Ladies and gentlemen, thank you for standing by. Welcome to the Boston Scientific Fourth Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and answer-session. Instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Susie Lisa. Please go ahead.

Thank you, Greg. Good morning, everyone, and thanks for joining us. With me on today's call are Mike Mahoney, Chairman and Chief Executive Officer; and Dan Brennan, Executive Vice President and Chief Financial Officer. We issued a press release earlier this morning announcing our Q4 2017 results, which included reconciliations of the non-GAAP measures used in the release. We have posted a copy of that release as well as reconciliations of the non-GAAP measures used in today's call to the Investor Relations section of our website under the heading Filings. The duration of this morning's call will be just under one hour. Mike will provide strategic and revenue highlights for Q4 2017 and full year 2017; Dan will review the financials for the quarter, and then Q1 2018 and full year 2018 guidance; and then, we'll take your questions. During today's Q&A session, Mike and Dan will be joined by our Global Chief Medical Officer, Dr. Ian Meredith; and Chief Medical Officer for Rhythm Management and Global Health Policy, Dr. Ken Stein. Before we begin, I'd like to remind everyone that, on the call, operational revenue growth excludes the impact of changes in foreign currency exchange rates. And organic revenue growth is defined as excluding the impacts of changes in foreign currency exchange rates and sales from the acquisitions of EndoChoice and Symetis over the relevant prior year period. Also note, this call contains forward-looking statements within the meaning of federal securities laws, which may be identified by words like anticipate, expect, believe, estimate, goals 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 Q1 and full year 2018 guidance, as well as our tax rates, R&D spend and other expenses. Actual results may differ materially from those discussed in the forward-looking statements. Factors that may cause such differences include those described in the Risk Factors section of our most recent 10-K and subsequent 10-Qs filed with the SEC. These statements speak only as of today's date and we disclaim any intention or obligation to update them. At this point, I'll turn it over to Mike for his comments. Mike?

Good morning. Thanks you, Susie. Thanks for dialing in. Boston Scientific delivered excellent financial results in fourth quarter 2017 with 8% operational revenue growth, 7% organic revenue growth, 190 basis point improvement in profitability and 14% adjusted EPS growth to $0.34. These fourth quarter results closed out a very strong 2017. For the full year, we delivered 8% operational revenue growth, 7% organic, against the 10% comp in 2016, which represents a 90 basis point improvement in profitability and 13% adjusted EPS growth to $1.16. Similarly, 2017 closed out a very strong three-year period for BSC, with an average operational revenue growth of 9%, organic growth of 7%, combined with a 480 basis point improvement in adjusted operating margin, which leveraged that growth 2-times to an average 14.5% growth in adjusted EPS over the three-year period. So our strategy of category leadership in key markets and diversification in the high-growth adjacencies continues to deliver. Our goal is to continue to execute against our strategic planned goals, and execute similarly strong sales and EPS growth results over the next three years. It is the combination of long-term consistent above-market revenue growth, margin expansion and targeted double-digit EPS growth, now coupled with an improved ability to deploy strong free cash flow, that we believe uniquely positions Boston Scientific to deliver shareholder value. Accordingly, we are excited about our plans to build upon our global momentum in 2018 and beyond. We're targeting full year 2018 organic revenue growth of 5% to 6%. We're guiding to adjusted EPS of $1.35 to a $1.39, which represents 7% to 10% earnings growth. Importantly, this EPS growth includes an expected $0.02 to $0.03 negative impact from foreign exchange, which we'll seek to offset and deliver another year of double-digit adjusted EPS growth. I'll now provide some highlights…

