Earnings Call Transcript - BSX Q1 2023

Operator, Operator

Good morning, everyone, and welcome to the Boston Scientific First Quarter 2023 Earnings Call. Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Lauren Tengler, Vice President, Investor Relations. Please go ahead.

Lauren Tengler, VP, Investor Relations

Thank you, Jamie. 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 Q1 2023 results, which include 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 and Filings. The duration of this morning's call will be approximately 1 hour. Mike and Dan will provide comments on Q1 performance as well as the outlook for our business, including Q2 and full year 2023 guidance, and then we'll take your questions. During today's Q&A session, Mike and Dan will be joined by our Chief Medical Officer, 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 fluctuations, and organic revenue growth further excludes acquisitions and divestitures for which there are less than a full period of comparable net sales. Relevant acquisitions excluded for organic growth are Baylis Medical, which closed on February 14, 2022, the majority stake investment in Acotec Scientific Holdings Limited and Apollo Endosurgery, which closed in February and April of this year, respectively. Please note that we have elected to consolidate Acotec results of operations on a 1-quarter lag, thus having no impact to our Q1 reported or adjusted results. Guidance excludes the previously announced agreement to purchase a majority stake in MI Tech, which has not closed. 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 the 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 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 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.

Michael Mahoney, CEO

Thanks, Lauren, and thank you to everyone for joining us today. Our first quarter performance exceeded our expectations across all business units and regions, which is a testament to the winning spirit of our global team and the relentless focus on innovation and execution. We also launched more than 70 new products globally in 2022. In the first quarter of 2023, total company operational sales grew 15% versus 2022, while organic sales grew 14%, exceeding the high end of our guidance range of 6% to 8%. We believe that all business units grew faster than their respective markets with differentiated portfolios and strong commercial execution, supported by healthy procedural demand. First quarter EPS of $0.47 grew 19% versus 2022, exceeding the high end of the guidance range of $0.42 to $0.44. First quarter adjusted operating margin was 25.5%, which is in line with expectations. Now for our 2023 guidance. For the second quarter of 2023, organic revenue, we're guiding to growth of 7% to 9% and full year organic growth of 8% to 10%. Our second quarter '23 adjusted EPS estimate is $0.48 to $0.50. And we're guiding to a full year adjusted EPS range of $1.90 to $1.96. I'll provide additional highlights on the first quarter, along with comments on our 2023 outlook, and Dan will provide more details on the financials. Regionally, on an operational basis, the U.S. grew 13% versus first quarter '22 inclusive of a 140 basis point tailwind from the Baylis acquisition with notable organic strength across all our business units. Europe, Middle East and Africa grew 20% on an operational basis versus first quarter '22 with nearly every market growing double digits in the quarter. This strong above-market growth is driven by our diverse portfolio, new launches and commercial execution with healthy underlying market demand. We remain excited about the year ahead and expect to continue to outpace our peers within the EMEA market. Asia Pac grew 15% operationally versus first quarter '22 with broad-based strength across all major markets and business units. Within the quarter, we're pleased to have received Health Sciences Authority approval for Farapulse in Singapore, expanding access to this innovative new technology to more patients. In Japan, first quarter growth was fueled by the launch of AGENT, a drug-coated balloon, a differentiated coronary drug-coated balloon for in-stent restenosis and small vessels with physicians pleased with ease of use in balloon deliverability. China also grew double digits in the first quarter, ahead of our expectations with solid procedural demand as hospitals work through COVID delayed procedures. Our diverse portfolio in China, commercial execution and supply chain management within the country supported the strong performance in the quarter. In February, we also closed our majority stake investment in Acotec, further expanding our presence in the market, and we continue to expect double-digit growth in China for the full year. I'll now provide some comments on our business units. Urology sales grew 16% organically. All four franchises grew double digits in the quarter with strength in key products, including LithoVue and Rezum. In the U.S., we received FDA clearance and initiated a limited market release for LithoVue Elite, which is a single-use flexible ureteroscope that incorporates an innovative pressure-sensing capability that will enable physicians to monitor intrarenal pressure during stone removal procedures. Endoscopy sales for the quarter grew 11% organically versus first quarter '22 with broad-based strength across all regions and franchises. Our Single-Use Imaging franchise grew double digits, and we're pleased to have recently launched our third-generation EXALT-D with improved ergonomic design updates to enhance the physician experience. In April, we closed the Apollo Endosurgery acquisition, which furthers our category leadership strategy within the important area of endoluminal surgery. With