Boston Scientific Corp

NYSE:BSX

Earnings Call Transcript 2022-Q2

[Operator]

Good morning, and welcome to the Boston Scientific Second Quarter 2022 Earnings Call. [Operator Instructions] Please 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, Vice President, Investor Relations]

Thank you, Andrew. Welcome, everyone, and thanks for joining us today. With me on today's call are Mike Mahoney, Chairman and Chief Executive Officer; and Dan Brenhan, Executive Vice President and Chief Financial Officer. We issued a press release earlier this morning announcing our Q2 2022 results, which included reconciliations of the non-GAAP measures used in the release. We have posted a copy of that release as well as reconciliations of the non-GAAP measures used in today's call to the Investor Relations section of our website under the heading Financials & Filings.

The duration of this morning's call will be approximately 1 hour. Mike will focus his comments on Q2 performance as well as future catalysts and the outlook for our business, including Q3 2022 and full year 2022 guidance. Dan will review the financials for the quarter, provide more details regarding our Q3 and full year guidance, and then we'll take your questions. During today's Q&A session, Mike and Dan will be joined by our Chief Medical Officers, Dr. Ian Meredith; and Dr. Ken Stein.

Before we begin, I'd like to remind everyone that on the call, operational revenue excludes the impact of foreign currency fluctuation and organic revenue growth further excludes acquisitions and divestitures for which there are less than a full period of comparable net sales. Relevant acquisitions excluded for the organic growth or Preventice, FARAPULSE and Lumina Surgical which closed in March, August and September of 2021, respectively; as well as Baylis Medical, which closed on February 14, 2022. Divestitures include the BTG Specialty Pharmaceuticals, which closed on March 1, 2021. Guidance excludes the recently announced agreement to purchase the majority stake of M.I. Tech, which is expected to close in the second half of 2022. 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, the impact of COVID-19 pandemic upon the company's operations and financial results; 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&D spend and other expenses. Factors that may cause such differences include those described in the Risk Factors section of our most recent 10-K and subsequent 10-Qs filed with the SEC. These statements speak only as of today's date, and we disclaim any intention or obligation to update them.

At this point, I'll turn it over to Mike for his comments.

[Mike Mahoney, Chairman & Chief Executive Officer]

Thanks, Lauren, and thank you to everyone for joining us today. We're very pleased with our second quarter performance and our strong outlook for the full year, supported by our innovative portfolio, commercial execution, clinical evidence and strategic tuck-in M&A. In the second quarter '22, total company operational sales grew 10% versus prior year, while organic sales grew 7% despite a strong comp of 9% organic growth in second quarter '21 versus 2019. Our sales results exceeded the high end of our guidance range of 3% to 6%. Importantly, we continue to grow faster than our peers in most of our businesses and regions.

Second quarter adjusted EPS of $0.44 grew 9.6% versus prior year, again, exceeding the guidance range of $0.41 to $0.43. Second quarter adjusted operating margin was 25.2%, which is in line with expectations. We anticipate more durable and consistent procedural growth for the remainder of the year as hospitals continue to manage through staffing challenges in COVID waves. Our first half revenue performance was 8.1%, and we anticipate growth to accelerate in the second half, and therefore, we are increasing our full year '22 guidance for operational growth from 10.5% to 11.5%, and organic growth to plus 8% to 9%.

For third quarter '22 revenue, we're guiding to operational growth of 10% to 12% and organic growth of 8% to 10%. We aim to improve operating margins in 2022. However, with the ongoing impact of supply chain challenges, we are updating our adjusted operating margin to 26% to 26.2% for the full year as a result of FX volatility and additional supply chain-related operating margin pressure. We are narrowing our full year '22 adjusted EPS guidance to $1.74 to $1.77.

Our third quarter '22 adjusted EPS estimate is $0.43 to $0.45, and Dan will provide more details on both of these sales and EPS performance and the outlook.

I'll now provide some additional highlights in the quarter along with comments on our '22 outlook. Regionally, the U.S. delivered operational growth of 7% versus prior year, and sales in the quarter included a transient impact from the contrast dye shortage primarily impacting our coronary therapies, WATCHMAN and PI business.

In Europe, Middle East, Africa, our business grew 12% on an operational basis versus prior year. We had excellent broad-based growth across the EMEA region with 5 of 8 business units posting double-digit growth. Key products in emerging markets within the region are driving growth across the portfolio with particular strength in electrophysiology, WATCHMAN and interventional cardiology therapies.

In Asia, we grew 11% operationally versus prior year. We're quite pleased with the overall performance of the region despite the impact of COVID and related public health measures within China, with notable performance in Japan, India and our ASEAN countries. We continue to make progress with new products and commenced the first WATCHMAN FLX cases in China, Korea, Singapore and Malaysia. The China team executed well in a very tough environment, growing 9% and performing in line with our expectations. We remain confident in the team's ability to drive double-digit growth for the full year '22, supported by our diversified portfolio and commercial execution.

Latin America grew 33% operationally versus prior year, and all 8 business units in the vast majority of countries grew double digits in the quarter.

Urology and Public Health organic sales grew 7% and 16% on an operational basis versus prior year. Globalization continues to be a focus with 44% growth within emerging markets driven by new and ongoing product launches such as LithoVue and SpaceOAR in key countries with momentum continuing with the recent approval of the Tria Firm Ureteral Stent in China. We continue to be pleased with the Lumines integration and execution of the global.

