Boston Scientific Corp

NYSE:BSX

Earnings Call Transcript 2017-Q4

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to the Boston Scientific Fourth Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and answer-session. Instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Susie Lisa. Please go ahead.

[Susan Lisa]

Thank you, Greg. Good morning, everyone, and thanks for joining us. With me on today's call are Mike Mahoney, Chairman and Chief Executive Officer; and Dan Brennan, Executive Vice President and Chief Financial Officer. We issued a press release earlier this morning announcing our Q4 2017 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 Filings.

The duration of this morning's call will be just under one hour. Mike will provide strategic and revenue highlights for Q4 2017 and full year 2017; Dan will review the financials for the quarter, and then Q1 2018 and full year 2018 guidance; and then, we'll take your questions. During today's Q&A session, Mike and Dan will be joined by our Global Chief Medical Officer, Dr. Ian Meredith; and Chief Medical Officer for Rhythm Management and Global Health Policy, Dr. Ken Stein.

Before we begin, I'd like to remind everyone that, on the call, operational revenue growth excludes the impact of changes in foreign currency exchange rates. And organic revenue growth is defined as excluding the impacts of changes in foreign currency exchange rates and sales from the acquisitions of EndoChoice and Symetis over the relevant prior year period.

Also note, this call contains forward-looking statements within the meaning of federal securities laws, which may be identified by words like anticipate, expect, believe, estimate, goals and other similar words. They include, among other things, statements about our growth and market share, new product approvals and launches, clinical trials, cost savings and growth opportunities, our cash flow and expected use, our financial performance, including sales, margins, earnings and other Q1 and full year 2018 guidance, as well as our tax rates, R&D spend and other expenses.

Actual results may differ materially from those discussed in the 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?

[Michael Mahoney, Chairman and Chief Executive Officer]

Good morning. Thanks you, Susie. Thanks for dialing in. Boston Scientific delivered excellent financial results in fourth quarter 2017 with 8% operational revenue growth, 7% organic revenue growth, 190 basis point improvement in profitability and 14% adjusted EPS growth to $0.34.

These fourth quarter results closed out a very strong 2017. For the full year, we delivered 8% operational revenue growth, 7% organic, against the 10% comp in 2016, which represents a 90 basis point improvement in profitability and 13% adjusted EPS growth to $1.16. Similarly, 2017 closed out a very strong three-year period for BSC, with an average operational revenue growth of 9%, organic growth of 7%, combined with a 480 basis point improvement in adjusted operating margin, which leveraged that growth 2-times to an average 14.5% growth in adjusted EPS over the three-year period.

So our strategy of category leadership in key markets and diversification in the high-growth adjacencies continues to deliver. Our goal is to continue to execute against our strategic planned goals, and execute similarly strong sales and EPS growth results over the next three years. It is the combination of long-term consistent above-market revenue growth, margin expansion and targeted double-digit EPS growth, now coupled with an improved ability to deploy strong free cash flow, that we believe uniquely positions Boston Scientific to deliver shareholder value.

Accordingly, we are excited about our plans to build upon our global momentum in 2018 and beyond. We're targeting full year 2018 organic revenue growth of 5% to 6%. We're guiding to adjusted EPS of $1.35 to a $1.39, which represents 7% to 10% earnings growth.

Importantly, this EPS growth includes an expected $0.02 to $0.03 negative impact from foreign exchange, which we'll seek to offset and deliver another year of double-digit adjusted EPS growth. I'll now provide some highlights in fourth quarter and 2017 results along with thoughts on our 2018 outlook. All growth figures highlighted are on an organic basis over the prior year, unless otherwise noted.

Our fourth quarter organic revenue growth of 7% continues to be broad-based across businesses and regions, led by our strong and diversified portfolio, continued global expansion and execution of our category leadership strategy. The ongoing diversification of our portfolio has helped drive excellent results with sales growth of 11% in MedSurg, 5% in cardiovascular and 3% in Rhythm Management. Four of the seven businesses grew revenue double digits, and we believe five of our seven businesses grew faster than the market.

We also delivered another quarter of balanced global growth, led by 8% revenue in both the US and EMEA, and 4% growth in Europe. Emerging markets revenue grew 13%, led by 19% in China. The MedSurg business has continued to deliver. MedSurg grew 13% operationally and 11% organically in fourth quarter and now represents 39% of the revenue mix in the quarter.

In Endo, we posted 10% organic and 13% operational growth in Q4 fueled by biliary, hemostasis and continued strong growth in the EndoChoice acquisition, which has now been part of the BSC team for over a year now and is fully integrated. Endo delivered 8% organic and 12% operational growth in full year 2017 sales, and we expect continued strength in our global Endo business in 2018.

Uro and Pelvic Health also continued its excellent performance, growing sales 11% in fourth quarter, which is the eighth straight quarter of double-digit sales growth and 12% for the full year 2017. Our single-use digital ureteroscope, LithoVue helped drive double-digit growth in our core stone franchise.

Prostate health also grew double-digits, while Men's Health grew single-digits. And also, the Minnetonka plant warning letter now has been lifted. And we anticipate a stronger new product cadence in our Men's Health business going forward. Boston Scientific continues to build the single-use market for ureteroscopy, while LithoVue now had over 700 accounts in the US and over 1,300 worldwide.

Neuromodulation revenue grew 15% in the fourth quarter. We're excited about the future for this business in 2018 and beyond, with fast growing markets and new innovative product launches in both the spinal-cord stimulation and deep-brain stimulation franchises. Our WaveWriter SCS System is currently launching, and is the first and only platform approved by the FDA to simultaneously provide a paresthesia-based and sub-perception therapy for patients suffering chronic pain.

