Boston Scientific Corporation (BSX) Q4 2014 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Boston Scientific Q4 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, today’s conference is being recorded. And I’d now like to turn the conference over to our host, Ms. Susie Lisa. Please go ahead.

Thank you, Brad. Good morning, everyone, and thanks for joining us. With me on today's call are Mike Mahoney, President and Chief Executive Officer; and Dan Brennan, Executive Vice President and Chief Financial Officer. We issued a press release earlier this morning announcing our Q4 2014 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 Web site under the heading, Financial Information. The duration of this morning's call will be approximately one hour. Mike will begin our prepared remarks with an update on our business progress and his perspectives on the quarter and year. Dan will then review our overall Q4 2014 and full-year 2014 financial results as well as guidance for full-year 2015 and Q1 2015. During today's Q&A session, Mike and Dan will be joined by our Chief Medical Officers, Dr. Keith Dawkins and Dr. Ken 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. 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 Q4 and full-year 2014 results and 2015 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 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?

Thank you, Susie, and good morning, everyone. Boston Scientific delivered excellent well balanced results in Q4 as the Company continues to strengthen execution, diversify our portfolio on regional mix and build global momentum. in the quarter is the result of broad: Importantly, our Q4 results built upon the momentum generated over the past few years and contributed to the following full-year ’14 results. Number one, we delivered above market revenue growth with 6% operational growth and 4% organic, excluding the acquired sales from Bard EP and Bayer Peripheral. We expanded adjusted operating margins 130 basis points over 2013 to 20.2%. And number three; we grew adjusted EPS to $0.84, which represents 15% growth for the full-year despite currency headwinds in the fourth quarter. We are continuing our track record of consistent results and exceeding the goals we provide at our February 13 Investor Day conference. We really continue to believe that Boston Scientific is uniquely positioned to deliver at or above market revenue growth and consistent double-digit EPS growth via our ongoing operating margin improvement initiatives. Our results demonstrate that we’re a Company that continues to deliver on those commitments. Since joining Boston Scientific three years ago, I’ve met with many customers globally and its really clear that we’re becoming a strong partner of choice, given our focus on meaningful innovation to improve patient outcomes and reduce overall healthcare cost. Our strategy is to provide market leading, comprehensive and innovative products and solutions to targeted clinical service lines. We strive to address several of the pressures facing healthcare systems today, the need to improve outcomes, lower costs, and increase access to life-saving and life enhancing therapies. Our fourth quarter and full-year 2014 results reflect this focus on delivering meaningful innovation to our patients and physicians, while also providing clinical and economic value to our hospitals and healthcare systems. I'll now provide some highlights in Q4 and 2014 results, along with thoughts on 2015 outlook and beyond. Dan will then review the financials and 2015 guidance and we will take your questions after that. Please note that these remarks all references to growth on a year-over-year constant currency basis unless otherwise specified. Many of our key highlights for the quarter are consistent with our achievements throughout the first three quarters of 2014. Number one, we delivered balanced 7% revenue growth in the fourth quarter with Cardiovascular growth of 10%, 5% growth in Rhythm Management and 4% in MedSurg. We are very encouraged by the strong results across most of our businesses and I’d particularly like to point out that growth rates in Interventional Cardiology at 10% and Urology and Women's Health at 9%. Also encouraged by the consistency of results in our Cardiac Rhythm Management business posting 3% revenue growth in the quarter, which brings sales growth in CRM for the trailing 12 months to 2%. Additionally, we saw strong results across all regions, led once again by impressive revenue growth of 10% in Europe, which we view as confirmation of our reinvigorated portfolio and strategic approach. Emerging markets revenue continued to grow at high teens rate, plus 17% in Q4 and represented 10% of total sales for the fourth quarter and full-year 2014. Taking a closer look at Interventional Cardiology, operational revenue growth of 10% in the quarter was due to the continued strong performance of our innovative portfolio and execution of our global commercial teams. We continue to gain share in a number of cardiovascular segments and DES, our differentiated platform of premier and synergy continues to build momentum globally and gain worldwide share. We are excited about expanding the global reach of SYNERGY and PREMIER in 2015. Other growth drivers include our complex PCI portfolio, such as Polaris and solutions for a complex total occlusions. We also enjoy continued strong growth of a small base from our Structural Heart franchise, which includes the highly differentiated second-generation LOTUS percutaneous valve and our WATCHMAN left atrial appendage closure device. For LOTUS, we are currently enrolling patients in the REPRISE III clinical study for FDA approval and Respond which is a 1,000 patient post-market registry in Europe. And we continue to expect a first half 2015 FDA approval for our WATCHMAN device. Looking forward, we are bullish on a rejuvenated IC pipeline and emerging Structural Heart business, including the SYNERGY, LOTUS, WATCHMAN, BRIDGEPOINT and the Polaris integrated IVUS and FFR imaging systems. We believe that Boston Scientific brings a uniquely broad set of solutions to help interventional cardiologist, heart teams and hospitals treat the most complex coronary artery in Structural Heart disease patients. Moving to MedSurg, Urology and Women's Health performance of 9% revenue growth in the fourth quarter brought the full-year growth rate to 7% led by our global expansion efforts. Urology and Women's Health is a great example of our global mindset and diversification, as the business have now posted OUS double-digit operational revenue growth for six consecutive quarters. Our Endoscopy team continues its high performance track record with consistent mid single-digit sales