Boston Scientific Corp

NYSE:BSX

Earnings Call Transcript 2022-Q3

[Operator]

Good morning and welcome to the Boston Scientific Third Quarter 2022 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please 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 Brennan, Executive Vice President and Chief Financial Officer.

We issued a press release earlier this morning announcing our Q3 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 one hour. Mike and Dan will provide comments on Q3 performance as well as the outlook for our business, including Q4 2022 and full year 2022 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 growth 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 include -- excluded for organic growth are Preventice, FARAPULSE and Lumenis 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 previously announced agreement to purchase the majority stake of M.I.Tech, which is expected to close by year-end 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, 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. If our underlying assumptions turn out to be incorrect or if certain risks or uncertainties materialize, actual results could vary materially from the expectations and projections expressed or implied by our forward-looking statements. Factors that may cause such differences include those described in the Risk Factors section of our most recent 10-K and subsequent 10-Qs filed with the SEC. These statements speak only as of today's date, and we disclaim any intention or obligation to update them.

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

[Mike Mahoney, Chairman & Chief Executive Officer]

Thanks, Lauren, and thank you, everyone, for joining us here today. We're very proud of our performance in the third quarter, particularly in light of the ongoing macroeconomic and supply chain headwinds. Our performance continues to be supported by the strength and diversification of our innovative portfolio and the winning spirit of our global team. Third quarter 2022 total company operational sales grew 14% versus prior year and organic sales grew 11.5%, which does exceed the high end of our guidance range of 8% to 10%. This performance is a testament to our category leadership strategy and focus on innovation with strong commercial execution.

Six of eight of our business units grew double-digits organically and we believe that nearly all of our businesses and regions grew faster than their respective markets. Third quarter adjusted EPS of $0.43 grew 6.3% versus prior year at the low end of our guidance range of $0.43 to $0.45, attributable to increased FX headwinds and slightly higher spend within the quarter.

We have grown 9.2% organically year-to-date through third quarter. And in light of this performance, we are increasing our full year 2022 guidance for operational growth to approximately 11.5% and organic growth to approximately 9%.

For fourth quarter 2022 revenue, we're guiding to operational growth of 8.5% to 10.5% and organic growth of 7% to 9%. We're also updating our full year 2022 adjusted EPS guidance to $1.71 to $1.74, primarily related to the ongoing headwind from foreign exchange. Our fourth quarter 2022 adjusted EPS estimate is $0.45 to $0.48.

Throughout 2022, we have maintained our goal to improve operating margins. While our goal remains, we feel it's prudent to provide an updated adjusted operating margin target of approximately 26% considering the continued macroeconomic pressures. On a full year basis, this does represent approximately 70 basis points of margin expansion versus our 2021 rate of 25.3%.

I'll now provide additional third quarter highlights along with some comments on future outlook. Regionally, the US delivered operational growth of 12% versus prior year. Strong growth was realized across most all of our business units, particularly cardiovascular and endoscopy, and included an approximate 300 basis point tailwind from acquisitions.

Middle East -- I'm sorry, Europe, Middle East, and Africa grew 15% on an operational basis versus prior year. We continue to see excellent execution fueled by our innovative portfolio with seven of the eight business units growing double-digits. Sales growth accelerated within our growth in emerging market countries within Europe, with notable strength across cardiology and peripheral interventions.

In Asia-Pac, we grew 15% operationally with strong growth in China, India, and ASEAN countries. While our Japan results saw some impact from COVID within the quarter, we continue to see strength driven by new products, including POLARx, WATCHMAN, FLX and Rezum.

Our team in China delivered excellent results in the third quarter with growth of 36%. Growth is primarily driven by our ICTx business within cardiovascular, PI and our CRM business units, supported by new and ongoing product launches across the portfolio.

Turning to Latin America. The team executed another exceptional quarter, growing 29% operationally. All business units in major markets grew double-digits in the third quarter and across the portfolio. More than 10 new products were launched enabled by remote training and support.

I'll now provide some thoughts on our business units, starting with Urology and Public Health, which grew organic sales 13% and 16% on an operational basis. The stone management, prosthetic urology, and prostate health franchises all grew double-digits in the third quarter, with balanced performance across the regions.

We continue to focus on global expansion and are pleased to have received approval and commenced the launches of SpaceOAR in both Korea and Mexico and Rezum in Japan.

Our Lumenis acquisition did turn organic in September and we remain excited about the global opportunity ahead with the Moses Laser Technology, LithoVue Single-Use Flexible Ureteroscopes, and our broad portfolio of stone management products.

In Endoscopy, sales grew 10% organically. This category-leading business continues to focus on product innovations, enhanced by best-in-class physician education and training. Growth in the quarter was driven by our biliary and single-use imaging franchises with ongoing market development activities, enabling increased utilization of EXALT-D and other key products.

In Neuromodulation, organic revenue grew 3%. Our pain franchise sales were flat year-over-year, below our expectations, with ongoing reimbursement challenges impacting US procedures for both Vertiflex and Spinal Cord Stimulation.

In SCS, while international growth was very strong, with broad demand for WaveWriter Alpha, our US SCS sales were impacted by preauthorization denials despite strong patient demand and ongoing physician interest in our fast therapy. We have a team in place focused on supporting the preauthorization documentation requirements. However, we do anticipate that challenges will continue to persist in the fourth quarter.

