Boston Scientific Corporation (NYSE:BSX) Q3 2023 Earnings Call Transcript

Boston Scientific Corporation (NYSE:BSX) Q3 2023 Earnings Call Transcript October 26, 2023

Boston Scientific Corporation beats earnings expectations. Reported EPS is $0.5, expectations were $0.48.

Operator: Good day, and welcome to the Boston Scientific Third Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note, this event is being recorded. I would now like to turn the conference over to Lauren Tengler, Vice President, Investor Relations. Please go ahead.

Lauren Tengler: Thank you, Costas. Welcome everyone, and thanks for joining us today. 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 Q2 2023 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 on the non-GAAP measures used in today’s call to the Investor Relations section of our website under the heading Financials & Filings. The duration of this morning’s call will be approximately one hour. Mike and Dan will provide comments on Q3 performance, as well as the outlook for our business, including Q4 and full-year 2023 guidance.

Then we’ll take your questions. During today’s Q&A session, Mike, and Dan will be joined by our Chief Medical Officer, Dr. Ken Stein. Before we begin, I’d like to remind everyone that on the call, operational revenue growth excludes the impact of foreign currency fluctuations, and organic revenue growth further excludes acquisitions and divestitures for which there are less than a full period of comparable net sales. Relevant acquisitions and divestitures excluded for organic growth are Baylis Medical, which closed on February 14, 2022, the majority stake investment in Acotec Scientific, and Apollo Endosurgery, which closed in February and April of this year, respectively. Divestitures include the endoscopy pathology business, which closed April of this year.

Please note that we have elected to consolidate Acotec results on a one quarter lag, which had been included in our Q3 reported and adjusted results. Guidance excludes the previously announced agreement to acquire Relievant Medsystems, which is expected to close in the first half of 2024, subject to customary closing conditions. For more information, please refer to our financial and operating highlights deck, which may be found on our Investor Relations website. On this call, all references to sales and revenue, unless otherwise specified, are organic. This call contains forward-looking statements within the meaning of federal securities laws, which may be identified by words like anticipate, expect, may, believe, estimate, and other similar words.

They include, among other things, statements about our growth in market share, new and anticipated product approvals and launches, acquisitions, clinical trials, cost savings and growth opportunities, our cash flow and expected use, our financial performance, including sales, margins and earnings, as well as our tax rates, R&D spend, and other expenses. If our underlying assumptions turn out to be incorrect, or if certain risks or uncertainties materialize, actual results could vary materially from the expectations and projections expressed or implied by our 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.

Mike Mahoney: Well done, Lauren. Thank you, and thank you for joining us today. We’re pleased with another quarter of excellent results, with momentum continuing fueled by new product innovation, clinical evidence, and our talented teams across the globe. Q3 ’23, total company sales grew 11% operationally and 10% organically versus Q3 ‘22, which exceeds the high end of our guidance range of 7% to 9%. This performance is a testament to our category leadership strategy, focus on innovation, and strong commercial execution. We believe that most of our global business units grew in line or faster than the respective markets. Q3 adjusted EPS at $0.50 grew 15% versus Q3 ‘22, which exceeds the high end of the guidance range of $0.46 to $0.48.

Q3 adjusted operating margin was 26.1%, slightly higher than anticipated. Now, for ‘23 guidance, we’re guiding to Q4 ‘23 organic revenue growth of 8% to 10%, and aligning our full-year organic guidance to approximately 11%, the high end of our prior guidance. Our Q4 ‘23 adjusted EPS estimate is $0.49 to $0.52, and we are raising our full-year adjusted EPS range to $1.99 to $2.02. I’ll now provide additional highlights on Q3, along with comments on our 2023 outlook, and then Dan will provide more details on the financials. Regionally, on an operational basis, the US grew 9% versus Q3 ’22, driven by strong performance within our WATCHMAN, EP, endo, and urology businesses. Europe, Middle East, and Africa grew 11% on an operational basis versus Q3 ‘22.