growth as revenue increased 5% operation in the quarter with growth in every region led by Latin America and Asia. Another highlight is our consistent revenue growth in Cardiac Rhythm Management with 3% revenue growth in the quarter and 2% for the full-year. We continue to grow de novo ICD share in the U.S despite the replacement share headwinds created by the excellent performance of our industry leading battery longevity. Our momentum in growth was once again fuelled by our strong portfolio, including a continued adoption of S-ICD, MINI, which is the world's smallest ICD, the longevity associated with our EnduraLife battery technology and our X4 quadripolar CRT-D system in Europe and pulse generator in the U.S. Patient and physician demand for our S-ICD, which is the only defibrillator that doesn't touch the heart or invade the vasculature, continues to be strong. We comfortably exceeded our 2014 full-year goal of delivering $100 million. We also continue to expand S-ICD reimbursement coverage with improved Medicare outpatient rates and physician payment codes in 2015 and new commercial coverage such as the recently announced TRICARE, following on from the Aeta approval from last quarter. TRICARE for example, with 10 million members provides coverage to active duty and retired military for medical services outside of the VA system, where S-ICD is also reimbursed. We strengthened our number two U.S share position in the de novo ICD implants and we expect continued momentum in 2015 given the growing clinical evidence and improved U.S reimbursement outlook for S-ICD. The targeted year-end 2015 launch of our second generation system EMBLEM, continued new product cadence as core CRM around the world and really increased recognition of the clinical and economic benefits of our EnduraLife battery technology. Our confidence is also bolstered by our 2014 performance of our European team, the region where each competitor has the latest products and solutions and Boston Scientific continues to take de novo share. An example of how we’re helping the healthcare systems reduce costs is our latest break through in CRM longevity. This unique capability in battery longevity was recently highlighted by Dr. Samir Saba, at the University of Pittsburg Medical Center. Dr. Saba led the first U.S implant of DYNAGEN EL and as data was recently published in the peer-reviewed journal called EuroPace, which demonstrates a superior longevity of Boston Scientific CRT-Ds versus competitors. The DYNAGEN EL platform offers our proprietary EnduraLife battery. This technology enables a smaller size, up to 11% smaller, 24% thinner than the competitors with industries longest projected battery longevity at approximately 12 years. Our battery technology allows us to help patients and hospitals reduce the cost and potential complications associated with early replacement. Turning now to revenue growth and expanding operating margins. I'm pleased to report that we are continuing our strong track record. We achieved seven straight quarters of operational revenue growth, we’re delivering on our financial goals and we’re ahead of the total revenue growth and EPS goals provide on our February 13 Investor Day. For the full-year ’14, sales growth of 6% and we expanded operating margins of 130 basis points from our full-year ’13 rate. We also meet our guidance and grew our adjusted EPS 15% year-over-year. We remain committed to our goal for double-digit adjusted EPS growth. And we believe this represents attractive scarcity value, given our revenue growth and differentiated margin expansion opportunities relative to our peers. As we close the books on 2014, I’d like to provide an update on the progress of a few of our key adjacency growth platforms. We continue to build capabilities and momentum in the Structural Heart. I discussed the ongoing clinical program for our LOTUS TAVR valve which posted strong growth and reorder rates in fourth quarter and remains on track for our 2017 U.S approval. In addition, WATCHMAN remains on track for first half 2015 FDA approval. In our Peripheral Interventions business, the acquisition of the Interventional Division of Bayer AG with the Thrombectomy and Atherectomy platforms has been an important step to strengthen our global key [ph] acquisition and expand our capabilities. Moving to renal denervation, we believe in our long-term value of the Vessix platform, we recently received FDA approval for an innovative IDE study called Reduce HTN Reinforce, which is designed to isolate the effects of our Vessix renal denervation system, while minimizing the impact of multiple medications and patient compliance that occurred in other trials. We expect to begin enrolling in this study in first half 2015. Rhythmia, our mapping and navigation system for use by electrophysiologist to map and treat complex heart arrhythmias is in limited market release and was recently featured in several successful live cases at the January AFib meeting, in Orlando. Momentum is also improving for our Alair, our BT system for Bronchial Thermoplasty, for treating for patients with severe asthma. Alair has recently received positive commercial coverage from both CareFirst with 3 million members and HCFC, the nations fourth largest insurer with over 40 million members. And finally VERCISE, our Deep Brain Stimulation system for the treatment of Parkinson's disease and another tremor disorders is building momentum in Europe in its second year of commercial availability. Enrollment continues in our U.S pivotal trial for DBS therapy in Parkinson's disease patients. So in summary, strength and execution, and improved results in our core business are really driving consistent results across the Company. Our European growth continues to provide evidence of our promising pipeline and we’re expanding our capabilities globally, particularly in emerging markets. It’s really an exciting time for Boston Scientific, and we look forward to continued high-performance globally. And to us that means above market revenue growth, leveraged operating income of growth via margin expansion, which in turn will drive differentiated double-digit EPS growth and we’re executing towards these goals. So in closing, we’re pleased with our ’14. It was a significant year of advancement in our operations, our pipeline and our commercial performance. Our global employees are inspired by our mission and transforming patient lives with innovative medical solutions and we estimate that Boston Scientific products touch more than 21 million patients in 2014. I’d like to thank our employees for their winning spirit and their tremendous commitment to the Company. I'll now turn the call over to Dan, for a more detailed review of our financials.

