

Yes. Well, on core ICDs, it's up I think we share -- from a share perspective. And my comment on pricing related to DES. I thought that's what you're referring to.

No, I was referring to ICD pricing. Generally, the ICD pricing in the overall market's been down anywhere between 3% and 5%. And then as I look at your ICD results, they did come in better than we thought. So we're just trying to figure out, was it maybe pricing came in a little bit better, were there share gains or did the overall market come in a little bit better?

Just to clarify then, so the comments on pricing, I thought you'd switch to DES, my error. On the ICD side, the pricing is no different than what it was in the fourth quarter.

Yes, I think on that, just to add some color to that. The pricing is similar, as Jeff said, in ICD. We believe we picked up some share in de novo ICD in the second quarter -- I'm sorry, in the first quarter, which helped our performance.

Our next question in queue will come from Mike Weinstein with JPMorgan. Michael N. Weinstein - JP Morgan Chase & Co, Research Division: So just to follow up, I think David's question is relative to the revenue guidance. So the 2Q, I guess, difference from where you're guiding to the $1.740 billion [ph] with the $1.800 billion [ph] versus the Street. Do you -- what do you think that is? Do you think that's just more conservatism? What is it do you think that's in your model that's not in the Street?

Well, Mike, one of the biggest differences is probably FX. And I think when the Street set their models was when we set our guidance. And at that point, we're expecting, I think, FX to be negative $10 million, and now it's negative $140 million. So it's almost $150 million negative impact of FX, and that's spread through the quarters. So what I would encourage the analysts to do is go back and kind of look at their models relative to FX because it was a $25 million negative impact in the first quarter. And I think I've said in the script it was something like $30 million, a negative in Q2? And we originally set guidance that was supposed to be minimal in Q2. Michael N. Weinstein - JP Morgan Chase & Co, Research Division: Okay, so you think the Street is lagging on FX?

Yes, I do believe that. Michael N. Weinstein - JP Morgan Chase & Co, Research Division: Okay. Let me ask about gross margin, because I think gross margin this quarter was a little bit lighter than I think we in the Street were looking for. And what's -- maybe just give us your thoughts on that. Is that -- is the decline or is just the -- let's call it the shortfall there, do you think is that a function just of mix and the weakness in the ICD side of the business? Is that in part because of what you sold on the S-ICD this quarter and that weighed on it? And how do we think about gross margin over the balance of the year?

Yes, sure. Thanks, Mike. So yes, so maybe the best way to do it is kind of bridge you off the fourth quarter to the first quarter, the fourth quarter of '12 to the first quarter. Why would margins be down 100 basis points? It's really 3 factors. One is a bit from a mix perspective. We had a slightly less rich mix of products, so that was about 1/3 of the impact. Another 1/3 was the Neurovascular distribution revenue that we had was actually higher in the first quarter than it was in the fourth quarter, and that was slightly unanticipated. So -- and again, as we've discussed before, that has -- basically, distributor's margin, very low margin. So that weighed on the margins. And then the third factor, which was roughly 1/3 as well, was that we ended up kind of taking our inventories down, maybe a little bit lower than we had thought we would initially, and that had an absorption impact that rolls through the margins in the first quarter. So 1/3 mix, 1/3 Neurovascular distribution being higher than planned and 1/3 absorption. If you look now, going forward, what do the margins do from a sequential perspective from the first quarter to the second, second to the third, is really kind of 3 factors. One is, we expect that our value improvement programs and our cost-saving initiatives will continue to be enough to offset from a margin percentage perspective price, and that mix will be less of a challenge. So we think those kind of neutralize, if not, slightly more favorable. What also happens is, from a Neurovascular perspective, our Neurovascular revenue, the distribution revenue, the striker drops off quite a bit from Q1 to Q2 and then again from Q2 to Q3. And in those step-downs, we get a margin uplift from those. So there's roughly a 50-basis-point benefit from Q1 to Q2 and then another 50 basis points from Q2 to Q3, from just basically taking that distribution revenue down from roughly $36 million in the first quarter to almost 0 in the third quarter. So you get a margin benefit from that. And the third factor is, from an FX perspective, with the rates are -- where they are today, that helps a bit from a margin percentage perspective. Michael N. Weinstein - JP Morgan Chase & Co, Research Division: Okay. I think that's clear. One last question, and I'll let others jump in. The -- as you get ready to launch the Lotus Valve in Europe, can you just talk about what your plans are from a distribution standpoint? Obviously, you've got a very strong Interventional Cardiology presence, but you haven't called historically on the cardiothoracic surgeon. So how are you preparing for that, and what are you going to do differently?