In Deep Brain Stimulation, the US, EMEA and LatAm regions grew double digits in the third quarter. Globally, we're seeing stable underlying DBS procedure growth, and we continue to see momentum in the US as we moved into full launch of our STIMVIEW XT integrated imaging and programming platforms.

Cardiology delivered another excellent quarter, with organic sales growing 13% and operational sales growing 16%. Within cardiology, interventional cardiology therapies, organic sales grew 11%. This coronary therapies franchise performed well in third quarter, driven by strong performance in our international regions, particularly with our differentiated imaging franchise.

Importantly, we recently completed enrollment in our AGENT IDE trial. This is the very first US trial for a coronary drug-coated balloon to treat in-stent restenosis. And we expect to launch in Japan in 2023, in the US in 2024. Our structural heart valves franchise did grow double digits in the third quarter again, with continued strength in Europe with our ACURATE neo2 TAVR platform.

Additionally, results from the PROTECTED TAVR trial were presented as a late breaker at TCT. Recall the PROTECTED TAVR trial studied our cerebral embolic protection device, SENTINEL, with TAVR versus unprotected TAVR.

With a reduction in the primary endpoint of overall stroke -- while the reduction in the primary endpoint of overall stroke did not reach statistical significance, a secondary analysis demonstrated a clinically meaningful 63% relative risk reduction in severe disabling stroke.

Turning to WATCHMAN. Organic sales grew 26% in third quarter. Global growth continues to be very strong, further supported by the US FDA approval of an expanded label to include DAPT, giving physicians and patients choice of DAPT or OAC in the first 45 days post implant.

We continue to focus on innovation in this space, with a Trusteer, which is our new steerable sheath and we also highlighted our next-generation FLX device, WATCHMAN FLX PRO at our TCT investor event in September. We expect FLX PRO to build on our second-generation FLX with additional sizes in the device coding designed to enhance healing.

In Cardiac Rhythm Management, organic sales grew 7% versus prior year. We had another strong quarter of performance, as we continue to focus on lifetime patient management from diagnostics to implant with our broad portfolio.

Within core CRM, our low-voltage franchise grew mid-single digits and high-voltage grew low single digits. Our diagnostics franchise continues to perform very well. We're pleased to have received CE Mark for our implantable cardiac monitor, LUX-Dx, and we have commenced our commercial launch.

Electrophysiology sales grew 26% on an organic basis and 83% on an operational basis. We continue to see strength in our comprehensive international portfolio, which grew 45% organically. And this includes two months of contribution from FARAPULSE. Physician demand for POLARx in Japan and FARAPULSE and POLARx in Europe remains very strong, and we continue to see increased utilization at existing centers, while we are expanding into new accounts.

In addition, we're pleased to have launched FARAPULSE in Australia and Singapore under special access, and we anticipate approval in 2023. The Baylis integration continues to go well with the differentiated Transseptal access portfolio growing double-digits in the quarter and remains on track to achieve our full year expectations.

In Peripheral Interventions, organic sales grew 12% with broad growth across all major franchises and regions. In Arterial, our differentiated drug-eluting portfolio grew double-digits in the quarter and we received FDA approval for a line extension of ELUVIA and commenced launch of the longest length of drug eluting stent for peripheral arterial disease in the US.

The Interventional Oncology business had another very strong quarter with great growth and continued strength in our cancer therapies, ICX and TheraSphere. We're pleased to have closed on the acquisition of Obsidio and the gel embolic material technology. Obsidio is the first gel embolic with an indication for the peripheral vasculature and a complementary addition to our portfolio. We look forward to launching this technology within the US in 2023.

In alignment with our overall commitment to progress our environment, social and governance efforts, the PI division announced collaboration with a healthcare data platform, TruVida, aiming to provide insights to help better address healthcare disparities within various PI disease states. We remain committed to driving sustainable innovation to Boston Scientific. And despite the persistent macroeconomic pressures, we continue to invest for the long-term in R&D, execute strategic tuck-in M&A with a focus on improving patient outcomes today and into the future.

We're also excited about the opportunities ahead and remain focused on our long-term financial goals, continuing to grow sales faster than the markets, operating margin expansion, double-digit adjusted EPS growth and strong adjusted free cash flow generation.

Before I turn it over to Dan, I do want to take a moment to share that our Chief Medical Officer, Dr. Ian Meredith, will be retiring in April of 2023. We're extremely grateful for his strong contributions, particularly as dedication to patients, clinical science and meaningful innovation. And it's a great sense of humor.

With that, I'll now turn things over to Dan to review our financial performance in more detail.

[Dan Brennan]

Thanks, Mike. Third quarter consolidated revenue of $3,170 million, represents 8.1% reported revenue growth versus third quarter 2021 and reflects a $162 million headwind from foreign exchange, higher than our expectations due to the continued strength of the US dollar. Excluding this 550 basis point headwind from foreign exchange, operational revenue growth was 13.7% in the quarter. Sales from the acquisitions of FARAPULSE through July, Lumenis through August and Baylis contributed 220 basis points resulting in 11.5% organic revenue growth, exceeding the high end of our guidance range of 8% to 10% growth versus 2021.

Continued foreign exchange headwinds and slightly higher spend on R&D investment across the portfolio largely offset our top line outperformance, resulting in Q3 adjusted earnings per share of $0.43, achieving the low end of our guidance range, representing 6.3% growth versus 2021. Adjusted gross margin for the third quarter was 70.7% in line with our expectations. The macroeconomic environment continues to be challenging, particularly related to inflationary pressures and availability of materials, which have largely offset a slight improvement in freight costs.