Thanks, Mike. I will start with some overall perspective on the quarter before diving into the details. We generated adjusted EPS of $0.22 achieving the high-end of our guidance range of $0.20 to $0.22. The strong performance in Q4 was driven primarily by operational revenue growth, gross margin expansion, and a lower than expected tax rate. Unfavorable foreign exchange impacted Q4 adjusted EPS by one penny. Our Q4 2014 adjusted operating margin of 20.7%, represents improvement of 210 basis points over Q4 of 2013. We’re pleased that we also exceeded our profitability goal for the full-year of 2014 delivering an adjusted operating margin of 20.2%, representing 130 basis points of adjusted operating margin improvement over the full-year of 2013. In addition, we generated adjusted free cash flow of $508 million and operating cash flow of $439 million in the quarter. The strong cash flow generation this quarter helped us exceed our adjusted free cash flow goal of $1.2 billion for the full-year of 2014. Now I'll provide a detailed review of our Q4 business performance and operating results. Unless stated otherwise, references to quarterly results increasing or decreasing are in comparison to the fourth quarter of 2013 and all revenue growth rates are given on a year-over-year constant currency basis. For the fourth quarter of 2014, consolidated revenue of $1.887 billion represented operational revenue growth of 7%, which excludes the impact of foreign exchange and the divested Neurovascular business. On an as reported basis, revenue grew 3% year-over-year. Excluding foreign currency impact, divestments and an approximate 200 basis point contribution from the Bard EP and the Bayer Interventional acquisitions, organic revenue growth was 5% in the quarter. The foreign exchange impact on sales was a $71 million headwind or approximately 385 basis points compared to the prior year period and about $44 million worse than we assumed in our guidance range. I’ll provide more color on FX later in my commentary. I’ll now provide more details on the revenue results for our seven businesses, which roll up into our three reporting segments. I’ll start with MedSurg, where total group sales of $614 million grew 4% and group adjusted operating income increased 170 basis points to 33.2%. Endoscopy sales grew 5% worldwide, driven by 7% growth in biliary, the largest franchise and all regions posted growth with Latin America being particularly strong growing above 20% for the third consecutive quarter. Urology and Women's Health worldwide sales continued to outperform the market and grew an impressive 9%, driven by double-digit growth in the urology franchise and international sales stood out again with Europe and Asia each growing 20%. To close out the MedSurg results, our worldwide Neuromodulation business declined 2% in the quarter, reflecting a very difficult comparison to Q4 of 2013 were growth was 30% plus and slower U.S market growth due to reimbursement changes that impacted physician office trialing. For the full-year 2014, our Neuromodulation global revenue grew 5% and we believe we gained share in the U.S spinal cord stimulator market. Turning now to the Cardiovascular Group, which consists of the Interventional Cardiology and Peripheral Interventions businesses, global sales for the group totaled $745 million and grew 10%. Cardiovascular Group adjusted operating margins for the quarter of 25.9%, represented a 470 basis point improvement year-over-year. Within cardiovascular, worldwide Interventional Cardiology sales of $523 million grew 10%. Globally, DES grew 12% with exceptional balance as the U.S., Europe, and Asia, all grew DES revenue double-digits. Worldwide complex PCI solutions grew 3% led by imaging, which grew double-digits driven by strong performances in the U.S., and Japan. This growth is due to physician demand for our OptiCross IVUS catheter and ongoing launch of our Polaris hardware system which can integrate both IVUS and FFR in the same platform. It was the second consecutive quarter of significantly above market revenue growth in IC, and we believe it validates our strategy of providing the interventional cardiologist with the broadest portfolio of technology and differentiated products to treat the most complex coronary cases. In Structural Heart, our LOTUS percutaneous valve continues to build momentum and WATCHMAN is now approved in over 70 countries and grew over 30% for the full-year. Peripheral Interventions delivered worldwide revenue growth of 10%, driven primarily by revenue from the acquired Bayer Interventional business. Offsetting this was some weakness in the core balloon business where we saw some softness during the quarter due to some recent global launches. We expect this newly strengthened peripheral franchise to grow above market in 2015 as we fully integrate the commercial teams and technology platforms. Finally, I will discuss our Rhythm Management group, which consists of our Electrophysiology and Cardiac Rhythm Management businesses. Worldwide Rhythm Management sales in Q4 of $527 million grew 5%. Rhythm Management's Q4 adjusted operating margin of 14.8% represents a roughly 800 basis point improvement year-over-year, admittedly off a low base in Q4 of 2013. Rhythm Management demonstrated consistent adjusted operating margin improvements throughout the year with mid teens or higher operating income growth every quarter, resulting in a Rhythm Management full-year 2014 adjusted operating margin of 13.4%. This represents improvement of 310 basis points over the full-year 2013. We are very pleased with this progress and remain focused on our goal of returning Rhythm Management’s adjusted operating margins to the low 20s in 2017. As we previously mentioned, there may be trade-offs that cause the rate of improvement to fluctuate from one quarter to the next and we encourage you to gauge improvements on a full-year basis. And given the gross margin significance of key new product launches, such as INGENIO 2 or ACCOLADE, and EMBLEM S-ICD, we expect gains in 2015 Rhythm Management adjusted operating margin to be a bit back-end loaded towards the second half of the year. Worldwide Electrophysiology revenue was up 23% in Q4, with legacy BSE EP sales up low single-digit. We continued the progress of our limited market release for our Rhythmia mapping and navigation system and we’re pleased by the early feedback from physicians using the system, given its higher fidelity images acquired in a fraction of the time required by competitive systems. For the Cardiac Rhythm Management division, Q4 worldwide sales increased 3%. Growth in CRM was led by Europe, which grew 6% for the second consecutive quarter. On a worldwide basis, defib sales of $339 million grew 5%. U.S. defib revenue posted solid growth of 5%, driven by continued S-ICD and MINI ICD momentum and our X4 quad pulse generator as we continue to gain de novo ICD share. Worldwide pacer sales were flat totaling $129 million. International growth was strong at 6%, led by adoption of our INGENIO family of pacemakers. Again, as we’ve said, CRM trends are best analyzed over multiple quarters, we believe we were net share gainers in worldwide CRM for the full-year 2014, as we estimate our 2% sales growth outpaced the underlying combined pacemaker and defibrillator market. Let me now briefly recap full-year 2014 revenue. On a reported basis, consolidated revenue was $7.380 billion, which represents a 3% increase from the prior year. On an operational basis, which excludes the impact of foreign exchange and the divested neurovascular business, sales increased 6% compared to 2013. Organically, which excludes foreign currency impact, divestments, and contribution from the acquired BARD EP and Bayer PI businesses, revenue grew 4% over full-year 2013. Lastly, foreign currency negatively impacted reported sales growth by approximately 120 basis points or about $86 million. Turning now to the P&L, adjusted gross profit margin for the fourth quarter was 71.4%, up 140 basis points year-over-year and 30 basis points, sequentially. The increase was largely attributable to benefits from our standard cost reduction program, partially offset by price erosion. For the full-year 2014, our adjusted gross profit margin was 70.7% compared to 69.7% for the full-year 2013. The 100 basis point net full-year gross margin improvement stemmed from improvements in standard costs, and lower sales of divested businesses partially offset by price as well as volume and mix. For Q4 and the full-year 2014, as a result of our hedging program, FX positively impacted gross margin by 40 and 20 basis points respectively. Adjusted SG&A expenses were $724 million or 38.4% of sales in Q4, roughly flat to the rate in Q4 of 2013. Our Q4 adjusted SG&A rate includes roughly 85 basis point impact related to settlement of a long standing litigation matter and fees related to our IRS transfer pricing litigation, the timing of which has continued to move out. For the full-year 2014, adjusted SG&A expenses were $2.8 billion or 37.9% of sales. We are not satisfied with this level of spending and are expecting our full-year adjusted SG&A rate to decrease by roughly 100 basis points in 2015. Adjusted