differentiated technologies like OverStitch and X-Tack along with an entry into the adjacent endobariatric market. Neuromodulation sales grew 14% organically versus first quarter '22. Our pain business grew high single digits in the quarter with strong SCS performance driven by our innovative Alpha portfolio with FAST therapy and our Cognita suite of digital tools supporting patient activation. Our brain franchise grew double digits in the quarter, driven by new product launches, including GUIDE XT, which was developed in collaboration with Brainlab. This revolutionary software provides implanting clinicians with the ability to model the effect of a patient simulation ahead of actual programming, which will improve procedural efficiency. In the quarter, peripheral interventions also grew 12% organically versus first quarter '22. Our arterial franchise grew double digits, led by our drug-eluting portfolio, establishing clear leadership in SFA drug elution, further supported by our differentiated Eluvia long-length DES. Our Venous franchise growth was driven by ongoing above-market performance in Varithena. And within the quarter, we launched EKOS Plus in the U.S., which provides more ultrasound power to resolve clot burden more quickly and completely. Our Interventional Oncology franchise grew double digits with strength across the entire portfolio. We look forward to initiating our limited market release in the second quarter for Obsidio, the first conformable embolic indication for the peripheral vasculature. Cardiology delivered another excellent quarter, with operational sales growing 17% and organic sales growing 15% versus first quarter '22. Within cardiology, interventional cardiology therapies, sales grew 13%. Our coronary therapies franchise grew low double digits in the first quarter, led by strong performance within our imaging portfolio with particular strength in the U.S. with the ongoing launch of the AVVIGO-II guidance system. Our Structural Heart Valves franchise continues to grow strong double digits, and we're pleased to have completed enrollment on our ACURATE IDE trial and continue to expect to launch ACURATE Neo2 within the U.S. in the second half of 2024. Watchman sales grew 29% organically versus first quarter '22. Demand remains very strong for Watchman FLX, and we now have treated more than 300,000 patients globally since launch. We are proud of our performance to date, and we continue to invest for the future through product innovation, solutions and clinical evidence. Last week, the Population Health Research Institute announced the IDE approval of a collaborative research study with Boston Scientific that will continue to expand our LAAC clinical evidence. This trial is expected to start in mid-2023 and will complement the existing CHAMPION AF and Option trials. Cardiac Rhythm Management sales grew 8% organically versus first quarter '22. Our Diagnostics franchise grew strong double digits in the quarter with continued momentum across the portfolio. In core CRM, both our high-voltage and low-voltage businesses grew mid-single digits. We believe that all major markets were in line or slightly above market growth. We do expect our core CM growth to taper closer to market growth for the remainder of '23 as replacement tailwinds neutralize. Electrophysiology sales grew 54% operationally and 31% organically versus first quarter '22. Our international EP business grew 40%. And importantly, the EMEA region grew our EP business 57%, driven by strong adoption of Farapulse and POLARx. We continue to invest in the expansion of our portfolio and received approval in Japan, Canada and Europe for POLARx FIT, which is an expandable balloon catheter capable of creating 28- and 31-millimeter sizes, providing procedural adaptability and efficiency. Just last week, one-year outcomes data from the MANIFEST-PF registry were presented as a late breaker at EHRA. This is the first large real-world dataset on a novel ablation technology, which demonstrated real-world safety, efficacy and efficiency of the Farapulse PFA system. The data also reinforced the minimal learning curve and reproducibility of the Farapulse workflow in everyday commercial use. We continue to advance our clinical evidence within this space and initiate enrollment in our ADVANTAGE AF trial, which is studying the use of Farapulse for patients with persistent atrial fibrillation. We also look forward to the readout of our Advent U.S. ID randomized controlled trial in the second half of this year and continue to expect the approval in the U.S. in '24. We're also very pleased with the performance of our Access Solutions franchise, which grew strong double digits in the first quarter, driven by further penetration into transseptal crossing procedures. Last week, we released our '22 performance report, outlining our environmental, social and governance results. We are pleased with the progress our global teams have made to advance sustainable innovation while contributing to a healthier planet, addressing inequities and supporting communities around the world. We have much more to do, and our values-based culture will serve us well as we continue to transform lives and hold ourselves accountable to our commitments. We are confident the year ahead will bring many more exciting milestones across each of our business units, and we remain committed to our financial goals of consistently growing faster than our underlying markets and our peer group, expanding operating margins and delivering double-digit adjusted EPS growth with strong free cash flow generation. We also look forward to hosting our hybrid Investor Day event on September 20. With that, I'll pass it off to Dan to provide more details on the financials.