Thanks, Mike. Fourth quarter consolidated revenue of $2,408 million represents 10% reported revenue growth and 8% growth on an operational basis, which excludes the impact of changes in foreign currency. The strong top line exceeded the high end of our operational guidance range of 5% to 6% due to outperformance across the majority of our businesses and regions, as Mike outlined. Our reported revenue reflects a $37 million tailwind from foreign exchange, basically in line with the $40 million tailwind expected at the time of guidance. Sales from the EndoChoice and Symetis acquisitions contributed approximately 130 basis points, which was also in line with our expectations at the time of guidance, resulting in a 7% organic revenue growth for the quarter. We delivered Q4 adjusted earnings per share of $0.34, which represents 14% year-over-year growth and is towards the high end of our guidance range of $0.32 to $0.35, driven primarily by that strong revenue growth. This includes a $0.02 headwind from FX, which was at the higher end of our range of $0.01 to $0.02. Our full year 2017 consolidated revenue of $9,048 million grew 8% operationally and on a reported basis and grew 7% organically. Full year 2017 adjusted earnings per share of $1.26, represents 13% growth our fifth straight year of double-digit adjusted earnings per share growth, excluding the $0.08 foreign exchange headwind that we effectively offset throughout the operational savings and initiatives. Adjusted earnings per share grew 20% versus 2016. Adjusted gross margin for the fourth quarter was 72.6% and flat to the prior year, but importantly, reflects our ability to offset a negative 200 basis point year-over-year impact from foreign exchange and pricing in line with what we have seen in prior years, with operational improvements and manufacturing cost reductions as well as favorable product…

Thanks, Dan. Greg, let's open it up to questions for the next 20 minutes or so. In order to enable us to take us many as possible, please limit yourself to one question and one related follow-up. Greg, please go ahead.

Thank you. [Operator Instructions] And your first question comes from the line of Mike Weinstein from J.P. Morgan. Please go ahead.

Good morning, guys. And thanks for the taking the questions. Let me start, I mean, we got a chance to talk a little bit about the quarter in San Francisco. And obviously, this is an extremely strong quarter on the tough comp for you. There are some discussion already on the Street about kind of what the first quarter ends up looking like. I think we get a sense for how you're thinking about it with your guidance here. But with you guys showing such a strong fourth quarter, the industry in general having a strong fourth quarter, do you have a feel for how you're thinking about the first quarter? And should it be conservative just relative to what we saw here in 4Q?

Sure, good morning, Mike. Yeah, we're very comfortable with our 5% to 6% full-year growth. We gave visibility to first quarter with 4% to 5%. As you said, we do have good momentum coming out of the company across the businesses with MedSurg delivering very well, WATCHMAN, PI, really across the board. We do have some headwinds in 2018 that we'll be facing. We do have some tough - difficult pacer comps. We have some more DES competition with some new entrants that we expect some trialing. We expect to maintain our share over the term, but we expect some trialing early on. We also see some one-time price cuts in Australia and Japan that have a bit more impact in 2018 and that will be neutralized in 2019. So overall, the business is performing very well. There are few headwinds and we're comfortable with the 5% to 6%. And gave you good line of sights and they are 4% to 5% for the quarter.

Okay. Let me ask you just couple of other items. One, first off, thanks for giving the detailed number on WATCHMAN. That was obviously appreciated. WATCHMAN has a ton of momentum. It sounds like the fourth quarter in particular was very strong for WATCHMAN. Can you just give us a little bit more color on what you're seeing amongst interventional cardiologist and electrophysiologist, and who seems to be really getting on board with WATCHMAN usage and who's driving it? And then, second, could you spend just a minute on the Millipede transaction? I thought the structure of the deal was obviously very interesting. Effectively, you will be acquiring the company, but it keeps it off your P&L for the next two years. Why was that the right technology? And why was this the right asset to buy in mitral? Thanks.