Yes, certainly, we're not going to provide lots of detail on our commercial strategy. As you said, we have a large Interventional Cardiology sales team and we have a clinical sales specialist that we have, not only for our Atritech program, but also for our Lotus program. So we'll leverage our clinical sales team's instructional hires and also the commercial presence that we have across our Interventional Cardiology team to commercialize Lotus. Does that help? Michael N. Weinstein - JP Morgan Chase & Co, Research Division: Yes.

Our next question in queue will come from Matt Taylor with Barclays.

I wanted to just touch on the constant currency guidance. Just was curious, I'm hearing a lot of moving parts around new products, has your expectation for contribution from the new products versus kind of the core business changed at all versus prior guidance?

Yes, that's a good question. So if you go back and you look at what we've laid out relative at Investor Day in terms of expectation, the contribution of some of the adjacencies that we've entered, I would say that our expectation has not changed. We still feel pretty good about the expected contributions. And those really start to kick in, in Q3, and then, in a bigger way, in Q4. Certainly, there'll be some puts and takes, but overall, we feel pretty good about the contribution of adjacencies in addition to the new products that have been developed internally, the Promus PREMIER launch, the continued rollout of INGENIO and the other countless new products that come out within the MedSurg business.

And then just real quickly onto the -- your launching and ramping here that you covered a little bit. Can we get more color on what the atrial appendage, given the data that you showed earlier in the quarter? And also, any color on maybe on the Asthmatx launch that you can give above and beyond what you talked about in the script would be great and your expectations there?

Well, Ken, maybe you can provide some comments, additional mind on Atritech. So we had a nice sequential growth, year-over-year growth in Europe, with Atritech exceeding 30%. And we expect to file with the FDA in the second quarter. And we'll also be announcing that, hopefully, a late breaker here at HRS, the efficacy results of our PROTECT-AF trial. So, Ken, any other comments you want to make on Atritech?

Yes. I mean I would just say, just to reiterate, we were very encouraged by the PREVAIL data. It, to our thinking, goes a long way to resolving the concerns people had about safety of the device, particularly with new implanters showed comparable efficacy outcomes to our anticoagulation. Also, I just want to emphasize to everyone that when we do file with the FDA, it's not just the PREVAIL data, it's the totality of all of the date we have, what device, the pilot study, PROTECT-AF, the ASAP trial in contraindicated patients, as well as PREVAIL. And again, just to reiterate, as Mike said, we will be presenting the long-term follow-up data PROTECT-AF as a late-breaking trial at HRS, and that's going to be by far the longest experience that anyone's had in a large-scale randomized clinical trial with left atrial appendage closure.

And with respect to -- yes, with respect to Alair, we had a few comments there in the script. We certainly want -- we're very optimistic about this program, and we're making steady progress. We yet don't have the final reimbursement numbers that we have, but we've seen sequential improvement. Our Asthmatx business grew about 70% in the first quarter. We're opening new centers. We're seeing the high renewal rates in terms of reordering rates amongst the physicians that are using it. We applied a grant today a Category I CPT code in the first quarter. And we continue to make efforts to drive a reimbursement strategy to open up this market. And we think a key -- the key deliverable will be our 5-year efficacy data that we'll present either late second quarter, early third quarter. And we are hopeful that will be a trigger to help unlock some of the reimbursement that's been clogging the channel for Alair.

Our next question in queue will come from Matthew Dodds with Citigroup.

First thing on the U.S. stent market, it looks like the volumes, unless Medtronic has a big quarter, are going to be down about 10%. But I think you said in the commentary, stents per procedure might be off a little. So I just I wanted to see, a, why you think that might be? And what do you think -- what's happening with the volumes in the U.S.? Why are they still falling so fast?

So, Matt, it's Jeff. I'm not sure we would agree that the volumes are falling 10% from -- so exclusive of price, I think we would put that the PCI's probably down, probably kind of low- to mid-single digits. That's kind of our intelligence so far looking at what we track, what Abbott has tracked and, of course, we'll see what Medtronic reports. And price, obviously, is a negative on top of that. So we're more kind of low- to mid-single-digit PCI contraction year-over-year.

