Boston Scientific Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
February 1, 2023

There are 11 speakers on the call.

Operator

Good morning, and welcome to the Boston Scientific 4th Quarter 2022 Earnings Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Lauren Tangler, Vice President, Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, Drew. Welcome, everyone, and thanks for joining us today. With me on today's call are Mike Mahoney, Chairman and Chief Executive And Dan Brennan, Executive Vice President and Chief Financial Officer. We issued a press release earlier this morning announcing our Q4 and full year 'twenty two results, Which include 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 Financials and Filings.

Speaker 1

The duration of this morning's call will be approximately 1 hour. Mike and Dan will provide comments on Q4 and full year performance as well as the outlook for our business, including 2023 guidance, and then we'll take During today's Q and A session, Mike and Dan will be joined by our Chief Medical Officers, Doctor. Ian Meredith and Doctor. 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.

Speaker 1

Relevant acquisitions excluded for organic growth are Preventis, Sharapulse and Lumina Surgical, which closed in March, August September of 2021 respectively, as well as Bayless Medical, which closed on February 14, 2022. Divestitures include the BTG Specialty Pharmaceuticals business, which closed on March 1, 2021. Guidance Excludes the previously announced agreements to purchase a majority stake in Mitek and Aquatek as well as the acquisition of Apollo Endosurgery, which are all expected to close in the first Half of twenty twenty three. 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.

Speaker 1

This call contains forward looking statements within the meanings of the federal securities Statements about our growth and 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 and 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 In 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.

Speaker 2

Thanks, Lauren, and thank you for everyone for joining us today. 2022 represented a return to more durable and procedural growth within the markets we serve, which provides a stronger base for our innovative portfolio. I'm very proud of the resiliency and winning spirit of our global team, Delivering on our sales and EPS goals despite the ongoing macroeconomic and supply chain challenges. Importantly, we delivered strong performance across all geographic regions and believe that most all of our business units gained or maintained market share throughout the year. In Q4 'twenty two, total company operational sales grew 9% And organic sales grew 7% versus Q4 'twenty one, which was the low end of our guidance range.

Speaker 2

However, it's very important to note that these results include an unplanned sales reserve of $60,000,000 established for an Italian government payback provision, Operating margin increases and earnings per share. And without the impact of the Italian sales reserve, we would have achieved the high end of our organic sales guidance range 7% to 9%. Full year 'twenty two operational sales grew 11% versus 'twenty one, while organic sales grew 9%, In line with our guidance of approximately 9. 4th quarter adjusted EPS of $0.45 declined minus 2% versus 0.21 And full year adjusted EPS of $1.71 grew 5% versus $0.21 both achieved in the low end of the guidance range. Once again, without the impact of the Italian sales reserve, we would achieve the high end of the guidance range for both 4th quarter and full year of $1.71 to $1.74 We generated full year free cash flow of $950,000,000 and adjusted free cash flow of $2,100,000,000 in line with our expectations.

Speaker 2

Now for outlook for 2023. We are guiding to organic growth of 6 to 8 For both Q1 'twenty three and full year 'twenty three, which excludes the acquisition of Apollo Endosurgery and the majority stake investments in Mitek and Accotec, all of which are expected to close in the first half of twenty twenty three. Our Q1 'twenty three adjusted EPS estimate is $0.42 to $0.44 and we expect our full year adjusted EPS to be $1.86 to $1.93 And despite the ongoing macroeconomic pressures and supply chain headwinds, We remain committed to our goal of plus fifty basis points of operating margin expansion and double digit adjusted EPS growth in 2023. Dan will provide more details on our 'twenty two performance, the Italian sales reserve and our 'twenty three outlook. I'll now provide some additional highlights on 'twenty two results along with comments on our 'twenty three outlook.

Speaker 2

Regionally, on an operational basis, the U. S. Grew 10% versus 4th with particular strength in our WATCHMAN, ENDO and Urology business units. Europe, Middle East and Africa grew 11% on an operational basis Q4 'twenty one and 12% on a full year basis. This above market growth is supported by ongoing investments in emerging markets, New and ongoing product launches across the portfolio, pricing discipline and strong commercial execution.

Speaker 2

We're excited about the year ahead with Ongoing momentum across the region, particularly with our innovative EP portfolio and further opportunity with Bayless and the Access Solutions franchise. Asia Pacific grew 10% operationally versus Q4 'twenty one and 12% for the full year. On a full year basis, 6 out of 8 business grew double digits supported by ongoing innovation across the region. Full year Japan growth was driven by new products including Polarex, which has approximately 50% share in open accounts. We look forward to 2023 with ongoing momentum for both new products and are excited about a recent approval and reimbursement received for agent DCB, which is a coronary drug coated balloon for instant restenosis In small vessels.

Speaker 2

On a full year basis, China grew more than 20% fueled by 13 new product launches, ongoing portfolio diversification and the team's resiliency and execution. We continue to expand our presence in the China market with the recently announced acquisition of a majority stake in Accotec. We believe this investment can create strategic value for both companies without opportunities to collaborate in R and D, manufacturing and commercial strategies. We also continue to expect China to be a double digit grower at 23 despite ongoing VBP pressure and potential impact to procedure volumes in Q1 from COVID. In Latin America, the momentum continued with operational sales growth of 16% versus Q4 'twenty one and full year growth of 28% with all business units growing double digits for 'twenty one.