For full year 2022, we continue to expect adjusted gross margin to be slightly below 70.8%, which includes $375 million in macroeconomic headwinds versus 2019. These headwinds are predominantly from increased freight costs and unfavorable manufacturing variances, primarily related to direct material cost and availability with a smaller portion attributable to increased labor costs.

Recall, unfavorable manufacturing variances are recognized over approximately six months, in line with our inventory turns. Third quarter adjusted operating margin was 25.5%, slightly lower than our expectations. We continue to focus on our global goal of operating margin expansion, but believe it is prudent to update our operating margin target to allow for the flexibility to weigh near-term spend discipline with investments to continue to fuel top line growth.

We now expect full year adjusted operating margin to be approximately 26%. One-time charges within the quarter's results included a minor write-off related to the discontinuation of our SAVAL program. In addition, we recognized a GAAP charge attributable to an intangible asset impairment of $125 million primarily related to Vertiflex as the business continues to face reimbursement challenges impacting the revenue outlook for the product. On a GAAP basis, the third quarter operating margin was 11.3%.

Moving to below the line. Adjusted interest and other expense totaled $91 million in Q3, higher than our expectations driven in part by FX losses from certain unhedged currencies. Our tax rate for the third quarter was 11.9% on an adjusted basis, including discrete tax items and the benefit from stock compensation accounting. Excluding these items, our operational tax rate was 14%, in line with expectations.

We ended Q3 with 1,440 million fully diluted weighted average shares outstanding. Adjusted free cash flow for the quarter was $626 million and free cash flow $320 million, with $470 million from operating activities less $150 million net capital expenditures. We now expect our full year 2022 adjusted free cash flow to be approximately $2 billion. Our total legal reserve as of September 30th was $304 million, a decrease of $210 million versus June 30th, primarily related to mesh and certain IP litigation payments.

As of September 30, 2022, we had cash on hand of $338 million. 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. As of September 30th, our leverage was 2.5 times, and we now expect year-end leverage to be at or slightly below 2.5 times.

I'll now walk through guidance for Q4 and the full year 2022. We expect full year 2022 operational revenue growth to be approximately 11.5% versus 2021, which excludes an approximate 500 basis point headwind from foreign exchange based on current rates, 100 basis points higher than our previous expectations. Excluding a 250 basis point contribution from the acquisitions of Preventice, FARAPULSE, Lumenis and Baylis, and $13 million of pre-divestiture specialty pharmaceutical sales in 2021, we now expect full year 2022 organic revenue growth to be approximately 9% versus 2021, reflecting our strong Q4 performance and confidence in continued consistent procedural growth.

We expect fourth quarter 2022 operational revenue growth to be in a range of 8.5% to 10.5% versus 2021, which excludes an approximate 650 basis point headwind from foreign exchange based on current rates.

Excluding a 150 basis point contribution from the acquisition of Baylis, we expect fourth quarter 2022 organic revenue growth to be in a range of 7% to 9%. We continue to expect our full year 2022 adjusted below-the-line expenses to be approximately $350 million.

Full year 2022 operational tax rate expectations remain unchanged at approximately 14%, with an adjusted tax rate of approximately 13%, including the benefit of the accounting standard for stock compensation and discrete tax items recognized year-to-date.

Our tax rate expectations reflect current legislation, including a provision on the treatment of R&D expenditures. We continue to believe there's 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 historical range of approximately 11% operational and 10% adjusted.

We expect a fully diluted weighted average share count of approximately 1,443 million shares for Q4 2022 and 1,440 million shares for the full year 2022. Our long-term hedging strategy continues to be effective at minimizing FX impact on EPS, and we are largely hedged through 2023.

At current rates, we now anticipate FX headwinds on our full year 2022 adjusted earnings per share of $0.06, which is $0.03 unfavorable versus previous expectations due to the continued strengthening of the US dollar.

As a result, we are updating our full year adjusted earnings per share range to $1.71 to $1.74, representing 5% to 7% growth versus 2021. We expect fourth quarter adjusted earnings per share to be in a range of $0.45 to $0.48.

One quick housekeeping item before I turn it back over to Lauren. We continue to expect full year 2022 preferred stock dividend expense of approximately $55 million related to our May 2020 mandatory convertible preferred stock offering using the if-converted method. These shares will mature on June 1st, 2023, at which point the dividend expense will retire and our share count will increase based on our share price at the time of conversion.

In each of the conversion scenarios, the resulting impact to EPS should be immaterial. For more information, please check our Investor Relations website for Q3 2022 financial and operational highlights, which outlines more details on Q3 results and the MCPS share conversion.

In closing, I'm proud of the results we've achieved year-to-date with continued revenue momentum. And despite a challenging macroeconomic environment, we remain focused on operating margin expansion balanced with investment in our innovative portfolio to drive continued above-market top line growth.

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

[Lauren Tengler, Vice President, Investor Relations]

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

[Operator]

We will now begin the question-and-answer session. [Operator Instructions] First question comes from Robbie Marcus with JPMorgan. Please, go ahead.