Thanks, Mike. I'll talk to a little bit of WATCHMAN and then I'll have - then we'll also talk about Millipede. And so, on the WATCHMAN the teams are doing a terrific job. We continue to open up centers, on track. But more importantly, we're improving utilization of the product and the therapies. We're increasing awareness amongst the referring physicians. We're training more physicians. And we're also expanding globally into China, and we will launch into Japan in 2019. So I think the overall momentum is just excellent clinical outcomes, more physicians, training in the product as well as just increasing awareness. And our focus is on improving utilization rates at these large centers each quarter. So we're very, very bullish on the platform. And as you know, we've only had about 1% of the utilization rate at $250 million. So you will continue to see us invest aggressively there. Maybe Dr. Stein can make a comment on the clinical work with WATCHMAN, and then we'll touch on Millipede.

Yeah, thanks, Mike. And, Mike, I think, the key behind the momentum has been the great results that we've seen, both in the clinical trials, really pleased with the results that were presented at TCT, the final five-year results, combined meta-analysis, protecting from fail, leaving really no reasonable doubt, but that this is at least as effective as warfarin for stroke prevention. And I think you've seen that translate into the market as well as really the extraordinarily good safety results that we've seen as a result of our training program and disciplined approach to bringing new sites online. We see balanced interest between IC and EP implanters. And I think both sides have the skill that's required to do the implant and the results show that both sides are doing it well and doing it effectively.

And on the Millipede transaction, we like the structure where we organized it. I think you outlined it pretty well. We aim to purchase this company once they're complete with a - their second-gen fam [ph] if you call it or - likely by the end of this year. That maybe, Ian, you can touch on kind of a rationale for Millipede.

Yeah, thanks, Mike. And thank you, Mike, good question. The rationale behind Millipede, it's based on very sound physics principles and logically correct for path of physiology of functional mitral regurgitation. As you know, it follows the surgical predicate in that you have a complete annuloplasty ring. And it's a small footprint device, transfemoral, transapical catheter repair, so not using the apex, which is a huge impasse on patients with significant left ventricle impairment to start with. And it provides some line of sight to tricuspid valve repair and obviously mitral valve replacement in the future. And more importantly, it doesn't limit or preclude the use of any other therapies and - that is particularly important because mitral valve repair is often a multifaceted approach leaflet and chord repair can still be done in this context. So we thought that we - there were 8 criteria that we would want for a transcatheter mitral valve repair foundational device and this meets all of those 8 foundational criteria.

Your next question comes from the line of David Lewis from Morgan Stanley. Please go ahead.

Good morning. One quick question on structural heart for me and then I have quick follow-up. Mike, I'm just thinking about the structural heart guidance you gave for 2018, which I thought was pretty interesting. I mean, the $400 million number, I wonder if you can provide some context around that. Because given the strong WATCHMAN number in 2017, as you're probably aware, WATCHMAN virtually slowed very marginally in 2017 versus 2016, very aggressive growth. To do $400 million 2018, if I just take your NeoTract annualization off the fourth quarter and very substantial deceleration in WATCHMAN, you get above $400 million. So help us frame up that $400 million number because it sort of implies a lot of WATCHMAN deceleration or frankly is a very conservative way to think about the year to start the year.

Oh, we've definitely taken the NeoTract numbers out of our numbers. Just kidding you there. But on the WATCHMAN, I think overall, we aim to deliver against our commitments and we continue to do so. So we feel very bullish on the platform. We don't have as many new centers opening in the U.S. We penetrated that quite a bit. We saw a few new centers. And we have some major launches coming more so in 2019 in terms of U.S. - really, Japan. But we feel comfortable with that guidance number. And hopefully, we continue to do well, whether we'll be able to have opportunity to increase it as the year goes on.

Sorry for the Freudian slip there, Mike. We'll move on

The only thing I'll comment on is on Symetis, as part of that. This - that business continues to increase. We've trained our clinical and our sales teams on it. So we expect some acceleration of Symetis in 2018. And the approval - that second generation platform, early third quarter will really be critical, because it already has a very low pacemaker rate, very, very quick to implant, and this will even reduce the PVL rate further and we have those two large clinical trials that we'll also report on. So I think you'll see strong momentum out of WATCHMAN and Symetis this year in 2018.