Speaker 2

On the business units starting with urology, Urology sales grew 12% both operationally and organically versus Q4 'twenty one and on a full year basis. They grew 15% operationally and 10% organically versus 21%. Within the quarter, all franchises grew double digits fueled by new and ongoing product launches and continue global expansion. On a full year basis, global growth was driven by key products such as Liftaview, Resume and SpaceOAR as well as the acquisition of the Luminus Moser Laser Technology, further complementing the urology portfolio. Endoscopy sales grew 7% organically in the quarter and on a full year basis grew 8% organically versus 'twenty one.

Speaker 2

In 'twenty two, we had global success with innovative products such as Axios and single use imaging, both growing over 20% and supporting strong growth across the globe. In Q4, we announced our intent to acquire Apollo Endosurgery, which will add a complementary and innovative endoluminal surgery portfolio. We look forward to closing this acquisition as well as our previously announced majority stake in Mitek, which includes the innovative wow, in the first half of twenty twenty three. Neuromodulation sales grew 5% organically versus Q4 2021 and full year basis grew 3% organically versus 21%. Globally, our spinal cord stimulation business grew 4% in 4th quarter with continued physician enthusiasm for WaveWriter Alpha and FAST.

Speaker 2

We continue to invest in clinical evidence to expand indications and presented 3 month data from our non surgical back study SOLUS at NANS earlier this year. The study Comparing SCS to conventional medical management, META's primary endpoints and we anticipate FDA approval for non surgical back indication by the end of 'twenty three. Our BRAIN franchise grew double digits in the quarter and low double digits on a full year basis. This strong performance is aided by continued momentum from new product launches in 'twenty two as well as the recent launch of the Versace 2 in 1 lead extension. Purple Intervention sales grew 9% organically versus both Q4 'twenty one and full year 'twenty one.

Speaker 2

Within our material, we are pleased with the performance of our drug eluting portfolio, Growing strong double digits for the full year and achieving the number one global position I'm sorry, the number one position within SFA in the U. S. On a full year basis, our Venus franchise is flat versus prior year with Verathena, our market leading varicose vein offering, Growing over 20% in 2022. Our interventional oncology franchise performed well in 2022, growing low double digits, Led by our portfolio of innovative cancer therapies and suite of embolization tools. We continue to invest in expanding the potential applications of TheraSPHERE and enrolled our first patient in our early feasibility study, Frontier, evaluating the image of safety of image guided intra arterial delivery at TheraSPHERE GBM in patients with the reoccurring glioblastoma.

Speaker 2

Cardiology delivered another excellent quarter with Operational sales growing 13% on organic sales growing 10% versus Q4 'twenty one. On a full year basis, Sales grew up 14% operationally and 10% organically. Our newly aligned cardiology group delivered strong growth across its 4 businesses as we continue to invest in the higher growth segments and differentiated offerings for our customers that address the areas of greatest cardiac need for patients. Within cardiology, interventional cardiology therapy sales grew 5% organically in 4th quarter and on a full year basis grew 8% organically versus 'twenty one. On a full year basis, the coronary therapies franchise, which includes both drug Looney Stents and complex PCI, grew 7%, driven by strong performance in our international regions and our imaging franchise.

Speaker 2

Our structural hard valves franchise grew double digits in 4th quarter and a full year basis outpacing the market in Europe with our ACURATE neo2 aortic valve. Ongoing clinical evidence has Reported growth throughout 'twenty two and in the Q4. Data from the ACURATE NEO2 PMCF study was presented as a late breaker at PCR Linden Valves, demonstrating positive safety and 30 day outcomes with low PBL rates and best in class pacemaker implementation rates. Additionally, we enrolled our first patient in the ACURATE Prime XL nested registry, assessing the safety and efficacy of the ACUR Prime aortic valve XL to treat patients with severe aortic restenosis who need a larger valve size for the TAVR procedure. WATCHMAN sales grew 22% organically versus Q4 'twenty one and on a full year basis grew 24% organically versus 21.

Speaker 2

Q4 finished with record sales, Strong utilization in the U. S. Supported by the DAPT label expansion. Importantly, we completed the enrollment of our CHAMPION AF trial Way ahead of schedule. This head to head trial versus novel oral anticoagulation has a potential to more than triple the number of patients indicated for WATCHMAN FLX in 2027 beyond.

Speaker 2

We remain excited about this outlook for this business and expect double digit growth in 2023 Fueled by innovation, ongoing clinical evidence and strong commercial execution. CRM sales grew 6% both operationally and organically Q4 'twenty one and on a full year basis grew 8% operationally and 7% organically. Our diagnostics franchise had a strong year growing double digits We expect that all major markets were in line or slightly above the market. Electrophysiology sales grew 76 percent operationally and 25% organically versus Q4 'twenty one and on a full year basis grew 69% operationally and 18% organically Polarex continues to perform well in both Europe and Japan has now been treated to treat over 25,000 patients since launch. Momentum in VERIPULSE continues with another strong quarter of growth in Europe.

Speaker 2

And we continue to invest in clinical evidence and look forward to the readout of the randomized ADVENT U. S. ID trial in the second half of twenty twenty three and are planning to initiate our ADVANTAGE AF trial studying the use of Feripulse for patients with persistent AFib imminently. We've been very pleased with the performance of our Bayless acquisition and the innovative VersaCrosse platform, which grew 2 times faster than the market in 'twenty 2. We launched our VersaCrosse Connect in 22 improving efficiencies in our WATCHMAN procedure.