Daniel Brennan, CFO

Thanks, Mike. First quarter consolidated revenue of $3.389 billion represents 12% reported revenue growth versus first quarter 2022 and reflects an $88 million headwind from foreign exchange, slightly favorable to our expectations with continued volatility in foreign exchange rates throughout the quarter. Excluding this 290 basis point headwind from foreign exchange, operational revenue growth was 14.9% in the quarter. Sales from the acquisition of Baylis through mid-February contributed 90 basis points, resulting in 14% organic revenue growth, nicely exceeding our guidance range of 6% to 8%. Strong revenue performance resulted in Q1 adjusted earnings per share of $0.47, again, exceeding the high end of our guidance range of $0.42 to $0.44 and representing growth of 19.2% versus 2022. Adjusted gross margin for the quarter was 70.4%. We continue to expect full year 2023 gross margin to include a similar level of macroeconomic and supply chain headwinds as 2022 and expect a sequential improvement in Q2, resulting in a first half 2023 gross margin that is higher than the second half of 2023, largely due to the timing of foreign exchange movements in 2022. First quarter adjusted operating margin was 25.5%. We continue to prioritize operating margin expansion and are maintaining our full year 2023 goal of approximately 26.4% adjusted operating margin, representing 80 basis points of improvement versus the full year 2022. On a GAAP basis, the first quarter operating margin was 16.3%. Moving to below the line, first quarter adjusted interest and other expense totaled $78 million, slightly favorable to expectations due to gains on certain unhedged currencies. On an adjusted basis, our tax rate for the first quarter was 12.8%, including discrete tax items and the benefit from stock compensation accounting, slightly higher than expectations due to the timing of certain discrete tax items. Our operational tax rate was 13.8% for the first quarter in line with our full year expectations of approximately 14%. Fully diluted weighted average shares outstanding ended at 1.446 billion shares in Q1. Free cash flow for the quarter was $83 million, with $190 million from operating activities, less $108 million net capital expenditures. Excluding payments related to acquisitions, restructuring and other special items, adjusted free cash flow was $229 million. We continue to aim for full year 2023 adjusted free cash flow in excess of $2.3 billion. As of March 31, 2023, we had cash on hand of $570 million, which in accordance with accounting standards for less than wholly owned subsidiaries includes the cash balance from Acotec of approximately $140 million following the completion of our majority stake investment. As of March 31, our leverage was 2.5x, in line with our expectations. I'll now walk through guidance for Q2 and the full year 2023. We expect full year 2023 operational revenue growth to be in a range of 9% to 11%, which excludes an approximate 50 basis point headwind from foreign exchange. Excluding the impact of closed acquisitions and the recently closed divestiture of our pathology business, which had approximately $24 million in revenue in 2022, we expect full year 2023 organic revenue growth to be in a range of 8% to 10% versus 2022. We expect second quarter 2023 operational revenue growth to be in a range of 7.5% to 9.5% versus Q2 2022 excluding an approximate 100 basis point headwind from foreign exchange based on current rates. Excluding the contribution from closed acquisitions and divestitures, we expect second quarter 2023 organic revenue growth to be in a range of 7% to 9%. We expect our full year 2023 adjusted below-the-line expenses to be approximately $340 million. We continue to expect our full year 2023 operational tax rate to be approximately 14%, with an adjusted tax rate of approximately 13% under current legislation and forecasted geographic mix of sales. We expect a fully diluted weighted average share count of approximately 1.458 billion shares for Q2 2023 and 1.464 billion shares for full year 2023, which includes the 23.98 million shares we expect to issue based on our current stock price on June 1, 2023, upon the conversion of our mandatory convertible preferred stock. We expect the impact to adjusted earnings per share to be neutral with the approximately $14 million quarterly preferred stock dividend ending at the time of conversion. We expect full year adjusted earnings per share to be in a range of $1.90 to $1.96, representing 11% to 15% growth versus 2022, which we believe delivers top-tier financial performance. We continue to anticipate a neutral impact from FX on full year 2023 adjusted earnings per share. We expect second quarter adjusted earnings per share to be in a range of $0.48 to $0.50. For more information, please check our Investor Relations website for Q1 2023 financial and operational highlights, which outlines more details on Q1 results and 2023 guidance. Before I turn the call over for a few upcoming events to note: we will be hosting our Annual Shareholder Meeting on May 4 at 8:00 a.m. Eastern and our Q2 2023 earnings call on Thursday, July 27, at 7:30 a.m. Eastern. With that, I'll turn it back to Lauren, who will moderate the Q&A.