Turning to Endoscopy, sales grew 6% organically versus prior year. Broadly, this diverse business continues to perform well with products like our innovative AXIOS stent, a stent indicated for transgastric and transduodenal access. We also continue to see strength in our single-use imaging franchise with EXALT-D expanding to new accounts and driving utilization.

To further broaden our portfolio, we announced an agreement to purchase a majority stake in MI Tech, which includes the novel arose technology, a family of conformable self-expanding metal stents. This agreement is expected to close in the second half of 2022.

In Neuromodulation, organic revenue declined 1% versus prior year against a very challenging year-over-year comp with the U.S. launches of WaveWriter Alpha and Vercise Genus along with COVID procedural recovery in second quarter '21.

In pain, sales grew sequentially in second quarter with physicians excited about a robust and innovative portfolio of offerings for SCS, including WaveWriter Alpha, fast therapy and the Cognito practice optimization suite of solutions.

In brain, performance also improved sequentially with the U.S. launch of the Neural Navigator software for with STIMVIEW XT, which is our integrated imaging and programming platform developed in partnership with Brainlab.

In cardiology, our organic sales grew 8% versus prior year and operational sales grew 12%. Within Cardiology, Interventional Cardiology Therapies organic sales grew 6% versus prior year. Our coronary therapies franchise grew mid-single digits, led by double-digit growth within our Imaging business as our AVVIGO II guidance system moved into full launch in the U.S.

Internationally, strong growth continues, driven by our innovative and comprehensive portfolio for imaging, for parent in treating complex coronary disease. Physician enthusiasm for ACURATE neo2 continues, supported by ongoing clinical data that further validates the differentiated enhancements of neo2, including the Italian neo registry which demonstrated reduced rates of PVL, low PPI, excellent hemodynamics and high device success rate in more than 900 patients.

Turning to WATCHMAN, organic sales grew 17% versus prior year. Growth accelerated sequentially on a comp-adjusted basis with strength across the region with a full launch of FLX in Japan, market share gains in Europe and increased penetration in the U.S. as we continue to drive awareness with ongoing clinical evidence and our second-generation device. We remain confident based on our ongoing discussions with FDA that our DAPT submission will be approved in the coming months. And the uses of DAPT with Flex was recently highlighted in real-world data with more than 17,000 patients with the NCDR registry. This demonstrated no significant difference in rates of major events at 45 days post implant. Whether patients were discharged from the hospital on DAPT, the DOAC and aspirin or warfarin and aspirin.

In Rhythm Management, organic sales grew 7% versus prior year. In core CRM, we anticipate that our growth was at or above the market with our low-voltage business growing mid-single digits and our high-voltage business growing low single digits. Our S-ICD franchise continues to perform well, further supported by positive data from the investigator-sponsored ATLAS trial presented at HRS earlier this year. The ATLAS trial compared EMBLEM S-ICD to single-chamber transvenous ICD devices and demonstrated similar protection from sudden death and superiority from serious lead-related complications at 6 months.

Our Diagnostics business continues to perform well outpacing the market, driven by the Preventice portfolio and our implantable cardiac LUX-Dx.

In Electrophysiology, sales grew 9% on an organic basis and 67% on an operational basis versus prior year. Second quarter performance was led by strength and differentiation of our portfolio in Europe and Japan. We're pleased to have completed enrollment in both the NEwTON AF trial and the ADVENT trial, important steps to expand the offering of our STABLEPOINT force-sensing catheter in the U.S. in 2023 and FARAPULSE in the U.S. in 2024.

Physician enthusiasm is very strong for both our POLARx and FARAPULSE platforms in Europe, and we're looking forward to increasing our account openings in the second half of this year.

The Baylis team continues to execute well with strong performance in the quarter led by VersaCross RF Access System. The integration is on track, and we're excited to have launched the Baylis-developed VersaCross Connect LAAC solution to provide safe and more efficient access to left side heart for WATCHMAN FLX implants.

In Peripheral Interventions, organic sales grew 6% versus prior year. Within the arterial franchise, we had another very strong quarter of double-digit growth in the drug-eluting portfolio as Ranger and Eluvia solidify their positions in key global markets. In Venous, the U.S. clot management business was impacted in the quarter by both the transient impact of the contrast shortage as well as by competition, largely offset by strength in Varithena sales as we continue to expand market share with our innovative offering.

Interventional Oncology grew low double digits in the quarter, fueled by our innovative cancer therapies, TheraSphere and ICEfx, as well as the robust set of embolization access and delivery tools that we offer. Globalization remains a significant opportunity in the space. And notably, we have commenced treatment of patients with hepatic malignancies in the Hainan province of China with TheraSphere through a medical pilot program. Outside of the Hainan province, TheraSphere treatment in China is restricted to the Mandarin clinical trial.

Earlier this quarter, we issued our annual performance report which showcases our commitment to corporate responsibility and progress toward our longer-term goals. In this report, we highlight key metrics in support of our efforts include performance against our first human capital scorecard, which tracks company-wide goals and is part of the company's annual bonus plan. You can access this report at any time through our Investor Relations websites.