And then how about the stents per procedure? That comment, is that something new?

No, I think we've started to see that about 6 to 9 months ago. And that was kind of a dynamic that kind of maybe midpoint last year, and it was kind of reflected in our assumptions going forward for guidance and for the market.

And then, Jeff, one more thing for you. Given the high percentage of sales in Japan, the impact on the top line, why -- or is there an impact in the bottom line that you're covering or do you offset it through the P&L?

Yes, that's a good question. So we -- our hedging philosophy is to neutralize for FX. And so at any point in time, we are almost, pick a percentage, 90% hedged for the current year. And the next 12 months, depending on where you are in the year, the following 12 months, we're probably somewhere between 70% hedged and we're about 50% hedged for the third year. So when we see these types of dramatic changes in currencies like the yen, we're pretty much protected from an OI perspective. Now when we hedge operating income, we don't hedge at the revenue level. So you'll see fluctuations in our revenue, which is why the guidance comes down $150 million on the top line because we don't hedge the revenue. But it doesn't have a big impact from us -- for us from an operating income and an EPS perspective because we neutralize for that. You give up some of the upside, but you neutralize for the downside, which, in this environment, actually plays out pretty well for you.

And are those hedges in -- all in the gross margin or are they also in other parts of the P&L?

The majority of them are -- run through the gross margin and some -- well, the impact hits you in kind of the gross margin and in some of the SG&A as well.

[Operator Instructions]

We'll take that question from Bruce Nudell with Credit Suisse. Bruce M. Nudell - Crédit Suisse AG, Research Division: I guess we've heard some, I don't mean to be disrespectful, but surprisingly nice things about Lotus, and that people really like, kind of the stress-free implant experience. Could you just opine on -- is this going to be, in your view, I know you need other sizes and all and the rollouts, controlled that you don't have transapical right away? But in the transdermal segment, how do you view this product in terms of market share?

Bruce, it's Mike. Thanks for your high expectations you had on the product, man. Bruce M. Nudell - Crédit Suisse AG, Research Division: No, no, no. We've consistently heard very nice things from surprising sources, I'd say.

Good. Well, why don't we first start off with Dr. Keith Dawkins who's on the phone. He was just at the Korea [ph] live event where Lotus was implanted live, so maybe he can make some comments.

Yes. It's good to hear you surprised, Bruce, about a good product. Yes, I'm at TCT Asia Pacific and Seoul, and the first live Lotus Valve was done yesterday, no aortic regurgitation at all. And just a completely different experience compared with the competitor products. Early valve function, as you say, a relaxed procedure, predictable, retrievable and re-positionable. And I think the aortic regurgitation is the -- is really the Holy Grail. And you will have seen the SAPIEN XT results of ACC were 29.2% moderate and severe aortic regurgitation, which really, clinically, is completely unacceptable. So we're very excited about this product. And the operators that have now used it in the CE Mark trial in 4 countries, Australia, France, Germany and the U.K. have just been blown away, as have the core lab, the eco-core lab. And as you know, when you assess aortic regurgitation and compare products, it's important to use an eco-core lab, and some of the smaller players don't do that. So we are very excited and looking forward to discussions with the FDA, further discussions with the FDA around the IDE trial and commercializing after CE Mark in the back half of this year. Bruce M. Nudell - Crédit Suisse AG, Research Division: And I guess my only follow-up is a small niggling question. How should we be thinking about revenue in the discontinued operations bucket for the rest of the year?

Yes. Bruce, it's Jeff. So as I said in responding to Mike's question on margins, we would expect that the distribution revenue to the Stryker would go from kind of the mid-30s down to -- which is what it was $35 million off the top of my head, in Q1 down, it's like $20 million in Q2, down to pretty much 0 in Q3.

Tony, there seems to be a lot of interest in just looking at the queue. [Operator Instructions]

We'll take our next question from Kristen Stewart with Deutsche Bank.

Just wanted to see if you guys would be willing to give just the S-ICD contribution in the quarter, just to try to better understand what the base kind of ICD business is doing.

Well, Kristen, we're not going to get in to kind of contributions from each of the product lines. As I think Mike pointed out in his comments, we had a very strong result for the first quarter at CRM, despite the fact that we weren't on the market much with the S-ICD device. So I think we'll probably leave it at that.