Performance of the region was broad-based, with double-digit growth in seven out of our eight business units. Within the quarter, we saw strong growth in EP, with ongoing momentum and demand for FARAPULSE and POLARx. Asia Pac grew 19% operationally versus third quarter ’22, led by strength in Japan and China. Japan grew strong double digits in the quarter, with ongoing momentum from new products, most notably AGENT DCB, Rezūm, POLARx FIT, and WATCHMAN FLX. Physician demand for our differentiated AGENT DCB remains high, and we’ve taken a market leadership position within the quarter after launching earlier this year. Double-digit growth in China was led by our Imaging and Complex PCI portfolio, as well as the commercial execution of the team more broadly.

These results were further supported by the performance of the Acotec business, and we continue to expect double-digit growth in China for the full year. I’ll now provide some additional commentary on the business units. In the quarter, urology sales grew 11% organically, with international growth of 18%, fueled by new products and globalization efforts, with all regions outside the US growing double digits. Globally, the Stone Management franchise grew double digits, driven by LithoVu and Laser Therapies. Rezūm had another strong quarter of double-digit growth, backed by long-term clinical data supporting international momentum with a leave nothing behind message resonating in Asia. Endoscopy sales grew 11% organically and 12% operationally versus third quarter ’22, broad-based strength across all regions.

Our single-use imaging and AXIOS technologies continued to perform well, both doing double digits within the quarter. And earlier this month, we received US marketing authorization for an expanded indication of the AXIOS stent to include gallbladder drainage, increasing access to more patients with this platform. Neuromodulation sales grew 3% organically versus third quarter ‘22. Our Brain franchise grew low double digits in the quarter, with strength from new product launches, including the Vercise Neural Navigator 5 Software, which is our fifth generation DBS programming solution, furthering our leadership in image-guided programming for more streamlined DBS programming in the US. Our pain business grew low single digits, driven by spinal cord stimulation sales, which were slightly below our expectations.

We’re optimistic about the opportunities ahead of our pain business included in our recent US approval to expand indication of our WaveWriter Alpha SCS system to include DPN, which is expected to launch in early ‘24. We’re also excited to add to our portfolio with our recently announced agreement to acquire Relievant Medsystems and its Intracept procedure. Intracept is the only US-cleared system for vertebrogenic pain, expanding our portfolio of pain offerings, which is expected to close in the first half of 2024. Peripheral intervention sales grew 8% organically and 13% operationally, which includes the results of Acotec versus third quarter ’22. Our Arterial franchise delivered another strong quarter, growing low double digits, led by ongoing success globally with our drug-eluting portfolio.

in Venous, data from the REAL-PE study was presented earlier this week, demonstrating statistically significant lower major bleeding rates in patients with pulmonary embolism who are treated with EKOS compared to a competitive mechanical thrombectomy device. The REAL-PE study analyzed nearly real-time EHR data for over 2,200 PE patients from 2009 to 2023. This study provides new clinical evidence for providers in determining the optimal modality for each patient’s needs. Our Interventional Oncology franchise grew double digits, including ongoing momentum with our Embold Coil, launch as well as strong demand for our cancer therapies. Within the quarter, we received FDA clearance to expand the indication of the Visual ICE Cryoablation System to treat pain associated with tumors that have metastasized to bone in patients who are unable to receive standard radiation therapy.

Our cardiology group delivered another excellent quarter, with organic sales growth of 11% versus third quarter ‘22. Within cardiology, interventional cardiology therapy sales grew 7% organically versus third quarter ‘22. Our Structural Heart Valves franchise grew double digits in third quarter, led by ACURATE Neo2 sales performance in Europe. And growth within our Coronary Therapies franchise is fueled by ongoing success of our Imaging technologies. We’re pleased to have received clearance for the AVVIGO+ Guidance System. AVVIGO is our next-generation platform that provides high quality fast imaging, with improved physiologic assessment of coronary vessels and lesions. We continue to be pleased with the performance of AGENT DCB in Japan.

