Boston Scientific Corporation (BSX)

Investor Day Conference Call

November 19, 2010 8:00 AM ET

Executives

Jeff Capello – EVP and CFO

Ray Elliott – President and CEO

Hank Kucheman – EVP and President of the Cardiology, Rhythm and Vascular Group

Joe Fitzgerald – SVP and President, Endovascular Unit

Mike Phalen – SVP and President, Endoscopy Division

John Pedersen – SVP and President, Urology and Women's Health Division

Mike Onuscheck – SVP and President, Neuromodulation Division

Keith Dawkins – SVP and Chief Medical Officer, Cardiology, Rhythm and Vascular Group

Larry Newman – SVP, Restructuring and Integration

Ken Stein – SVP and Associate Chief Medical Officer for CRM Group

Analysts

Mike [ph]

Rick Wise – Leerink Swann

Bob Hopkins – Bank of America Merrill Lynch

Adam Feinstein – Barclays

David Lewis – Morgan Stanley

Kristen Stewart – Deutsche Bank

Tim Lee – Piper Jaffray

Larry Biegelsen – Wells Fargo

Brooks West – Craig-Hallum Capital

Tao Levy – Collins Stewart

Joanne Wuensch – BMO Capital Markets

Derrick Sung – Sanford Bernstein

David Roman – Goldman Sachs

Glen Novarro – RBC

Presentation

Operator

Ladies and gentlemen please welcome Boston Scientific’s Chief Financial Officer, Jeff Capello.

Jeff Capello

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Welcome to the 2010 Boston Scientific Investor Conference. We’re very pleased to have you here with us today. We know you have a lot to do. We appreciate your interest in the company and appreciate you coming here today. What I’m going to do is kick-off a few slides to get through our disclaimers and then review the agenda.

So as with all investments we encourage you to have a look at our Safe Harbor statements. It’s listed here on the screen. It will also be on our website and it’s attached to all our public filings. In terms of additional disclaimers, we’re going to talk about a lot of our new products that are coming out. Some of these products have not yet been approved by the FDA. Therefore they’re not yet for sale in the US. In addition, we’re going to talk about release dates. Those release dates are estimates at this point and are contingent on a number of different variables.

Finally, the numbers that I’ll share with you in my section as well as some of the other sections will all be reconciled to the non-GAAP measures within our filings on our website. Now let me just spend a minute on our agenda. We’re going to start the day with our Chief Executive Officer and President, Ray Elliott, who is going take us through our strategic direction. We’re then going to have Hank Kucheman come up and talk about our CRV business, and then we’ll have Joe Fitzgerald talk about the Endovascular business. With that we’re going to take a very brief 10 minute break after which Mike Phalen is going to come up and talk about our Endoscopy business.

We’ll then move to Urology and Women’s Health where John Pedersen will have a discussion on those products and our outlook. And then Michael Onuscheck will wrap up our business unit discussion with the Neuromodulation business. We’ll then ask Dr. Keith Dawkins to come up and talk about a number of clinical trials and issues in that area. And then I’ll come up after a short break and talk about the finance section, and then Ray will wrap it up.

I just need to remind you that we are webcasting this event, so we are going to stay on time with 10 minute breaks, so if you get back in your chairs after 10 minutes that would be greatly appreciated. With that let me ask our President and Chief Executive Officer, Ray Elliott to come up. Ray?

Ray Elliott

I hope you appreciate the song that Sammy Hagar

and

Eddie Van Halen and I wrote just for the opening. It’s pretty upbeat. I want to welcome you obviously to actually the first investor meeting we’ve had in 4.5 years. Why so long? I can’t obviously answer that. But at least for this meeting’s goals, we’re going to temporarily do three things, and simply convince you that in the near-term we can drive EPS, in the medium-term we can drive sales and we’ll talk about what that means and that this executive team can deliver on that.

I think as we in analyst meetings and go through the process of talking with people, probably people don’t really believe or at least haven’t been given enough material to believe that we can deliver growth, but I think quietly and carefully we’ve put a plan together to do actually just that. And not just with acquisitions although that gets to be a lot of the public talk, but rather starting with 2010 and you’ll see them today over 150 new products in a very much rebuilt strategic plan pipeline.

Our mission that’s been in place for a long-time really hasn’t changed. This is still our guiding principle. I won’t read it for you, you’ve seen it many, many times. It’s based on the fact that we will always put the patient first, as based on the fact that for many, many years now our growth rate is really in less invasive or at least invasive or less invasive if we can do it.

