Ladies and gentlemen, thank you for standing by. Welcome to the Boston Scientific Fourth Quarter 2019 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. 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.

Good morning. Thank you, Susie. Good morning, everyone. Boston Scientific finished up a strong 2019 as we significantly strengthened our portfolio and capabilities for the future by delivering strong revenue and EPS growth. Consistent with preliminary results we announced on January 14th, we delivered 14.1% operational revenue growth and 7.3% organic revenue growth for the fourth quarter of '19. This represents excellent growth, yet was below our organic revenue guidance of 8% to 9% due primarily to our US high-voltage and US EP businesses. Importantly, operational growth outside of the US in both CRM and EP were solid as were worldwide result in five of our other divisions, which all grew at or above market and three posted double-digit growth, Interventional Cardiology, Urology, Pelvic Health and Endoscopy.

Thanks, Mike. Fourth quarter consolidated revenue of $2.905 billion, represents 13.4% reported revenue growth and reflects an $18 million headwind from foreign exchange, slightly less than the $20 million to $25 million headwind expected at the time of the guidance. On an operational basis, revenue growth was 14.1% in the quarter. Sales from the Vertiflex and BTG acquisitions, partially offset by the divestiture of our legacy embolic beads portfolio contributed a net 680 basis points of growth at the high end of our acquisition contribution guidance range. Of the 680 basis points, BTG contributed 610 basis points split between Interventional Medicine contributing 380 basis points and Specialty Pharmaceuticals, 230 basis points. The resulting 7.3% organic revenue growth in the quarter was below our organic guidance range of 8% to 9%, as Mike detailed. Despite the mix, we delivered Q4 adjusted earnings per share of $0.46, above our guidance range of $0.42 to $0.45, representing 16% year-over-year growth and 19% growth excluding the $0.01 net tax benefit in Q4 2018. Earnings were driven by healthy P&L metrics across the Board, as well as an approximate $0.03 tax benefit, higher than expected at the time of our preliminary fourth quarter and full year results announcement. The tax benefit is related to both discrete tax items within the quarter, as well as the lower full year operational tax rate, which I will detail shortly. The FX impact on adjusted earnings per share was immaterial as expected at the time of guidance. Our full year 2019 consolidated revenue of $10.735 billion grew 9.3% on a reported basis and 11.1% on an operational basis, which includes 380 basis points of growth related to the acquisitions of NxThera, Claret, Augmenix, Vertiflex and BTG, net the divestiture of the beads portfolio. Operational growth was in line with…

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

Thank you. Your first question comes from the line of Robbie Marcus from JP Morgan. Please go ahead.

Robbie, can you hear us?

I can hear you. Can you hear me?

We hear you now.

We can hear you.

Great. Maybe you could just start with the top-line guidance for 2020. The range is a little wider than we've seen from you historically. You have a lot of new product launches into new markets in 2020. Maybe just walk through the rationale for the wider guidance range and any important cadence issues to pay attention to?

Sure, yes. So, the full year guidance organic. You heard in the script there 6.5 to 8.5. We think 200 basis points wide range isn't crazy for a company our size. So we think that makes sense. Similar to '19, in '19 we saw 6.3% organic in the first half, 8.3% organic the second half. And so we expect a similar trend in 2020. As I mentioned, you'll see second half acceleration as mentioned due to the product cadence and we can talk about the various products, if you'd like, as well as the M&A train organic. And also we expect hopefully, we aim for a resolution of the potential impact in China as we enter the second quarter. So we'll see second half acceleration and we expect many of our businesses to grow double-digit. We expect UroPH and Endo, as well as EP all to accelerate in 2020. We expect PI to put up a first quarter similar to fourth quarter. We expect nice acceleration due to important product launches in PI, as well as the integration going on plan. And we've also given the Structural Heart guidance $900 million to $1 billion, which is a significant increase over 2019. So we're very confident in the product launches that we have across all the divisions. And the execution, our aim will be to accelerate organic revenue growth in '20 faster than we did in '19.

Great. And maybe just the follow-up on CRM at the JP Morgan Conference when you pre-announced, you thought that some of the softness in fourth quarter was due to replacements and high power. Have you been able to dig into that any further and come up with why maybe replacements were softer in December versus expectations?