We're very pleased with our first half results and the outlook for '22 and beyond despite the macroeconomic challenges we continue to face. Our innovative portfolio, category leadership strategy, commercial execution and commitment to ongoing clinical evidence positions us well today and into the future. We look forward to hosting an investor event at TCT this September. We'll provide more details as they're available.

While the macroeconomic environment continues to be challenging, we remain committed to our long-term financial goals, continuing to grow sales faster than underlying markets, operating margin expansion, double-digit adjusted EPS growth and strong adjusted free cash flow. I remain very grateful to our employees for their winning spirit.

I will now turn things over to Dan to review our financial performance in more detail.

[Dan Brennan]

Thanks, Mike. Second quarter consolidated revenue of $3.244 billion represents 5.4% reported revenue growth versus second quarter 2021 and reflects a $130 million headwind from foreign exchange, higher than our expectations due to the strengthened U.S. dollar. Excluding this 420 basis point headwind from foreign exchange, operational revenue growth was 9.6% in the quarter.

Quarterly sales from the acquisitions of FARAPULSE, Lumenis and Baylis contributed 300 basis points, resulting in 6.6% organic revenue growth, exceeding the high end of our guidance range of 3% to 6% growth versus 2021.

Strong top line results primarily drove Q2 adjusted earnings per share of $0.44, representing 9.6% growth versus 2021 and exceeding the high end of our guidance range of $0.41 to $0.43.

Adjusted gross margin for the second quarter was 70.4%, in line with our expectations. Although we've seen some stabilization in the cost of freight, we do anticipate incremental second half headwinds of approximately $75 million versus pre-COVID level resulting from inefficiencies in our manufacturing plants due to the availability of direct materials and the cost to procure them. This incremental $75 million brings the total headwind versus 2019 to $375 million. Recall this headwind is primarily driven by inflationary pressures on direct materials, freight and labor costs, as well as inefficiencies in our manufacturing plants due to material availability.

We now expect our full year adjusted gross margin to be slightly below the second half of 2021 adjusted gross margin of 70.8%. We anticipate a slight improvement to adjusted gross margin in the second half due to the full realization of standard cost improvements consistent with historical trends, as well as an FX tailwind from the stronger U.S. dollar.

Second quarter adjusted operating margin was 25.2%, resulting in a first half adjusted operating margin of 25.5%. As a result of the increased macroeconomic pressures on gross margin, we now anticipate our full year adjusted operating margin to be within a range of to 26% to 26.2%. Despite these macroeconomic headwinds, we're focused on margin improvement versus the second half 2021 average of 25.9% with our range representing 10 to 30 basis points of operating margin expansion. On a GAAP basis, second quarter operating margin was 13%, including a charge related to ongoing IP litigation.

Moving to below the line, adjusted interest and other expense totaled $74 million in the quarter, lower than our expectations driven in part by a onetime FX gain from certain unhedged currencies.

Our tax rate for the second quarter was 12.8% on an adjusted basis, including discrete tax items and the benefit from stock compensation accounting. Excluding these items, our operational tax rate was 14.3% in line with our expectations. We ended Q2 with 1,438 billion fully diluted weighted average shares outstanding. Adjusted free cash flow for the quarter was $593 million, and free cash flow $204 million with $307 million from operating activities, less $103 million net capital expenditures. For full year 2021 adjusted free cash flow, we continue to aim to be at or above 2021 adjusted free cash flow of $2.2 billion.

As of June 30, 2022, we had cash on hand of $276 million, and we continue to expect to close the purchase of the majority stake of M.I. Tech in the second half of 2022 funded with cash on hand. Our top priority for capital allocation remains high-quality tuck-in M&A, and we'll continue to assess opportunities in conjunction with our financial goals. We continue to expect leverage of 2.5x by year-end 2022. And as of June 30, our leverage was 2.6x.

I'll now walk through guidance for Q3 and for the full year 2022. We expect full year 2022 operational revenue growth to be in a range of 10.5% to 11.5% versus 2021, which excludes an approximate 400 basis point headwind from foreign exchange based on current rates, 200 basis points higher than our previous expectations and includes a 250 basis point contribution from the acquisitions of Preventice, FARAPULSE, Lumenis and Baylis and $13 million of predivestiture specialty pharmaceutical sales in 2021.

As a result of our strong Q2 performance and confidence in durable and consistent procedural growth, we are raising our full year 2022 organic revenue growth range to 8% to 9% versus 2021, excluding the impact of closed acquisitions and divestitures.

We expect third quarter 2022 operational revenue growth to be in a range of 10% to 12% versus 2021, which excludes an approximate 400 basis point headwind from foreign exchange based on current rates, and includes a 200 basis point contribution from the acquisitions of FARAPULSE, Lumenis and Baylis. Excluding the impact of closed acquisitions, we expect third quarter 2022 organic revenue growth to be in a range of 8% to 10%.

We now expect our full year 2022 adjusted below-the-line expenses to be approximately $350 million, reflecting the FX gain recognized in Q2.

We continue to expect our full year 2022 operational tax rate to be 14%, with an adjusted tax rate of approximately 13% including the benefit of the accounting standard for stock compensation and discrete tax items recognized in the first half of the year. As a reminder, our tax rate reflects current legislation, including a provision on the treatment of R&D expenditures. We continue to believe there is bipartisan support to reverse this provision, and if such legislation were to be enacted, we would expect our full year tax rate to revert to its historic range of approximately 11% operational and 10% adjusted, resulting in a $0.06 earnings per share benefit.