Speaker 2

Earlier this year, we shared our strategy consistent with years past. We continue to position ourselves to win in the markets we play through meaningful innovation by balancing our financial And in 'twenty two, we announced 4 acquisitions, invested 10% of our sales in internal R and D to fund sustainable growth and advance patient care. We're extremely excited about the year ahead and remain focused on our people and sustaining a culture that is motivated to drive differentiated performance and achieve our long term goals, continuing to grow sales faster than markets, continuing to expand operating margins and delivering double digit adjusted EPS growth and strong adjusted free cash flow generation. So before I turn it over to Dan, I want to share that with the retirement of Doctor. Ian Meredith, Doctor.

Speaker 2

Ken Stein will assume some of the global responsibilities That previously fell under Ian, including total company investor engagement, in addition to a CRM, EP and Watchman roles. Please join me in congratulating Ken and thanking Ian for his many contributions. With that, I'll pass it off to Dan to provide more details on the financials.

Speaker 3

Thanks, Mike. 4th quarter consolidated revenue of $3,242,000,000 represents a 3.7% reported revenue growth versus Q4 2021 and reflects a $158,000,000 headwind from foreign exchange, slightly favorable to our expectations As the U. S. Dollar weakened throughout the quarter, excluding this 500 basis point headwind from foreign exchange, operational revenue growth was 8.7% in the quarter. Sales from the acquisition of Bayless contributed 160 basis points resulting in 7.1 percent organic revenue growth At the low end of our guidance range of 7% to 9% growth versus 2021, including an approximate 200 basis point impact associated with an unplanned sales reserve related to an Italian government payback provision, which was recorded in the Q4 of 2022.

Speaker 3

With the goal of recovering spending above the government's medical device budgets, this payback provision requires companies that have supplied medical devices to public hospitals in Italy to pay back a portion of these overrun amounts, while we and others in our industry have appealed and will continue to challenge the enforceability of the law through the Italian court system. We established A sales reserve of $60,000,000 in the 4th quarter, representing our best estimates of amounts we could be required to pay back. Without the reserve, we would have achieved the high end of the organic revenue growth guidance range. Flow through on the Italian sales reserve resulted in Q4 adjusted earnings per share of $0.45 at the low end of our range, representing of 2% versus 2021. Without the reserve, we would have achieved the high end of our range for the quarter.

Speaker 3

Full year 2022 consolidated revenue of $12,682,000,000 represents 6.7% reported revenue growth versus full year 2021 and reflects a $524,000,000 headwind from foreign exchange. Excluding this 440 basis point headwind from foreign exchange, Operational revenue growth was 11.1% for the year. Sales from closed acquisitions contributed 2 40 basis points, resulting in 8.7 percent organic revenue growth, in line with expectations and inclusive of a 50 basis point impact associated with the Italian sales reserve. Full year 2022 adjusted earnings per share of $1.71 represents 4.8% growth versus 2021, achieving the low end of our guidance range of $1.71 to $1.74 without the unplanned Italian sales reserve, we would have been at the high end of our full year guidance range. Adjusted gross margin for the Q4 was 70.5%, resulting in full year 2022 adjusted gross margin also of 70.5%, in line with our expectations.

Speaker 3

Full year adjusted gross margin improved versus 2021, driven by an FX tailwind of 100 basis points related to our hedging contracts, partially offset by continued macroeconomic headwinds. These headwinds were approximately $375,000,000 versus 2019 and are predominantly from increased freight costs and unfavorable manufacturing variances primarily related to direct material cost and availability. Our 2023 guidance assumes macroeconomic and supply chain headwinds will be similar to 2022. Different from prior years, We expect first half twenty twenty three gross margin to be higher than the second half, largely due to the timing of foreign change movements that occurred during 2022. 4th quarter adjusted operating margin was 25.7 percent, resulting in full year 2022 adjusted operating margin of 25.6%, improving 30 basis points versus 2021, inclusive of a 30 basis point negative impact from the unplanned Italian sales reserve.

Speaker 3

As we look to 2023, We continue to focus on our goal of annual operating margin expansion and despite our expectation of continued macroeconomic headwinds, Our goal is to achieve approximately 26.4 percent adjusted operating margin for the full year 2023, Representing 80 basis points of improvement versus the 2022 adjusted operating margin of 25.6 percent and importantly, 50 basis points of expansion compared to the full year 2022 adjusted operating margin without the impact of the Italian sales reserve. On a GAAP basis, the 4th quarter operating margin was 12.4%, including $131,000,000 in litigation related expenses, which I'll provide detail on in a moment. Moving to below the line, 4th quarter adjusted interest and other expense totaled $88,000,000 resulting in full year adjusted interest and other expense of $362,000,000 slightly higher than our expectations, Our tax rate for the Q4 was 11.9% 12.7% for the full year 2022, including discrete tax items and the benefit from stock compensation accounting. Our operational tax rate was 12% for the 4th quarter and 13.5% for the full year, Slightly favorable to our expectations of approximately 14%. Fully diluted weighted average shares outstanding ended Adjusted free cash flow for the quarter was $776,000,000 and free cash flow was $597,000,000 with $807,000,000 of operating activities, less $210,000,000 of net capital expenditures.