Importantly, our AGENT IDE trial results were presented yesterday as a late breaker at TCT, with data demonstrating statistical superiority of the AGENT drug-coated balloon versus uncoated balloon angioplasty for the treatment of patients with in-stent restenosis. With our recent regulatory submission to FDA, we anticipate approval of AGENT, the first drug-coated balloon indicated for the coronary arteries within the US in the second half of ’24. WATCHMAN sales grew 23% organically versus third quarter ‘22. We’re very pleased with the excellent performance of this franchise, and have now treated more than 350,000 patients globally. Last month, we received FDA approval of the latest generation WATCHMAN FLX Pro, which is designed to improve visualization during device placement to enhance healing post-implant, and treat a broader range of patient anatomies.

Additionally, enrollment has commenced in HEAL-LAA, a post-market study of the WATCHMAN FLX Pro device in the US. We continue to expect strong growth from the WATCHMAN, business backed by new technologies and significant investment in clinical evidence. Cardiac rhythm management sales grew 5% organically versus third quarter ’22. And core CRM, our high voltage business, grew low single digits, and our low voltage business grew mid-single digits. Our Diagnostics franchise grew double digits in the quarter, fueled by our diverse portfolio of ambulatory ECGs and ICM. We continue to further innovate in the space, having launched in the US the next-generation LUX-Dx II and the II+ implantable cardiac monitor for long-term monitoring of arrhythmias, providing enhanced diagnostic capabilities and enabling a more efficient workflow.

Electrophysiology sales grew 27% organically versus third quarter ‘22. International growth of 33% was driven by excellent performance from our differentiated FARAPULS and POLARx technologies, as well as our Access Solutions franchise and the leading VersaCross Access platform. US growth of 22% was led by our Access Solutions franchise, along with contribution from the early approval – I’m sorry, from the approval of the POLARx Cryoablation System, including POLARx FIT, which enables physicians to adjust and expand the cryo balloon to best fit a patient’s individual anatomy. Also, within the quarter, we launched VersaCross Connect for POLARSHEATH, which provides safe and efficient access to the left side of the heart during procedures, expanding our Access Solutions portfolio.

Clinical evidence generation remains a key priority, and we’re pleased to have completed enrollment in the first phase of the ADVANTAGE AF clinical trial studying FARAPULSE for the treatment of patients with persistent AFib. Additionally, we commenced enrollment and treated our first patient in an extension arm of the ADVANTAGE study to evaluate FARAPOINT, which is a point-by-point PFA focal catheter for CTI ablations used to treat atrial flutter. Finally, within the quarter, we achieved important milestones to bring in our leading PFA technology to the US. Recalled data from our ADVENT IDE trial was presented at ESC at the end of August, comparing FARAPULSE to standard of care thermal modalities meeting the primary endpoints. We’ve also completed our US regulatory submission and continue to anticipate the approval of FARAPULSE in the US in the second half of ’24.

Through the first nine months of this year, we have grown organic sales 12% while growing adjusted EPS 18%, with broad-based growth across all of our business units and regions. This performance is supportive of the goal we laid out last month at our Investor Day, where we aspire to be highest performing large cap med tech company over the next three years. We believe our focus and talent and culture, our relentless pursuit of innovation, while doing the right thing for society and operating responsibly, sets us up to deliver a unique set of financial goals over the 2024 to 2026 long range period. Our LRP goals include growing sales 8% to 10% CAGR over the period, while expanding adjusted rate operating margins by 150 basis points over the three years, with double-digit adjusted EPS growth annually, and improvement of our free cash flow conversion to approximately 70% by 2026.

With that, I’ll pass off to Dan to provide more details on the financials.

