Boston Scientific Corporation (NYSE:BSX) Q2 2023 Earnings Call Transcript July 27, 2023
Boston Scientific Corporation misses on earnings expectations. Reported EPS is $0.44 EPS, expectations were $0.49.
Operator: Welcome to the Boston Scientific Q2 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note, this event is being recorded. I'd now like to turn the conference over to Lauren Tengler, Vice President, Investor Relations. Please go ahead.
Lauren Tengler: Thank you, Kyle. 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 Q2 2023 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 on the non-GAAP measures used in today's call to the Investor Relations section of our website under the heading Financials & Filings. The duration of this morning's call will be approximately 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 and divestitures excluded for organic growth or 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. Divestitures include the endoscopy pathology business, which closed April of this year.
Please note that, we have elected to consolidate Acotec results on a one quarter lag, which had an immaterial impact on our Q2 reported and adjusted results. On June 15, 2022, we announced our entry into a definitive agreement to purchase a majority stake in M.I. Tech, the agreement required global regulatory approvals that we were unable to obtain in some countries. As a result, the original agreement was terminated and in June of this year, we purchased a minority stake in M.I. Tech. 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 in market share, new and anticipated product approvals and launches, acquisitions, clinical trials, cost savings and growth opportunities, our cash flow and expected use, our financial performance, including sales, margins and earnings, as well as our tax rates, R&D spend and other expenses. If our underlying assumptions turn out to be incorrect or if certain risks or uncertainties materialize, actual results could vary materially from the expectations and projections used on – or 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. Mike?
Mike Mahoney: Thanks, Lauren, and thank you to everyone for joining us today. We're very proud of our second quarter results, which exceeded our expectations and demonstrated the strength of our category leadership strategy, commitment to clinical evidence, and the winning spirit of our global team. In second quarter '23, total company sales grew 12%, both operationally and organically versus second quarter '22, exceeding the high end of our organic guidance range of 7% to 9%. We anticipate that most of our business units grew in line or faster than the respective markets, fueled by our innovative portfolio and commercial execution, also supported by healthy procedure demand. Second quarter adjusted EPS of $0.53 grew 21% versus second quarter '22, exceeding the high end of the guidance range of $0.48 to $0.50.
And second quarter adjusted operating margin was 26.8%, also slightly higher than anticipated. Through the first half of the year, we have grown their business organic sales rate at 13%, with broad-based durable growth across all of our business units and regions. Importantly, we have also grown our adjusted EPS growth 20% during the first half, while balancing our investments to ensure we achieve our short-term and long-term goals. Now for our 2023 guidance, we're guiding the third quarter '23 organic revenue growth of 7% to 9% and we expect momentum to continue and are raising our full year organic guidance to 10% to 11%. Our third quarter adjusted EPS estimate is $0.46 to $0.48 and we're increasing our full year adjusted EPS range to $1.96 to $2.
I'll now provide some additional highlights in the second quarter, along with comments on our '23 outlook, and Dan will provide more details on the financials. Regionally, and on an operational basis, the U.S. grew 9% in second quarter, with notable strength in our WATCHMAN, PI and Endoscopy businesses. Europe, Middle East Africa also grew 9% on an operational basis versus second quarter, with strong performance in the region was broad-based, with double-digit growth in four out of our five major markets in Europe. Across the portfolio, we saw strength in new and ongoing product launches, including FARAPULSE, POLARx, ACURATE neo2 and LUX-DX. Asia Pacific grew 24% operationally versus second quarter, led by strength in China and Japan. Japan growth is fueled by new products, including agent, our drug-coated balloon for the coronary arteries, and resume our minimally invasive BPH technology with device performance and procedures that leave nothing behind is resonating in the market.
China delivered excellent growth in the second quarter, led by our innovative portfolio and commercial execution against the COVID impact second quarter '22. We also saw particular strength in our interventional cardiology therapies, WATCHMAN, CRM and PI business units and we continue to expect double-digit growth in China for the full year. I'll now provide some additional commentary on our businesses. Starting with urology. Urology sales grew 8% organically in the second quarter. The stone management franchise grew double-digits, driven by LithoVue and ongoing globalization efforts. Rezum continues to do well globally, growing strong double-digits in the quarter and most recently launching in Brazil. We continue to see ongoing momentum within our prosthetic urology franchise, fueled by patient activation efforts.
designed to bring awareness to our erectile restoration and male incontinence interventions. Endoscopy sales were excellent, growing 12% organically and 14% operationally in the second quarter, with notable strength in the U.S., Latin America and Asia-Pac, with new product momentum and healthy procedure demand. Our Apollo integration is progressing well and earlier this month that we received FDA clearance for OverStitch NXT, a suturing system that enables suture placement during advanced endoscopic procedures. This next-generation device brings ease-of-use benefits and improved accessibility when using a single-channel endoscope. Neuromodulation sales grew 3% organically in the second quarter. Spinal cord stimulation sales were flat versus prior year and we expect SCS sales growth to improve in the second half of the year, with strong trialing in the second quarter in support of clinical evidence, which was presented this month at Aspen.