Speaker 3

Full year 2022 adjusted free cash flow was $2,100,000,000 in line with expectations free cash flow was $949,000,000 with $1,500,000,000 from operating activities, less $576,000,000 of net capital expenditures. For 2023, we expect adjusted free cash flow in excess of $2,300,000,000 As of December 31, 2022, we had cash on hand of $928,000,000 We continue to expect close the acquisition of Apollo Endosurgery and the majority stake investments in Mitek and Accotec with cash on hand or available credit lines in As of December 31, our leverage was 2.57 times, in line with our expectations, And we were pleased to be upgraded to BBB plus with a stable outlook at both Fitch and Standard and Poor's within the quarter. Our legal reserve was $443,000,000 as of December 31, an increase of $139,000,000 from the prior quarter, primarily related to our mesh litigation. While our U. S.

Speaker 3

Case count has remained materially the same over the past 3 years, We've increased our reserve to account for our latest estimates of the time and cost to resolve these claims as well as remaining probable and estimable global claims. I'll now walk through guidance for Q1 and the full year 2023. And as a reminder, guidance excludes any acquisitions that have not yet closed. We expect full year 2023 reported revenue growth to be in a range of 5% to 7% versus 2022, Excluding an approximate 100 basis point headwind from foreign exchange based on current rates and a 20 basis point contribution from closed acquisitions, We expect full year 2023 organic revenue growth to be in a range of 6% to 8% versus 2022. We expect Q1 2023 reported revenue growth to be in a range of 3% to 5% versus Q1 2022.

Speaker 3

Excluding an approximate 350 basis point headwind from foreign exchange based on current rates and a 70 basis point contribution from closed acquisitions, we expect Q1 2023 organic revenue growth to be in a range of 6% to 8%. We expect our full year 2023 adjusted below the line expenses to be approximately $340,000,000 Under current legislation and forecasted geographic mix of sales, We forecast a full year 2023 operational tax rate of approximately 14%, with an adjusted tax rate of approximately 13%, including the benefit of the accounting for stock compensation, which we expect will largely be recognized in the Q1, resulting in a Q1 2023 adjusted tax rate of approximately 12%. We expect a fully diluted weighted average share count of approximately 1,447,000,000 shares for Q1 2023 and 1,464,000,000 shares for full year 2023, which includes the shares We expect to issue on June 1 this year related to our May 2020 mandatory convertible preferred stock offering. We expect the impact to adjusted earnings per share to be neutral with the preferred stock dividend ending at the time of conversion. We expect full year adjusted earnings per share to be in a range of $1.86 to $1.93 Representing 9% to 13% growth versus 2022.

Speaker 3

At current rates and existing hedging contracts, we anticipate a neutral impact from FX on full year 2023 adjusted earnings per share. We expect 1st quarter adjusted earnings per share to be in a range of $0.42 to $0.44 For more information, please check our Investor Relations website for Q4 2022 financial and operational highlights, which outlines more details on Q4 results and 2023 guidance. In closing, I'm very proud of the results that our global team achieved in 2022 with top tier revenue performance and differentiated operating margin expansion Despite a challenging macroeconomic environment and I'm looking forward to continued momentum during 2023. With that, I'll turn it back to Lauren, who will moderate the Q and A.

Speaker 1

Thanks, Dan. Drew, 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. Drew, please go ahead.

Operator

Thank you. We will now begin the question and answer session. The first question comes from Rick Wise with Stifel. Please go ahead.

Speaker 4

Good morning, everybody. Great to see another excellent year from Boston Scientific. I guess to focus on one question, I'll start with your 2023 guidance. Obviously, the 6% to 8% guide is right in line with your long term philosophy. But you started at the same place in 2022.

Speaker 4

You obviously, excluding the Italy issue finished above 9% organically. Why again stick with the 6% to 8% Is this conservatism, respect for lingering macro pressures or both? And maybe just as part of that, why model macro headwinds similar to 2022? The large cap companies reporting To date, they're not Boston Scientific, but they're all in some way, shape or form highlighting the improving or less pressures from macro as they finish the year and start 'twenty three? Thank you very much.

Speaker 2

Good morning, Rick. It's Mike. Thanks for the compliments. Just to summarize your points, I guess. We're really happy with Q4 excluding that one time Italy reserve grew plus 9%, basically high end of sales, high end of EPS.

Speaker 2

And as Dan said, really pleased that delivered top tier revenue growth and I think one of the few companies that actually improved margins as well in 2022. So we have a lot of momentum And we're excited very bullish on 23% in the future here. On guidance, you don't win the day in February here. So we think the 6% to 8% guidance for full year is appropriate for the full year. We're coming off a 9% growth comp in 2022?

Speaker 2

And we obviously plan to grow as fast as we possibly can while continuing investment company. There are a couple of things that will be there are pluses and minuses. We're very bullish on the EP business, our momentum with WATCHMAN with TheraPulse. There's a couple of tail or headwinds. We do believe in the CRM side.

Speaker 2

We grew about 6% or 7%, I guess last year 7% In a market that's low single digit when you include diagnostics. So we expect a little bit of a headwind there based on comps. China performed terrific for us in 2022 and we expect them to deliver again excellent double digit growth but potentially not Quite as fast as they did in 2022. Also the underlying markets we competed about 6%. So we think coming off a 9% comp, 6% to 8% full year estimate this time of year is the smart guidance to give and we're going to push like heck to beat it.