[Robbie Marcus, JPMorgan]

Great. Thanks for taking the question and congrats on a great top line quarter. I'll also add congratulations to Dr. Meredith on a very well-deserved retirement. Maybe for my question, it really was a strong top line, double digits organic. Fourth quarter continues to look good in guidance. I think the one area where we've seen a little pressure is on margins.

So, Dan, I was hoping you might be able to give us an early look into next year, how elevated is the spending. There's a lot of moving pieces with OpEx and currency and the share count. Do you think the Street's generally in a decent spot for next year with returning to more normalized margin expansion, or do you think it's still going to be a pressured year in 2023? Thanks.

[Dan Brennan]

Sure, Robbie. I think, obviously, early to comment on 2023 specifically. But I think I can probably give you some commentary that would be helpful. First, you mentioned share count. That shouldn't really be a driving factor, because I mentioned on the conversion of the MCPS, that, that shouldn't really impact next year's EPS once converted.

Let me look at Q3 first, though. If you look at EPS for the quarter, given the reported revenue at the high end of the range, it's probably reasonable to expect that we would have been at the high end of the EPS range, which was $0.43 to $0.45. We achieved $0.43, which is $0.02 lower than the 45. $0.01 of that is from the incremental FX headwind and $0.01 is from lower operating income percentage versus expectations in the quarter.

I think the FX impact, I think, is well understood, given the strengthening of the US dollar, so not a lot of additional commentary there. Relative to our operating income percentage, the goal is to be 26% for the full year. And this involves balancing certain initiatives to reduce expenses in the short term to offset the supply chain and inflation headwinds, while at the same time, continuing to fuel our top line, which has been performing very well.

If you look at the P&L components of a 26% adjusted margin scenario in 2022, it would likely have gross margin higher than 2021, SG&A lower than 2021 and R&D slightly higher than 2021. And we think this is appropriate.

And keep in mind, as Mike said, this would be 70 basis points higher than the 2021 adjusted operating income margin full year of 25.3% and in line with the 2021 second half and importantly, in line with 2019 full year while absorbing $375 million of supply chain and inflation headwinds compared to 2019. So I feel very good about how we're balancing that and looking at that 26% as a very successful number for the year.

Specific to 2023, again, our goal is always to continue to increase operating margin, long-standing goal of doing that 50 basis points per year. If you look at the 25.3 last year, we'll be 70 basis points, as I said, advanced on that in 2022 if we hit that 26. And then even with where we were in 2019 and the second half. So more to come as we evolve and deliver guidance likely in that February timeframe, but I feel good where we are in 2022 and look forward to continuing the journey in 2023 and beyond.

[Robbie Marcus, JPMorgan]

Great. Appreciate the color. Thanks.

[Operator]

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

[Larry Biegelsen, Wells Fargo]

Good morning. Thanks for taking the question. I just wanted to ask about Neuromodulation. Mike, could you talk a little bit more about the reimbursement challenges there? What channels are you seeing that in? And it seems like all your businesses are consistently growing around the corporate growth rate except Neuromodulation. So what's the plan to accelerate the growth in that business? And let me just also extend my congratulations to Dr. Meredith, and I wholeheartedly agree with your comments earlier, especially about his sense of humor. Thanks for taking the questions.

[Mike Mahoney, Chairman & Chief Executive Officer]

Larry, yes, we're quite proud of the performance nearly every business grew double-digits and faster than the peer group and every region as well. You saw the growth in Europe and China all over. So we're quite proud of the results in the quarter and really through the year. Neuromod, they're really broken down in two pieces. The deep brain stimulation franchise is doing extremely well, growing strong double-digits, US, Europe, and a nice pipeline. And we're not seeing really some of the macro headwinds in the DBS business.

On the spinal cord stimulation business, as you know, this market has been tough to call. Really over the past few years during the pandemic. And now as we're essentially hopefully getting out of the pandemic. The markets, we think, in the low single-digits to potentially mid-single-digit range now. So it has come down a bit in terms of the overall market growth rate, we believe. What's hurting the market, not necessarily Boston Scientific as you've seen some competitive results already, and you've seen this trend throughout the year, has been in the spinal cord stimulation market in the US.

And we're seeing more preauthorization denials in the US. We are seeing strong patient funnels. So our team is essentially really focused on building additional capabilities to help our physician customers manage those preauthorization trials. These patients need the products. The products obviously work. I think it's more of an industry challenge right now.

And we're working with them to streamline that authorization process to get patients through the funnel and position to get paid. So we do anticipate that headwind will persist in fourth quarter. Hopefully, it will get better in 2023. Us, like our competitors, will have easy comps in 2023 based on this so that helps mathematically. But fundamentally, we need to improve the -- help our patients and customers with this preauthorization hiccups and some of the capabilities we're building into the system with that. But I think it's more a class issue right now than a Boston Scientific issue.

[Larry Biegelsen, Wells Fargo]

Thank you so much.

[Operator]

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

[Joanne Wuensch, Citi]

Sorry, Thank you very much for taking the questions. Can we spend a little bit of time on WATCHMAN franchise? You've had over the last 12 months, increased competition but an improved label and sort of broader geographic reach. Can you pick apart how those segments are going or how those headwinds and maybe not headwinds are impacting the franchise? Thanks.

[Mike Mahoney, Chairman & Chief Executive Officer]

Sure. The WATCHMAN business had a terrific quarter. It grew 26%. The bulk of that growth coming from the US. We have launched recently in Japan, albeit a bit slower given the COVID situation there and the need for more proctoring, but that should have a bigger impact for us in 2023. Similar results in China, I would say same commentary. A bit slower out of the gate given some of the COVID restrictions, but should get better in 2023.