research and development expenses were $208 million in the fourth quarter or 11% of sales. As a percent of sales, this represents a 70 basis point decline in year-over-year spending, due to efficiency gains and the timing of projects. For the full-year 2014, adjusted R&D expenses were $817 million or 11.1% of sales. Royalty expense was $25 million in the quarter or 1.3% of sales, in line with Q4 of 2013 and for the full-year 2014 royalty expense was $111 million or 1.5% of sales. On an adjusted basis, pre-tax operating income was $390 million in the quarter or 20.7% of sales, up 210 basis points year-over-year and 20 basis points, sequentially. Adjusted pre-tax operating income grew 14% with all three of our reportable segments contributing to the improvement. GAAP operating income, which includes GAAP to adjusted items of $283 million, was $107 million in Q4. The primary GAAP to adjusted items for the quarter included litigation related charges of $37 million, contingent consideration expense of $37 million, intangible asset impairment of $18 million, restructuring and other charges of $48 million and amortization expense of $111 million. Our total accrual for all legal matters was $972 million as of December 31, 2014, an increase of $27 million due to cost related to ongoing litigation. Now, I’ll move to our other income and expense, which primarily consisted of interest expense. Interest expense for the quarter was $54 million, which is $4 million lower than Q4 of 2013. Full-year 2014 interest expense was $216 million; $109 million lower than full-year 2013, primarily due to the refinancing of our public debt in Q3 of 2013. Our tax rate for the fourth quarter was negative on a reported basis, and 7.7% on an adjusted basis. Our Q4 2014 adjusted tax rate includes roughly $16 million of discrete tax benefits. Now I’ll provide a bit more detail on our full-year 2014 adjusted tax rate where our most recent guidance was 12% to 13%. As you may know, the tax extenders package was passed during the fourth quarter of 2014, which included a one-year extension of the U.S R&D tax credit for 2014. The R&D tax credit itself was roughly 150 favorable basis points. However, other elements of the legislation had an unfavorable impact of about 50 basis points for a net favorable impact of approximately 100 basis points. In addition, we had certain Q4 discrete tax items that reduced our full-year rate by approximately 100 basis points. The net result of this is our 10.9% adjusted tax rate for the full-year. Therefore, without the tax extenders package and the Q4 tax discrete, our full-year 2014 adjusted tax rate would have been in the 13% range. The difference between our reported and adjusted tax rates for the quarter is attributable to charges excluded in determining our non-GAAP results. For the full-year, we reported adjusted EPS of $0.84 per share which represents 15% adjusted EPS growth over 2013. On a reported GAAP basis, 2014 EPS was $0.20 per share. GAAP results for 2014 included after-tax charges of $862 million or $0.64 per share related to intangible asset impairments, acquisition and divestiture related costs, litigation, restructuring related expenses, and amortization of intangible assets. Moving on to the balance sheet, DSO of 56 days decreased 9 days compared to December of 2013, due primarily to strong collections in Europe. Days inventory on hand of 156 days was up 7 days compared to December 2013, due to higher inventory in advance of launches and lower cost of goods sold, driven primarily by standard cost improvements and a favorable product mix. Adjusted free cash flow for the quarter was $508 million compared to $319 million in Q4 2013. Our full-year 2014 adjusted free cash flow of $1.261 billion represents growth of 6% over full-year 2013. This increase was primarily due to higher adjusted operating profit and continued focus on reducing working capital partially offset by higher ordinary tax payments due to the use of acquired tax benefits in 2013. Capital expenditures were $79 million in the fourth quarter compared to $85 million in the fourth quarter of 2013. For the full-year, capital expenditures were $259 million compared to $245 million in 2013. There were no share repurchases in the quarter and there is no change to our top capital allocation priorities, M&A and share repurchase while maintaining flexibility. Any continuation of our share repurchase program in 2015 would be subject to business development opportunities, market conditions, our stock performance, regulatory trading windows, and other factors. To summarize, 2014 was a strong year for Boston Scientific as we continue to make solid progress on our global strategy. We delivered against three critical financial objectives, consistent revenue growth, meaningful adjusted operating margin expansion, and double-digit adjusted EPS growth, specifically 6% operational revenue growth, 10% adjusted operating income growth, and 15% adjusted EPS growth. Although pleased with 2014 results, we believe that we will continue to have opportunities to enhance profitability and expect to continue to generate strong cash flow. I’d like to conclude with guidance for Q1 and full-year 2015. For the full-year 2015, we expect consolidated revenue to be in the range of $7.300 billion to $7.500 billion, which represents year-over-year growth of 3% to 6% on an operational basis and a decline of 1% to growth of 2% on a reported basis. As a result of a stronger dollar at current rates, we expect foreign currency to be roughly $310 million headwind for the full-year 2015. We expect our adjusted gross margin for the year as a percentage of sales to be in the range of 71% to 72%. Although we expect to continue to see downward pricing pressure, we expect this headwind to be offset by improved price management, principally through market segmentation and tiered offerings and standard cost reduction programs. We believe that the impact of these benefits will increase particular in the second half of 2015. Our adjusted SG&A rate was 37.9% in 2014 and our goal was to bring the full-year 2015 adjusted SG&A rate to between 36.5% and 37.5% of sales. We continue to transform our R&D organization and refocus our spending to drive innovation and growth. In 2015, we expect adjusted R&D expenses as a percent of sales to be in the range of 11% to 12%. We expect 2015 royalties to be approximately 1% of sales, 50 basis points less than 2014. Interest and other expense is expected to be slightly higher in 2015 than 2014, primarily due to some net investment gains we recognized in 2014, we do not expect these gains to reoccur. This implies a full-year adjusted operating margin in the range of 21.5% to 22.5%, the mid point of which represents 180 basis points of improvement over full-year 2014. We expect our adjusted tax rate for the full-year 2015 to be between 13% and 15% consistent with what we’ve said throughout 2014. As you'd expect, this does not assume an extension of the U.S R&D tax credit or any other expired tax provisions during 2015, nor does it assume any discrete tax items. It does assume a more normalized geographic mix of earnings. As a result, we expect adjusted EPS for the full-year 2015 to be in the range of $0.88 to $0.92. We believe we have an effective hedging program with a three-year time horizon that has a long track record of successfully minimizing the foreign exchange impact on operating income, with current euro and yen rates we haven't seen in close to a decade, we expect 2015 adjusted EPS to be negatively impacted by approximately $0.04 or a little north of $50 million of adjusted income -- net income. The $0.04 impact breaks down into roughly $0.01 per quarter for modeling purposes and our full-year adjusted EPS guidance range reflects this. Despite this $0.04 hit, our goal remains double-digit adjusted EPS growth, which will be realized at the higher end of our range. On a GAAP basis, we expect EPS to be in a range of $0.42 to $0.48 and lastly for 2015 our guidance assumes adjusted free cash flow of approximately $1.3 billion, capital expenditures of approximately $260 million, pre-tax amortization expense of approximately $435 million, stock comp expense of approximately $100 million and a share count of roughly $1.345 billion fully diluted weighted average shares for our EPS calculations for the full-year subject to the conditions I mentioned earlier. Now turning to Q1, 2015, we expect consolidated revenues to be in a range of $1.740 billion to $1.800 billion. If current foreign exchange rates hold constant, the headwind from FX should be approximately $90 million or 500 basis points relative to Q1 of 2014. On an operational basis, we expect consolidated Q1 sales to grow year-over-year in a range of 3% to 6%. For the first quarter, adjusted EPS is expected to be in a range of $0.19 to $0.21 per share and GAAP EPS is expected to be in a range of $0.07 to $0.11 per share. I encourage you to check our investor relations Web site for Q4 2014 financial and operational highlights, which outlines Q4 results, as well as Q1 and full-year 2015 guidance including P&L line item guidance. So with that, I'll turn it back to Suzie, who will moderate the Q&A.