Speaker 2

And then relative

Speaker 3

to the macroeconomic environment, Rick, We kind of reiterated that $375,000,000 that we saw in 2022 as being a similar headwind in 2023. As you saw through 2022, we have a pretty high performing global supply chain organization that has been on top of this all through it and which is The reason that we've been giving the updates at the level of specificity that we have. So as you would imagine, as we went through our annual operating plan process and guidance preparation process, They really dug in at a detailed level to try and understand what 2023 could bring. There are some elements that look better, right? Freight does look better.

Speaker 3

You see fuel prices and oil prices coming down. So we're optimistic freight costs will be less. The supply of materials and the cost of materials is still a bit uncertain and choppy. And in that direct labor piece that we had in 2022, you got to annualize that in 2023. So I think the prudent case right here, the prudent course For guidance in February is to assume that we don't get a lot of macroeconomic help in 2023.

Speaker 3

I'd love to be surprised as we go through the year that we get that help, but I think we sit here in February, prudent to assume a similar headwind to what we saw last year. Thank you so much. Thanks Rick.

Operator

The next question comes from Robbie Marcus with JPMorgan. Please go ahead.

Speaker 5

Great. Thanks for taking the Questions and congrats on a nice quarter.

Speaker 6

Thanks, Robbie.

Speaker 5

Maybe to start, Mike, at our conference last month, you were really bullish on Faropulse and we saw EP have a nice in the quarter, particularly outside the U. S. Where you have PowerPulse and Polar Rx going now. Maybe you could talk about your expectations or what you saw in the quarter for Farapol specifically and your expectations for it in 2023, especially after we get the data later in the back half of the year assuming it looks good?

Speaker 2

Sure. Our AP business in the quarter Grew 25% and it grew, what is it, 40% or 50%, I think

Speaker 1

40% internationally.

Speaker 2

40% internationally and Poorly in the U. S. Because we don't have these products approved in the U. S. So that really drove the growth down to 25%.

Speaker 2

But I really look at the Outside the U. S. Growth is the key barometer for us. And we're continuing to see great pickup with both our cryo platform and Therapulse. Cryo is a platform that is competing against a product that hasn't changed in a decade.

Speaker 2

And so physicians like the ease of use and the features of the cryo platform that we have in Japan and in Europe. So that's doing quite well. And we're hopeful to have approval for that second half of twenty twenty three in the U. S. Here.

Speaker 2

And then, FerraPulse is doing extremely well for both Cryo users who have adopted FerraPulse and point to point RF users. Doctor. Stein is in the phone, so he can make some comments. But the utilization enthusiasm for VERIPULSE is extremely high, and we're very bullish as we look at 2023 in terms of our EP performance and outlook, especially in Europe and Japan. And if we can get some the approval of The cryo platform in the second half, the U.

Speaker 2

S. Will perform quite well as well. And then we expect to see a big impact from Ferrapulse Feripulse and cryo that are differentiated and showing that clinically where they're launched. And we have an excellent commercial team ready to bring these to the U. S.

Speaker 2

So We won't give specific guidance for EP, but it's clearly a critical growth driver for us in 'twenty three and well beyond that. Doctor. Stein, if you have any other comments?

Speaker 7

Yes, absolutely. Thanks, Mike. Thanks, Robbie. Again, just We do believe that Ferra PULSE is differentiated relative to other PFA technologies out there. I think it's important to reiterate that All PSA is not created equal and because it's a field effect, the results that you're going to see with any of the technologies are Highly dependent on the way actual catheter design and Right now, that was designed from the ground up to deliver PSA, dependent on the waveform that's delivered and dependent on the dosing strategy.

Speaker 7

And as you said, we are really looking forward to presenting the results of our randomized Farapulse trial ADVENT in the second half of this year as well as to initiate our persistent AF trial advantage imminently. The only thing I'd add to what Mike said is I also think as you think about EP, I think it's really important also to consider the really extraordinary momentum that we've got with our transseptal access solutions From Bayless and continue to see above market growth with that and continue to see increased use of the BALIS transseptal access solutions, the energy needle and Versa Cross access, both in ablation procedures and in WATCHMAN and other structural heart procedures.

Speaker 5

Great. Thanks for the color. And maybe just a quick follow-up. China has been an important growth driver for Boston Scientific grew 22% in the year even with the difficult operating environment. So how should we be thinking about China coming out of the reopening here into Q1 and what's your expectation for the year going forward?

Speaker 2

Thanks. Thank you. That team had a terrific 'twenty two despite all the challenges of COVID and All the different pricing tenders that occur over there. So for China in 2023, we're very bullish again. We do expect double digit growth out of the China team for the full year.

Speaker 2

There will likely be some pressure in Q1 given the challenges that they've had in China with COVID. So we expect potentially some sales growth challenges in Q1, but we do expect strong double digit for the full year, Likely not at the same level as the 22% that we delivered in 'twenty two, but strong double digits nonetheless.

Operator

The next question comes from Larry Biegelsen with Wells Fargo. Please go ahead.

