Boston Scientific (BSX)

Q2 2011 Earnings Call

July 28, 2011 8:00 am ET

Executives

Michael Phalen - Executive Vice President and President of International

William Kucheman - Executive Vice President and President of Cardiology, Rhythm & Vascular Group

Sean Wirtjes - VP of Finance and Treasurer

J. Elliott - Chief Executive Officer, President, Director and Member of Finance Committee

Ken Stein - Senior Vice President and Associate Chief Medical Officer of Cardiac Rhythm Management

Jeffrey Capello - Chief Financial Officer and Executive Vice President

Analysts

Matthew Dodds - Citigroup Inc

Charles Chon - Stifel, Nicolaus & Co., Inc.

Bruce Nudell

Brooks West - Piper Jaffray Companies

David Roman - Goldman Sachs Group Inc.

Michael Weinstein - JP Morgan Chase & Co

Robert Hopkins

Glenn Novarro - RBC Capital Markets, LLC

Kristen Stewart - Deutsche Bank AG

Larry Biegelsen - Wells Fargo Securities, LLC

David Lewis - Morgan Stanley

Frederick Wise - Leerink Swann LLC

Tao Levy - Collins Stewart LLC

Joanne Wuensch - BMO Capital Markets U.S.

Presentation

Operator

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» Boston Scientific Investor Day – Transcript

Ladies and gentlemen, thank you for standing by, and welcome to the Boston Scientific Q2 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mr. Sean Wirtjes. Please go ahead, sir.

Sean Wirtjes

Thank you, Marla. Good morning, everyone. Thanks for joining us. With me on the call today are Ray Elliott, President and Chief Executive Officer; and Jeff Capello, Executive Vice President and Chief Financial Officer.

We issued a press release earlier this morning announcing our second quarter 2011 results, which included key financials and reconciliations of the non-GAAP financial measures used in the release. We posted a copy of that press release as well as reconciliations of the non-GAAP financial measures used in today's conference call and other supporting schedules to the Investor Relations section of our website under the heading Financial Information.

The agenda for this morning's call will include a review of the second quarter financial results as well as Q3 and updated full year 2011 guidance from Jeff, an update on our business performance in the quarter from Ray, followed by his perspective on the quarter overall.

We'll then open it up to questions. We'll also be joined during the question-and-answer session today by Sam Leno, Executive Vice President and Chief Operations Officer; Hank Kucheman, Executive Vice President and Group President of CRV; John Pedersen, Senior Vice President and President of our Urology and Women's Health business; Michael Onuscheck, Senior Vice President and President of our Neuromodulation business; Dr. Keith Dawkins, Chief Medical Officer for our CRV Group; and Dr. Ken Stein, Chief Medical Officer for CRM.

Before we begin, I'd like to remind everyone that this call contains forward-looking statements within the meaning of Federal Securities Laws, which may be identified by words like anticipate, expect, project, believe, plan, estimate, intend and similar words. These forward-looking statements include among other things statements regarding our expected market share, growth projections, markets for our products, new product approvals, launches in sales, competitive offerings, clinical trials, the regulatory environment applicable to us and our products, our liquidity and financial position, the strength of our balance sheet, capital structure and cash flows, our future financial performance including expected net sales, margins, earnings and tax rates from the third quarter and full year 2011, our future expenses including our R&D and SG&A spend and royalty expense, the timing and effects of our share repurchase programs, restructuring activities, investments and POWER growth strategy, including our Priority Growth Initiatives and investments in emerging markets such as China, future opportunities arising from J&J's decision to exit the DES market and views on our litigation. We caution you that actual results may differ materially from those discussed or implied in these forward-looking statements.

Factors that may cause such differences include, among other things, future political economic competitive reimbursement and regulatory conditions, clinical trial results, intellectual property rights litigation, financial market conditions, future business decisions made by us and our competitors, and the other factors described in the Risk Factors section in our most recent 10-K filed with the Securities and Exchange Commission as updated in the 10-Q that we filed or will file hereafter. These forward-looking statements speak only as of the date hereof and we disclaim any intention or obligation to update them.

At this point, I'll now turn it over to Jeff for a review of the second quarter financial results.

Jeffrey Capello

Thanks, Sean. Let me begin by providing some overall perspective on the quarter before getting into the details. We had a very good quarter, with adjusted earnings per share of $0.17, above our guidance range of $0.12 to $0.15 and the Street consensus of $0.14.

Although we did benefit from a few unanticipated items in the quarter that I will describe in more detail shortly, the quarter still exceeded our expectations, driven by solid revenue performance in most businesses and continued strong attention to cost control. The U.S. CRM market, which we believe declined in the high single-digits in the second quarter, continued to be the primary area of disappointment.

In addition to the financial results, we made strong progress on a number of other fronts in executing our strategy during the quarter. Let me now move to the detailed review of the quarter to discuss the operating results and highlight the progress being made.

Consolidated revenue for the second quarter was $1.975 billion versus our guidance range of $1.92 billion to $2 billion and represents an increase of 2% on a reported basis and a decrease of 2% in constant currency compared to the second quarter of last year, including the negative impact of the Neurovascular divestiture.