We've also continued to gain share in Europe, which I think is important. But by far, the most important market is the US and the team there has done an excellent job. It's really a comment similar to previous calls. You did call out the DAPT label. That did have some additional momentum for us in third quarter as some physicians, kind of, converted back to WATCHMAN FLX now that we've had that label. And really, it's the consistent ease of use, the safety benefits, and the support that the implanting cardiologist or EP is receiving from the refer.

The referring community is getting more and more confident in WATCHMAN, in particular, each quarter. And so we expect the market to continue to be quite healthy. We're calling it roughly 30% growth. We're investing in the clinical trials that you're aware of with option and champion to further widen the market opportunity for it.

And we have a very strong pipeline of new products coming behind what is already differentiated from our competitor WATCHMAN FLX product. So, we think we're in a really good position here and we're going to continue to grow the market and invest to have this be one of our top growth drivers.

[Joanne Wuensch, Citi]

Thank you very much.

[Operator]

The next question comes from Vijay Kumar with Evercore. Please go ahead.

[Vijay Kumar, Evercore]

Hey guys. Thanks for taking my question. Dan, maybe 1 for you on the financial side here. I think the 26% operating margin for the year, that would imply Q4, the pretty steep ramp in Q4. Are we thinking about margins the right way? And when you think about those margins, what should FX impact be for next year at current rates? Anything to think about balance sheet inventories, which have been capitalized that flowing through the P&L for next year, any impact for 2022? Thank you.

[Dan Brennan]

Relative to -- say that again, Vijay?

[Vijay Kumar, Evercore]

I meant the inventory impact for 2023, sorry. Not 2022.

[Dan Brennan]

Yes, right, got that. Specific to Q4, so your math is right, right? We're 25.5% year-to-date adjusted operating margin. So it implies a 27.5% for the fourth quarter to get to the full year 26%. We believe we have the plans in place to do that. There's a bit of a seasonality that helps if you look back over the past few years, Q4 is usually the highest margin quarter we have, both gross and operating. So, we're looking for that trend to continue here in Q4. So -- but yes, it requires a strong Q4, but we believe we have the plans in place to deliver that.

Specific to 2023, I probably can be a little bit helpful on that. I think somewhat unique to us in our hedging program, we do hedge out multiple years in that program. So, as I mentioned in my commentary, we are largely hedged for 2023. So, if rates were to stay where they are today, I think you'd likely see an impact in 2023 of pretty similar to what you see this year on earnings per share.

Recall, at the operating margin percentage level, you don't see much benefit from FX. You see that in the gross margin. But then because our -- the majority of our OpEx dollars are dollar-denominated, you lose that in the OpEx section of the P&L.

So, the operating margin contribution from FX is very minor. So, not much to talk about there. But relative to EPS impact, I would say, likely similar to what you see this year, assuming rates remain constant.

[Vijay Kumar, Evercore]

Thanks guys.

[Dan Brennan]

Thanks Vijay

[Operator]

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

[Travis Steed, Bank of America]

Hey for the question. Also congrats to Ian Meredith. So I might have missed it earlier, but can you remind us again the moving parts on what drove the higher OpEx and the lower op margin guide for 2022 versus three months ago? Just as a quick clarification.

And then the question I was going to ask was more on the Analyst Day last year. You were committed to a double-digit EPS growth CAGR. This year, you're closer to 7%. Is that double-digit EPS CAGR still good? And in the starting point for 2023 and still be in that double-digit range, given the macro pressures that we're in?

[Dan Brennan]

Yes, on the double-digit earnings per share, that's always been our growth goal, and we've achieved that many years. The issue this year is a change in tax legislation that went into effect in January. And that is about $0.06 overall for the year. So if that were the old legislation, we'd be solidly double digits.

It's a provision on the amortization of R&D within tax. And so, that's really the kind of the stick and the spokes of getting to double digits this year. Double digit remains our goal going forward as we talked about at Investor Day. And then your first question was...?

[Mike Mahoney, Chairman & Chief Executive Officer]

I'll just comment. There's a lot of focus on with AdvaMed society and others on advocating for that R&D amortization to reverse. So that is a one-timer that will annualize in 2023. And if you neutralize that and some of the FX were strong double digits for the year.

[Travis Steed, Bank of America]

That’s helpful. And if you could just remind us the moving parts on the 2022 margin guide, exactly what the higher OpEx and what drove the change in op margin again. I may have missed that earlier.

[Dan Brennan]

Yes, it's really. It's really just a balance within the P&L. So if you think of where we are versus 2021, you'll see higher gross margin, you'll see lower SG&A and you'll see slightly higher R&D. So we're balancing the P&L to try and offset the $375 million of headwinds that we have versus 2019.

And just maintaining the appropriate level of spend in that R&D line to continue to fuel the top line. So that's really the only tweak within there. So making sure that we fuel the top line, while still trying to offset the supply chain and inflationary headwinds.

[Travis Steed, Bank of America]

Great. And congrats on another good top line.

[Dan Brennan]

Thanks.