Lauren Tengler, VP, Investor Relations

Thanks, Dan. Let's open it up to questions for the next 35 minutes or so. In order for us to take as many questions as possible, please try and limit yourself to one question. Jamie, please go ahead.

Operator, Operator

Our first question today comes from Robbie Marcus from JPMorgan.

Robbie Marcus, Analyst

Congratulations on a strong quarter. I have a two-part question. Firstly, your performance in the first quarter was impressive, especially regarding revenue. We understand this may be the last easy comparison to COVID trends from the first quarter last year. Can you provide insights on what you are observing globally and how sustainable this growth is? You indicated a slight slowdown for the second quarter; is there anything significant to discuss beyond a cautious outlook? Secondly, there have been recent news articles about potential mergers and acquisitions involving Boston Scientific. Can you update us on your M&A strategy? Historically, we’ve seen a focus on smaller tuck-in acquisitions, is that still your aim? Any thoughts on this would be appreciated.

Michael Mahoney, CEO

Sure, Robbie. Thanks for the question. The second question is easier for me, then I'll do the first one. On the second one on M&A, as you know, we've been consistent over the years. As a matter of practice, we never comment on rumors or speculation in the marketplace. On the first question, I'm really proud of the global performance across the board. If you look at the regional side, as I mentioned in the script, the U.S. grew 13%. I think it's really important to note that Europe grew 20%, and Asia Pac grew 15%. So it wasn't one region or one business; it really was strong performance all around. And it's encouraging in Europe, in particular, where we have an impressive product line in our EP portfolio and in our TAVI portfolio that's not launched yet in the U.S., which I think is a good signal for the future, as you'll hear about more in Investor Day. The fact that the U.S. posted a double-digit number, albeit on some softer comps, as you said, given the COVID impact, is significant. The European and Asia Pac performance is truly impressive. Many of the products are not yet approved in the U.S., so overall, really pleased. Almost every business unit grew double digits. Not all of our competitors have reported yet, but we'd be surprised if we didn't exceed the peer group across each one of our businesses. The execution of the team is very strong. There were also some underlying market improvements in the first quarter, as evidenced by public hospitals reporting good patient volume, especially good outpatient volume, which is a good indicator for Boston Scientific, given our portfolio. The nursing shortage is still a challenge for sure but has improved, and hospitals are being very efficient. So, the underlying backdrop for procedure volume demand has improved and is strong, and our portfolio meets the moment around the world. So, we're really pleased with the overall performance.

Daniel Brennan, CFO

And then specific to Q2, Robbie, just to double-click on that. As Mike mentioned, relative to CRM, that grew 8% in the quarter. We had talked about at the beginning of the year, that kind of growing at market, lower single digits. We have some replacement trends that are starting to become a bit more challenging. So that 8% probably a bit outsized for what we're expecting there. Moreover, Neuromod has been in that low single-digit range, but the pop of 14% is great for the quarter. However, it might be too early to call full recovery in that market. So just the 7% to 9% hedge for second quarter guidance is appropriately prudent.

Operator, Operator

Our next question comes from Joanne Wuensch from Citi.

Joanne Wuensch, Analyst

And may I reiterate or repeat, good quarter. One of the things I've been trying to figure out this particular quarter is how much of what we're seeing is easy comps, pent-up demand, or something else. I know you can't particularly pick that apart on this kind of delivery but if it is pent-up demand, is there any way to quantify how many quarters or what kind of tailwind that is? And I'll throw my second question in too. Farapulse seems to be doing quite well outside the United States, and we're getting a lot of questions on the timing of it in the United States and what that ramp may look like. If there's any color or sort of level-setting of expectations, that would be appreciated.