We're also launching in the US our Vercise DBS platforms to treat Parkinson's disease. Vercise, is a rechargeable platform with a multiple independent control to offer more adaptable delivery of stimulation. Our Cardiovascular group grew 7% operationally in fourth quarter and 5% organically in both fourth quarter and full year.

Our PI business Peripheral Interventions grew 7%, both in the quarter and for the full year. From a product sales standpoint, drug-eluting technology has led the away, but many franchises grew double digits, including stents, atherectomy, IVUS, and our CeloNova microspheres for interventional oncology procedures.

We're seeing expanded use of a drug-eluting technologies in peripheral in Europe, and we continue to be the only manufacturer offering both the highly-effective drug-eluting stents and a drug-coated balloon. Both of our drug-eluting technologies are on track for U.S launches in 2019 for Eluvia, our drug-eluting stent, and in 2020 for Ranger, our drug-coated balloon.

We expect data from Eluvia pivotal trial IMPERIAL to be presented in the second half of 2018. And earlier this week, we're encouraged by early COMPARE I trial data that was presented at the LEERINK conference in Leipzig, Germany. This is the first comparative data in the PI DCB space, looking at our Ranger DCB in a prospective multicenter randomized trial against Medtronic's IN.PACT, IN.PACT Admiral DCB.

Ranger will be differentiated as the lowest profile of any DCB, utilizing the minimum effective dose of paclitaxel and builds upon our market-leading 0.018 Sterling platform balloon. We also expect to bring Ranger to the U.S. and Japan as the first DCB with the longest lengths available on the market. Intervention Cardiology continues its above-market growth trend, delivering a 4% organic and 7% operational revenue in the quarter, and for the full year of 4% organic and 6% operational.

IC growth was led worldwide by continued strength of WATCHMAN, 10% growth in our complex PCI portfolio and mid-single-digit growth in PCI guidance. We also launched four new complex PCI products in the second half of 2017, as we continue to extend our lead in terms of depth and breadth of our complex PCI portfolio.

We're targeting continued momentum in 2018 with new launches like the WOLVERINE cutting balloon and our next-generation rotational atherectomy platform called ROTAPRO. We also recently received FDA approval for a high-definition IVUS system, and expect to begin a limited market release this quarter, while we continue to rollout our new Comet FFR platform.

As we disclosed earlier this month, 2017 structural heart revenue exceeded our guidance of $275 million, and WATCHMAN sales delivered $250 million. WATCHMAN has now treated over 3,000 [ph] patients globally, and we continue to drive growth via increasing utilization with existing customers, opening new centers and expanding the therapy geographically.

Clinically, our efforts include indication expansion with the ASAP-TOO study in patients with absolute contradiction to oral anticoagulants. And we reported positive real world results and EWOLUTION WASP [ph] registries this year as well as the five year PROTECT AF PREVAIL meta-analysis.

On the product development front, we target beginning enrollment in Q2 for the next-generation of WATCHMAN FLX in the PINNACLE FLX IDE trial and launching in Japan in 2019. WATCHMAN also received a 10.6% increase in its primary DRG reimbursement in the U.S. starting last October as well as reimbursement in Australia. We remain committed to educating patients and their caregivers about WATCHMAN, as an alternative to oral anticoagulants to help reduce the risk of bleeding and stroke.

Our ACURATE TAVR program, a platform continues to build momentum in Europe, and we recently completed training of our European sales and clinical teams. We look forward to continued momentum as well as the launch of the next-generation ACURATE neo2 that incorporates an advanced seal in Europe in the second half of this year. We also remain on track to begin enrolling patients in our U.S. IDE for ACURATE in the second half of this year, and we'll confirm the trial details in the coming months.

Regarding our LOTUS Edge TAVR valve platform, there's no change to our commentary from earlier this year in that pending our ability to clear certain technical and regulatory hurdles, our goal is to launch LOTUS Edge in the U.S. and European markets in 2019.

Finally, in structural heart, last week, we announced exciting investment and acquisition option agreement with Millipede, a company that's developing a transcatheter mitral valve and Annuloplasty repair device to treat patients with severe mitral regurgitation. This is a large and currently underserved patient population that we estimate could represent $1 billion market opportunity by 2021.

The Millipede IRIS Annuloplasty Ring delivered via transfemoral, transseptal delivery system follows the surgical standard of care to repair, and ultimately reduce the size of a dilated mitral annulus. This unique design in that is a complete - a unique design and that is a complete ring designed to be used as a standalone device or in combination with other technologies. It's also designed to be highly customizable to a specific patient's anatomy and disease state. We're pleased with the results of Millipede's first-in-human study, and a second first-in-human study will focus on improving the efficiency of the procedure.

With WATCHMAN, ACURATE, LOTUS and now IRIS, we're excited about our structural heart capabilities and the long-term growth prospects of our structural heart business. For 2018, we expect revenue from our WATCHMAN and ACURATE TAVR franchise to deliver approximately $400 million in revenue.

Global Rhythm Management sales grew 3% operationally and organically in Q4 and 4% for the full year. CRM sales grew 1% in the quarter and 2% for the full year 2017, while EP sales increased 18% in the quarter and 14% for the full year.

CRM's 1% growth in Q4 reflects strong 6% growth in defib, offset by high single-digit declines in pacing due to tough comps post-April 2016 U.S. launch of our Brady MRI line. The 6% growth in defib reflects the impact of MRI conditional labeling in the U.S., the ongoing European and U.S. launches of our Resonate platform that contains HeartLogic Heart Failure alert, multipoint pacing MRI and best-in-class longevity with EnduraLife battery technology. EMBLEM S-ICD also continued to do extremely well and grew double digits for the full year 2017, while replacements are tracking to our expectations.