[Operator]

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

[Cecilia Furlong, Morgan Stanley]

Great. Good morning and thank you for taking the questions. Just wanted to ask a bit more color on what you saw exiting September versus July and August across your portfolio. And then, looking at the 4Q guide, if you could just walk through your expectations, either US, OUS, what you're looking at for China. And then just expected either seasonality. Any impact from deductibles. Anything you would call out specifically that you incorporated in the 4Q guide. And thanks for taking the question.

[Dan Brennan]

Yes. I don't think we're going to get into the specifics of the quarter. I mean, we're -- I think the revenue results stand on their own. We're super proud of the 11.5% organic growth in the quarter. So I think that speaks for itself. Relative to Q4, obviously, we're giving guidance today. We know where we are through October through -- where we are in October.

And Neuromod, as Mike said, Neuromod is probably a bit challenged in Q4 versus what we might have expected 90 days ago. But the rest of the business has tremendous momentum. And again, super proud of the 11.5% that we delivered in Q3, again, with most of those businesses in double digits.

[Mike Mahoney, Chairman & Chief Executive Officer]

Yes. You asked about the regions. You saw the US performance in third quarter and for the full year is quite strong, but also a particular strength in Europe and Asia-Pac. And our China business grew over 30% in the quarter. It's done extremely well this year based on the diversification of the portfolio and the product launches. And really the innovation of the team in China. And also shout out to the European team in a very mature market, continues to grow double-digits in the kind of Western more established markets and very strong double-digits in the emerging markets there.

So, you're seeing really balanced growth across each region throughout the year. And many of those products, as I mentioned in the script, in Europe, particularly in EP, we're working on clinical trials to get these products through and improved in the US.

[Cecilia Furlong, Morgan Stanley]

Great. Thanks for taking the question.

[Mike Mahoney, Chairman & Chief Executive Officer]

You are welcome.

[Operator]

The next question comes from Rick Wise with Stifel. Please go ahead.

[Rick Wise, Stifel]

Hi Mike, hi Dan. Two questions. Maybe just on the recovery, just one large picture and one product question. On the recovery, I'm very -- obviously, FX is a notable factor that's going to continue. But I'm curious to what extent are some of the other macro headwinds stabilizing or even improving particularly staffing. I keep saying myself if staffing were less of an issue, maybe you would have grown even more rapidly. Is staffing still an issue? Are things stabilizing in general on the freight and cost side are getting worse? And then I have a product follow-up question.

[Mike Mahoney, Chairman & Chief Executive Officer]

Sure. On the hospital staffing, you've seen some of the big public companies, hospital change report. Maybe it's gotten incrementally better, but certainly still quite a challenge for hospitals. Despite that, the procedure volumes are quite healthy.

Despite some of the staffing shortages, could they be a little bit better. If the shortage were improved likely. But they're doing a nice job of managing it. And it's forcing us to be innovative with them on reducing procedure times, which we continue to do, find ways through our portfolio.

So, staffing may be slightly better, but still a very tough environment for hospitals. It might provide some upside over time as that gets better, but it's going to get better, more slowly, not overnight.

And the other headwinds we talked about I think the $375 million-ish of incremental supply chain, bucketed supply chain costs versus 2019. And the biggest -- we are seeing some slight improvement in some of the freight areas, and we expect some slight improvements ongoing there in 2023. The bigger bucket that's most impactful is the product cost. The material cost, the supplies and raw materials that we purchase. And due to some of the shortages there we have tied up some longer term contracts to ensure supply, but those have come at more hefty price increases.

So that bucket, we don't see getting better in 2023. So, we think we'll carry that forward in 2023 as you annualize those contracts. Some of the other areas will get more efficient the productivity of our manufacturing plants and so forth.

So, as Dan mentioned, we expect to carry many of the supply chain headwinds primarily for material cost into our 2023 plans. But similar to this year, we did improve margins 70 bps versus 2021. Our goal will be to continue to improve margins in 2023 and manage through that.

[Rick Wise, Stifel]

That's great, Mike. And just -- it's hard to resist asking about FARAPULSE. It sounds like things are going extremely well. Can you talk about drivers of the demand for FARAPULSE in Europe, maybe any incremental color on centers opened? And just maybe update us, remind us if everything is still on track for data -- US data readout in 2023 and approval in 2024? Thank you again.

[Mike Mahoney, Chairman & Chief Executive Officer]

Thanks, Rick. I'll have Dr. Stein cover that one.

[Ken Stein, Chief Medical Officer]

Yes, sure, thanks, Mike, and thanks, Rick, for the question. We're very pleased with the commercial rollout in Europe to date, both in terms of continued procedure growth at the centers where we have opened and being able to open new centers as we continue the product launch.

And I think that the drivers are really, what we've always said is the promise of the FARAPULSE technology, right? It's enhanced safety as compared to thermal ablation, it's proving to be at least as efficacious, if not more effective. And certainly, as Mike mentioned in terms of the issue with headwinds with staffing, it's a much more efficient procedure and really just couldn't be happier with what we're seeing in terms of outcomes in Europe to date.

We have completed enrollment in our US IDE trial that was the ADVENT trial, and again, still on track to finish follow-up for the primary endpoint of that data in, sort of, midterm next year and then submit to the FDA and then it's all in the hands of the regulators.

[Rick Wise, Stifel]

Thank you, very much.

[Operator]

The next question comes from Matthew O'Brien with Piper Jaffray. Please, go ahead.