Michael Mahoney, CEO

Sure. On the first one, Joanne, I wish we could provide a perfect scientific response to your question on the overall market. I would say it's a healthy market for all the factors that you just indicated. There are some easier comps. Our comp for Q1 was 9.7%, but that was based on COVID impacted 2021. So maybe the comps are a little bit easier, but clearly, the procedure volume is stronger, as I mentioned, with the hospitals that have reported. The outpatient momentum is quite strong, which fits our portfolio. We have a very strong product cadence across the world right now. So I think it is really all these factors contributing to a very strong first quarter and the increase in our full-year guide. We typically denote the markets that we serve to grow around 6%. Clearly, the market grew faster than that in the first quarter. But we're not quite ready to declare this as exceptionally strong market growth for the whole year. That would be premature and not responsible. That's why we gave the guidance of 8% to 10% full-year growth, because we see strong underlying market demand, but it may not be quite as strong as we saw in the first quarter. This could change as the year progresses. On Farapulse, I was at the EHRA meeting in Europe just last week, and the enthusiasm for Farapulse is very unique. The MANIFEST data was excellent. Ken, can you remind us when we expect the trial to read out?

Ken Stein, Chief Medical Officer

Yes. So our U.S. IDE trial, the Advent trial, is the most rigorous trial that anyone has done in this space. It's a double-blinded, randomized trial against conventional thermal ablation. We continue to expect to present that data in the second half of this year, followed by submission to the FDA at the same time. So, we continue to anticipate U.S. approval in '24.

Joanne Wuensch, Analyst

Would you expect it to ramp similarly to what you’re seeing outside the United States?

Michael Mahoney, CEO

Yes. For Farapulse, we broke out the number in Europe, which is 57%, I believe. Organically, all EP. And that includes POLARx, which makes a very strong contribution. We expect approvals for POLARx in the U.S. in the second half of this year, and we do expect POLARx to be an important part of our portfolio globally for many years. Customer demand for Farapulse is outpacing current supply, so there is excellent enthusiasm. We will continue to report our progress in EP. The momentum in Europe is notably strong, which is why we highlighted that number for you.

Operator, Operator

Our next question comes from Rick Wise from Stifel.

Rick Wise, Analyst

Mike, just looking ahead to the September 20 Analyst Day, Boston's excellent CFO recently spoken public, I think, March 1 at my friend Joanne's event and said that he is excited for the next chapter for the company for '23 and then for '24, '25 and '26. And I think you said Boston has the opportunity to have a special chapter for the company. I'm just wondering what do you think, Dan, meant? And what is a special chapter? And does that possibly suggest more willingness, given that everything is happening fundamentally and with the product portfolio to commit to a sustained higher growth rate guidance for the next Long Range Plan?

Michael Mahoney, CEO

Well, Dan is a smart guy, and he wouldn't have said that unless he meant it. I certainly support that. We'll lay it out more at Investor Day, but you can see the strength of our businesses across the board, and the portfolio mix continues to drive us. This is an approach we've purposely designed and executed on for many quarters. Our businesses in the slower growth markets continue to shrink as percentages of our sales, while we continue to add faster growth markets and better innovation that helps with our pricing. There are many key products that are launched outside the U.S. that are not yet in the U.S. and have strong demand, allowing us to achieve better gross margins. This will be part of our update at the Investor Day; we’re very excited about the company’s future.

Rick Wise, Analyst

And let me sneak in one quick follow-up on Farapulse. I know that you've been supply constrained on Farapulse generators. Is that situation improving? Will it be resolved by the time you hopefully get U.S. approval? Any update on that situation?

Michael Mahoney, CEO

Yes. We do expect that to dramatically improve prior to U.S. approval, primarily because we have strategic contracts with important long-term partners that will be part of our solution. We're also ramping up internal capabilities. So we expect to enhance console supply to meet the demand by the time we get U.S. approval, which makes us optimistic about the timeline.

Operator, Operator

Our next question comes from Larry Biegelsen from Wells Fargo.

Larry Biegelsen, Analyst

Congrats on a great start to the year here, guys. So one for Dr. Stein, one for Mike. So Dr. Stein, Farapulse is a single-shot technology with PFA energy, but companies are developing large local catheters and dual energy sources. How are you thinking about the evolution of Farapulse beyond its current geometry and energy source? And Mike, we all completely understand you won't comment on rumors, but there are interesting assets in MedTech that would push you to over 4.5x leverage or require the use of equity because of relatively large deals. Are those options on the table? And just remind us of how you think about ROIC?