Thanks, Dan. Brad, let's open it up to questions for the next 25 minutes. In order to enable us to take as many questions as possible, please limit yourself to one question and one related follow-up. Brad, please go ahead.

Of course. [Operator Instructions] And our first question today comes from the line of David Lewis with Morgan Stanley. Please go ahead.

Good morning. Mike, just two questions here. Maybe one for you, one for Dan. So just taking ’15 guidance for a second here, a little stronger at the top end of the range than we’d have expected, but maybe help us understand what drives the top and the bottom end of this view and specifically what assumptions have you made for key pipeline products in ’15 and namely they are S-ICD, WATCHMAN and SYNERGY? And just had a quick follow-up.

Sure, David. I'll take that one and then I'll hand your call off as well. As you look at the 3% to 6%, we’re not going to get into the specifics of what the individual line item guidance is for specific products within that, but at the low end of that, its markets that may not be as strong as they are today. Maybe pricing is a little bit more unfavorable. Always have to be wary of the global economy and then specific around Structural Heart maybe it's a slower ramp in some of our Structural Heart products, LOTUS and then WATCHMAN in the U.S. The flip side of that on the higher end of that is, maybe the core end markets are a little bit better. Some of them -- some of our markets we call kind of flat to slightly up. If those are a little bit better, then that’s closer to the top end. The flip of the slower ramp in Structural Heart is maybe there is a stronger uptick relative to those products. And then, MedSurg which doesn't get a lot of attention on the high-end maybe better and earlier new product launches on MedSurg front could get us closer to the higher range as well. Hopefully that -- directionally hopeful that’s helpful in terms of what would put us at each end of that range.