This slide I will read it, it’s not a mission and it’s not intended ever to replace our mission but rather a methodology for success. So Boston Scientific will pursue priority growth initiatives by buying or building products we understand, to be sold through sales forces we already have. The products will be least or less invasive, cost and comparatively effectively and, where possible, reduce or eliminate refractory drug use. Today we need to be able to grow. Today we need to be able to leverage our earnings in the near-term and today and most of it in the future costs, meaning cost of products are really going to matter.

Defining tomorrow, today is a new tagline. The colors you see within the text area, you see the new logos, the division logos. You’ll see more of it today. But it’s not just about looking different, anybody can do that with a little bit of marketing and advertising. We’re going to be different. Defining tomorrow, today, it doesn’t make it different but delivering on it really does. Why are we doing that? We’re going to return back to the company’s routes. We’re going to return to innovation and a very, very full pipeline to cross augment that with some of the M&A that’s been talked about.

My friend Mr. Gretzky would say that the secret of success at least on the hierarchy is not understanding where is the puck is now, but rather understanding where the puck is going to be. And a big part of what we’re going to do is just that. I’m going to talk about the near-term and for reference here, you’re going to see near-term, medium-term, long-term. Near-term for purposes here is a couple of years, medium-term is kind of two to four, so you can reference your thinking as we present.

But in the near-term, we want to increase our profitability and optimize organization. It’s all about our new power strategy, that we’re going to show you and you’ll see it referenced a number of times in the presentation. In the near-term, sales can’t grow much more than low single-digits. You know that and of course we know it as well and often confirm it. However I would point out the same is not true for profitability. We have a number of opportunities and this is sort of an expected near-term EPS. And we’ve taken out and washed out all the other things. This is obviously a simple product chart. So price is going to be somewhat a negative in some of our factors, but we have other positive staff set aside of that [ph].

So I wanted to highlight the net effects if you will. We have about $750 million, again this is in the near-term and opportunities to grow operating profit that is solely in our hands to execute. It has nothing to do in effect with customers, it doesn’t have anything to do with securing M&A deals. It’s strictly our ability to flawlessly execute. If we do it and we expect to, that’s $0.40 rough numbers today of OI at a multiple that I think will be above today’s multiple or at least we hope so. If people believe our growth initiative story, this will happen.

In the medium-term, we want to accelerate that sales growth and improve and increase the operating leverage. We need to be able to execute key strategies flawlessly by an energized and passionate management team and as you’ll see from the folks that I’m fortunate enough to work with every day. We’ve got just that.

Take a minute just to read these, they’re important and you’ll see them come up repetitively as our folks get into the details. Focused on product costs, comparative, less invasive and leveraged sales forces, I mentioned that. Reallocating R&D resources to growth initiatives, you’re going to see a good deal of that today, and it’s important in our strategy. Transform corporate efficiency, effectiveness and value added. We’re going to show you how we’re going to do that. Change portfolio to growth through M&A, obviously gets a lot of chatter as it is. And then reinvesting a part of our savings into substantial opportunities we have in some expanding emerging markets growth opportunities.

We’re global leader in about $30 billion marketplace. And we’re pretty blessed as a company when you think about it, because if you look at these great markets, all of them individually of all these marketplaces we’re in, and at years about 28 of them. They all exceed a $1 billion in individual segment value. Obviously some are growing more than others, some are not growing at all, but of course that’s not true for procedures since – as we look at market valuations, market growth it’s usually done in US dollars. Some are obviously softer markets in the US, but the same is not true for emerging markets.

If you look at this first slide and think about where we need to get to, it’s the part that I’ve referred to many times as I’ve talked with people at analyst meetings or presentations and it’s the solving for X. If you understand what’s in your base business, what kind of growth markets do you have to get into that? What growth rates to get to 6% or 7%. Now growth markets that we’re going into and you’ll see them today, we expect to be sustainable in the near-term and that 6% or 7% demand [ph] effective med devices at least in this country become the new double-digit.

If you look at little longer-term take the same exact growth markets and work our way through them, we believe that those are sustainable through the longer-term. So if you think again, couple of years is short-term or near-term. Medium-term is two to four and then four plus would be longer term. We’re very comfortable we’ll show you why that we believe that not only are these the right places to be, but in fact they will have excellent rating rates both procedures and sales growth.