We expect a fully diluted weighted average share count of approximately 1,442 billion shares for Q3 and 1,441 billion shares for the full year 2022.

As a result of continued uncertainty within the macroeconomic environment as well as FX volatility, we are narrowing our full year adjusted earnings per share range to $1.74 to $1.77; and for the third quarter expect to be in a range of $0.43 to $0.45.

Please check our Investor Relations website for Q2 2022 financial and operational highlights, which outlines more detailed Q2 results.

In closing, I am proud of the first half results we achieved with projected second half momentum supporting our organic revenue guidance increase of 100 basis points at the midpoint. Despite a challenging macroeconomic environment, we remain focused on operating margin expansion, and expect to see sequential improvement in the second half of this year.

And with that, I'll turn it back to Lauren, who will moderate the Q&A.

[Lauren Tengler, Vice President, Investor Relations]

Thanks, Dan. Andrew, let's open it up to questions for the next 35 minutes or so. [Operator Instructions] Andrew, please go ahead.

[Operator]

[Operator Instructions] The first question comes from Joanne Wuensch with Citi.

[Joanne Wuensch, Citi]

May I say congratulations. I want to spend just a little bit of time on the organic growth rate because when you entered the year, we were looking for 6% to 8%, which was raised on the first quarter call to 6.5% to 8.5%, and now to 8% to 9% organic. What is happening in your core businesses or in your particular franchises, as maybe, that's helping you sort of buck the trend and actually be raising your organic growth rate each quarter?

[Mike Mahoney, Chairman & Chief Executive Officer]

Joanne, Dan can supplement as well. Just as Dan mentioned in his script and I did, I would just -- overall, we're very pleased with the execution of our global team. We had just tremendous growth in each region. Europe with a pretty mature market as you saw grew double digits, and we've made significant investments in the GEM region over the last few years, and the team there has really done a nice job of building up our scale that's driving outsized growth for us in Europe, and we're taking share in the mature markets.

In Asia Pac, we've seen really a rebound of strength in Japan, given the portfolio that we have led by POLARx, which is our cryo offering EDP as well as WATCHMAN. And the China team did a really nice job at delivering in a tough environment. In the U.S., we continue to do quite well as well. And you'll see the impact of those acquisitions going more organic, a bit benefit in the second half of the year and also in 2023.

So I think the team has executed quite well. We think we've gained share in most all of our businesses, as I said in the script. And we continue to try to position ourselves into faster-growth markets consistently quarter-over-quarter. So I think it's portfolio. The clinical evidence we're driving and very strong commercial execution.

[Operator]

Next question comes from Robbie Marcus of JPMorgan.

[Robert Marcus]

I'll add my congratulations on a good quarter. Dan, I was wondering, it sounds like you're absorbing about 300 basis points of headwinds versus 2019 but on track to generate flat operating margins, which is really impressive given all the headwinds. Maybe just walk through where you're seeing those pressures and how you're offsetting it in the base business. And then if there's anything we should be focused on that carries over into 2023 in the models from some of these offsets or pressures.

[Dan Brennan]

Maybe helpful to just give a couple of finer points on the numbers. So in 2019, we were 26.1% adjusted operating margin. We were 72.4% gross margin. So if you just look at the bottom line operating margin, the midpoint of our guidance in 2022 is back at that 26.1%. And as you said, we're absorbing the $375 million headwind, the majority of which hits in 2022. Some of that, that will go to '23, to your question of 2023. So there's some -- from a gross margin standpoint, that will still be on the balance sheet in '23. But the majority of that 375 will hit in 2022 and hits gross margin.

So when you look at the P&L, all line items of the P&L, we've had activities in place to offset that over the last 2-plus years, whether it's looking at standard cost value improvement programs, pricing discipline, a bit of a favorable product mix, other opportunities to leverage SG&A and R&D in a smart and thoughtful way. And so the entire 375 has been offset through the whole P&L.

You see gross margin. Obviously, gross margin is lower. We talked about being a little bit lower than last year's second half average of that 70.8%. So we're not -- we haven't been able to offset the full 375 in gross margin, but that's what the rest of the P&L is for, right, whether it's SG&A, R&D, even areas like royalties. We were very focused to offset that. So I'm very pleased to look at a 26.1% midpoint guidance for this year against that 2019 and look forward to '23 and beyond.

A little early to get specific about '23, obviously, relative to what we see. We've been clear that we don't see the macroeconomic headwinds abating in '22, but we are hopeful for '23 and beyond that we'll see some relief there.

[Operator]

The next question comes from Larry Biegelsen with Wells Fargo.

[Larry Biegelsen, Wells Fargo]

Congrats on a nice quarter. I heard you mention that you are having an analyst meeting at TCT. So are you expecting to present any significant data there, for example, the SAVAL BTK data? And if so, kind of what should we be looking for and your confidence, if you can overcome the issues of previous devices? And just maybe on Devoro, any color on the launch there and how you see that fitting into the treatment armamentarium?