Okay, very helpful. And then, maybe a related question on margins and growth. By our math, you’ve got 10% to 15% constant currency earnings growth which is, obviously nothing to sneeze at for the year. But one of the big drivers has obviously been gross margin. This is the fourth straight quarter of GM expansion, the third straight year of GM expansion, and you’re guiding to another robust GM year for ’15. So, can you just give us specifically, what are those drivers of GM on the upside here for ’15, and your confidence in this 500 basis points of operating margin expansion over the next two to three years. Thank you.

Sure, David. You’re correct. I mean, gross margin has been a significant point of strength for the company over the last two to three years. And we look for that to continue going forward. It’s probably about a -- at the mid-point of our range, 80 basis points over 2014. So, we were 70.7 in 2014, and the mid-point of our range is 71.5. So, within that, it’s a continuation of the same things that we’ve been doing and executing on over the last couple of years, which is taking high single-digits of cost out of the system every year relative to standard cost. It obviously offsets the pricing impact that we have. And then we have other efforts in OCOGs around period expenses and excess and obsolete charges to really accelerate the gross margin improvement. So, it’s been a big part of our story, and I would look for it to continue to be a big part of our margin expansion story going forward.

Thank you very much.

Thanks, David.

And we do have a question from the line of Mike Weinstein with JPMorgan. Please go ahead.

Thanks for taking the question. Maybe just a couple of items on the guidance. Dan, I think you commented that you had a goal of producing SG&A by a 100 basis points in 2015. Could you just talk a bit about that, and what drives that and how you get there?

Sure, Mike. Thanks for the question. So, clearly as we look at ’14 -- 2014, the $379 million is higher than we wanted to it be, so we’re redoubling our efforts on SG&A in ’15. I’d probably look at three key reasons and three key drivers that we’re looking at for ’15. You’ll have better leverage in the adjacencies as sales continue to ramp at a lower operating cost. You think of LOTUS, you think of a U.S. rollout of WATCHMAN. So, overall structural heart just gets better in terms of a leverage perspective. We are doing some things around challenging our global team to really focus on reducing spending with a variety of new initiatives and programs. I’d say undergoing a cultural shift to focus more directly on spending, everything from travel to meetings to suppliers to royalties. No stone left unturned there and then a continuation of what we’ve done in the past which is, the G&A competitive benchmarking and making sure that all of our G&A functions have competitive benchmarks and time horizons to get to best in class against those benchmarks. There is a few others you think of leverage in the emerging markets, particularly in BRIC, reduced integration cost from prior acquisitions. So, there are other things, but I think those other three are really the key drivers that are going to get us down to that 37% in ’15.

Okay. Let me ask couple of pipeline items before I drop. So one, have you submitted the G&A supplement for EMBLEM? Two, could you talk about the timing of INGENIO 2.0 in Europe which has started to rollout and then in U.S. and then third, can you give us any sense of when you expect to complete enrollment in REPRISE III for those? Thanks.

Hi, good morning, Mike. Yes, on the EMBLEM we’re still confident that we’ll be able to have a full rollout of EMBLEM product by the end of the year in 2015 both in U.S. and Europe, and we’re really building up our internal supply chain capabilities to accommodate that goal for yearend launch in EMBLEM in both those markets. On the enrollment of our LOTUS TAVR valve we’re making good progress there. We have about 50 to 60 patients enrolled currently, and we’re confident of a fourth -- by yearend enrollment in 2015 for TAVR as well as our registry in Europe will continue to mount. And then third one, on WATCHMAN, I don’t think you asked about that one. We’re still confident in a first half approval in the U.S. with WATCHMAN.

And we do have a question from the line of Rick Wise with Stifel. Please go ahead.

Good morning, everybody. Can you talk a little bit about LOTUS in a little more detail? Clearly you’re building momentum; you talked about the EU re-order rates. Is the availability in Europe [indiscernible] valve size making a difference? Is that what's helping? Is that the critical factor? And maybe talk about when we might see some data that reflects this broader size at? Thanks.

Sure. And Keith maybe you could make some comments upfront, I’m done. The addition of the 25 millimeter valve has helped. We see that as the valve size that’s used most frequently in Europe. And so having that valve size added to our matrix is very helpful, and then we should have -- add two additional sizes to our LOTUS fleet if you will by the end of the year. So that will help round out up to five sizes in our matrix in Europe. So we’ll be positioned to have that by the end of the year. And in terms of the reorder rates, they continue to grow nicely off of a small base, and we’ll likely highlight our structural heart business in particular at our upcoming investor day in the second quarter. So, we’ll provide more details on some of the reorder rates and financials behind our TAVR program then. And in terms of the clinical piece, Keith did you have any comments on that?

Yes, Rick. So we are encouraged by the recruitment rates in the respond post market study in Europe which is a 1000 patient study and has the three valve sizes, 23, 25, 27, and at least a third of the patients, so the newest size was 25. And the first 250 of those patients will be presented at PCR in Paris in May. We also have a next-generation delivery system which is being tested and has performed very well, and the data from that will be presented at PCR as well. And as Mike says, REPRISE III is on track. The pivotal trial should complete by the end of the year. That of course had three valve sizes. And then the 21 and the 29 millimeter valve and a new sheath they’re in development. And finally, we’re very encouraged by the sale of the Safari wire, which is a dedicated TAVR wire which is being used not only for LOTUS implants, but also for competitive bowl implant.

Thanks. And just, second question, maybe if you could talk Dan or more about the operating margin made. I mean, with zero margins continuing to expand despite exceeding your S-ICD goal. Maybe just a little more color, is the S-ICD more profitable than we thought? Are you getting it, cost reduction or a mix improvement elsewhere? And did you give a target S-ICD number for 2015, maybe I missed it. Thanks so much.