Okay. And then just the financial question is for me. Dan, you - tax rate came in a little lower than we thought. Could you just to talk us, what drives the low end and high end of the earnings range? I think we initially thought 50 basis points of leverage this year. Maybe with the - you've got more flexibility now with the lower tax rate. So how are you thinking about leverage in 2018? And from balance sheet perspective, I think a lot of investors are interested on, like, what you think your capacity is towards the back half of this year? Is it $750 million? Is it $1 billion? And where do those priorities sit versus acting under venture portfolio versus externally driven M&A? Thanks so much.

Sure, David. So on the tax rate, in early January we had talked about the 16%. That was the best read at that time. And frankly, now that we've had more time to crawl through it and there's been more clarity, we think the 14% to 15% from an operational rate perspective is a good call for 2018. And then, keep in mind the all-in tax rate is 100 basis points lower than that, just given the ASU on stock comp. In terms of the leverage, if you look at the ranges that we have down through the P&L, you get the outcomes at the different ranges that we have for EPS. So the lower tax rate is helpful, but the margin goal of 50 to 75 basis points over 2017 is exactly what we said in early January, it's in line with that. We think that sets us up well to get to that 28% by 2020. The - really, the only one that's a bit stuck on that is the gross margin, and that's just the FX impact that we'll see in 2018 and that hopefully turns to a tailwind in 2019 and 2020. So I think, all tends to line up well in terms of very solid leverage in 2018 and then probably acceleration of that leverage in 2019 and 2020. And then the balance sheet. Balance sheet is probably as healthy it's been in 10-plus years when you look at it relative to our capacity and our debt and leverage ratios. So we're down in the low-tows now. We sit very well with that. As I mentioned in my prepared remarks, we should have roughly $500 million kind of left over from the $1.9 billion goal that we have this year for cash flow, for more strategic uses in the back half after we take care of the rest of mesh and IRS tax case. So that going into 2019 and 2020, as we've said very publicly, as we sit with the balance sheet today, we don't have a lot of call on that cash. So as you look at what should be north of $2 billion in each of those years, that's really the exciting part that we get to put even more in strategic uses. I don't know, Mike, you have any other comment on that?

Yeah, you summarized it. We've - on the venture portfolio, we have a number of investments that we like. And I think we've commented in the past, you'll likely see three or four potential acquisitions months within that venture portfolio.

Your next question comes from the line of Rick Wise from Stifel. Please go ahead.

Good morning, everybody. Maybe just starting with the balance sheet, again, Dan. Maybe talk about your cash flow priorities, or Mike maybe you want to talk about it as well as we think about 2018 unfolding and into2019 and 2020. From here, is it going to be continued M&A? Is that's the number one priority? Or help us think about share buyback as well.

Yeah. That's the sequence that you laid out is the priority. One is, we had to finish the mesh pay down and tax, which we're doing this year. And then, we'll really have much more freedom as you look at second half of 2018 and then going forward once those are retired. We do have a pretty active M&A appetite. We have a venture portfolio that's pretty healthy, that we have some preferred rights to buy a number of those companies. So I think you'll see us be active with tuck-in acquisitions to strengthen our category leadership strategy. But to the extent that we don't find strategic deals that meet our financial criteria then we would look at share repurchase, more likely share repurchase, more likely in 2019 than 2018.

That's great. And just last for me. It's sort of a long haul, but impressive pipeline and beautifully laid out in the charts and the tables, maybe just from your perspective, Mike or Ian, you could highlight the parts that you think have the most outsized potential in the 2018 through 2020 period to drive growth and expanding margins. Is that Symetis? Is it margin you see around, et cetera? And just last on the stent business. How do we think about it from here? You said you think you're going to hold share in 2018. But does that mean, Mike, that the business is flat or down because of price? A little more color there on maybe the potential headwind or risk in 2018. Thanks a lot.