[Mike Mahoney, Chairman & Chief Executive Officer]

I'll mention -- I'll make a couple of comments on Devoro and maybe Dr. Meredith can answer what's heading up at TCT. So again, the broad-based PI business, you saw the performance in that -- in my report, 3 franchises, our arterial franchise, which grew double digit, very strong. Our second biggest one interventional oncology, again, grew double digit with really terrific performance and new clinical indications we're going after. And our smaller businesses, our Venous business, and the gap that we have, as you mentioned, is the Devoro product that we acquired.

And so we'll be in our first patients in the second half of this year. And hopefully those will go quite well and we'll hopefully have some approval in 2023 to launch Devoro in 2023. So all things going well, you'll see some impact as the year progresses in 2023 to fill that portfolio gap that we have in Venous. So more to come, and we'll have good clinical data by year-end.

Dr. Meredith are you on the line?

[Ian Meredith, Global Chief Medical Officer]

I am, Mike. Thank you. Yes, so the formal announcements for what's going to be presented at TCT haven't come out yet, so I don't want to comment on that further, but we're absolutely delighted that TCT will be in Boston this year, giving us a great opportunity to highlight the full strength of our cardiovascular businesses. But no formal announcement yet as the program hasn't been finalized.

[Operator]

The next question comes from Vijay Kumar with Evercore.

[Vijay Kumar, Evercore]

I have a 2-part question. One, just on the guidance here, first half versus second half. The high end implies I think low doubles in the second half versus 8% in the first half. And I -- the pre-pandemic comps in the first half, second half '21 versus '19, they seem comparable. There is no first half versus second half. So I'm curious what's driving the second half acceleration. What was the China lockdown in contrast media impact in 2Q, perhaps is that what's giving you the confidence looking at the underlying trends for the second half? And Dan, on the gross margin, $375 million of cost. Do you know what dollar amount of that is capitalized on the balance sheet?

[Dan Brennan]

So the cost on the balance sheet, I'll take that one first, yes, I do know what it is. And it will be a minimal headwind for early 2023 because, as I said, the 375 that is incremental this year is not all going to hit the P&L this year, but the lion's share of it does hit in '22. So a small headwind for '23, but hopefully should be manageable.

Relative to your question, let me just put a finer point on the numbers, and I can turn it to Mike for some of the color. So our first half actual in 2022 in terms of our organic revenue growth rate was 8.1%. If I take the midpoint of the full year guidance, so 8.5%, that implies around 9% for the second half. So a nice acceleration to your point, to that 9%.

The comps, again, '21 versus '20, those are a little bit crazy comps, obviously, with the COVID comps. So the '21 versus '19, I think is a good basis to use for comps. That's what we did all last year. The first half comp was 5.9%. The second half comp is 5.4% So basically, the second half comp is 50 basis points easier. But our revenue at the midpoint is call it, 90 basis points of acceleration. So it's outstripping the comps and it's real apples-to-apples acceleration first half to second half, which is great to see.

I'll take the China piece and just say that relative to what we had for expectations in Q2, China was basically in line with that. The scenario that we put in for guidance, that's pretty much what transpired as part of China. Looking forward to seeing the second half return to more normal growth rates in double digits for the full year.

I don't know, Mike, if you'd add anything relative to --

[Mike Mahoney, Chairman & Chief Executive Officer]

We do have about a 50 basis point easier comp second half versus first half. So that helps a little bit. We -- in the first half, as you know, we did have some impact from the contrast shortage, so that's been essentially resolved. So we think we'll see smoother sailing there. We had a tougher second quarter despite the 9% growth in China. We expect that business to strengthen despite being quite strong in the first half. We continue to be excited about our EP business. The growth in Japan and in Europe is tremendous and we expect to open up more accounts with FARAPULSE in cryo in those markets. I won't go through a long list, neuromod, had a super difficult comp in second quarter. So we expect double-digit growth on neuromod in the second half.

So we just really have strong performance across the board in our business units. Slightly easier comp but not significant and good momentum as a company and the top line.

[Vijay Kumar, Evercore]

Helpful commentary. Congrats again, Mike.

[Operator]

The next question comes from Rick Wise with Stifel.

[Rick Wise, Stifel]

Dan, maybe you could give us a little more color on 2 key products, both WATCHMAN and FARAPULSE. WATCHMAN, you did face a difficult 2Q comp, I mean another excellent quarter. Maybe talk about where we are in the FLX rollout and what's driving that growth and how sustainable you see it. What sustains this kind of impressive growth going ahead?

And on FARAPULSE, we recently checked in with some earlier FARAPULSE adopters in Europe, and they love the technology but were concerned about price and sort of limiting their utilization. So maybe you can sort of talk about that, how you're addressing that issue. And any color on where you are with the number of accounts and your goals in terms of account opening in Europe? Any extra color would be great.

[Mike Mahoney, Chairman & Chief Executive Officer]

Thanks, Rick. On WATCHMAN, Dr. Stein can further comment. It's really similar comments to previous quarters. It always starts with do you get excellent clinical outcomes. And that's what WATCHMAN FLX continues to prove with the safety profile and ease of use, which drives increasing comfort level from physicians and referring physicians and increasing utilization and more doctors using it per site. So really, it's those clinical outcomes and the safety profile and ease of use.

And then in terms of the market, as you know, we're very underpenetrated, still about 8% or so in the market that we see likely around 2 billion in the coming years here. And as you know, we're doing those clinical trials with CHAMPION and OPTION, which have enrolled -- not completed enrollment, but are enrolling far ahead of schedule. So we think this market continue to grow 25%, 30% for many -- for multiple years. And importantly, we have a really nice cadence of additional platforms coming for WATCHMAN to continue to improve it.