Sure, Rick. No you didn’t miss it. We didn’t give specific number for S-ICD. We did in ’14 obviously with a lot of interest around the ramp and the uptake and now in ’15 and beyond we look at that really as part of our core business. Relative to your question on margins, I think I’d start with the growth of ’14 versus ’13 in each of our segment. So, Rhythm Management gets a lot of focus. But if you look at operating margin for each of three segments, the cardiovascular was up 220 basis points year-over-year, Rhythm Management was up 310, and MedSurg was up 120. So, yes Rhythm Management is a big piece of that, but all segments are contributing. Specific to Rhythm Management we knew what the profitability was of the S-ICD heading into 2014 obviously and we have other programs and other actions and initiatives in place to ensure that we hit our target. So nothing really surprised us relative to that. We knew what we had heading into ’14. We know what we have now heading into ’15 until we launch EMBLEM by the end of the year in the U.S. and Europe. So, its all part of the overall well documented and executed plan within Rhythm Management to continue to drive margins back to the low-20s.

And we do have a question from the line of Bruce Nudell with Credit Suisse. Please go ahead.

Good morning. Can you hear me okay?

Yes, Bruce.

Good morning, Bruce.

Okay, great. Excellent year, Mike. Well done. The surprise I saw today was really about renal denervation. Could somebody talk about that trial design, when we might have results, and what are the key elements of it that will help tease out the specific treatment effect in what class of patients?

Dr. Dawkins, would you like to take that one?

Sure, Bruce. I mean, we can't release full details of the protocol right now, but we’re having a great protocol with the agency. And we think, there were lots confounders as you know in the simplicity trial. And we feel we should pullout some of the obvious one in relation to patient compliance, manipulation of medication, the length of the primary endpoint and stability of the patient, as well as highlighting the performance of what we think is differentiated products. We remain very confident about renal denervation with Vessix not only for hypertension, but we have trials ongoing, investigator sponsored trials with other applications. And so, we think this will be a very important scientific study not just for Boston Scientific investors but actually for the field to justify the role of renal denervation in the treatment of difficult hypertension.

And my second question is, when I met with you guys recently, you expressed under-appreciation of your likely success in TAVI. Could you just kind of speak to the position that you hope to be able to retain and what's proving to be a much more robust market than people thought a year ago? And are there dimensions of performance improvement that would -- that could be improved upon in the current LOTUS design?

Do you want to talk to that Mike or?

Just briefly, then you can add to it, Keith. We take a lot of pride in the capabilities of our engineering teams and our clinical teams and our commercial teams. And we have very strong track record of delivering innovation across the cardiovascular business, and we have really excellent capabilities in terms of R&D and manufacturing at Galway. And we’re really building strong knowledge base in structural heart in TAVR as well as WATCHMAN. So, we think given our leadership commercial position and the capabilities of R&D team that the structural heart expectations of the external analysts is quite understated as you go out in the mid and longer term of the strat plan. So we would be very disappointed in delivering against some of the projections that externally have been discussed. So we have a lot of confidence in the program, and we think with the differentiated platform, we’re starting to see that and the revenue growth numbers in the fourth quarter in Europe. And we’re really starting to click in terms of the productivity the R&D teams with, as Keith said with new valve sizes coming, reduction in profile of the device coming, and its really just building up new capabilities everyday. We also think the market as you said continues to expand globally, and we also think this is a very expensive endeavor to be fully committed to the TAVR space. And we don’t think this market is going to be quite as crowded as what we see in Europe globally.

I would just add Bruce that, we’ve got to a very good position in a very short time with the REPRISE program, and I would encourage you to look at the independent Weber [ph] data that we released shortly in Europe to identify the Boston Scientific LOTUS position in Europe. We’d obviously give more granularity about the structural heart side at our New York Investor Day later this year. And finally of course the REPRISE III trial in the U.S, the pivotal trial is in fact incorporating two partner trials in one. So, we’re looking at extreme risk and severe risk, and so, we’ll catch up again. So we think considering we were later into the market we’re in good shape.

Thanks so much.

And we do have a question from the line of Bob Hopkins with Bank of Merrill Lynch. Please go ahead.

Thanks so much, and congrats on a good year. The first question, given that it’s a point of interest for everybody, I was wondering if we could just get a quick litigation update from you in terms of any updated thoughts on the timing from a ruling from the judge in the J&J case, or just any other litigation milestones we should be aware of in 2015 as it relates to mesh or IRS?

Sure, Bob, this is Dan. I’ll take that one. Relative to the J&J litigation, I think it’s where we were at the end of the closing comments in the end of January. With the judge we like our set of facts, and then are looking forward to a favorable resolution in that -- in his words shortly we’ll see what that means relative to timing. With respect to mesh, we continue to try cases in mesh. So, I don’t think there’s anything necessarily to look for there. All the reserves that we have relative to all of our litigation are included in the $972 million that I referenced in my prepared remarks.

And then as a follow-up, I wanted to ask Dan a question on margins. I think you mentioned that Rhythm Management margins in 2015 would be a bit more backend loaded. So I was wondering if you could just explain that, should we expect continued sequential improvement earlier in the year, and to what degree are your pricing trends impacting things, and did pricing trends in the fourth quarter get worse or stay the same relative to earlier in the year? Thank you.