Speaker 3

Good morning. Thanks for taking the question and congratulations on a strong end to the year here. I wanted to ask a 2 part question also on FARA PULSE. So maybe for Doctor. Stein, you talked about your excitement for the ADVENT trial later this year.

Speaker 3

Can you help put the MANIFEST data into context? How did that compare to prior RF and cryo studies? And what would be a win for you in ADVENT for Faropulse? And we're going to see the second part is we're going to see the Medtronic Pulse Select data at ACC, the J and J INSPIRE data at Boston AF, I guess this weekend. You talked about how Ferra PULSE is differentiated.

Speaker 3

What should we be looking for in those studies that would support your comments earlier? Thanks for taking the questions.

Speaker 7

Yes. Thanks, Larry. Let me just sort of begin by reiterating what I said to Rob. As we look at the data, everyone just needs to bear in mind that every PFA technology really needs to be evaluated on its own. It's very much unlike RF ablation.

Speaker 7

When you're doing RF ablation, if you've got the same size RF catheter tip and you've got the same back patch and the same power that you're putting through it, you get the same lesion. PFA is very different. Again, because it's an electric field effect, What happens is just intimately related to actually the catheter design that tells you the shape of the field that you're generating, The waveform, which again really tells you very much what kind of impact you're going to have from that field And then your dosing strategy, how many applications of energy do you put in and where do you put them in? We're very confident that Ferra PULSE is the industry leader in this. Again, based on having a catheter that was designed from the ground up to deliver PFA based on a decade of preclinical And then really high quality clinical data validating the waveform and validating a dosing strategy with remap studies that creates durable Installation and say

Speaker 2

the proof of the pudding is

Speaker 7

in the eating. We're really excited and looking forward to seeing the results of our randomized ADVENT trial. I'm glad that you mentioned MANIFEST again, it gives us A high degree of confidence in where we're going, right. So MANIFEST is a registry study of the earliest commercial cases following our CE Mark approval in Europe, so this is people's first experience climbing the learning curve and Vivek Reddy has reported out, published initially on the first 1700 cases and then some limited follow-up in about 1400 of those patients. And really what those data show really proves the advantages of using a system like Feripulse.

Speaker 7

Certainly in 1700 patients, the safety promise of Farapulse was realized, no cases of esophageal injury, no cases of persistent phrenic nerve injury, no cases of pulmonary vein stenosis. So certainly being able to avoid most feared complications of AF ablation, seeing efficacy results that for paroxysmal AFib are at least as good as what's reported in high quality trials with conventional thermal ablation And seeing remarkable procedure efficiency. Now in commercial clinical use, now sort of routinely seeing these cases being done on the order of 30 minutes and that kind of procedural efficiency is it's Good for the system as a whole, right. There are a lot of patients who need to be treated, dealing with staffing issues, etcetera, etcetera, anything we can do to increase throughput is good. It's good for patients though too.

Speaker 7

The less time you're undergoing a procedure, the less number of things that can go wrong honestly. And so basically to sum, right, the MANIFEST data validates what we see as all of the differentiated advantages of Ferra PULSE, A safer procedure avoiding the worst complications, a procedure that is at least as effective as what you see with thermal ablation and a really efficient procedure, which benefits physicians, hospitals and patients.

Operator

The next question comes from Joanne Wuensch with Citibank. Please go ahead.

Speaker 1

Thank you very much for taking the question and good morning. I want to spend just a minute or 2 on the urology and pellet pulp business. I mean that was Another 12% this quarter, 12.7% organically last quarter. What is driving that? And should We think of this more as a solid double digit grower as we look forward.

Speaker 1

And my follow-up question, I'm going to just put it out there now, 50 basis points of operating margin expansion or at least 50 basis points this year, where is that coming from? Thank you.

Speaker 2

Great. Mike here. Thanks for asking the Endo Euro or you didn't ask about Endo, But I'll throw it in there, because they continue just to really outperform and are getting quite sizable within our portfolio and both accretive nicely to margins and growth rate. On the urology results, I mentioned in the prepared words, It's really a excuse me, it's a strong global performance around the world. This business has It's been predominantly a U.

Speaker 2

S. Oriented business that grows faster in the U. S. Accretive to Boston Scientific. Outside the U.

Speaker 2

S, it's been very underpenetrated. But now with all the investments that we've made, commercial And through R and D and through acquisitions, it's strengthening our outside the U. S. Business in urology extensively. And the combination of that global performance and a, I would say, highly differentiated portfolio, We talk about category leadership within a service line and we really have that with urology and with endoscopy.

Speaker 2

So they have a very differentiated portfolio that's very comprehensive versus our competitive set and contracting capabilities with customers who want to work with us. And so urology continues to do quite well and we expect similar results over the next few years here and the integration of Luminus has done well. So that's a terrific business. And I would say Along the same lines, most of the same words with endoscopy as well. In terms of margin improvement, Dan, if you want to hit that one?

Speaker 3

I can do that. Yes. So The commentary again was 50 basis points on top of the 2022 results, excluding the Italian So that would be more like 25.6% was the actual and then there was a 30 basis point impact. So then add 50 basis points to that is where you get the 26 Just to give you the math there. And where does it come from?