And that Baylis acquisition, we're going to make a safe procedure even more productive in terms of turnaround time with the integration of the Baylis platform with the WATCHMAN to help improve productivity further to drive more procedure volume and utilization. And you're also getting some global expansion in Japan and China, launched their first WATCHMAN FLX cases.

I don't know, Dr. Stein, any other comments on WATCHMAN?

[Ken Stein, Chief Medical Officer, Rhythm Management]

No, not much, right, again, it's safety and ease of use with FLX. It's continued growth into the currently indicated patient populations. It's looking forward to the data. So our OPTION trial completed enrollment and actually enrolled way ahead of schedule in spite of the COVID challenges. Looking for data from CHAMPION, and then I just want to read what Mike said, really excited about Baylis bringing the VersaCross solution. So we've commenced that launch in the U.S. And again, it's just part of this whole portfolio around all of our AF therapies to make procedures safer, make them more efficient. And I do think that that's what you see driving all the growth.

[Mike Mahoney, Chairman & Chief Executive Officer]

Yes, in FARAPULSE we're not going to provide some of the information you're asking about how many accounts, how many account openings, all those things. We obviously track that. It's a super important platform for us we think for many years here. And I would say, overall, we've had some supply chain issues that we continue to manage, which has tampered a bit of the new account openings. Nevertheless, the team opened up many more accounts in the second quarter than in first quarter, and we expect quite a few more incremental new account openings in the third quarter versus second quarter.

So we're increasing the pace of our account openings. The utilization of the platform is quite high for physicians. It is priced at a bit of a premium because it's a premium product. And we think that's the right -- appropriate pricing. And that's something that we can always take a look at for the future, but we think it delivers a unique value. And it's not massively available in terms of some of the supply chain constraints. So it's important for us to continue to improve on that, which we will in the second half of the year.

[Operator]

Next question comes from Cecilia Furlong with Morgan Stanley.

[Cecilia Furlong, Morgan Stanley]

I wanted to ask on WATCHMAN, but specifically contrast supply. If you could just talk to the headwind that posed in the quarter. And then broadly, too, can you speak to what you've seen from a residual staffing shortage impact across the hospital system at this point? Where do you feel we are in recovery and how much further recovery is incorporated in your outlook for the back half of the year?

[Mike Mahoney, Chairman & Chief Executive Officer]

Sure, there certainly was an impact with the contrast orders with WATCHMAN. Some of our interventional cardiology procedures and some of our peripheral procedures in the second quarter. So potentially, sales could have been a bit better absent that, but we haven't quantified that. And it's a bit difficult. We did see kind of mid-quarter some WATCHMAN procedures that were deferred due to the contrast shortage. Hopefully, that helps us a bit more in third quarter and second half to make up for some of that, but we aren't able to quantify that for you in terms of what the incremental impact was, but there was some impact in 2Q with WATCHMAN.

On the staffing shortage, hospitals do ROIC work and continuing to support their communities. And it's still a big issue. And so is it better maybe incrementally slightly, better but it's still a challenge for hospitals and thus, things like procedural productivity and doing a WATCHMAN procedure same day in less time and doing a FARAPULSE procedure in Europe significantly faster with great results becomes more and more important. And I think that's the focus of our portfolio is driving great clinical outcomes, but also assisting the productivity and throughput of the hospital and the patient satisfaction. I think many of our key products do that.

And so the staffing shortage will continue to be with us. It's not going to be an overnight fix. And hopefully, over time, it continues to improve. But a staff shortage rebound is not baked in assumption, is not baked into our second half guidance. We assume that the staffing shortage will be with us for a while.

[Operator]

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

[Travis Steed, Bank of America]

You talked about the gross margin pressures being offset in the P&L. Just curious how sustainable that is as you move into '23. Do some of that OpEx have to come back, or can you keep OpEx at this level until the gross margin pressures ease? And then a quick follow-up on China, up 9%, much better than your peers, which are still down. Just curious what's driving the strength in your China business versus peers.

[Dan Brennan]

Sure. I can take the gross margin and Mike can take the China. I think the management of the overall P&L is how I would answer that, right? So we look -- as we said to Robbie's question, we've effectively been able to offset the $375 million headwind from 2019 at the midpoint of our adjusted operating margin guidance for this year. And it really is managing all lines of the P&L. So through the rest of '22 and into '23, we're going to monitor the macroeconomic situation, all the elements that we talked about. We'll see if that means we need to continue to focus on the spending that we have in place, or whether we can let a little air out of the balloon on some of those items and invest some more.

But key point being that all the decisions that we make relative to spending, are with a long-term revenue growth pipeline in mind. We're trying to make decisions that are impacting long-term revenue growth. So we look at areas that don't have an impact there, so. But that's what we do. We manage the P&L, top to bottom, and we'll continue to do that through the rest of '22 and '23 and beyond.