Dan Brennan: Thanks, Mike. Third quarter 2023 consolidated revenue of $3,527 million, represents 11.2% reported revenue growth versus third quarter 2022, and includes a 10 basis point tailwind from foreign exchange, which was lower than expected due to the strengthening of the US dollar throughout the quarter. Excluding this $4 million tailwind from foreign exchange, operational revenue growth was 11.1% in the quarter. Sales from acquisitions and divestitures contributed 90 basis points, resulting in 10.2% organic revenue growth, exceeding our guidance range of 7% to 9%. Q3 2023 adjusted earnings per share of $0.50 grew 15% versus 2022, exceeding the high end of our guidance range of $0.46 to $0.48, driven predominantly by our strong sales performance.

Adjusted gross margin for the third quarter was 70.2%, slightly lower than our expectations, primarily driven by foreign exchange. In light of our Q3 results, we now anticipate that full-year 2023 adjusted gross margin will only slightly improve on a year-over-year basis. Strong sales performance drove third quarter adjusted operating margin of 26.1%, resulting in a year-to-date adjusted operating margin also of 26.1%. Our year-to-date performance sets us up well to achieve our full-year 2023 adjusted operating margin goal of approximately 26.4%, which represents 80 basis points of expansion versus 2022.On a GAAP basis, the third quarter operating margin was 19.6%, which includes a $111 million credit primarily related to certain IP litigation matters.

Moving to below the line, third quarter adjusted interest and other expenses totaled $81 million, which was in line with our expectations. On an adjusted basis, our tax rate for the third quarter was 12.4%, favorable to our expectations, driven by certain discreet tax items in the quarter. Our operational tax rate was 13.9%, in line with expectations. Fully diluted weighted average shares outstanding ended at 1,475 million in Q3. Free cash flow for the quarter was $509 million, with $698 million from operating activities, less $190 million net capital expenditures. Excluding special items, adjusted free cash flow was $582 million. As a result of our strong year-to-date adjusted free cash flow generation, we now expect full-year 2023 adjusted free cash flow in excess of $2.4 billion.

Our top capital allocation priority remains strategic tuck-in M&A, followed by annual share purchases to offset dilution from employee stock grants, which we announced at last month’s Investor Day. As of September 30, 2023, we had cash on hand of $952 million, and our gross debt leverage was 2.3 times. I’ll now walk through guidance for Q4 and full-year 2023. We expect full-year 2023 operational revenue growth to be approximately 12%, which excludes an approximate 100 basis-point headwind from foreign exchange, higher than our previous estimate due to the strengthening of the US dollar. Excluding the impact of closed acquisitions and divestitures, we expect full-year 2023 organic revenue growth to be approximately 11% versus 2022. We expect fourth quarter 2023 operational revenue growth to be in a range of 9% to 11% versus Q3 2022, with a neutral impact from foreign exchange based on current rates.

Excluding the contribution from closed acquisitions and divestitures, we expect fourth quarter 2023 organic revenue growth to be in a range of 8% to 10%. We continue to expect our full-year 2023 adjusted below the line expenses to be approximately $340 million. Our full-year 2023 operational tax rate is now expected to be approximately 13.5% under current legislation and forecasted geographic mix of sales. As a result of a lower operational tax rate and favorable discrete items recognized in the third quarter, we now expect our adjusted tax rate to be approximately 12%. We expect a fully diluted weighted average share count of approximately 1,478 million shares for Q4 2023, and 1,464 million shares for the full year 2023. We expect full-year adjusted earnings per share to be in a range of $1.99 to $2.02, representing 17% to 18% growth versus 2022.

We continue to anticipate a neutral impact from foreign exchange on full year 2023 adjusted earnings per share. We expect fourth quarter adjusted earnings per share to be in a range of $0.49 to $0.52. For more information, please check our Investor Relations website for Q3 2023 financial and operational highlights, which outlines more details on Q3 results and 2023 guidance. In closing, I’m very proud of our year-to-date financial performance, with top-tier organic revenue growth of 12%, adjusted operating margin of 26.1%, and adjusted earnings per share growth of 18%. I look forward to continued momentum in the fourth quarter to close out 2023, which will set the stage towards achieving our long-range financial goals. With that, I’ll turn it back to Lauren, who will moderate the Q&A.