Speaker 3

The short answer is, we believe all lines of the P and L. So gross margin will have a slight headwind from this year. Again, we said neutral to the EPS line, neutral to adjusted EPS for the year. But at the gross margin line, we're largely hedged for the year of 2023 and with what we see with where rates are today, we think we'll have a slight headwind from FX in gross margin. But we still think gross margin itself can North through a lot of the good activities that we have from our global supply chain team in terms of reducing cost and other volume improvement programs.

Speaker 3

And then, tightly managing our discretionary spend within SG and A to ensure it's helping us achieve our strategic plan. And as we've always talked about, just really focused on R and D efficiencies and leverage. It all starts with a healthy top line. We think that 6% to 8% guidance versus that 9 comp last year is a good solid healthy top line that gives us leverage opportunities throughout the whole P and L, and we think each line of the P and L has the opportunity to

Operator

Question comes from Vijay Kumar with Evercore ISI. Please go ahead.

Speaker 6

Hey, guys. Thanks for taking my question. Just some cleanup questions here on the guidance assumptions. Mike, the 68% organic, It is where it is, but can you just remind us what are the incremental tailwinds, positive tailwinds here in 'twenty three in any incremental headwinds versus 'twenty two? Some things I can think of, and if FerroPlus becomes organic, Maybe China is a little bit of a headwind, but can you just go through some of those drivers?

Speaker 6

And again, Share count up 20,000,000 that seems egregious just given how we've seen share count progress throughout the year. Curious why and what's behind the share count assumption for the year?

Speaker 3

Yes, sure. On the share count, just to take that clean up quickly and then Mike can take Your revenue question. It's just a simple math of the converts that we have in during the year. So the increase is from the share count that will increase when we convert the mandatory preferreds. Recall, we then lose the Preferred dividend.

Speaker 3

So it's neutral to EPS, but the share count increases as those preferred holders will get common shares.

Speaker 8

That makes sense, Vijay?

Speaker 7

That's helpful. Yes.

Speaker 3

Yes. So, I mean, the takeaway should be neutral EPS impact from share count related to the Mandatory preferred conversion this year.

Speaker 2

Sure. I mean, yes, headwinds and tailwinds, maybe just some of the headwinds. We like the fact we did 9% growth in 'twenty two, but that's a bit of a tighter tougher comp The normal. So that's one. I had mentioned China would be expect double digit growth, but likely not the same growth as 'twenty two.

Speaker 2

And then also CRM coming off of a really exceedingly market growth quite a bit in 2022, Likely to grow more in line with the market in 'twenty three. So there's a couple of the headwinds, clearly A bunch of tailwinds. The company performed continues to perform extremely well across the globe, Europe, LatAm, Asia Pac and U. S. You saw really impressive growth across the company.

Speaker 2

WATCHMAN growing 24 for the year, cardiology as a whole grouping grow 10, PI growing 9, Endo 8, Euro 10. So we have just very strong momentum across the businesses, which is obviously a bit of a tailwind given the momentum we have commercially and we have incrementally to that. Some of the questions today on EP, We expect to have a very strong year in EP outside in Europe and in Japan. Potential tailwind would be Depending on when cryo gets approved in the U. S.

Speaker 2

So unsure how much of an impact that will have in the U. S. Depends on the approval date there. Other products like WATCHMAN continue to do extremely well. We're really proud.

Speaker 2

We actually think we gained share in Q4 with WATCHMAN And ended the year just over 90% market share. So that business continues to do really well. And the one that gets very little discussion by analysts, but Lots internally in by physicians is ACURATE NEO2. We now have a large size. That business is doing extremely well in Europe, actually building momentum each quarter.

Speaker 2

And we're anxious to finish that U. S. Trial shortly.

Operator

The next question comes from Travis Seed with Bank of America.

Speaker 8

I guess, I'll ask a question on the Italy impact. Just curious, while we're only hearing about this from Boston, maybe it's you're taking a more conservative approach and taking a reserve. And it seems like a big number. I don't know it seems like Italy wouldn't be that big of a country, so maybe it's calculated on more than a year of sales and just want to confirm no impact on 2023? And then I'll ask my follow-up now as well, which is on op margins.

Speaker 8

I think you mentioned gross margin first half higher, lower in the second half on currency and just want make sure there's any puts and takes to consider on the op margin side first half versus second half? Thank you.

Speaker 3

Sure, Travis. I'll take the Italy one can't speak for other companies. I can speak for on behalf of Boston Scientific. It's been an evolving situation, particularly over the last few weeks here, Because what you have is the Italian government passed a provision back in 2015 with regard to what I mentioned, to try and claw back some excess spending over the allocated budgets within the public hospitals in Italy. But for the last 7 plus years, there's really been it's been dormant.

Speaker 3

There's been limited implementation guidance. There's really been little or no activity around that. That changed again over the last few weeks with some events that put a little more teeth into their desire to collect those monies. And so we booked that Incremental reserve. We had a reserve on the books.

Speaker 3

We booked an incremental reserve to cover what we believe will be the amounts that we'll owe as part of that. We're obviously challenging it vehemently through the Italian court system as our other industry participants. We disagree with it. But That outcome will be uncertain, but we picked a reserve that we think is a reasonable reserve given the timeframe.

Speaker 2

You also mentioned, do you see an issue in 'twenty three with more of a reserve?