[Mike Mahoney, Chairman & Chief Executive Officer]

China grew about 9% in the quarter, which is quite a bit less than what they typically grow. So there was an impact for sure in the quarter on the lockdowns. We saw mid-quarter very, very weak growth. And then maybe the last 3, 4 weeks of the quarter improvement. And then we anticipate a more consistent strong performance in the second half. It's difficult to point to one thing because like Boston Scientific across the board, their portfolio is much more diversified. And the business that continues to really drive there is our complex coronary capabilities with our imaging, our WOLVERIN, our Cutting Balloon, all things related to treating complex coronary disease, which is so significant in China.

And then our Peripheral Interventions business is also one of our larger businesses there. So it's a diverse portfolio. That obviously hits a lot of patient demand and we have a strong team there. And they were impacted by the lockdowns quite a bit, but did a great job in improving results, the second -- the very end of the second quarter, I would say.

[Operator]

The next question comes from Pito Chickering with Deutsche Bank.

[Pito Chickering, Deutsche Bank]

Two quickies. From a capital allocation perspective, I understand M&A will always be a priority for you guys, but as you look at your free cash flow generation, what are the reasons to not get more aggressive with share repo to keep driving EPS growth? And also, can you give us any details on the Vortex heart pump, what is the size of the pump or when you start seeing data from that?

[Dan Brennan]

Sure, Peter. I can take the share repurchase one. Yes, our capital allocation strategy, I think, is crystal clear. With the available free cash flow we have, a high-quality high-growth tuck-in M&A is the first priority. And we use excess cash to fill in on the back for share repurchase.

If you look over the history of the last few years, we've done a lot of great deals. I'm super proud of the class of 2021, the 5 deals we did there. So that utilized the available cash that we had and didn't leave any room for share repurchase. So it's M&A first and then if room with excess cash, share repurchase. And it's been clear, and I think it would continue to be that going forward.

[Ian Meredith, Global Chief Medical Officer]

Do you want me to take that? Yes. Thank you -- so just with respect to Vortex, product is called [Vitalist] and it is an internally developed acute mechanical support device. We've just undertaken a first-in-human study. That's -- it's very early days yet. And there's not really much more to actually report at this stage. I'm very pleased with the progress in the first-in-human study.

[Pito Chickering, Deutsche Bank]

Any chance you can give us the size of the pump.

[Ian Meredith, Global Chief Medical Officer]

No. I mean --

[Mike Mahoney, Chairman & Chief Executive Officer]

Just too early. Yes, I think I'll just comment, Dr. Meredith. We completed the early feasibility study. We're very bullish on the platform. We're going to continue to drive clinical evidence that we need, but it's far too early to be sharing details about the platform.

[Operator]

The next question comes from Josh Jennings with Cowen.

[Josh Jennings, Cowen]

Just wanted to focus on WATCHMAN, and just with the DAPT label update. Do you expect that to cause any change in terms of decision-making on device selection? I mean, it seems like it's not impacting growth and that there's some off-label utilization going on out there already with data that's been put in the public domain.

And then just the second part is just I heard you say on kind of next-generation WATCHMAN devices. And I saw a presentation recently about coding enhancements that could increase hemocompatibility, potentially reduce the device-rated thrombus rate. I just wanted to -- it seems like there's some bench in animal data out there already, but any update you can give us on this coding enhancement project internally would be great to hear.

[Ken Stein, Chief Medical Officer, Rhythm Management]

Yes, it's Ken. Josh. Let me take first just the question about DAPT again. I probably pretty sure you're referring to data presented at TCT from the DAPT FLX study, right? And as Mike said in his script, that was a real-world evidence study of 17,000 patients showing, as you said, already great variability in the post-implant drug regimen that people are using out there in the real world and certainly supporting the safety and efficacy of using DAPT post implant. No difference in death, no difference in stroke, no difference in bleeding, no difference in device-related thrombus, whether or not patients were treated with the on-label regimen of warfarin aspirin, DOAC and aspirin or if they were treated with DAPT post implant. And that's why, again, we have a high degree of confidence that the data will support a label change within the coming months from FDA.

Whether that change is going to have a material impact on what people are doing in the real world, it certainly takes us to the point where FLX clearly superior to the competition out there in terms of safety and ease of use, and post-implant leak takes away what may have been the only real differentiated feature the competition was using. But I think most people recognize already that whatever regimen you use post implant, you're going to get a great result with FLX.

I think in terms of next-generation FLX device, I don't think we're prepared to go into any -- just as Mike said, we’ve worked FLX, although we're a lot closer to the goal line on this one, really not prepared to go into any detail at this moment on the benefits that we see of the new device.

[Operator]

The next question comes from Richard Newitter with Truist.

[Richard Newitter, Truist]

Congrats on the quarter. You have some competitors out there that are calling out pricing strategies, particularly as they head into 2023. Anything you'd call out there potentially as a lever to offset margin headwinds to sustain? And then also, if you could just comment a little bit more on the double-digit growth comment in the back half that you're expecting under your Neuromod business, any specific regions driving that? I'm assuming that doesn't assume a major pickup in SES, but other product categories, but please correct that if that's wrong.

[Mike Mahoney, Chairman & Chief Executive Officer]

Yes. On the pricing one, similar to some previous comments we've made, for us, it's all about our portfolio mix and consistently diversifying the portfolio into more innovative, faster-growing areas where we deliver great clinical benefit in markets that are potentially less price sensitive. And as you -- as many of you -- as you're aware, we've reduced on dramatically, for example, the concentration of drug luminal stents to quite a small percentage of the company.