Turning to EP, this franchise continues to build momentum, and we grew sales 18% for the quarter. The second-gen RHYTHMIA HDx platform, which provides significant improvements on workflow efficiency and performance, continues to be rolled out and enables our platform to support future innovative capabilities such as the recent European limited market release of our DirectSense catheters. DirectSense technology has received very positive early physician feedback in Europe and provides physicians with confidence in location, stability and proximity of the catheter to the tissue. Full launch of DirectSense is planned for the U.S. and Europe in 2018.

We believe our strategy of category leadership is working and helping us to become a stronger partner to our global customers. We believe we are poised for a strong 2018, we're well positioned to continue and strengthen our performance track record in 2019 and beyond. Over the course of the next three years, we aim to expand into significant markets that represent an estimated $16 billion in opportunities, with strong margin improvement potential, a consistent tax rate and a greatly improved ability to deploy capital. I really want to thank our employees for the high-performance results, their winning spirit and commitment to advancing science and improving the lives of patients around the world.

Now let me turn the call over the Dan for a detailed review of our financials.

[Daniel Brennan]

Thanks, Mike. Fourth quarter consolidated revenue of $2,408 million represents 10% reported revenue growth and 8% growth on an operational basis, which excludes the impact of changes in foreign currency. The strong top line exceeded the high end of our operational guidance range of 5% to 6% due to outperformance across the majority of our businesses and regions, as Mike outlined.

Our reported revenue reflects a $37 million tailwind from foreign exchange, basically in line with the $40 million tailwind expected at the time of guidance. Sales from the EndoChoice and Symetis acquisitions contributed approximately 130 basis points, which was also in line with our expectations at the time of guidance, resulting in a 7% organic revenue growth for the quarter.

We delivered Q4 adjusted earnings per share of $0.34, which represents 14% year-over-year growth and is towards the high end of our guidance range of $0.32 to $0.35, driven primarily by that strong revenue growth. This includes a $0.02 headwind from FX, which was at the higher end of our range of $0.01 to $0.02.

Our full year 2017 consolidated revenue of $9,048 million grew 8% operationally and on a reported basis and grew 7% organically. Full year 2017 adjusted earnings per share of $1.26, represents 13% growth our fifth straight year of double-digit adjusted earnings per share growth, excluding the $0.08 foreign exchange headwind that we effectively offset throughout the operational savings and initiatives. Adjusted earnings per share grew 20% versus 2016.

Adjusted gross margin for the fourth quarter was 72.6% and flat to the prior year, but importantly, reflects our ability to offset a negative 200 basis point year-over-year impact from foreign exchange and pricing in line with what we have seen in prior years, with operational improvements and manufacturing cost reductions as well as favorable product mix due to the continued strength in our WATCHMAN and Men's Health franchises, to name a couple.

For the full year 2017, adjusted gross margin was 72.1%, in line with the 72% adjusted gross margin for 2016, effectively offsetting a negative 130 basis point year-over-year impact from foreign exchange plus the LOTUS inventory charges in Q1 as well as the unfavorable variances incurred in our Puerto Rico facility due to Hurricane Maria in the third quarter. Adjusted SG&A expenses were $859 million or 35.7% of sales in Q4 2017, down 80 basis points year-over-year and within our guidance range of 35% to 36%.

We remain committed to and continue to realize the benefit of our targeted initiatives focused on reducing SG&A, like, end-to-end business process streamlining and automation, expansion of global shared services, and leveraging global indirect sourcing. As a result of these initiatives, the full year 2017 adjusted SG&A rate of 35.6% is down 50 basis points versus the full year 2016.

Adjusted research and development expenses were $256 million in the fourth quarter or 10.6% of sales, which is down 90 basis points from Q4 2016. And for the full year 2017, adjusted R&D expenses were $974 million or 10.8% of sales compared to 10.9% in 2016. Royalty expense was 0.7% of sales in Q4 and 0.8% for the full year 2017, roughly flat year-over-year for both periods. As a result, Q4 2017 adjusted operating margin of 25.6% increased 190 basis points year-over-year and was within our guidance range of 25.5% to 26.5%.

Full year 2017, adjusted operating margin of 25% is an increase of 90 basis points over the full year 2016 and on target with the goals we established nearly five years ago at our 2013 Investor Day as we seek to continue to build our track record of delivering high performance and meeting or exceeding our long-term goals. The 90 basis point year-over-year improvement in our 2017 adjusted operating margin rate was largely driven by gains in our Rhythm Management and MedSurg segment operating results.

The Rhythm Management team delivered an operating margin of 21.6% for Q4 and 19.7% for the full year 2017. This represents an impressive year-over-year operating margin increase of 620 basis points for Q4 and 470 basis points for the full year.

The team continues to make strong progress on gross margin through favorable S-ICD and Resonate product portfolio mix as well as manufacturing efficiencies, while also focusing on expense control and leveraging the improved top line performance of both the global CRM and EP businesses. This improvement also reflects offsetting incremental spend related to the acquisition of Apama Medical and its single-shot pulmonary vein isolation technology that we announced in October.

The MedSurg segment also realized significant year-over-year improvements of 290 basis points in the quarter, delivering Q4 operating margin of 34.3%. The full year rate of 32.3%, increased 100 basis points over the full year 2016. Investments in commercial capability for ongoing launches across MedSurg were more than offset by the strength in Endoscopy and Urology Pelvic Health, two of our highest operating margin businesses and improvements in Neuromodulation operating margin, with its recent commercial launches and resulting moderation in development spend.

We recorded a net litigation-related charge of $89 million this quarter, related primarily to our mesh litigation. We have now reached conditional, final or near final settlement on approximately 44,000 of our approximately 49,000 claims. However, as we do each quarter, we review the volume of known claims, the estimated cost to resolve each claim, an estimate of future claims and the cost to defend each claim in order to calculate the required reserve and make any necessary adjustments.