Ken Stein, Chief Medical Officer

Yes. Thanks, Larry. I'll take the first part. We certainly are exploring alternate catheter form factors. The current catheter, approved in CE Mark countries, is designed for pulmonary vein isolation and is ideally suited for that. We're seeing strong interest and success with this form factor. Additionally, we are investigating beyond pulmonary vein isolation, specifically for persistent atrial fibrillation. Our ADvantage trial is aimed at determining efficacy in that space. When it comes to the evolution of Farapulse, we believe our catheter is uniquely positioned to outperform others in the market.

Michael Mahoney, CEO

As a matter of practice, Larry, we don't comment on rumors or speculation. We did mention earlier that we closed the Apollo acquisition recently, which strengthens our presence in endoscopy and reflects our commitment to category leadership. We will evaluate future opportunities, but we won't speculate on future deals.

Operator, Operator

Our next question comes from Travis Steed from Bank of America.

Travis Steed, Analyst

I guess high level, maybe you could just refresh us on your overall capital allocation priorities and start there. And then a quick question on the guidance. Revenue growth obviously moved up quite a bit, but earnings didn't move up quite as much. So I just want to make sure I'm not missing something on the EPS side given that margins are staying the same.

Daniel Brennan, CFO

Sure, Travis. I think I can probably take both of those. Capital allocation priorities remain unchanged; high-quality tuck-in adjacent type growth M&A and then any excess cash for share repurchase. We tend to not pay dividends. Regarding EPS, we kind of surpassed the midpoint and consensus estimates by $200 million. If you apply our overall margin percentage to that, you'd expect additional adjusted EPS of about $0.02 to $0.03, but we delivered 3.5%. We're at 25.5% adjusted operating margin, in place to achieve our 26.4% for the year.

Operator, Operator

Our next question comes from Vijay Kumar from Evercore.

Vijay Kumar, Analyst

Congratulations on the quarter. I have two questions, one regarding the product and another about capital allocation. On the product side, Mike, did I hear you correctly in your previous response about Farapulse? Can you now perform point-by-point ablation? I initially thought it was only a single-shot catheter, so I would like to know if it can do point-by-point ablation and whether you are gaining market share in the RF segment as well. Regarding capital allocation, I understand you won't comment on market speculation. This question isn’t about that, but could you remind us of the leverage levels Boston would be comfortable with in the current interest rate environment? If Boston considers a deal strategic, would you be open to pursuing a deal that could be dilutive to earnings?

Ken Stein, Chief Medical Officer

Vijay, it's Ken. Let me start with a question about Farapulse. The current catheter we have approved in CE Mark countries is a single-shot catheter, so it's not designed for point-by-point ablation. It is ideally suited for pulmonary vein isolation. We believe it is the best option available for most patients undergoing atrial fibrillation ablation. Regarding market share, we are converting users from traditional techniques, and our safety and efficacy data support our competitive positioning in the market.

Daniel Brennan, CFO

Regarding leverage, we’ve focused on getting back to a BBB+ rating with all three rating agencies, taking that journey seriously, and being comfortable at that level. We are committed to investment grade.

Operator, Operator

Our next question comes from Danielle Antalffy from UBS.

Danielle Antalffy, Analyst

Congratulations on a very strong quarter. I have a question about Farapulse. I apologize for the heavy emphasis on this product during the call, but I am interested in your perspective on the market's evolution. The AF ablation market has experienced double-digit growth for over a decade. Do you think Farapulse and the introduction of pulse sales ablation could significantly and sustainably accelerate market growth due to the device's safety profile? Additionally, what insights do you have regarding overall market growth for this device in Europe? I also have a follow-up question on Watchman.

Ken Stein, Chief Medical Officer

Yes. Sure, Danielle. I guess I'll take that first one, and we’ll see about the follow-up. We do see Farapulse accelerating adoption of AF ablation. AF is the most common sustained arrhythmia globally. Ablation remains underpenetrated for several reasons including safety concerns and the complexities involved. The Farapulse system, through its safety, efficacy, and procedural efficiency, will pull more patients who are currently indicated into the ablation market. We see great potential in driving further use in persistent atrial fibrillation, where current ablation techniques produce marginal results. Our ongoing ADVANTAGE trial will help us gain further approval for that indication.

Danielle Antalffy, Analyst

Okay. My question about Watchman is really focused on the market growth perspective because we're seeing strong numbers. It's difficult to distinguish between backlog and underlying growth, but it has been growing steadily for a while, especially with a competitor launching in the U.S. I'm curious about the market growth acceleration you're observing for Watchman.