Yes. So we don't have all the market data yet. It's still too early to receive kind of unit volume across the industry. Similar to what I mentioned before, we think primarily the impact in Q4 was due to our comps. We had mid-single-digit positive comps. Our competitors had negative comps and so we don't see a -- we don't believe that we lost market share in defib in fourth quarter. We think we faced a tougher comp than our competitors did. And also we don't have the ICM loop recorder yet and some competitors include that in their sales. So in a pure like-for-like basis, we think we held share and we do think the market is a bit softer though. We think the market in 2020, we project global CRM to be flat to declining low single-digit. And we expect -- we obviously aim to continue to grow faster than the market, like, we have for many years in defib, but we think the market growth is probably zero to negative 2% for the full year.

Thank you.

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

Thank you and good morning. So first question just wanted to ask about the guidance you're providing for the first quarter that 5% to 7% and if you use the midpoint of your assumptions on Coronavirus maybe 6% to 8% excluding that. My question is that, even excluding the slower China growth in Q1, it does feel like a deceleration from what you've been experiencing over the last couple of quarters, given the selling day and an easier comp in the first quarter. So what do you assume slows in Q1 relative to the last couple of quarters or is this just you guys being conservative?

Sure. Good morning, Bob. So, again, we're very comfortable in the quarterly guidance we provided as well as the full year and we aim to accelerate in '20 over '19 organic growth, which I think is the most important piece here. We look at first quarter there is an extra what Dan calls a half day, when we look at all the global selling days and so forth. So there's a slight benefit there. But as mentioned in the script in a few areas, we do expect to see in first quarter Endo decelerate a little bit from first -- from fourth quarter, as well as PI being soft again in first quarter similar to fourth quarter. So those kind of are in line. And we also see some challenges in drug eluting stents with Japan price cuts, as well as the overall pricing environment in drug-eluting stents. So we anticipate that in the first quarter and we talked about the CRM market kind of zero to negative 2% range. But importantly, we have some nice mixed launches in DBS to support the full year and we expect to see continued complex coronary growth do well. And then all the other businesses across the company should do extremely well with Structural Heart . But in first quarter the combination of some of those pricing pressures we're seeing in DBS combined with the Coronavirus issue that Dan outlined and really moving through that BTG integration that was the guidance of the 6 to 7.5 pre-Coronavirus and we estimate the impact, as I mentioned, 10 to 40 from China which brings our first quarter guidance down to 5 to 7.

Okay. And then maybe as just a sort of an obvious follow-up on that. What do you assume in Endo slows a little bit in Q1? And then also I'd love to see hear your comments on Exalt-D in terms of what you're expecting for the year out of that product? Thank you.

Yes. So Endo is one of our more predictable businesses, I would say, in the company. Very good execution against our plans. And it's not uncommon for them to have a slightly softer first quarter. So slightly soft is going to be above the BSC average and likely above market. So their definition of soft there is probably not fair. But as we see -- as we look at the full year, they have a nice set of product launches with new hemostasis clip, improvements to digital SpyGlass and the big one the Exalt-D. And we've had our first few cases take place over the past week and they want -- they're very, very encouraging. And so you're going to see a kind of more of a controlled launch in the first quarter to make sure things are going well. A lot of the contracting in terms of the capital placements are being organized now and we're very confident in acceleration really each month in Exalt with a much bigger impact in second quarter and a significant impact in the second half of the year, and then the surgical scope coming. So I think we're really on track with Exalt-D launch and couldn't be more excited about the early results.

Great. Thank you.

And then just to give you a little bit of the math on the ranges. So the 6% to 7.5% is the range without Coronavirus for Q1 in terms of organic revenue growth. Just to let you know how we got to the 5 to 7. So the low end of 5 is basically the midpoint of 6.75 and we took the high end of the risk of 10 to 40 for the Coronavirus and took that off to get to the 5. And then, saying, similarly for the high end of 7 it's the 7.5 high end less the low end of the Coronavirus of 10 million, which brings you to the 7%. So just to give you a little bit of that math as to how it came to 5 to 7 from the 6 to 7.5.

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

Good morning. Just two questions for me. Dan I want to come back to Coronavirus just to sort of set expectations. So by our quick math, China is kind of 5% of the company. Maybe it was a point of growth to 2019. I appreciate the focus in the first quarter. But picking those numbers, it seems like you're implying for first quarter that China business is either a 10% grower kind of half what you grew last year 20% or maybe slightly declined. Is that kind of roughly accurate? And what's actually in the annual guidance for impact from China given it drove a point of growth from last year? Then I had a quick follow-up.