Having now settled or reached agreement in principle with approximately 90% of all known claims, we continue to reduce the risk on our balance sheet and are targeting a resolution of the majority of our mesh claims in 2018. Our total legal reserve, of which mesh is included, was $1,612 million as of December 31, 2017.

And importantly, for 2018, we expect to make cash payments of approximately $800 million, which will fund the settlement of remaining legal reserves related to the mesh litigation and minimize this liability on our balance sheet, given the cash payments we've already made in prior quarters into the qualified settlement funds. This combined with our expected payment to finalize our disputes with the Internal Revenue Service for approximately $600 million during 2018, requires approximately $1.4 billion of cash flow to settle our remaining significant existing contingencies. Therefore, in 2018, we expect to have approximately $500 million of cash flow for our other, more strategic uses. I'll give more detail on our cash flow guidance in a minute.

Now I'll move to below the line and interest and other expense. Interest expense for the quarter was $56 million, roughly flat to Q4 of 2016. Our average interest expense rate was 3.8% in Q4 of 2017, and 4% in Q4 of 2016. Adjusted other expense was $31 million in the fourth quarter and primarily included a $19 million impairment on certain of our available-for-sale investments as well as foreign exchange losses related to our hedging program. For the full year, interest expense and adjusted other expense were $229 million and $57 million respectively, slightly below our expected $300 million for the full year.

Our tax rate for the fourth quarter was 371.1% [ph] on a reported basis and 9.5% on an adjusted basis. On an adjusted basis, the favorability in our tax rate was due to a better-than-expected geographic mix of profit and certain discrete tax items. Our reported tax rate includes an estimated one-time net income charge of $861 million resulting from the enactment of the Tax Cuts and Jobs Act. This estimate includes approximate $1 billion charge related to the deemed repatriation of unremitted earnings of our foreign subsidiaries, offset by a $100 million benefit related to the remeasurement of the company's deferred taxes as a result of the lower U.S. corporate tax rate. The net of these two items is the approximate $861 million one-time charge.

Importantly, we expect to be able to utilize certain tax benefits such as NOL and R&D credits, and thus anticipate the cash impact of these charges will be approximately $450 million which is very manageable considering it's paid out over a period of eight years. Our full year tax rate was 88.8% on a reported basis and 11.2% on an adjusted basis.

Finally, Q4 2017 adjusted earnings per share of $0.34, includes approximately $0.02 of unfavorable foreign exchange and represents 14% year-over-year growth or 23% growth excluding the impact of foreign exchange. On a reported GAAP basis, which includes the one-time net income tax charge and other net charges, and amortization expenses totaling $1,095 million after tax, Q4 2017 was a loss per share of $0.45.

For the full year 2017 adjusted earnings per share of $1.26 reflects the higher end of our guidance range, while absorbing the $0.08 of unfavorable foreign exchange. Full year 2017, adjusted earnings per share grew 13% over the prior year and 20% excluding the impact of foreign exchange.

On a reported GAAP basis, 2017 EPS was $0.08 compared to full year 2016 GAAP income per share of $0.25. We ended Q4 with 1,393 million fully diluted weighted average shares outstanding. Adjusted free cash flow for the quarter was $685 million compared to $472 million in Q4 of 2016. And in the quarter we used cash primarily to fund previously agreed upon legal settlements as well as business development activities, namely the Apama Medical acquisition that I mentioned. As of December 31, 2017, we had cash on hand of $188 million.

Our full year 2017 adjusted free cash flow of $1,729 million represents 7% year-over-year growth, but fell slightly short of our $1,750 million cash flow guidance. The shortfall was primarily related to working capital. I'll detail 2018 guidance in a moment, but we continue to expect 2018 adjusted cash flow to be approximately $1.9 billion.

Capital expenditures for the full year 2017 totaled $319 million, in line with our $320 million target, which included expenditures for strategic investments expected to build capacity and drive growth. We expect capital expenditures to be at similar levels for 2018.

So now I'll walk through guidance for Q1 and full year 2018. For the full year 2018, we expect consolidated revenue to be in the range of $9,650 million to $9,800 million, which represents year-over-year growth of 5% to 6% on an organic basis, with an additional 30 basis point contribution from the Symetis acquisition. We expect foreign exchange to be a tailwind of approximately $150 million to $175 million for the full year 2018. However, as I'll detail next, due to our hedging program, we do not expect to see the same benefit in our adjusted gross margin or earnings per share.

We expect our adjusted gross margin for the year, as a percentage of sales, to be approximately 72% for the full year, which assumes a negative FX impact of 110 basis points. As a reminder, we lock in our foreign currency hedges up to 3 to 5 years in advance, depending on the currency, so we do not benefit from the recent currency movements. As a result, the upside in reported sales, primarily from the strengthening of the euro, has no associated gross profit benefit and thus our gross margin rate is negatively impacted.

We expect this headwind to be partially offset by favorable mix, standard cost reduction program, and the ramp of accretive new products. As we look forward to 2019 and 2020 if rates were to remain constant, we'd expect a neutral to slightly positive impact from foreign exchange on results in those two years. We expect full year adjusted SG&A to be in the range of 34.5% to 35% of sales as we continue to see the benefits of programs currently underway. In 2018, we will again reinvest the full benefit of the medical device excise tax expansion with strong investments in structural heart and other exciting durable growth platforms.

Full year adjusted research and development is expected to be in a range of 10% to 11%. And we expect our royalty rate to remain at slightly less than 1% of sales for 2018. This implies a full year 2018 adjusted operating margin in a range of 25.5% to 25.75%, which is consistent with the improvement goals we outlined on January 9, and sets us up well to deliver on our long-term goal of 28% adjusted operating margin in 2020.