Lauren Tengler: Thanks, Dan. Costas, let’s open it up to questions for the next 30 minutes or so. In order for us to take as many questions as possible, please limit yourself to one question. Costas, please go ahead.

Operator: [Operator instructions]. And the first question comes from the line of Robbie Marcus with J.P. Morgan. Please go ahead.

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Q&A Session

Robbie Marcus: Hi, good morning. And congrats on a great quarter. And since many of us are at TCT, I’ll add the nice AGENT DCB trial as well. I had two questions, so I’m going to – I’ll just go with one here. As we go back to the Analyst Day, you pointed to 8% to 10% growth and 150 basis points of operating margin expansion over the three-year timeframe. And I believe one of the comments was at the beginning of the range, it’ll be towards the lower end and accelerate as you have some of your big new product launches coming. So, I’m looking at 2024 here and I see the Street at 8% to 9% organic sales growth and about 50 basis points margin expansion. I just want to make sure we’re interpreting the comments you made at t he Analyst Day correctly, and any thoughts you have on directionality for next year. Thanks a lot.

Mike Mahoney: Yes, sure. Robbie. I think relative to the Analyst Day commentary, let me just reiterate just to make sure we’re all on the same page. So, yes, as you said, 8% to 10% organic revenue growth over the period, 2024 to 2026, 150 basis points of margin expansion over that three-year period, which would put us, assuming we’re at that 26.4% at the end of this year, kind of near that 28%, which is a nice jumping off point for that 30% long-term goal. And then we said that the 2025 revenue growth rate would likely be higher than our 2024 revenue growth rate due to the launches that are coming in 2024. So, that’s really the commentary that we had relative to Investor Day. And obviously, 2023 is shaping up to be a great year, good jumping off point heading into 2024.

But relative to specifics around 2024, we’re working through our 2024 annual planning process here in the fourth quarter. And as you would expect, we’ll use that as the basis to give you the guidance when we get to our Q4 earnings call in January.

Robbie Marcus: All right, appreciate it. Thank you.

Operator: The next question is from the line of Joanne Wuensch with Citibank. Please go ahead.

Joanne Wuensch: Good morning, and thank you for taking the question. Since many are sitting here at TCT, I think I’m going to focus on that, including, I’d love some feedback on the data that’s been presented here, particularly on the AGENT trial. And then I found the WATCH-TAVR Trial also interesting. So, anything you can comment on, that would be wonderful. Thank you.

Mike Mahoney: Dr. Stein, you want to comment?

Dr. Ken Stein: Yes, thanks, Mike. Let me start again. Hey Joanne. We’re really pleased by all of the data that we saw at TCT. I’ll begin with AGENT, and literally could not be happier with the ultimate results of that randomized trial, which again, as I hope everyone recognizes, right, is intended to get approval of the first drug-coated balloon indicated for use in the coronaries in the United States for in-stent restenosis, right? In-stent restenosis accounts for approximately 10% of US coronary interventions today. Having a drug-coated balloon will allow interventionalists to address these stent failures while leaving nothing behind. We’ve seen how well it’s performing where we do have it approved in Japan. And just to reiterate really the incredible results from the trial met endpoint of target lesion failure at 12 months was really marked statistical and clinical superiority to Plano balloon angioplasty, and importantly, both clinically important reductions in target-vessel-MI, and reductions in the need for target lesion revascularization.

And then – yes, so that was yesterday. Day before yesterday, we saw the results of WATCH-TAVR. And so, WATCH-TAVR, I think, was an important investigator-initiated trial looking at the combined use of the legacy WATCHMAN 2.5 device at the same time of TAVR in high risk patients with atrial fibrillation undergoing TAVR. And I think on the one hand, we sort of acknowledge that combined use of WATCHMAN with TAVR does face a challenge in reimbursement environment, but also important, the trial validates the safety and the efficacy of the legacy WATCHMAN 2.5 device as compared to control therapy, including the use of NOACs in this population.