Sure. I mean, as we talked about at our Investor Day, China was about a $500 million business growing 20%. That would imply about a $600 million business in 2020. So rough math $50 million a month. The 10 and the 40 are simply the impacts our China team that's obviously very close to the issues in China on the ground. That's how they size it today and so that's why we included that in the Q1 guide. For the full year, as you saw, the 6.5 to 8.5, we assume that we can get some of those procedural volumes back and that other parts of the company could kick in and keep that 6.5% to 8.5% organic revenue growth range intact. But it's just the ability to react within Q1 with the acute nature of what we see as the potential in China that's why we raised it.

Okay. And then you are seeing that impact. You have seen that impact here in the early part of January into February?

As you look at China, I mean, everybody sees it on the news and such. There just -- the number of procedures for medical device procedures in Q1 is not going to be what was expected 90 days or 180 days ago. So, certainly, we are planning to see an impact in that business in Q1.

Okay. And then just for the guidance for the year, just two things maybe for Dan or for Mike. One, obviously, you talked about second half acceleration. Maybe just help us understand the key drivers of that second half acceleration from a product perspective? And kind of related to that, your two big products from a revenue perspective absolute dollar contribution are Augmenix and LOTUS maybe just sort of talk to your confidence in those two products and what drives that back half acceleration? Thanks so much.

Sure. We have a number of things we could talk about. But just to hit on the biggest -- the bigger ones. The biggest growth driver contributor is going to be Structural Heart that $900 million to $1 billion. And the big impacts there are excited about led by WATCHMAN, with the new WATCHMAN FLX launch will happen in the US in the second half of the year and that's doing extremely well in Europe and we have a number of big clinical trials. So we expect very strong growth on a WATCHMAN. LOTUS is doing very well in the market. It's kind of on plan for 150 accounts. So you'll see a full year impact of LOTUS and we expect to see each quarter greater impact there. Our Symetis valve, ACURATE is doing well. It grew above the company average and grew about mid-teens in the fourth quarter and we expect to see neo2 launching in the second half. So the whole basket of Structural Heart will be big. EXALT will be a meaningful new incremental revenue driver with stronger second half impact. And then in PI, I would say, we're confident in quarterly improvements as we settled in on the BTG integration and you have new products being launched from legacy BTG, as well as potentially Ranger in the second half of 2020, which will put our position there. And EP, I mentioned, POLARx, you'll see a nice impact from that particularly in the second half of the year as we ramp that up. And Neuro continues to do well with, as you mentioned, Augmenix which did over $100 million and is growing very, very well, as well as NxThera, which also is doing well and we'll expect five-year data shortly, and new reimbursement approvals from Cigna and Blue Cross. So this is really across the portfolio. There's a number of exciting things. That's why to reinforce Dan's comment, despite some of the near-term issues in China we're very comfortable with 6.5% to 8.5% full year range.

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

Hi. Good morning, Mike. If we could focus -- if I can focus on Exalt-D. Obviously, you're excited, we've had a bunch of in-depth doctor conversations lately. Happily, all of them want to try it and we're interested, some very interested. But they highlighted usability and sort of comparability to their current reusable technology. And they were all seemed uncertain about pricing and cost. Can you talk to us about your confidence that Exalt-D equals current reusable technology? Talk to us about pricing and how you're going to go at making the economic case to the docs and the hospitals? And maybe last just talk about the manufacturing ramp and how that ties into the acceleration as you move toward full launch? Thanks so much.

Thanks, Rick. So the teams have -- as you know this has been a multi-year program built off of the capabilities we've learned with LithoVue in digital SpyGlass. Those capabilities leveraged for Exalt-D and you hit the key criteria. The number one criteria, if this is to be a blockbuster product, which we think it will be -- it will -- to be -- have comparable, usability and functionality as existing scopes that require the sterilization expense of processes. And so that is the spec that the team has been focused on over the past three years or four years. And so the good news is, we've had done a number of procedures. We've had a number of key positions around the globe involved with the product for multiple years and we're quite confident in the design elements and the visualization capabilities of the product. Also, I think what's important with this with the FDA-approved device and the capabilities of the team, we'll be able to make improvements to the platform within each year. And so just like we've done with digital and with LithoVue, expect to see probably a once-a-year enhancements upgrade, if you will, to the platform. And so it's not as if this is a stagnant product and which sometimes you get with the reusables for many years. This is a product that we'll be able to enhance at least once per year throughout the next year period whether it be smaller handles, left-handed, right-handed, different user features that the competition doesn't have. So I think that cadence will allow us to please physicians and the spec is to make it as good. On the manufacturing side, we have a lot of experience with this. We've been investing ahead of it. That's one reason why you saw the increase in our capital investment in '19 and '20 as to manage the volume that we expect. So we're comfortable with the ramp that we have laid out with acceleration in the second quarter and beyond. On the economics of it, it's a complicated topic. We do believe there's ample room in the existing reimbursement within patient at roughly $4,000 to $12 -- to $11,500 and outpatient $3000 to call it $5000. And we're also, as you know, we did receive FDA kind of the breakthrough status, which potentially could help with additional potential reimbursement tailwinds. In terms of the pricing itself, we have lots of flexibility within our Endo business to price it on its own and potentially look at contracting capabilities leveraging our portfolio across the business there.