Compared to the $76 million of favorable foreign exchange assumed in our second quarter guidance range, FX had a $96 million positive impact on our second quarter sales, which positively affected our reported revenue by $20 million. In addition, the Neurovascular divestiture negatively impacted Q2 revenue growth by approximately 220 basis points or $44 million.

And we estimate that the defib ship hold and product removal actions in Q2 last year increased our revenue growth by approximately 220 basis points or $43 million in the quarter. This reflects a $62 million impact reported in Q2 last year, produced by the estimated share impact on a similar period in Q2 this year, which was in line with our expectations.

Ray will provide a broader overview of our businesses and major product categories. But I'll address our sales results for all our businesses at a high level here. Worldwide DES revenue came in at $400 million, including a $6 million positive impact from the partial reversal of the sales returns reserve relating to the launch of ION. This was near the missed point of our guidance range of $385 million to $410 million, and it represents a reported increase of 3% at a constant currency decrease of 2%, compared to the second quarter of 2010.

Our worldwide DES revenue included $116 million for TAXUS and TAXUS Element, $176 million for PROMUS and $108 million for PROMUS Element. Our worldwide TAXUS, PROMUS and PROMUS Element split for the quarter was 29-44-27, with 56% of revenue from self manufactured products, which is up from 46% a year ago and 49% last quarter. We grew our worldwide DES market share leadership during the second quarter with an estimated global market share of 36%, which we estimate to be about 900 basis points higher than our nearest competitor and up 100 basis points compared to the sequential quarter. These figures exclude the impact of the ION reserve in the U.S.

Our strong commercial team is focused on the only 2-drug platform in the industry. And when you couple that with the continued adoption of PROMUS Element and strong U.S. launch of ION, we expect to maintain our market share leadership going forward.

U.S. DES revenue of $208 million, including the positive impact of the ION reserve, which was at the high end of our guidance range of $195 million to $210 million and essentially flat compared to the second quarter of last year. The performance in the quarter was driven primarily by the launch of ION. U.S. DES revenue includes $46 million of TAXUS, $34 million of ION, and $128 million of PROMUS, and represents a 38-62 mix of TAXUS, ION and PROMUS in the U.S. compared to a 35-65 mix a year ago.

Excluding the impact of the ION reserve, we estimate that our U.S. DES share was 50% for the quarter with 11 share points TAXUS, 8 share points of ION and 31 share points of PROMUS. We estimate that our U.S. DES share was up 400 basis points both sequentially compared to Q2 of last year off of the ION launch, and that we exited the quarter up 500 basis points at 51% of the market, excluding the impact of the ION reserve. We continue to maintain drug-eluting stent market share leadership in a competitive U.S. market with more than 1,600 basis points more than our nearest competitor.

Based on our estimates of the U.S. market for the second quarter, we believe that Abbott share was approximately 34%, while Medtronic and J&J achieved approximately 11% and 5%, respectively.

Given the early success of our ION launch, coupled with J&J's announcement that they're exiting the DES market and our planned launch of PROMUS Element ahead of our planned mid-2012 timing, we believe that we are very well positioned to maintain our strong market leadership in the U.S.

International DES sales of $192 million were at the low end of our guidance range of $190 million to $200 million, representing a reported decrease of 2% and a decrease of 3% on a constant-currency basis. This includes $35 million in TAXUS, $48 million in PROMUS and $109 million in PROMUS Element sales and represents an 18-25-57 mix of TAXUS, PROMUS, PROMUS Element internationally.

We continue to shift our international mix to self manufactured products on the strength of our Element platform. We estimate that our U.S -- the DES market share in EMEA in the second quarter was approximately 32%, which was flat on a sequential basis. TAXUS market share was approximately 6% with revenue of $15 million. PROMUS market share was less than 1% with revenue of less than $1 million. And PROMUS Element share was 26% with revenue of $67 million. Together, this represents a TAXUS, PROMUS, PROMUS Element mix in EMEA of 18-1-81.

We estimate Abbott share at 25%, Medtronic share at 20% and J&J share at 10% during the quarter. We continue to be very pleased with the market acceptance of the Element platform in EMEA. It now comprises 93% of our DES product mix in the region, driven by its market-leading alloy and stent design, which we believe improves ease-of-use. Through the success of PROMUS Element and the TAXUS platform, we have driven substantially all of our DES product mix in EMEA back to self manufactured margins.

Our DES share in Japan was an estimated 38%, up 100 basis points sequentially with revenue of $49 million, driven by share recapture from a competitor. TAXUS market share in Q2 was approximately 6% with revenue of $7 million, and PROMUS market share was approximately 32% with revenue of $42 million. Together, this represents a TAXUS, PROMUS mix of 14-86.

We estimate Abbott share at 34%, Medtronic share at 8% and J&J share at 4% during the quarter. We performed better than planned in the quarter due to the late launch of a local competitor stent. However, we expect to pay some incremental pressure on our share in the near term now that we have launched.

That pressure is expected to abate once we gain approval of PROMUS Element, which is anticipated in mid-2012. We estimate that our intercontinental DES share to decrease slightly to about 20% in the second quarter with a share split of 4% TAXUS with $13 million of revenue, 2% PROMUS with $5 million revenue and 14% PROMUS Element with $41 million in revenue, or a TAXUS, PROMUS, PROMUS Element mix of 22-8-70.

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