Sure, Bob. No, it’s not necessarily pricing trends, because they have been consistent through ’14, and I don’t think we see those changing in ’15. I think as you look at ’15, we’re talking more about the backend for sequential improvements relative to Rhythm Management. I think in the first half, you’d see it be more flat to where we have been. And then the benefits of EMBLEM and the INGENIO 2, ACCOLADE will really start to kick-in in the second half. So, again I just want to make sure that folks look at broader windows than just 90 day windows. And we feel very good at where we are as we exit ’14, and we would look for, as we exit ’15 to be in the same spot, but I’d just look more to the back half of ’15 for more incremental gains in Rhythm Management operating margins.

Great. Thanks for the color.

Sure.

And we do have a question from the line of Danielle Antalffy with Leerink Partners. Please go ahead.

Hi. Good morning, guys. Thanks so much for taking the question. I was hoping you could give a little bit more color on endoscopy. You guys came in a little bit lower than we were expecting. And just wondering how we think about the Alaris adoption ramp here given the reimbursement pressures in such, and thinking about that in not just ’15 but also longer term?

Sure. Thanks for asking the question on endoscopy. Overall we’re pleased with the performance for the full year. We grew 5% in the quarter -- fourth quarter, 5% in the full year. We think that’s slightly faster than the market. And the team is really building out – it’s our most global business, and the team is building a number of new capabilities to drive future revenue growth particularly in Biliary in the emerging markets where there is a lot of under-penetrated patient demand as well as the need for greater physician training. So, our team is really pioneering that in the emerging markets. So, we think 5% of solid year. Then also as Dan, mentioned the MedSurg segment improved operating margins. And as you look to 2015, we’ll have a stronger cadence of product launches in the endoscopy business in 2015 which should help. And also as you mentioned Alair which I think some had written off is starting to build some momentum in terms of reimbursement as I mentioned in the opening comments. So we still have a long way to go for Alair to make a meaningful impact on the top line of endoscopy, but we’re not giving up on it, because the product works, the clinical results are very good. And we think over time, we’ll continue to layer on additional reimbursement approvals where Alair maybe not in ’15 but in the strat plan period will have a more significant impact on endoscopy’s top line.

Okay, great. That’s really helpful. And then, on the Neuromodulation side of things, I know this was a tough year. You do have potentially more competition coming here in the back half of the year. So I was wondering if you could give a little bit more color about the trajectory there, and also an update on the clinical side of things. I know you guys are doing to accelerate clinical trial and when we could see some data from that? Thanks so much.

Sure. So, on Neuromod, the performance if you look across 2014 was a 5% grower, and we clearly had very high growth in the first half of the year off of our Spectra launch, and then we really had some very challenging growth comparables in the second -- really the second half of the year. I don’t have the exact number, but growth comparable is probably in the 25% plus range that we’re fighting against. So for the full year to scratch out of 5% growth we think its kind of in line with the market for Neuromodulation. We also are encouraged with as we head into 2015 with some new product approvals with the 32 contact paddle which we think provides additional differentiation with our Spectra platform, and Spectra continues to be really the market share leader in spinal cord stimulation with share gains there. So we have some new products that will come in 2015, and Nevro we anticipated their FDA approval, so that wasn’t a surprise for us. We have been competing with Nevro for a number of years over in Europe and Australia. In Australia we’re very comfortable with our leading market share position. And also as you mentioned, we are investing beyond the technology platforms in additional clinical studies for Neuromodulation, and we’ll continue to report those out as appropriate.

All right. Thanks so much.

Brad, we’ll take one more question please.

Our last question comes from the line of Brooks West with Piper Jaffray. Please go ahead.

Hi, guys. Thanks for sneaking me in. Couple of product questions, I was wondering on the synergy U.S. launch versus how you’re launching that in Europe. You’ve got tiered strategy over there, is that how we should think about the approach to the U.S. or can that be a workhorse stent and just any thoughts on kind of uptake there. Then I’ve got a follow-up.

Yes, we haven’t provided any insights yet in terms of the, kind of the launch strategy in the U.S. We are expecting FDA approval synergy in late ’15, so hopefully we can get a potentially a fourth quarter impact with synergy. And we’re continuing to be very careful about how we price that synergy. We think that’s the best way to preserve the strength of this overall marketplace, the strategy to working for us, and for the full year we grew DES 6% in a combination between PREMIER and Synergy. So, we think we offer a differentiated platform that provides unique value and therefore we should be apprised appropriately that way. So, we’ll continue to refine our launch plans for U.S. and communicate more details on that once it’s approved.

Thanks. And then on the EP platform with Rhythmia, can you give us a little bit more detail again on the launch trajectory there. And then I’m curious in the accounts that have the Rhythmia system, are you seeing pull-through of your diagnostic catheters, and then when could we see the new ablation catheters I believe they’re called the MiFi catheters, is that still on track for kind of the next 18 months here?

Yes. So, on the Rhythmia side we did see -- you saw a few cases if you went to the few live cases at the AFib meeting in Orlando early in January there. So we’ve just really launched our first call it 10 sites or so globally, and we’re seeing some excellent feedback in terms of the speed and acquisition times and the collection points of the Rhythmia platform. In those sites we are seeing some core pull-through as you mentioned in the diagnostic side. And also, lecture physiologists are looking at Boston Scientific as their Rhythm Management provider. So we also see the strength of our CRM business, the capabilities we have there will also help in the overall story with lecture physiologists. So we’re in our early days of the Rhythmia launch but its going well on the sites that have installed it and we have seen some pull-through in diagnostic catheters.

And anything Mike on the MiFi catheters?

Yes, on the MiFi catheters we’re still enrolling in the U.S. and we’re looking to continue to sell the open-irrigated platform for MiFi in Europe.

Great. Thank you. End of Q&A

And with that we’d like to conclude the call. Thanks for joining us today. We sincerely appreciate your interest in Boston Scientific. And before you disconnect Brad will give you all the pertinent details for the replay. Thanks very much.