Thanks so much for all that.

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

Thanks for taking my question. So Mike maybe one follow-up on the guidance and then I had one for Dan. On the guidance the comments around the cadence first half versus second half. If I recollect last year you had the days impact in second half. I mean, I appreciate all the comments on Structural Heart but shouldn't Structural Heart cadence to be similar to last year? So the real incremental for our new products, which should step up in second half. Is that the right way to think about that ? And just on the range itself 6.5% to 8.5%, are you comfortable at the midpoint of the range or -- and I appreciate the wider range just given Q4 and market factors, but just want to get a sense whether you're comfortable at the midpoint?

Sure. This is Dan, Vijay. So on the Structural Heart piece, I think, that's fair that as you look at the LOTUS launch that's obviously a very controlled rollout that we've had and that should gain momentum over time as should Sentinel. Mike mentioned that neo2 comes out in the second half. So I think that's fair relative to Structural Heart. We obviously wouldn't give a specific number within the guidance range of 6.5% to 8.5% organic for the full year. But then you heard in Mike's commentary that our goal is to accelerate in 2020 off 2019.

That's helpful Dan. And then one on the margins here, Dan, I think, I heard you mention in a China tender, Japan biannual price cuts. What specifically is the impact from those factors on gross margin? And on the operating line, does it have any impact on the mix just given BTG is coming in because it looks like you're implying 50 basis points margin expansion? Thank you.

Yes. Actually on that prior question from my WATCHMAN team friends here. I want to make sure I include WATCHMAN FLX in the US as well, because that's a huge launch for the WATCHMAN team, who has done a fantastic job since inception. On the price impact, as I look at it, the summary would be, we just have a little bit more price across the enterprise this year in a couple of those areas, as we mentioned, the biannual Japan price cut and the China that will not allow the normal manufacturing cost improvements to poke their head above that and have gross margin go north. The normal equation is you have your manufacturing cost improvements then you have pricing and mix, and the net of those three normally has gross margin increasing. This year the pricing is a little bit higher with China and Japan, and potentially some acceleration on the DES front there, as Mike mentioned. So that really just all netted out where margin -- gross margin should be in that approximately 72% range we set. That's not a surprise to us. It's what we've been saying all along for the last two years is that gross margin, which has paid a lot of the builds over the last five years or six years would slow in terms of its ability to contribute to operating margin improvement, and then SG&A and R&D would pick up that slack. You saw that in 2019 and you should see the same thing in 2020.

Thanks guys.

Your next question comes from the line of Larry Biegelsen from Wells Fargo. Please go ahead.

Good morning. Thanks for taking the questions guys. One on complex PCI, one on Neuromodulation. So your complex PCI business continues to do really well. But that's a business that we don't have a lot of visibility on. So my question for you Mike or Dan is, how are you feeling about the sustainability of growth in that business in 2020 and what are the drivers? And I had one follow-up.

Sure. That business as we've mentioned is larger than DES and continues to do very well around the globe and it's really maybe our most important business in Asia-Pac. So that strategically is a very big business for us. It requires more clinical orientation, which is also helpful and more in our sweet spot and also it is under less pricing pressure, I would say, compared to drug-eluting stents. So the innovation there is really important. And you see a big focus on our Ivis and rural later platform, as well as WOLVERINE and maybe Ian can touch on some other key products. But it's really a key cadence of new products that we have, as well as a big focus on complex PCI training that we have around the globe and how our portfolio matches that.

I think you've said most of it Mark. I think the thing I'd say, Larry, it's most important is the population is aging. And so the burden of disease is appearing later. And so we're seeing more patients with more complex due to the later age with more comorbidities, less suitable for surgery. So just the sheer demographic change is actually driving the burden of complex coronary disease in late age. So it requires more complex interventions.