We forecast our full year 2018 adjusted tax rate to be between 13% and 14%. This assumes an operational tax rate of approximately 14% to 15%, which is lower than the 16% we expected in early January as a result of additional analysis and clarity on the Tax Cuts and Jobs Act.

In addition, we expect an approximate 100 basis point benefit to the operational tax rate from the accounting standard for stock compensation compared to the approximate 200 basis point benefit we had in 2017 as a result of the US tax rate declining from 35% to 21%.

In 2019 and beyond, we now expect a similar long-term effective tax rate between 14% and 15%, with full access to our global cash. We expect below-the-line expenses, which include interest payments, dilution from our VC portfolio and costs associated with our hedging program to be approximately $300 million for the year, and fully diluted weighted average share-count of approximately 1,399 million shares for the first quarter and 1,402 million for the full year.

As a result, we expect full year 2018 adjusted EPS to be in a range of $1.35 to $1.39, representing 7% to 10% adjusted earnings growth, despite headwinds from a full year negative impact of foreign exchange of approximately $0.02 to $0.03. On a GAAP basis, we expect EPS to be in a range of $0.93 to $0.98.

Now, turning to Q1 2018, we expect consolidated revenue to be in a range of 2,320 million to 2,350 million. This represents year-over-year organic growth in a range of 4% to 5% versus a 9% growth comparison in Q1 2017, with an additional 80 basis point operational growth contribution from Symetis.

We expect the foreign exchange impact on Q1 revenue to be a $60 million to $70 million tailwind. For the first quarter, adjusted earnings per share is expected to be in a range of $0.30 to $0.32 per share, representing 5% to 12% growth and GAAP earnings per share is expected to be in a range of $0.19 to $0.22 per share.

Please check our Investor Relations website for Q4 2017 financial and operational highlights, which outlines Q4 and full year results as well as Q1 and full year 2018 guidance, including P&L line item guidance. So with that, I'll turn it back to Susie, who will moderate the Q&A.

[Susan Lisa]

Thanks, Dan. Greg, let's open it up to questions for the next 20 minutes or so. In order to enable us to take us many as possible, please limit yourself to one question and one related follow-up. Greg, please go ahead.

[Operator]

Thank you. [Operator Instructions] And your first question comes from the line of Mike Weinstein from J.P. Morgan. Please go ahead.

[Michael Weinstein, J.P. Morgan Securities Inc.]

Good morning, guys. And thanks for the taking the questions. Let me start, I mean, we got a chance to talk a little bit about the quarter in San Francisco. And obviously, this is an extremely strong quarter on the tough comp for you. There are some discussion already on the Street about kind of what the first quarter ends up looking like. I think we get a sense for how you're thinking about it with your guidance here.

But with you guys showing such a strong fourth quarter, the industry in general having a strong fourth quarter, do you have a feel for how you're thinking about the first quarter? And should it be conservative just relative to what we saw here in 4Q?

[Michael Mahoney, Chairman and Chief Executive Officer]

Sure, good morning, Mike. Yeah, we're very comfortable with our 5% to 6% full-year growth. We gave visibility to first quarter with 4% to 5%. As you said, we do have good momentum coming out of the company across the businesses with MedSurg delivering very well, WATCHMAN, PI, really across the board.

We do have some headwinds in 2018 that we'll be facing. We do have some tough - difficult pacer comps. We have some more DES competition with some new entrants that we expect some trialing. We expect to maintain our share over the term, but we expect some trialing early on. We also see some one-time price cuts in Australia and Japan that have a bit more impact in 2018 and that will be neutralized in 2019.

So overall, the business is performing very well. There are few headwinds and we're comfortable with the 5% to 6%. And gave you good line of sights and they are 4% to 5% for the quarter.

[Michael Weinstein, J.P. Morgan Securities Inc.]

Okay. Let me ask you just couple of other items. One, first off, thanks for giving the detailed number on WATCHMAN. That was obviously appreciated. WATCHMAN has a ton of momentum. It sounds like the fourth quarter in particular was very strong for WATCHMAN. Can you just give us a little bit more color on what you're seeing amongst interventional cardiologist and electrophysiologist, and who seems to be really getting on board with WATCHMAN usage and who's driving it?

And then, second, could you spend just a minute on the Millipede transaction? I thought the structure of the deal was obviously very interesting. Effectively, you will be acquiring the company, but it keeps it off your P&L for the next two years. Why was that the right technology? And why was this the right asset to buy in mitral? Thanks.

[Michael Mahoney, Chairman and Chief Executive Officer]

Thanks, Mike. I'll talk to a little bit of WATCHMAN and then I'll have - then we'll also talk about Millipede. And so, on the WATCHMAN the teams are doing a terrific job. We continue to open up centers, on track. But more importantly, we're improving utilization of the product and the therapies. We're increasing awareness amongst the referring physicians. We're training more physicians. And we're also expanding globally into China, and we will launch into Japan in 2019.

So I think the overall momentum is just excellent clinical outcomes, more physicians, training in the product as well as just increasing awareness. And our focus is on improving utilization rates at these large centers each quarter. So we're very, very bullish on the platform. And as you know, we've only had about 1% of the utilization rate at $250 million. So you will continue to see us invest aggressively there.

Maybe Dr. Stein can make a comment on the clinical work with WATCHMAN, and then we'll touch on Millipede.

[Kenneth Stein, Boston Scientific Corp.]