Now this is done on purpose. Actually you can – and the size of slide is not that you can read a bit of it. It’s not intended that you really read it particularly. But it wants to point out that it’s an anatomy of strength. We don’t begin our new life from the position of weakness. We have 24 – these are major segments in medical devices, they’re simply based on us as the base. And we have 24 number one, or number two positions globally. We in fact have leadership in 75% of our global categories. The I-chart here is intentional but focus on the grey areas. If you think about the world that we’re going into, a marketplace will demand more from us with GPOs and hospital mergers and combined purchasing.

It’s really the grey spaces that matter. It’s our deep belief that in that economic environment of facing competitive grey spaces, I promise you we’ll prove fatal to them versus our combination. We do have some pressure from the current health care system. There is no doubt about it in that that real economic environment looks something like this and this is very, very different from the history that most of us have grown up in med devices. Physician institutional alignment, in fact the bars you see on the left of the chart are in fact the changes overtime of physicians becoming employees or single relationship. And that alignment changes in terms of the value proposition that many of us and the interrelationship between all the components of health care.

Doubling of PCIs to outpatient by 2013. Rise of the economic customer and payer power. New care delivery models. This isn’t new in terms of being written about, analysts are writing about it or people are talking about it. But the question is how do you win in that environment? That’s the secret of the game. And of course on a global basis, focus on tenders, reference pricing, DRGs and then Asian Pacific countries particularly China, government is investing in their own country.

The key is for us is don’t long for the good old days, to go how to make patients, providers, shareholders happy in this new environment. In the short-term we just do our own study and had a long chat with a lot of administrators. It does appear at least in the short-term, there may be some positive outlook at least from the administrators. You can see the comments on here positive I should say procedure growth for 2011. Some moderation with shifting to patients, but of course less than 30% of our revenue comes from segments that are impacted in any form by elective procedures.

Demographics will support our growth. We have chosen our growth initiatives and the disease states that we want to enter into with device solutions very, very carefully. In fact shortly after I joined the company, we spent more than two months with the top 30 executives in this company defining precisely what our future needs to look like, the diseased states, in areas we want to enter and what those devices might be. And our desire to approve these diseased states with devices and reduced refractory drug uses in the example is supported by demographic – both demographically and economically. These are great places to be, and they’re going to continue to be strong growth markets in the future.

So what is this power plan and why will it succeed if flawlessly executed? And it’s all about, at least for us these five components, preparing our people, optimize the company, win global market share, expand our sales and marketing focus and realign our business portfolio. So let me start with the first one, and I recognize often times this can be considered the soft areas, the fringe areas [ph] to prepare our people. Economists and mathematicians and market markers and so on don’t always get comfortable with this part, but it’s essential for us. It always starts with people and always starts in fact with leadership.

I think as Jim Collins, so eloquently put it, right people on the bus, wrong people off the bus, right people in the right seats. So we’re seeing again for us at least it starts and is all about leadership. If you take a look at what we’ve done and you can read the bullet points, so I’ll just comment on them for you. If you look at the top 50 physicians and you go back a year or year and half and take a look at the top 50 physicians in Boston Scientific, you’ll see that we’ve changed 80% of the roles or the people, during our last 15 months. And in many cases its role expansion, role changes, not necessarily obviously that level of turnover, but substantial change in how we’re doing things.

We took a blank piece of paper and redeveloped our own set of leadership competencies that connect every employee in the company and it’s presented to all 26,000 people generally speaking in their own language. We win by being inclusive by including everyone. We have a major diversity and inclusion program. We’ve changed compensation massively in the last year and redefined how we compensate people, essentially realigning it and aligning with shareholders. And we actually made every single of those 26,000 employees a shareholder by voluntarily cutting top executive bonuses.

And then lastly, people don’t just wake up in the morning and be leaders. So in order to augment that, we built a school. In March, we selected over 80 people with maximum performance, potential scores and the ability to be promoted twice in two years or less. We’ve built an office to plan their careers and mentorship. And our new leadership, meaning myself, us and the folks you’ll see today, we personally teach them without – we bring in a few outsiders, but most of this is created by us. And just to give you a feel for that 80 people. We started this about last April and in that timeframe between now and then through the first module of the first courses of Top Gun School, 28 people have already been promoted and/or rotated to much expanded roles.