So as a result of all that, our pricing impact has improved year-over-year. It's still slightly negative for 2022 but it's improved versus 2021 versus each year. And hopefully, in the near future, will be a kind of breakeven and maybe even 1 day, an upside of being positive price. But right now, it's still slightly negative like any good company, and you heard earlier that our prices are too high in some areas. But like any good company, we try to where we have differentiated value and economic proof, and it's appropriately profitable for hospitals. We try to take appropriate price increases.

Difficult to do in some parts of our portfolio. Some of our hospitals are under longer-term contracts. But we do the best job we can when it makes sense for us and it warrants it with the customer. But overall, we're seeing not a neutral or positive price yet, but improving consistent price performance.

[Dan Brennan]

And on the neuromod question, I can take that one. That's -- it's twofold. One is less COVID impact across those businesses in the second half, and then another is just simple math on the comps. The comps are minus 1 and minus 7 for 2021 in the second half versus '19. So that's helpful as well. So that's the reason for the commentary around double digits on Neuromod for the second half. The minus 1 for third quarter.

[Operator]

The next question comes from Jayson Bedford with Raymond James.

[Jayson Bedford, Raymond James]

Just two EP related questions. It's a bit tough for me to get at here. But do you have an organic EP growth number in the international markets, just ex-Baylis, I guess. And then just secondly, on the FARAPULSE rollout, you mentioned the supply chain challenges, when do you expect to fully launch the product in Europe?

[Mike Mahoney, Chairman & Chief Executive Officer]

Yes. Maybe, Dan, you can help me with the comp. I think FARAPULSE in terms of organic comp and cryo, there were no sales prior to us buying the companies. So cryo had no sales and needed a FARAPULSE. So they were essentially start-ups and now you're getting some sales for both. So Dan, maybe you can comment any further on that one.

In terms of the supply chain for FARAPULSE, like many companies that deal with capital equipment and chips and so forth or some challenges there. On the catheter side, we really aren't -- as we are supply constrained, which is great news. So the team has done a great job on the catheter side on the capital equipment, it's a bit tougher, but it's improving quarter-over-quarter. And difficult to say when it would be unconstrained. But we continue to increase the number of new installations each month and each quarter.

[Dan Brennan]

And then, Jason, just on the EP numbers. International grew mid-teens. The total grew 9, so the U.S. grew less than 9.

[Operator]

Ms. Tengler, I understand there's time for 1 more questioner.

[Lauren Tengler, Vice President, Investor Relations]

Yes, that's right, Andrew.

[Operator]

The next question comes from Shagun Singh with RBC.

[Shagun Singh, RBC]

I was wondering if you can provide a little bit color on 2023. You did call out durable growth in the back half of this year. Directionally, should we expect that strength to continue into next year just given your higher acuity exposure? And despite a potential economic slowdown, what are the key catalysts we should look out for next year? And then you talked about some macroeconomic headwinds continuing into 2023, but the majority will impact -- majority of the impact is going to come this year. Does that mean we can expect you to return to plus 50 basis points of operating margin goal in 2023 and beyond?

[Dan Brennan]

Yes, let me take the second part first. So just to be clear on my commentary, the commentary is there's $375 million of incremental impact in 2022 versus our pre COVID 2019. The majority of that hits the P&L in 2022. It's balance sheet, it comes to the P&L in 2022. The commentary is not that, that all goes away for 2023. The commentary is relative to the macroeconomic $375 million, the majority of that $375 million will hit the P&L in 2022. We fully believe that macroeconomic headwinds will persist into 2023. At what level, we don't know. We'll obviously be more -- we'll see more over the second half. And I think just overall, a bit early to be commenting specifically on 2023.

We are -- we do see a very helpful backdrop from a revenue perspective. You see that in our first half performance this year, you see it in the guidance raise we had on the organic revenue for the second half. It's a -- durable consistent revenue growth is a big piece of our strategy. You heard Mike talk about operating margin expansion and growing at the high end of our peer set for revenue. Those are all long-term tenets of the company that we'll look to continue '23 and beyond. But specific numbers for '23, I think it's just a bit early.

[Shagun Singh, RBC]

And just the key catalyst. I’m sorry, just the key catalyst of the top line for ’23?

[Mike Mahoney, Chairman & Chief Executive Officer]

Yes. It's really -- when I think about the company, you follow us is it's -- we'll launch a bunch of new products in 2023. And especially in the U.S. just talking about EP, hopefully, it would be a bit more unconstrained there. And hopefully, we'll launch our cryo platform potentially in the second half of '23. We have many product launches each year and it's really the strength, the diversity of the portfolio across the board. So we'll touch on it a bit more, but it's -- our portfolio doesn't change overnight. So it's so much of our current products and new enhancements that will continue to layer on top.

[Lauren Tengler, Vice President, Investor Relations]

Thanks, Mike. Thanks for joining us today. We appreciate your interest in Boston Scientific. If we're unable to get to your question or if you have any follow-ups, please don't hesitate to reach out to the Investor Relations team.

Before you disconnect, Andrew will give you all the pertinent details for the replay.

[Operator]

Please note a recording will be available in 1 hour by dialing either 1-877-344-7529 or 1-412-317-0088 using replay code 3825727 until August 3, 2022 at 11:59 p.m. Eastern Time.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.