Speaker 3

The 'twenty three amounts are included in guidance. So the amount of the reserve relates to the Prior periods 2015 to 2022, anything that's 2023 and beyond is included in guidance. With respect to op margin, actually, I'm glad you asked that question because it's a bit of a juxtaposition with gross margin, right? So I mentioned that gross margin will be higher in the first half and lower in the second half, which is a bit of a bucks the trend we normally have, which I wanted to make sure I got that point out there. Relative to operating margin though, I think you'll see a similar trend where it builds throughout the year.

Speaker 3

So the gross margin higher in the first half, lower in the second half, But through the rest of the P and L and netting down to operating margin, I would expect you'd see a very similar trend starting in Q1 and building to higher amounts as you go first half, second half.

Speaker 2

So hopefully that's clear, Travis.

Speaker 8

It is. Yes. Thank you. Yes.

Operator

The next question comes from Cecilia Furlong with Morgan Stanley. Please go ahead.

Speaker 9

Hey, good morning and thank you for taking the question. I wanted to ask on Watchmen, Specifically, what's underlying the double digit growth outlook that you called out for 'twenty three? How you're thinking about market growth as well as Japan and And then just a quick follow-up on Accurate Neo2 with the PRIME XL registry, how you're thinking about approval timelines at this point in the U. S?

Speaker 2

Sure. On WATCHMAN, we had a terrific year in 2022. As I said, maintaining call it 90% share, potentially slightly above that, grew 24% for the full year. It's a very healthy market.

Speaker 3

I don't

Speaker 2

know Lauren, what do we say on the market?

Speaker 1

25%.

Speaker 2

So call it 25% growth we expect In 20 3, 2 companies in the marketplace today. Similar to previous comments, The success of Watchmen is really manyfold. The safety, consistency and proven effectiveness through clinical trial and everyday practice at Watchmen, physicians are extremely comfortable in using the device. They're very comfortable with the support team they have from Boston in the lab with them and the referring physician community is seeing such strong benefits from the LA ACE procedure that is helping to drive that market growth. So it's an excellent market.

Speaker 2

It's also a product that's a procedure that's profitable for hospitals And the procedure time today continues to improve, which is really important for hospitals. So the overall market context is very good. We have a leading platform and we have a new product, new steerable sheath coming this year and the next gen watch them platform, coming about a year from now. So we have a Differentiated pipeline as well. NEO-two is doing extremely well in Europe.

Speaker 2

We just Launched or just having some implementation of our XL valves that's part of the U. S. Trial. There was I think some a bit of inaccurate reporting on that one. We do not expect that XL to slow down the approval process for the U.

Speaker 2

S. So that does not have an impact on U. S. Approval. And that XL valve is important because it's about a third of the procedures are using that size valve in Europe.

Speaker 2

So we're doing quite well, growing faster than market in Europe without that and eventually we'll be adding that to approval. So we're excited about that

Operator

And the next question currently I have is Josh Jennings with Cowen. Please go ahead.

Speaker 10

Hi, good morning. Thanks for taking the questions. I was hoping to start off with just your Apollo acquisition and get you into the diabetes sorry, diabetes the obesity segment and just wanted to hear about your outlook for that portfolio, but also just the device based intervention opportunities in obesity from a higher level and whether this portfolio could become a long term growth driver for the endoscopy franchise? And then the follow-up is just on your neuromodulation business. Congratulations on the SOLACE trial results.

Speaker 10

And I think 3 of the big competitors in the space have a peripheral diabetic neuropathy indication now with different levels of evidence, but I was hoping you could just review Boston's plan to generate clinical evidence for that indication going forward? Thanks a lot.

Speaker 2

Yes. So on Apollo Endosurgery overall, it's really consistent with our overall of category leadership, which is driving above market growth and continuing to advance new therapies, where we can be the leader. When we look at endoluminal surgery, we think that is really the next frontier for our endo business. And you see terrific uptake of endolumal surgery, I would say outside the U. S, particularly in Japan, A bit more so in Europe and less so in U.

Speaker 2

S. And so we think endoluminal surgery will really continue to build momentum over the next coming years and Apollo is the platform that's most used by physicians particularly outside the U. S. To perform these procedures with a product called OverStitch and Xtac. So we think the Addition of Apollo into our current platform will obviously make us the number one strongest endoluminal surgery portfolio, But also put us in a position as Doctor.

Speaker 2

Duncan would say to help train the field because these are procedures that require significant physician training to get great outcomes and we'll be able to do that with the Apollo platform.

Speaker 1

And then on Neuromod, you asked about Solis?

Speaker 2

On Solis, with SCS, again, we did see some improvement in that overall SCS business in the 4th quarter growing 4% In the quarter, SOLUS, we're pleased with the 3 month results that we expected. We expect indication and approval for non surgical back by the year end of 2023.

Speaker 1

And we're in early clinical work for PDN right now and haven't announced any time line, but We'll look to continue to invest in that space.

Speaker 10

Great. Thank you.

Speaker 1

And that concludes our call for today. So thank you for joining us. We appreciate your interest in Boston Scientific. If we were Unable to get to your question or if you have any follow-up, please don't hesitate to reach out to the Investor Relations team. Before you disconnect, Drew will give you all of the pertinent details for the replay.

Speaker 1

Drew?

Operator

Please note a recording will be available in 1 hour by dialing either 3,170,088 using replay code 7,344,004 until February 8, 2023 at 11:59 pm Eastern Time.

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Earnings Conference Call
Boston Scientific Q4 2022
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