Joanne Wuensch: Thank you.

Operator: The next question is from a line of Rick Wise with Stifel. Please go ahead.

Rick Wise: Good morning. Thank you for the question and it’s wonderful to see such an excellent quarter. I guess if I focus on one, maybe you could expand on your – Mike, on your – if you want to do it, your neuromod comments, just your latest thinking, just broadly what’s going to help re-accelerate the business or what’s next from here. But more specifically, the PDN indication approval, how does that affect the business? When does it start contributing? How would you have us think about the beneficial contribution there? Thanks a lot.

Mike Mahoney: Thanks. Morning, Rick. In the third quarter, as I mentioned, we’re proud that most all of our businesses grew, at least, at most likely, most of them grew above market, likely, with the exception of the one that you asked about, neuromod. So, in the neuromod business, we grew roughly 3% in the quarter. I’ll just start off, before you – I jumped SCS, the brain business. Our DBS business continues to do well, continues to grow share. And in third quarter, it grew double digits again with the neural navigator. So, that business continues to become a larger part of the overall mix. Global SCS still is the largest piece. That’s been under pressure, as you pointed out. The pressure points really come from additional – probably a couple of new competitors to the marketplace, some competitive launches, and our DPN approval, which we’re very excited about, which you highlighted, we received in October, but we don’t expect to launch our DPN platform until likely first quarter, near the mid first quarter of 2024.

So, this will certainly help us with our core SCS business with that additional indication. And also, with the Relievant company that we’ve signed but not yet closed, we expect to close that in 2024. So, we need the combination of the DPN through our existing SCS base, combining with the Relievant, and also our RF platform gives us a really nice category leadership position to treat pain with a variety of options, which will be differentiated. So, we do expect likely some softness to continue in the fourth quarter, and we obviously aim to improve on those results in 2024 based on what I just highlighted.

Rick Wise: Appreciate the color. Thank you.

Operator: The next question is from the line of Vijay Kumar with Evercore ISI. Please go ahead.

Vijay Kumar: Hey, guys, congrats on the print and the data being presented at TCT. If I may, I want to stick to on the financial side. Dan, just to clarify the 2024 commentary, if the acceleration is all being driven by new products, and these new products are being launched, I think you said back half of next year, should we be perhaps thinking about the lower end of that 8% to 10%? And I think you mentioned gross margins FX impact here. So, it looks like Q4 is going to look similar to 3Q. How to think about any FX impact from gross margins as we look at the outlook.

Dan Brennan: Sure. So, I’ll hit the gross margin one first. The gross margin in the third quarter was a little bit lower than we expected, and it was predominantly driven by FX, that 70.2%. So, we had been targeting kind of to be approaching 71% for the full year this year. We were 70.5 last year. Just tempering that commentary to say you know what, we might not hit the approaching 71%. We might be – we’ll be north of 70.5, but maybe not as high as approaching 71%. So, a bit of a nuance there, but driven by FX. And we had mentioned for – the long range plan at Investor Day for 2024, 2025, and 2026, that there’d be a bit of an FX headwind in gross margin in 2024 that should get better over that timeframe of 2024, 2025, 2026.

Relative to 2024 organic revenue growth, no, there’s really not much to assume other than we’ll let you know on January 31 when we have our call. We have 8% to 10% as the CAGR for the three years. As I mentioned, we’ll work through our annual planning process here over the back half of this quarter, and we’ll let you know. We do have some nice launches, obviously in 2024, as you mentioned, many in the back half, but we’ll let you know on January 31 what we think the range will be for 2024.

Vijay Kumar: Understood. Thanks, guys.

Operator: The next question is from the line of Larry Biegelsen with Wells Fargo. Please go ahead.