Yeah, thanks, Mike. And, Mike, I think, the key behind the momentum has been the great results that we've seen, both in the clinical trials, really pleased with the results that were presented at TCT, the final five-year results, combined meta-analysis, protecting from fail, leaving really no reasonable doubt, but that this is at least as effective as warfarin for stroke prevention. And I think you've seen that translate into the market as well as really the extraordinarily good safety results that we've seen as a result of our training program and disciplined approach to bringing new sites online.

We see balanced interest between IC and EP implanters. And I think both sides have the skill that's required to do the implant and the results show that both sides are doing it well and doing it effectively.

[Michael Mahoney, Chairman and Chief Executive Officer]

And on the Millipede transaction, we like the structure where we organized it. I think you outlined it pretty well. We aim to purchase this company once they're complete with a - their second-gen fam [ph] if you call it or - likely by the end of this year. That maybe, Ian, you can touch on kind of a rationale for Millipede.

[Ian Meredith]

Yeah, thanks, Mike. And thank you, Mike, good question. The rationale behind Millipede, it's based on very sound physics principles and logically correct for path of physiology of functional mitral regurgitation. As you know, it follows the surgical predicate in that you have a complete annuloplasty ring. And it's a small footprint device, transfemoral, transapical catheter repair, so not using the apex, which is a huge impasse on patients with significant left ventricle impairment to start with.

And it provides some line of sight to tricuspid valve repair and obviously mitral valve replacement in the future. And more importantly, it doesn't limit or preclude the use of any other therapies and - that is particularly important because mitral valve repair is often a multifaceted approach leaflet and chord repair can still be done in this context.

So we thought that we - there were 8 criteria that we would want for a transcatheter mitral valve repair foundational device and this meets all of those 8 foundational criteria.

[Operator]

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

[David Lewis, Morgan Stanley & Co., Inc.]

Good morning. One quick question on structural heart for me and then I have quick follow-up. Mike, I'm just thinking about the structural heart guidance you gave for 2018, which I thought was pretty interesting. I mean, the $400 million number, I wonder if you can provide some context around that. Because given the strong WATCHMAN number in 2017, as you're probably aware, WATCHMAN virtually slowed very marginally in 2017 versus 2016, very aggressive growth.

To do $400 million 2018, if I just take your NeoTract annualization off the fourth quarter and very substantial deceleration in WATCHMAN, you get above $400 million. So help us frame up that $400 million number because it sort of implies a lot of WATCHMAN deceleration or frankly is a very conservative way to think about the year to start the year.

[Michael Mahoney, Chairman and Chief Executive Officer]

Oh, we've definitely taken the NeoTract numbers out of our numbers. Just kidding you there. But on the WATCHMAN, I think overall, we aim to deliver against our commitments and we continue to do so. So we feel very bullish on the platform. We don't have as many new centers opening in the U.S. We penetrated that quite a bit. We saw a few new centers. And we have some major launches coming more so in 2019 in terms of U.S. - really, Japan. But we feel comfortable with that guidance number. And hopefully, we continue to do well, whether we'll be able to have opportunity to increase it as the year goes on.

[David Lewis, Morgan Stanley & Co., Inc.]

Sorry for the Freudian slip there, Mike. We'll move on

[Michael Mahoney, Chairman and Chief Executive Officer]

The only thing I'll comment on is on Symetis, as part of that. This - that business continues to increase. We've trained our clinical and our sales teams on it. So we expect some acceleration of Symetis in 2018. And the approval - that second generation platform, early third quarter will really be critical, because it already has a very low pacemaker rate, very, very quick to implant, and this will even reduce the PVL rate further and we have those two large clinical trials that we'll also report on.

So I think you'll see strong momentum out of WATCHMAN and Symetis this year in 2018.

[David Lewis, Morgan Stanley & Co., Inc.]

Okay. And then just the financial question is for me. Dan, you - tax rate came in a little lower than we thought. Could you just to talk us, what drives the low end and high end of the earnings range? I think we initially thought 50 basis points of leverage this year. Maybe with the - you've got more flexibility now with the lower tax rate. So how are you thinking about leverage in 2018? And from balance sheet perspective, I think a lot of investors are interested on, like, what you think your capacity is towards the back half of this year? Is it $750 million? Is it $1 billion? And where do those priorities sit versus acting under venture portfolio versus externally driven M&A? Thanks so much.

[Daniel Brennan]

Sure, David. So on the tax rate, in early January we had talked about the 16%. That was the best read at that time. And frankly, now that we've had more time to crawl through it and there's been more clarity, we think the 14% to 15% from an operational rate perspective is a good call for 2018. And then, keep in mind the all-in tax rate is 100 basis points lower than that, just given the ASU on stock comp. In terms of the leverage, if you look at the ranges that we have down through the P&L, you get the outcomes at the different ranges that we have for EPS.

So the lower tax rate is helpful, but the margin goal of 50 to 75 basis points over 2017 is exactly what we said in early January, it's in line with that. We think that sets us up well to get to that 28% by 2020. The - really, the only one that's a bit stuck on that is the gross margin, and that's just the FX impact that we'll see in 2018 and that hopefully turns to a tailwind in 2019 and 2020. So I think, all tends to line up well in terms of very solid leverage in 2018 and then probably acceleration of that leverage in 2019 and 2020.

And then the balance sheet. Balance sheet is probably as healthy it's been in 10-plus years when you look at it relative to our capacity and our debt and leverage ratios. So we're down in the low-tows now. We sit very well with that. As I mentioned in my prepared remarks, we should have roughly $500 million kind of left over from the $1.9 billion goal that we have this year for cash flow, for more strategic uses in the back half after we take care of the rest of mesh and IRS tax case.

So that going into 2019 and 2020, as we've said very publicly, as we sit with the balance sheet today, we don't have a lot of call on that cash. So as you look at what should be north of $2 billion in each of those years, that's really the exciting part that we get to put even more in strategic uses. I don't know, Mike, you have any other comment on that?