[Matthew O'Brien, Piper Jaffray]

Good morning. Thanks for taking my question. And let me offer my congratulations to Dr. Meredith as well on his retirement. Mike, it seems like you're taking a little bit of near-term pain right now to continue your spending in these growth areas, because you continue to be one of the faster growth, diversified med tech names out there.

So I'm just curious, if you feel like that momentum is going to continue into 2023, where you can stay one of the faster growth, large-cap med tech names out there. And if it's going to be more of a broad-based level of improvement across all the different franchises where you can keep kind of growing in this double-digit range in some areas, or if it's going to be a little bit more focal than what we've seen historically. I don't know if it's specifically in cardiology or other areas. Thank you.

[Mike Mahoney, Chairman & Chief Executive Officer]

Sure. What you've seen in the performance this year is pretty consistent across all of our divisions, six of eight grew double digits in the quarter. And you've seen similar performance throughout the year because of the innovation and commercial teams that we have.

And our -- each quarter, as we mentioned many times, the lower growth markets, the mix of those businesses get smaller each quarter and we layer on M&A and new innovation to grow faster. So that's kind of our formula, and it's proven to work pretty well.

As we look in some of the decisions that we make, we're very excited about the portfolio of significant launches that we have. Most of the significant -- very significant, move the needle launches are more in the 2024, 2025 period, and that's where you're seeing the great growth in Europe, whether it be our ACURATE neo valve, the Agent balloon that we're excited about, which we think will change really the script in coronary and that will launch next year in Japan. And as Dr. Stein just mentioned, our EP portfolio with FARAPULSE and cryo is doing exceptionally well outside the US, and we have other launches.

So that does require quite a bit of R&D and clinical work. We'll be starting a persistent trial with FARAPULSE in the coming months here. So we think our R&D spend is appropriate to fuel that consistent above peer market growth over the LRP.

In 2023, we'll give guidance in February. We will have a bit tougher comps in 2023 based on the performance of the estimated 9% growth this year. But if you look at -- we're excited what 2023 will bring, and we'll give more guidance there.

But if you look at the company, and what we have for the future based on what we're seeing in Europe and the clinical science that we're delivering, whether it be in our Interventional Oncology business or EP business, we're quite confident in the next LRP that will consistently grow above peer group.

[Operator]

The next question comes from Matt Taylor with Jefferies. Please go ahead.

[Matt Taylor, Jefferies]

Hi, thanks for taking the question. Can you hear me okay?

[Dan Brennan]

Yes, hear you fine Matt.

[Matt Taylor, Jefferies]

Thanks Dan. Okay, so I wanted to circle back and just ask 1 about Q4. Just on the 7% to 9% organic versus the 11% plus that you did this quarter. Obviously, the comp is tougher. But is there anything else you call out there? Are you seeing anything slow down? Are you being conservative? Any highlights on just kind of the delta quarter-over-quarter?

[Dan Brennan]

I think it's really just the comp, which is the better part of 250 basis points more difficult. And Neuromod is lower than the average of the rest of the businesses. But as we've continued to say, six of eight double-digits in Q3, continued momentum with a lot of the good new product launches we have, both in the US and internationally. So, I think the business has great momentum.

And I think once you clear for the comp, it's a great Q4. And if we delivered 9% organic revenue growth for the full year versus 2021, I think that will be a great year for the company.

[Matt Taylor, Jefferies]

Great. Can I ask 1 follow-up? I just wanted to know, we heard more about pent-up demand signs from some of the other peers that have reported. Would you found that -- are you seeing signs of that start to come due? And how do you square that, I guess, with staffing getting slightly better? What are the things that, I guess, could release over the next couple of quarters to help with the volumes?

[Dan Brennan]

We think the volume is pretty good. And there is certainly pent-up demand, but it's been in the system for a while. You look at your typical backlog, whether it be a knee replacement or a Afib product or whatever, a men's health implant. Oftentimes, you're getting a 60 to 120-day wait in the US. And so there's certainly pent-up demand. But I don't see that getting cured in the near-term.

I think there's just a very strong patient demand. There is a bit of a staffing shortage -- there's only so many labs that a hospital has to do procedures. And so we see pretty strong volume, which I guess is a good sign for the future here despite some of the staffing shortages and just hospitals extremely busy, lab time very busy and demand that outstrips their supply in many cases that drive the waitlist. But we don't see that waitlist dramatically changing in the coming months.

[Matt Taylor, Jefferies]

Thanks Mike, thanks Dan.

[Operator]

The next question comes from Pito Chickering with Deutsche Bank. Please go ahead.

[Pito Chickering, Deutsche Bank]

Hey good morning guys. Thanks for taking my question. Now, it's been a while since the last COVID spike. Have you seen the funnel for patients to get procedures normalize across your product portfolio versus pre COVID levels? Are you seeing any bottlenecks within that funnel as you think about your organic growth? And just to be clear, this isn't about necessarily nurse staffing and hospitals, but all the touch points across health care systems.

[Mike Mahoney, Chairman & Chief Executive Officer]

Yes, I think -- thank you. I think it's similar to the last response. It depends on the region of the world. We did see a slowdown in third quarter in Japan. And you see pockets in China and sometimes pockets all over the world depending on what happens with COVID. But overall, that's been smoothed out with the underlying pretty good procedure growth and us doing a bit better.