Michael Mahoney, CEO

Sure. I would say we are experiencing 25 percent growth in the market, which is very strong as it continues to scale. We believe our market share has either remained steady or possibly increased over the last six months. The teams in the U.S. have performed exceptionally well commercially with the Watchman FLX product. We expect this market to grow at over 20 to 25 percent for several years. Moreover, we have groundbreaking trials with Option, CHAMPION, and the recent LOUS 4, which will further expand our market indications through positive clinical results. We are dedicated to developing this category and expanding our product portfolio for improved outcomes.

Operator, Operator

Our next question comes from Cecilia Furlong from Morgan Stanley.

Cecilia Furlong, Analyst

And also, echoing my congrats on the quarter. I wanted to ask specifically just your comments on pain and SCS. Really what you saw in the quarter, especially as it pertains to recent headwinds? And then just your outlook in terms of underlying market growth; do we see some recapture in 1Q? Was that part of the strength? And how you’re thinking about underlying market growth going forward?

Michael Mahoney, CEO

Sure. In the first quarter, we noted improvement in our global business. Overall, the Neuromod business grew 14%, led by our deep brain stimulation business, which had a terrific quarter, with spinal cord stimulators tending toward about 9%. We experienced slightly favorable staffing conditions that helped the entire Neuromod market. There were slightly easier comparisons as well following the '21 COVID impact. Overall, we expect the pain business and the brain side to grow above market, with DBS significantly doing better than market. Our new STIMVIEW capability is designed to enhance overall productivity and efficacy, which we believe will benefit the procedure. It is too early to specify exact market expectations for spinal cord stimulation for the full year, but mid-single digits of around 5-6% seems reasonable.

Cecilia Furlong, Analyst

Great. And if I could just quickly follow up on China. Some of your comments, what you saw in the quarter coming in ahead of expectations. How should we think about really just the rest of '23 in terms of pent-up demand, backlog procedures, and then also what you've seen to date with Watchman in the region?

Michael Mahoney, CEO

Yes. China catches up to everything quickly. There was an impact early in the quarter from delayed COVID procedures, but they quickly made up for it in the second half of the quarter. We expect double-digit growth in China despite some pricing pressures. This is consistent with prior years based on our robust overall portfolio strength. We’re excited about our Acotec agreement, where we own 60% of a leading drug-coated balloon company in the region. This partnership will further solidify our growth, and we anticipate double-digit growth for the full year. Watchman is performing acceptably in China, and we can provide more details in the future. FLX is indeed approved there.

Operator, Operator

Our next question comes from Matt Taylor from Jefferies.

Matt Taylor, Analyst

So great result. I guess what I'm struggling to understand is, obviously, you saw strong demand in the quarter. And I think we're seeing a lot of macro things improving like staffing, etc. I mean could it actually theoretically get better sequentially? Or why are we thinking so conservatively? Do you think that the direction of travel could be positive, negative or neutral? And what are some of the background thoughts that you would base that on?

Michael Mahoney, CEO

I would say, again, we're very proud of the quarter. We exceeded what we believe is our peer group and performed well across every region. I won’t detail every one. Even with a 9.7%, the way the comp looks off a lighter '21 shows some comp benefits, yet it doesn't take away from the excellent overall performance you compared to peers. It wouldn't be prudent for us to assume the same market growth for the remainder of the year because traditionally, our served markets grow closer to 6.5%. Therefore, while we hope to see continued improvement, we're being cautious about expectations for the full year.

Matthew Taylor, Analyst

Yes. And then, Mike, just a follow-up on that. I mean, thinking ahead to 2024, if we do have some, let's call it, supernormal growth this year, some catch-up or whatever, do you still think that you can grow in kind of the LRP range in 2024 over what could be a tough comp in 2023 if things play out well?

Daniel Brennan, CFO

I would suggest you attend our Investor Day. We'll share insights on our expectations for '24, '25, and '26. We’ll see how things unfold this year in the coming quarters. At previous Investor Days, we provided a clear view of our three-year outlook.

Operator, Operator

And our next question comes from Matt Miksic from Barclays.

Matt Miksic, Analyst

So a question for Dan. And then just a couple of follow-ups on some of the product lines here we haven't yet talked about so much on the call. So for Dan, free cash flow conversion. Could you talk maybe a little bit about where you're at now, where you want to be, and what some of the challenges are currently, supply chain or whatever else has been more challenging and how you're kind of tackling those? And as I mentioned, I just have one other follow-up.