Sure. We have a - the beauty of that portfolio, it's very diversified. So we have a number of important growth drivers. I won't hit all of them, but just a couple just to highlight. S-ICD continues to grow double-digit, and then we'll eventually get the modular pacemaker on S-ICD, Resonate is a new platform there. We touched on WATCHMAN before, which is really a strong growth driver with great margins. Very bullish on ACURATE. We aim to bring Lotus to the market in 2019. Endo has a full suite of products, guys, I don't want to go through all of them, I think the strength of the company right now - and also, I'll just mention two big platforms, the spinal cord stim and DPS. So it's a very diversified company now. And each business has really some key platforms that are launching either this year or if the cadence actually gets stronger in 2019 and 2018. On DES, we continue to believe that SYNERGY based on zero stent thrombosis and its ease of use is the best stent of the marketplace continue to grow that business, although very slowly, but we grow it in Europe. In Europe it seem - faced more competitors than the U.S. We expect some headwinds in the U.S., we think more temporarily as physicians may try the DES platform. But importantly, for our coronary business, the other business that surrounds DES is our complex PCI business and that business is growing 10% last year. And it's 80% the size of DES. So I think you'll see maybe by the end of 2018 or 2019, those businesses especially the same size. So we expect, really, any softness in DES will be tempered by the growth in our Complex PCI business, where we continue to launch new platforms. So I think we will see some - likely some headwinds with some trialing, but that will be buffered with Complex PCI, then we're confident based on what we've seen Europe, doctors will stay with synergy.

Your next question comes from the line of Bob Hopkins from Bank of America. Please go ahead.

Well, thanks and good morning.

Good morning.

So, first question. I just want to clarify from a big picture perspective the 2018 earnings guidance. It's obviously in the slides, you can nicely see that you're guiding to 7% to 10% EPS growth in 2018. But, Mike, I think in your prepared comments, you said that you hope to be able to offset some FX and therefore maybe 10% is more likely. I just want to make sure that I heard that right. Is that the message on earnings growth for 2018?

No, I think the message is that the range is 7% to 10%. Within that 7% to 10%, the goal is to offset that $0.02 to $0.03 negative FX as we've done in the past few years, offsetting the FX impact. But I don't point to one number more likely than the other. The range is 7% to 10%.

Okay. And just the reason I asked that is because at J.P. Morgan, the slides were pretty clear. You expect or you were hoping for double-digit earnings growth. And I'm just - with the lower tax rate. I guess, I was just a little surprised the guidance was a bit higher on the earnings side. So maybe, Dan, you can talk just a little bit about some of the things that prevents you from just guiding to 10% or better? Thank you.

Well, I think as we've said, we have a pretty good track record of hitting or exceeding the goals that we have put out over the last few years. As you look at that range, 10% is at the high end of the guidance range. And obviously, that's our goal, right, our goals is always double digits. But the range is - it contemplates the outcomes of 7% to 10%. As you look down the different, various elements of the P&L, and this is a bit getting to Mike's question earlier gross margin is really the only one where you don't see a solid amount of progress in 2018 and that's really the foreign exchange impact that we have to offset in 2018. Other than that, at the midpoint of SG&A, you're seeing almost 100 basis points of improvement. And that's what we've been saying over the last few quarters is that SG&A is a big driver of that operating margin improvement story and that's solid progress in 2018 and more to come in 2019 and 2020. So at the 25 we were in 2017, and then the 50 to 75 basis points this year. And then what should be a much better years for FX in 2019 and 2020, I think we're well on track to have a solid year this year and get to that 28% by 2020.

Okay. Very fair, thank you.

Your next question comes from the line of Josh Jennings from Cowen. Please go ahead.

Hi, good morning. Thanks for taking the question.

Good morning, Josh.

I wanted to follow-up on - good morning - on the operating margin trajectory out through to 2020 and how we should be thinking about the cadence of operating margin expansion in 2019 and 2020? Is there anything, Dan, that we should be thinking about in 2019, potentially Lotus launch or FX headwinds getting lighter on the gross margin line, in terms of that 240 basis points-ish of operating margin expansion left to that - for that 28% target?