That's helpful. And just on Neuromodulation, Mike and Dan, you gave a lot of helpful color on the different businesses for 2020. But I wasn't sure if I heard your expectations for Neuromodulation for 2020 relative to 2019. So how do you see that business in 2020 relative to 2019 on an organic basis? Thanks for taking the questions guys.

Sure. Yes. We're hopeful that -- we aim for that business, I would say, to accelerate versus '19. If you look at '19 our SCS business was slow, the market was slow and we had extremely difficult comps the prior year. And so we would expect our global SCS business to improve over '19 and 2020. And also you heard at NANS, as well as detail out in some of the script, some of the clinical benefits we have with that portfolio. So, I think truly on a comp basis and expectations for the market to improve somewhat, we would expect that to improve. And in DBS we just have a lot of really good momentum there. Excellent share taking is taking place in Europe and in the US and you'll see some additional clinical studies being presented with that platform and we touched on some of the product differentiation there. So, and then you have Vertiflex, which will go organic in the second half of the year. So we think broadly speaking Neuromodulator will grow faster in '20 than '19.

Thanks for taking the questions guys.

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

Hi, good morning. Thanks. And just two questions, first on China, I understand you provided nice details around the 1Q potential headwind. But can you help us get a little bit more granular? And any help just in terms of your exposure in China by business unit? I mean, its Cardiovascular Interventional Cardiology most exposed or is it more broad-based? And then on the second question just WATCHMAN FLX. Many comments today just on it being a driver. Can you help us understand the boost that you'll get from WATCHMAN FLX launch? Is that premium pricing are there accounts out there that are waiting for WATCHMAN FLX to get over the hump to start a WATCHMAN program or is it just deeper penetration to current accounts as WATCHMAN FLX will open up kind of more procedures in different risk categories of patients? Thanks for taking the questions.

Sure, Josh. I can start on the first one, and I think, Mike, can take the second one. The good news is we do have, as you mentioned, a very well-diversified portfolio in our China business. It's not reliant on one particular business within the mix. But as our team reflects on all of what's going on there. It's pretty clear that a vast majority of the healthcare resources in China are focused on diagnosing, treating and preventing the spread of the Coronavirus and that all of the procedures are at risk of being delayed. So as we look at it, we don't say its particular division or another and that 10 to 40 contemplates the whole market basket of Boston Scientific business and the impact that we could see here in the first quarter.

Yes. And on WATCHMAN FLX, Ian or Dr. Stein can comment on it as well. But I think in terms of what we've seen in Europe, it's been more of a share taking capability that we have in Europe. And in the US, we haven't seen centers not opening, because we don't have WATCHMAN FLX. So we don't think it's going to drive the sort of new center openings that we wouldn't already receive with current WATCHMAN. I think it's -- and they can speak to the safety profile and the confidence that physicians have with FLX, which will give them more confidence to continue to increase our utilization rates, which are -- so our key metric for WATCHMAN broadly is utilization rates. We'll continue to open more centers in the US. We're expanding in Japan. We're expanding in other countries. But in the US it's all about turning on and continue to ramp up utilization, which we're seeing or we believe WATCHMAN FLX will further enhance that.

I'd just add to that. I'd say the key drivers to utilization or our awareness and we're driving that through education strategies and direct to patient, direct to physician education strategies, which is highly effective. And then procedural enhancements actually increased utilization and WATCHMAN FLX is a substantial procedural enhancement in terms of being simpler to use, easier to recapture and physicians immediately recognize the some of the valuable procedural enhancements. And the third part of increasing utilization is building evidence. And I think the mere fact that we've let -- announced the CHAMPION trial a major doc versus WATCHMAN FLX trial helps to build the awareness and therefore the utilization. So I think things will be very positive.

Great. With that we'd like to conclude the call. Thanks for joining us today. We appreciate your interest in BSX. Before we disconnect, Greg, will give you all the pertinent details for the replay.

Thank you. Ladies and gentlemen, this conference will be available for replay after 12:30 Eastern Time today through February 20th. You may access the AT&T Executive replay system at any time by dialing 1866-207-1041 and entering the access code 3900175. International participants dial 402-970-0847. Those number once again are 1866-207-1041 or 402-970-0847 with the access code 3900175. That does conclude your conference for today. Thank you for your participation and for using AT&T Teleconferencing. You may now disconnect.