Optimize the company. We’ve got – this is an interesting one. We’ve got enormous opportunities to reduce COGS and SG&A. Now the feedback we often get is that we don’t have that opportunity because our SG&A ratios are lower than industry standards and that is true, certainly from a technical calculation point of view. We actually believe though that that theory is wrong. And that the other guys, our run-on competitors are going to get caught in the changing world with SG&A and with COGS that are way too high. So do we look lower now and we get much lower? The answer is yes. From scrap to sales models to corporate overheads, we can get a lot better than we are today.

This month we’ll launch corporate zero-based budgeting program to seek value added and eliminate bureaucracy in the corporation worldwide. And this could take 40 fulltime people, about six months to run this whole project. Project transformation, this is a great one. One of the things when I joined the company is talk to people about, how do we produce on-budget, on-time? What kind of dollars are we wasting? How much time are we wasting? Do we have target costs for products, or do we just produce things that have features and benefits, and the cost of our product becomes the cost?

Project transformation, we’ve newly put in place and this is one of the single largest opportunities we have. We believe there is $200 million of waste in our R&D system. Essentially, we believe that we can accumulate and recover that waste from 2010 to 2013. The product development and knowledge based systems that we utilize to build products are being overhauled by more than 30 fulltime people. Their goal is give the right product, right time, right cost. Any project that starts at Boston Scientific today that’s $5 million or higher must have a target standard cost in order for us to proceed. We can no longer afford to bring our products that while they’re nicely featured and benefit to 10% or 15% or 20% more than the predecessor product that they replaced.

Other opportunities and these are just three quick ones. We’ve got a lot of them. Looking to your left first, our distribution centers compete [ph] from the 1970s. So we’re taking $40 million and putting into flexible, scalable, automated and robust. And as we speak today, that system is being changed right now starting with our Quincy operations in Massachusetts and then moving over to the Netherlands to Kerkrade

In the middle picture as you see it there, our view is 2012 [ph] plants are too many, in fact still is 17, but 12 or about half or more we started just about right and those 12 plants what we’ll get to. And then UNITY is a major IT program that we put millions of dollars into in the last year. And in fact we shut down and replaced more than 20 legacy platforms in the corporation particularly as you think about legacy Guidant and legacy Boston having the opportunity to work and talk together more efficiently.

We completely the work this August after 70,000 man hours of effort to make us into one system. Win global market share. Many of our OUS served markets grow double-digits. That’s certainly not true for the most part in the US. This is one of those slides that sort of invokes that that glass half empty, glass half full thought vision. Our view is obviously that its half full. Boston Scientific and I’d just use DES here as the example, served market share in developed markets is 31% compared to 6% in emerging markets. And you can see from the overall slide that about our EM exposure, emerging market exposure is about 3% compared to the other well-known names that you see.

It strikes me that 3% in emerging markets with our brands doesn’t make any sense and we’re taking steps as we speak and I’ll show you some of those to get after what is a huge opportunity by expanding our footprint globally. This is kind of our world as we see it between advanced markets and obviously emerging markets. You can read the boxes but I’ll just repeat the quick highlights, $30 million to $40 million is going into emerging markets as we speak. It’s going into sales reps, I’m going to give you some individual company examples, product registrations. In many cases, the great products we have weren’t even being registered in those countries. So you’re certainly not going to sell them.

Clinical trials, investor-sponsored research, Dr. Dawkins is going to talk about that in a few minutes, distribution, infrastructure, product launches which you will see, R&D and manufacturing. If we look at those, I’m just going to look at three of them because this is a lot of places where we’re doing investments but there is three substantial ones. Brazil, product launches, PROMUS Element and WALLFLEX may not be [ph] to made it to registration. It’s expensive to register, get that, put together. We’re doing that. We’re putting in place an economic buyer infrastructure down there, very similar to the corporate sales and negotiation strategy that we have in the US. And in fact our folks who are down there a lot.

Increasing PES – DES, I should say penetration. The CRM market is non-existed. We virtually have no sales there. We put together an infrastructure, sales management team, sales folks and in some countries a distribution system, in South America to go back after that opportunity. And then of course we’ve got proprietary technologies that we can train and build our physicians on. China, double market share to more than 20% in the products we sell. Again I was talking on the phone about two or three months after joining the company, I was talking to our General Manager in China. And I said, are you going to make sure you use the experience launch capabilities of the US team and the European team when you do PROMUS Element? And he said we’re not doing PROMUS Element, because we never registered. And now we’ve registered it and we’ve registered WALLFLEX and ALTRUA and making sure that these products have an opportunity in those marketplaces, and also advancing more of CRM, EP and so on.

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