[Michael Mahoney, Chairman and Chief Executive Officer]

Yeah, you summarized it. We've - on the venture portfolio, we have a number of investments that we like. And I think we've commented in the past, you'll likely see three or four potential acquisitions months within that venture portfolio.

[Operator]

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

[Frederick Wise, Stifel, Nicolaus & Co., Inc.]

Good morning, everybody. Maybe just starting with the balance sheet, again, Dan. Maybe talk about your cash flow priorities, or Mike maybe you want to talk about it as well as we think about 2018 unfolding and into2019 and 2020. From here, is it going to be continued M&A? Is that's the number one priority? Or help us think about share buyback as well.

[Michael Mahoney, Chairman and Chief Executive Officer]

Yeah. That's the sequence that you laid out is the priority. One is, we had to finish the mesh pay down and tax, which we're doing this year. And then, we'll really have much more freedom as you look at second half of 2018 and then going forward once those are retired. We do have a pretty active M&A appetite. We have a venture portfolio that's pretty healthy, that we have some preferred rights to buy a number of those companies. So I think you'll see us be active with tuck-in acquisitions to strengthen our category leadership strategy.

But to the extent that we don't find strategic deals that meet our financial criteria then we would look at share repurchase, more likely share repurchase, more likely in 2019 than 2018.

[Frederick Wise, Stifel, Nicolaus & Co., Inc.]

That's great. And just last for me. It's sort of a long haul, but impressive pipeline and beautifully laid out in the charts and the tables, maybe just from your perspective, Mike or Ian, you could highlight the parts that you think have the most outsized potential in the 2018 through 2020 period to drive growth and expanding margins. Is that Symetis? Is it margin you see around, et cetera?

And just last on the stent business. How do we think about it from here? You said you think you're going to hold share in 2018. But does that mean, Mike, that the business is flat or down because of price? A little more color there on maybe the potential headwind or risk in 2018. Thanks a lot.

[Michael Mahoney, Chairman and Chief Executive Officer]

Sure. We have a - the beauty of that portfolio, it's very diversified. So we have a number of important growth drivers. I won't hit all of them, but just a couple just to highlight. S-ICD continues to grow double-digit, and then we'll eventually get the modular pacemaker on S-ICD, Resonate is a new platform there. We touched on WATCHMAN before, which is really a strong growth driver with great margins. Very bullish on ACURATE. We aim to bring Lotus to the market in 2019.

Endo has a full suite of products, guys, I don't want to go through all of them, I think the strength of the company right now - and also, I'll just mention two big platforms, the spinal cord stim and DPS. So it's a very diversified company now. And each business has really some key platforms that are launching either this year or if the cadence actually gets stronger in 2019 and 2018.

On DES, we continue to believe that SYNERGY based on zero stent thrombosis and its ease of use is the best stent of the marketplace continue to grow that business, although very slowly, but we grow it in Europe. In Europe it seem - faced more competitors than the U.S. We expect some headwinds in the U.S., we think more temporarily as physicians may try the DES platform. But importantly, for our coronary business, the other business that surrounds DES is our complex PCI business and that business is growing 10% last year. And it's 80% the size of DES.

So I think you'll see maybe by the end of 2018 or 2019, those businesses especially the same size. So we expect, really, any softness in DES will be tempered by the growth in our Complex PCI business, where we continue to launch new platforms. So I think we will see some - likely some headwinds with some trialing, but that will be buffered with Complex PCI, then we're confident based on what we've seen Europe, doctors will stay with synergy.

[Operator]

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

[Robert Hopkins, Bank of America Merrill Lynch]

Well, thanks and good morning.

[Michael Mahoney, Chairman and Chief Executive Officer]

Good morning.

[Robert Hopkins, Bank of America Merrill Lynch]

So, first question. I just want to clarify from a big picture perspective the 2018 earnings guidance. It's obviously in the slides, you can nicely see that you're guiding to 7% to 10% EPS growth in 2018. But, Mike, I think in your prepared comments, you said that you hope to be able to offset some FX and therefore maybe 10% is more likely. I just want to make sure that I heard that right. Is that the message on earnings growth for 2018?

[Michael Mahoney, Chairman and Chief Executive Officer]

No, I think the message is that the range is 7% to 10%. Within that 7% to 10%, the goal is to offset that $0.02 to $0.03 negative FX as we've done in the past few years, offsetting the FX impact. But I don't point to one number more likely than the other. The range is 7% to 10%.

[Robert Hopkins, Bank of America Merrill Lynch]

Okay. And just the reason I asked that is because at J.P. Morgan, the slides were pretty clear. You expect or you were hoping for double-digit earnings growth. And I'm just - with the lower tax rate. I guess, I was just a little surprised the guidance was a bit higher on the earnings side. So maybe, Dan, you can talk just a little bit about some of the things that prevents you from just guiding to 10% or better? Thank you.

[Daniel Brennan]

Well, I think as we've said, we have a pretty good track record of hitting or exceeding the goals that we have put out over the last few years. As you look at that range, 10% is at the high end of the guidance range. And obviously, that's our goal, right, our goals is always double digits. But the range is - it contemplates the outcomes of 7% to 10%.

As you look down the different, various elements of the P&L, and this is a bit getting to Mike's question earlier gross margin is really the only one where you don't see a solid amount of progress in 2018 and that's really the foreign exchange impact that we have to offset in 2018. Other than that, at the midpoint of SG&A, you're seeing almost 100 basis points of improvement. And that's what we've been saying over the last few quarters is that SG&A is a big driver of that operating margin improvement story and that's solid progress in 2018 and more to come in 2019 and 2020.