Yeah, so I think you're kind of using the midpoint of this year and saying there's 240 left at the end of this year to get to that 28 by 2020, which I think is fair. Certainly, leveraging our Lotus launch, as Mike said, that's goal in 2019 in the US. Leveraging that will be helpful because we have a certain amount of commercial infrastructure that's in place, ready to go there. So leveraging that would be helpful. But then, the rest of the P&L and just the - if you look at the ranges for revenue, we talk about 5 to 6 this year. We've talked about 5 to 8 for 2019 and 2020 as we have a good launch year, this year in 2018. But we are setup for 2019 and 2020 to be even better product launch year. So I think there is a natural opportunity for a topline leverage in 2019 and 2020, plus the continued focus that we have on SG&A, and then the FX relents a little bit in 2019 and 2020. So you should see better gross margin and less of a drag from an EPS perspective. So I think the - if you look at the 50 to 75 this year and then, say, we need 240 to get to that 28 by 2020, I think the pieces are in place to get there.

Great. And then just a quick follow-up on the mitral valve portfolio, you guys are - the Millipede investment was nice to see. How are you thinking about building out the mitral valve-specific transcatheter pipeline? Is there anything internal that we should be remembering? And do you think you need a replacement device to fully capitalize on that opportunity over the next couple of years? Thanks for taking the questions.

Thanks very much. And perhaps I can take that question. I think we do have internal programs as well. And as you know, repairing the mitral valve is often the multi-factorial approach and you need more than one solution to repair the mitral valve. But the primary foundation of mitral valve repair, particularly, functional mitral regurgitation, is the angioplasty, and that can actually serve to treat functional mitral regurgitation in a large proportion of patients. So we see this as the foundational move in them and their critical first step in building a mitral program but it's certainly the lion's share of that program. Obviously, this does provide us the line of sight down the track to a mitral valve replacement option and indeed tricuspid valve repair as well. It's not the immediate aim, and the immediate aim is to get through the clinical trials and launch a transcatheter mitral valve repair device from a transeptal approach, which I think everybody is yearning for.

Yes, we think this platform serves, clearly as a repair device immediately. Then potentially replacement as well as tricuspids. So we think that's the unique benefit of this platform.

Your next question comes from the line of Vijay Kumar from Evercore ISI. Please go ahead.

Hey, guys. Thanks for taking my question, so maybe one on WATCHMAN. Really strong performance in 2017. Maybe, Mike, can you comment on what portion of the drill came from the new center adds versus same center volume growth? I think that would be helpful.

Yeah, we don't break that out for you. But as you might expect, early on, a few years ago it was new centers that were opening up. But now, call it 80/20 practically, just roughly.

And that's helpful, that's helpful.

Much more so on utilization of increased utilization of same-store. I shouldn't say same-store, utilization of our facilities that are open and less on new openings.

That's helpful, Mike. And, Dan, one on FX hedges I think the comments you made about 3 to 5 years out you guys hedged. Is this now, I assume, this is now a below the line item, right? And given three to five year hedges, like is this now - does this now have impact for 2019 as well?

Yeah, I think it's not a below the line impact. The cost associated with the hedging program are shown below the line, but the actual settlement of the contract - the hedging contract are shown in gross margin, which is why the - we've had that headwind in gross margin in the last two to three years from an FX perspective. So to be clear, this year we expect 110 basis points of headwind in FX, related to gross margin. When you get to 2019 and 2020, if the rates were to hold where they are today, it becomes a much better story, where it's neutral to slightly favorable for us, both at the gross margin line and then at the FX line as well. So 2019 and 2020 is a much better FX story than it has been for the last three-plus years.

Thank you, guys.

Okay. With that, we'd like to conclude the call. Thanks for joining us today. We appreciate your interest, especially at this early hour, in Boston Scientific. And before you disconnect, Greg will give you all the pertinent details for the replay.