And so again, I think as you look to fourth quarter and 2023 here, staffing shortage still is an issue. It's not going to be resolved in 2023. Hospitals are being very innovative to try to shore that up. But a strong patient demand, common to see longer wait list. So, we do see pretty consistent demand, but we don't see a quick fix for the staffing shortage. But the underlying demand still strong despite that.

[Pito Chickering, Deutsche Bank]

Great. Thanks so much.

[Operator]

The next question comes from Chris Pasquale with Nephron Research. Please go ahead.

[Chris Pasquale, Nephron Research]

I wanted to follow up on the increased prior of denials in Neuromod. You talked about helping physicians with documentation, but what about addressing the underlying payer reticence to allow access to those therapies? Do you think more clinical data can help? And what had you had planned on that front?

[Mike Mahoney, Chairman & Chief Executive Officer]

I'm really much more to comment on. The team does quite a bit with our clinical studies that we do for product approvals. It's a well-accepted therapy across -- it's been -- it's a pretty mature market in terms of number of competitors and clinical science that's actually increased quite a bit the last few years.

Part of it is the payers. We certainly work with our hema teams to contact those payers directly and reemphasize that clinical evidence. But it's really a bit of just some of the recent preauthorization denials that just need to be worked through in terms of their efficiency. And we aim to improve that process.

[Chris Pasquale, Nephron Research]

Got you. Okay.

[Mike Mahoney, Chairman & Chief Executive Officer]

I don't think it's related to any -- it's not related -- the slowdown is not related to any poor clinical data. There's good clinical data at Boston Scientific and our peer group and it's well established by the implanter, whether it be a pain physician or an orthopedic physician. It's well proven out.

I think it's working through some of the mechanics of these preauthorization denials is the issue. But I also think overall, the market is a bit slower, even excluding that than it was historically.

[Chris Pasquale, Nephron Research]

And then renal innovation is going to be a hot topic at AHA. Boston had a program there at one time with Vasix [ph]. How are you thinking about the potential of that therapy and Boston's ability to participate there as it does become a new growth driver in cardiology?

[Mike Mahoney, Chairman & Chief Executive Officer]

Dr. Meredith, take that one.

[Ian Meredith, Chief Medical Officer]

Yes, thanks, Chris. It's a good question. Yes, we will see Medtronic hypertension study come out of AHA, and we just saw the RADIANCE II trial results come out the TCT with Ultrasound. This is a real therapy, and hypertension is an enormous cardiovascular problem globally, and we follow this space very carefully. This is a significant opportunity. Obviously, the results still could be improved.

If you look, there's significant variability in the treated arm effect. And that probably reflects that we've got more to do to understand in whom we should be using this form of therapy. But it's a real opportunity. Hypertension is a massive cardiovascular problem. We follow the field very closely. It's one that we have to pay attention to.

[Chris Pasquale, Nephron Research]

Thanks, and congrats, Dr. Meredith.

[Ian Meredith, Chief Medical Officer]

Thank you.

[Operator]

And I understand there is time for one last question, and that would be from Matt Miksic with Barclays. Please go ahead.

[Matt Miksic, Barclays]

Hey thanks so much for squeezing me in.

[Mike Mahoney, Chairman & Chief Executive Officer]

Good morning Matt.

[Matt Miksic, Barclays]

Hey how are you? So, congrats on a really strong quarter, and Dr. Meredith, we'll certainly miss your insights and your cheerful disposition. And I guess I'm thankful to that we've got about six months to get to know this humorous side that everyone is referring to. So, I look forward to that.

Just one follow-up, if I could, on margins. Dan, you talked about the impact of FX, and it seems like that explains pretty much the $0.03 reduction in EPS guide for the year. Just maybe one question on trajectory. It's such a strong Q3 here. You're adjusting Q4 for EPS and top end of the range for organic growth. That strikes me as a little bit conservative just given the strength, but I love your comment on that.

And then maybe you're not talking much about 2023, but the shape of margins. I know there's been a lot of questions around how far into 2023 some of the higher costs will go. And if we were to think about -- is this sort of a front half, back half that we should be thinking about for 2023 at this point. Or I'm sure it's too early to say, but any insight you can give on how we should think about costs as they roll through inventory and P&L and so on? Thanks so much.

[Dan Brennan]

Sure, Matt. A lot to chew on in that question. So, the -- first, I agree with your assertion. The $1.71 to $1.74 from the $1.74 to $1.77 adjusted earnings per share guidance for the year, that is FX. That's down $0.03. FX is the FX impact on EPS was $0.03, it is now $0.06. So that is the difference for the $1.71 to $1.74 change in guidance.

On the revenue for Q4, your comment that it appears conservative. I think it's appropriate. I think we've looked at all the different variables that are there, the momentum in the business and we think that the guidance we gave is appropriate.

And I think for 2023, I think it's just a bit early. I mean I gave you a little bit of a teaser there on FX, given where we are with our hedging program. But I think other than that -- and obviously, that our goal is to continue to expand operating margin over time.

But other than that, I'll probably just let you wait until we give guidance officially on all the specifics. But super excited about how the company has performed this year and look forward to continuing that trend in 2023 and beyond.

[Lauren Tengler, Vice President, Investor Relations]

All right. Thank you for joining us today. We appreciate your interest in Boston Scientific. If we were 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. Thank you.

[Operator]

Please note, a recording will be available in one hour by dialing either 1-877-344-7529 or 1-412-317-0088 using replay code 9072485 until November 2nd, 2022, at 11:59 P.M. Eastern Time. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.