Daniel Brennan, CFO

Sure. I would say I'm not where I want to be yet on free cash flow conversion. It's a key focus item for us. Some things are structural, others are more transient. Our integration costs as an acquiring company can get in the way of free cash flow. Fortunately, litigation challenges have been trending down over time. We have also seen some impact from restructuring charges; however, these efforts are beneficial for continuous improvements. We focus on working capital management, particularly receivables, payables, and inventory, with intense focus in those areas. While we're not where we want to be, we are dedicated to improving cash flow conversion over time.

Matt Miksic, Analyst

Great. And then maybe a follow-up for Mike. So Interventional Oncology, we talk to clinicians, and that business just seems to be growing at very healthy kind of rates in these centers. So just any quick color or comment on what Obsidio could mean to that business? And then similarly, stone management, very strong. Maybe if you could talk a little bit about how the Lumines acquisition is kind of dovetailing there and what the impact of this new single-use scope could be to the LithoVue Elite?

Michael Mahoney, CEO

Yes, Matt, thank you, first of all, for bringing up these businesses that are indeed over $2 billion, growing very fast, and accretive to our margin profile overall. Farapulse is fantastic, but it sometimes overshadows everything else we’re doing. In PI, Interventional Oncology, we are pleased with our overall BTG acquisition integration and continuing capture of core share with Y90. Cryo, our product within that family, has also been successful globally. Obsidio also represents another differentiated product for our portfolio. The team continues to push for new clinical indications; it's early days, but we believe Y90 and other therapies can expand past their current indications through strong clinical evidence over the next few years, supporting long-term investment and market positioning in Interventional Oncology. The same sort of sentiments apply to urology; we're clear global leaders and continue to pioneer systems like LithoVue while integrating pressure sensors and other advanced tools to create smarter, more efficient systems that improve physician and patient outcomes, which we refer to as StoneSmart. This is a multiyear a journey, and so far our team is executing well on this.

Operator, Operator

And our final question today comes from Chris Pasquale from Nephron.

Chris Pasquale, Analyst

And sorry, Mike, but I'm going to go back to Farapulse real quick here to finish up. Just I want to ask a couple of follow-ups on the MANIFEST study. First, do you think 80% efficacy in paroxysmal patients is a realistic goal for Advent? Or should we keep in mind any important differences in endpoints or trial design? And then second, I was struck by the relatively low use of mapping in Europe today. How important do you think Rhythmia integration is to the long-term outlook of Farapulse? And how are you thinking about the regulatory pathway and timing to achieve that?

Ken Stein, Chief Medical Officer

Yes, Chris. I'll take MANIFEST first and then say a few words about where we think we need to be in terms of mapping. As you noted, there are essential differences in trial design between our Advent study and MANIFEST. Some of those differences are positive while others are negative. There are differences in the actual definition of endpoints. In MANIFEST, that 80% number allowed for patients to remain on previously effective antiarrhythmic drugs over the year, which wouldn't count as success in Advent. Monitoring strategy in Advent is more intensive than that of a registry like MANIFEST. Importantly, this is the first broad rollout of commercial experience compared to just highly selected clinical trial sites. What matters most in Advent, though, is our randomized trial against thermal ablation techniques. The trial is structured as a non-inferiority trial. We would need to design a larger trial for superiority as a primary endpoint; however, if we achieve non-inferiority, we can subsequently test for superiority. Regarding mapping in the U.S., I think we will see higher usage than Europe due to economic factors. Nonetheless, it's evident that for paroxysmal Afib, where you've focused only on pulmonary vein isolation, mapping is not vital for success with Farapulse, as indicated by MANIFEST results. In complex cases, there will be a greater urge to employ mapping strategies.

Lauren Tengler, VP, Investor Relations

Thank you, Dr. Stein, and thank you for joining us today. We appreciate your interest in Boston Scientific. If we are unable to get to your question or if you have any follow-up, please don't hesitate to reach out to the Investor Relations team. Before you disconnect, Jamie will give you all the pertinent details for the replay.

Operator, Operator

And ladies and gentlemen, that will conclude today's conference call and presentation. To join the replay, we will have it up within the next 2 hours. The conference ID will be 2742311. The dial-in numbers will be 8 (187) 7344-7529 or 1 (412) 317-0088. The replay will be available until May 3, 2023, at 11:59 p.m. Eastern Time. Once again, today's conference is concluded. Thank you for attending. You may now disconnect.