Okay. And then just looking at the operating margins that you are now providing as well, I was kind of somewhat surprised by just how low the Rhythm Management margins were and they declined on a year-over-year basis, looks like now they're at 12%. Can you maybe just, I guess, explain why margins were down so much year-to-year and kind of where do you see those margins kind of going since you are substantially below kind of where we would expect Medtronic and St. Jude's margins to be? What are going to be the key initiatives do you have to basically moving that up? I'm not sure how much of an impact the S-ICD has with that on a year-to-year basis.

Yes, it's a very good question, Kristen. So as you have noticed in the earnings release, we have -- as we've discussed, we've moved towards these global business segments. And now we will be disclosing the operating income profitability of Cardiovascular, Rhythm Management and MedSurg on a regular basis. I'm going to take you back and answering your question to the Investor Day. We clearly had outlined a game plan to improve our overall company operating margins by at least 600 basis points over the next 5 years. And frankly, the Rhythm Management business was a big piece of that. The reason why they are lower than we'd like them to be, and perhaps some of our competitors, one factor, obviously, has been the market declines and some of the historical issues we've had. But the second issue, which is pretty important is, we are investing aggressively in that business, both the Cameron acquisition, the Rhythmia acquisition, the Atritech acquisition have all added significant investments in research and development and commercial operations. So that's important to understand. Now why does it change? Certainly, what you're seeing now is kind of the weight of all of those investments and not much of the return. So as we finish the R&D programs and as we get through kind of the commercialization investment and the revenue starts to take off in the back half of the year and into '14, you're going to see a pretty dramatic change in the profitability because right now it's weighed down by all those investments and not much revenue. And into the back half of this year, starting in the back half of this year and into next year, you get the release of some of that investment because we're through some of those programs, and then…

And just real quick and last on the WATCHMAN Device. Do you guys anticipate having to go back before a panel or -- for approval?

Hey, Ken, do you want to comment on that?

Yes. Well, we're prepared to go to a panel if we have to, but I'm not going to speculate on what the FDA is going to decide in that regard. Obviously, the device has already been through a panel previously that did recommend approval.

Our next question in queue will come from Larry Biegelsen with Wells Fargo.

One on the P&L, one product question. Similar to a question that was asked earlier on R&D, Jeff, can you talk about the SG&A spending from an absolute standpoint? Last year, it actually trended down through the year. And second, on royalties, it was a little bit higher than we expected this quarter. Do you expect that to trend down as we saw last year? And then I just have one follow-up product-related question.

Okay. Well, so from an SG&A prospective, you're right, it did trend down as we went through the year in 2012. We do expect it to trend up slightly in Q2 and Q3 based on some of the commercialization investments that we're making to bring the TAVR product to market, which we expect to hit the market in the back half of the year; the Vessix product to the market; as well as a unit kind of rollout of Promus PREMIER in Europe now, and in the back half of the year, for the U.S. So we expect it to uptick slightly in Q2s and Q3s from a percentage perspective, so hopefully that's helpful. So that's from an SG&A perspective. From a royalty perspective, we do expect it to trend down in the back half of the year because what happens is the percentages, those tiers and the royalty arrangements, where you get to a certain tier of revenue, and the percentage actually drops. So if you sell more, the percentage goes down. As a result, the overall average percentage drops down as you go through the year. And that's consistent with pretty much every year.

That's very helpful. And then on the product question, another one on the Lotus Valve. Like Bruce, we've also heard positive things on the valve. So two-part question. One is, can you remind us of the rollout plan on the different sizes? And second, in the first study, there was a relatively high pacemaker rate, but it was a very small study, 4 out of 11. Do you guys think that you guys have addressed that and we would expect to see the pacemaker rate probably in line with other self-expanded transcatheter valve, such as a core valve pacemaker rate?

Yes, Keith, you can make some comments. What we'll be shooting for CE Mark approval will be 2 valve sizes, the 23 and the 27 that you're hearing the results on, and we'll continue to expand the portfolio of valve sizes over the future. With respect to the pacemaker rate, we'll be presenting some data at the upcoming PCR. But in general, we would assume that the pacemaker rate would be in line with the core valve product.