So at the 25 we were in 2017, and then the 50 to 75 basis points this year. And then what should be a much better years for FX in 2019 and 2020, I think we're well on track to have a solid year this year and get to that 28% by 2020.

[Robert Hopkins, Bank of America Merrill Lynch]

Okay. Very fair, thank you.

[Operator]

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

[Josh Jennings, Cowen & Co.]

Hi, good morning. Thanks for taking the question.

[Michael Mahoney, Chairman and Chief Executive Officer]

Good morning, Josh.

[Josh Jennings, Cowen & Co.]

I wanted to follow-up on - good morning - on the operating margin trajectory out through to 2020 and how we should be thinking about the cadence of operating margin expansion in 2019 and 2020? Is there anything, Dan, that we should be thinking about in 2019, potentially Lotus launch or FX headwinds getting lighter on the gross margin line, in terms of that 240 basis points-ish of operating margin expansion left to that - for that 28% target?

[Michael Mahoney, Chairman and Chief Executive Officer]

Yeah, so I think you're kind of using the midpoint of this year and saying there's 240 left at the end of this year to get to that 28 by 2020, which I think is fair. Certainly, leveraging our Lotus launch, as Mike said, that's goal in 2019 in the US. Leveraging that will be helpful because we have a certain amount of commercial infrastructure that's in place, ready to go there. So leveraging that would be helpful.

But then, the rest of the P&L and just the - if you look at the ranges for revenue, we talk about 5 to 6 this year. We've talked about 5 to 8 for 2019 and 2020 as we have a good launch year, this year in 2018. But we are setup for 2019 and 2020 to be even better product launch year. So I think there is a natural opportunity for a topline leverage in 2019 and 2020, plus the continued focus that we have on SG&A, and then the FX relents a little bit in 2019 and 2020. So you should see better gross margin and less of a drag from an EPS perspective.

So I think the - if you look at the 50 to 75 this year and then, say, we need 240 to get to that 28 by 2020, I think the pieces are in place to get there.

[Josh Jennings, Cowen & Co.]

Great. And then just a quick follow-up on the mitral valve portfolio, you guys are - the Millipede investment was nice to see. How are you thinking about building out the mitral valve-specific transcatheter pipeline? Is there anything internal that we should be remembering? And do you think you need a replacement device to fully capitalize on that opportunity over the next couple of years? Thanks for taking the questions.

[Kenneth Stein, Boston Scientific Corp.]

Thanks very much. And perhaps I can take that question. I think we do have internal programs as well. And as you know, repairing the mitral valve is often the multi-factorial approach and you need more than one solution to repair the mitral valve. But the primary foundation of mitral valve repair, particularly, functional mitral regurgitation, is the angioplasty, and that can actually serve to treat functional mitral regurgitation in a large proportion of patients.

So we see this as the foundational move in them and their critical first step in building a mitral program but it's certainly the lion's share of that program. Obviously, this does provide us the line of sight down the track to a mitral valve replacement option and indeed tricuspid valve repair as well. It's not the immediate aim, and the immediate aim is to get through the clinical trials and launch a transcatheter mitral valve repair device from a transeptal approach, which I think everybody is yearning for.

[Michael Mahoney, Chairman and Chief Executive Officer]

Yes, we think this platform serves, clearly as a repair device immediately. Then potentially replacement as well as tricuspids. So we think that's the unique benefit of this platform.

[Operator]

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

[Vijay Kumar, Evercore ISI]

Hey, guys. Thanks for taking my question, so maybe one on WATCHMAN. Really strong performance in 2017. Maybe, Mike, can you comment on what portion of the drill came from the new center adds versus same center volume growth? I think that would be helpful.

[Michael Mahoney, Chairman and Chief Executive Officer]

Yeah, we don't break that out for you. But as you might expect, early on, a few years ago it was new centers that were opening up. But now, call it 80/20 practically, just roughly.

[Vijay Kumar, Evercore ISI]

And that's helpful, that's helpful.

[Michael Mahoney, Chairman and Chief Executive Officer]

Much more so on utilization of increased utilization of same-store. I shouldn't say same-store, utilization of our facilities that are open and less on new openings.

[Vijay Kumar, Evercore ISI]

That's helpful, Mike. And, Dan, one on FX hedges I think the comments you made about 3 to 5 years out you guys hedged. Is this now, I assume, this is now a below the line item, right? And given three to five year hedges, like is this now - does this now have impact for 2019 as well?

[Daniel Brennan]

Yeah, I think it's not a below the line impact. The cost associated with the hedging program are shown below the line, but the actual settlement of the contract - the hedging contract are shown in gross margin, which is why the - we've had that headwind in gross margin in the last two to three years from an FX perspective.

So to be clear, this year we expect 110 basis points of headwind in FX, related to gross margin. When you get to 2019 and 2020, if the rates were to hold where they are today, it becomes a much better story, where it's neutral to slightly favorable for us, both at the gross margin line and then at the FX line as well. So 2019 and 2020 is a much better FX story than it has been for the last three-plus years.

[Vijay Kumar, Evercore ISI]

Thank you, guys.

[Susan Lisa]

Okay. With that, we'd like to conclude the call. Thanks for joining us today. We appreciate your interest, especially at this early hour, in Boston Scientific. And before you disconnect, Greg will give you all the pertinent details for the replay.

[Operator]

Thank you. Ladies and gentlemen, this conference will be available for replay after 10:00 AM Eastern Time today through February 15. You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code 442339. International participants dial 320-365-3844. Those numbers, again are 1-800-475-6701 or 320-365-3844 with the access code 442339. That does conclude your conference for today. Thank you for your participation and for using AT&T Executive TeleConference. You may now disconnect.