I'll just add, Larry, as you said in REPRISE I, that was a 11-patient study and there were 4 patients who have paced, but 2 of the pacemakers had not been used. And then, as Mike says, in EuroPCR in the late-breaking trial, we'll present the 30-day data from the first 60 of the 120 patients in REPRISE II to the CE Mark trial, and that will include the pacing data. It's not strictly a self-expanding valve, just to correct you there. It's not the same as a balloon expandable valve or a self-expanding valve. It's a hybrid valve. It's between one and the other.

Our next question in queue will come from Brooks West with Piper Jaffray.

I wonder, Mike, if I could steer you back to the emerging markets, specifically the BRIC comments, can you talk about the scale of that business? And then can you talk about kind of the key product mix that's driving growth there?

Sure. Within our BRIC markets, we continue to increase, not in dramatic ways, but we continue to increase the percent of the overall mix of revenue for BSC from BRIC. Historically, we've been at 3%, we moved up to 4%, now we're more approaching 5%. So it certainly is an important growth driver for us, and we expect to continue that 35% growth throughout the planning period here. I won't go through each country. We're very strong in Brazil. We're getting much stronger in China. We're building solid bases of business in India and Russia. And most often, our Interventional Cardiology, Endoscopy and Peripheral businesses are our large contributors of growth and operating income to those regions, those 3 business units. So we're obviously advancing all of our business units, but those 3 provide the greatest contribution.

That's helpful. And then just 2 quick ones for Jeff. Can you speak to pricing trends in DES? We've been picking up some signals that maybe the pricing headwinds, especially in the U.S., had been getting worse? And then would you say anything on your exposure to the pelvic floor litigation that's been talked about recently?

Yes. So on the pricing trends, I would say that the -- we weren't encouraged by the pricing -- we -- encouragement had happened to us in terms of pricing in the first quarter. So we've been very conscious and have conceded some share historically to kind of walk away from situations where the price was not commensurate with the value we were delivering. And we'll continue to kind of be pretty disciplined, and I think that is actually getting slightly better for us. So I'd say pricing -- so obviously, you make that comment with a little bit of hesitation because you don't know what's going to happen, but we were encouraged by what we saw in the first quarter from a pricing perspective.

And then on the -- just on the pelvic floor litigation?

Yes, like all litigation matters, we wouldn't comment on that specifically.

Our next question will come from Jose Haresco with JMP Securities.

Let's see here, just following up on the pricing. Do you have -- on DES here in the U.S., do you have a sense of what factors could be leading to a better environment on the pricing side here in the U.S.? And can you contrast that with what you're seeing in Europe?

Well, I'd say certainly product differentiation is pretty important, right? If you back up 1 year, 1.5 years ago, you had 2 products that are completely identical in PROMUS and XIENCE, just different boxes. And so now, we certainly feel that our PROMUS Plus stent in the U.S. is better than anything on the market, and we're marketing it as such. And when we come out with Promus PREMIER, we think that's another step forward from a product prospective. So -- and we intend to sell the product for its value, and so we think that's what's driving some better comparables from a pricing dynamic perspective. Europe's a little bit more of a challenge given the macro factors and the austerity measures, that pricing erosion is a little higher upper-single digit, if not kind of low 10% over the board than that, and that's just all driven by the austerity measures.

A follow-up question on another subject. You mentioned you slightly picked up some share in the de novo implants in the first quarter. Is that a sustainable trend? And could you point at 1 or 2 things that are leading to that?

On the de novo front, we launched a new platform in 2012, the INCEPTA-ENERGEN platform, that has differentiated features and price points based on the customers' objectives, and that continues to make good progress. And there are many compelling features on it, the top 3: One, is we still believe it's the small, thinnest device that patients enjoy; secondly, the longevity of the device and our significant warranties to back that up; and third, the lead reliability. So those are 3 features that we think are differentiated and we believe are helping to contribute to some of the positive share gains we're seeing in de novo ICD implants. Okay, with that, we would like to conclude the call. Thanks for joining us today. We appreciate your interest in Boston Scientific. Before you disconnect, Tony will give you all of the pertinent details for the replay. Have a great day.

Thank you very much. And ladies and gentlemen, this conference will be available for replay after 10:30 a.m. Eastern Time today running through May 9 at midnight. You may access the AT&T Executive playback service at any time by dialing (800) 475-6701 and entering the access code of 285176. International participants may dial (320) 365-3844. That does conclude your conference call for today. We do thank you for your participation. You may now disconnect.