Notably, six-month outcome data were reported from the SOLIS trial, which is a randomized controlled trial for non-surgical back pain, which demonstrated superior outcomes for SCS against conventional medical management, also consistent with primary endpoint results. Our brain franchise grew double-digits in the quarter, with continued momentum from new product launches in the U.S. and procedure recovery in Europe. Earlier this month, we received FDA approval for the Vercise Neural Navigator 5 software, which when used with our deep brain stimulation system can help provide clinicians with data for efficient programming in the treatment of Parkinson's disease. Peripheral Interventions sales were very strong growing 13% organically versus second quarter '22.
Our arterial franchise grew double-digits, led by our drug eluting portfolio. And earlier this month, after reviewing all available data and analysis, the FDA provided updated information associated with paclitaxel-coated devices used to treat PAD, recognizing the safety of these devices and eliminating the requirement for specific warning language within device-related labeling. We're pleased that the FDA determined that the available data do not support an excess mortality risk and we remain dedicated to helping physicians provide the best care possible for their patients. In Venous, U.S. growth was led by ongoing strength in Varithena, a non-thermal treatment for varicose veins, with international growth driven by our clot management technologies.
Healthcare biology microscope, lab laboratory
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Our Interventional Oncology franchise grew double-digits with strength across the entire portfolio. And last month, we received clearance for the EMBOLD, Soft and Packing Coils, which along with the EMBOLD fibroid coil, complete our detachable coil system. We also began our limited market release for Obsidio, which is the only conformable gel embolic material that's indicated for the peripheral vasculature, adding to our robust embolization portfolio. Cardiology delivered another excellent quarter with organic sales growth of 13% versus second quarter. Within cardiology, the Interventional Cardiology Therapies business, sales grew 12% organically versus second quarter. Our coronary therapies franchise growth was driven by our innovative imaging technologies as well as the recent launch of our agent drug-coated balloon in Japan, offsetting ongoing price pressure in drug eluting stents.
Our structural heart valves franchise grew strong double-digits with another quarter of performance from our ACURATE neo2 in Europe. Market reception remains very high, backed by clinical evidence, ease-of-use benefits and a focus on lifetime patient management. We continue to expect to bring ACURATE neo2 to the U.S. in the second half of 2024. WATCHMAN sales grew 27% organically versus second quarter, also outpacing the market. U.S. demand remains strong and international growth was led by China and Japan. We were pleased to have completed enrollment in the WATCHMAN FLX Pro CT pilot study, which is a single study design using multiple imaging modalities to assess post-procedural healing in the next generation of WATCHMAN FLX Pro. We expect continued momentum within the WATCHMAN franchise further supported by the anticipated approval of our both WATCHMAN FLX Pro and our steerable sheath called Trusteer (ph) by the end of 2023.
Cardiac Rhythm Management sales grew 5% organically in the quarter. In core CRM, our high-voltage business grew low-single digits and our low-voltage business grew mid-single digits, and we believe that performance was in line or slightly below market growth as the replacement tailwinds neutralize. Our diagnostic franchise grew double-digits in the quarter on the strength of our broad cardiac diagnostic portfolio and we anticipate momentum will continue, supported by the approval of our next-generation ICM called LUX 2 expected later this year. Electrophysiology sales grew 28% organically in the second quarter. International growth continues to be fueled by strong performance in both FARAPULSE and POLARx across Europe and Asia-Pac. We continue to make progress towards bringing these innovative technologies to the U.S., and we expect POLARx approval in the third quarter.
In addition, we are looking forward to the data presentation of the ADVENT trial, our U.S. IDE, at the ESC Conference on August 27. Recall the ADVENT trial is a first of its kind, randomized clinical trial, designed for a non-inferior 12-month primary safety and efficacy endpoints compared to a commercially available RF and cryoablation systems. It is notable for its design and rigor as it seeks to demonstrate the single procedure effectiveness of an intervention without the use of antiarrhythmic drugs and reablations. We continue to anticipate the approval of FARAPULSE in the U.S. in 2024. The Access Solutions franchise grew strong double-digits in the second quarter with continued momentum in the U.S. and Japan with a differentiated VersaCross Transseptal platform.
We're also proud of the performance of our global teams and are confident in our future. We remain committed to sustainable innovation and our financial goals, consistently growing sales faster than our underlying markets, expanding operating margins and delivered strong double-digit adjusted EPS growth with a strong adjusted free cash flow generation. We're looking forward to our September 20 Investor Day, where our leadership team will provide more insight into our innovative pipeline today, the opportunities ahead and our long-term financial goals. So before I pass it along to Dan, I want to announce that we also have some movement within our business unit leadership team. And after nearly 20 years at Boston Scientific, Maulik Nanavaty has announced his plan to retire in August.
Jim Cassidy will now lead the neuromodulation business, where he previously spent eight years prior before moving over to lead the WATCHMAN franchise five years ago. Lastly, Angelo DeRosa will now lead our WATCHMAN business. Angelo has spent the last 10 years of Boston Scientific in Europe, most recently leading the European CRM and EP business. Congratulations to Jim and Angelo and we appreciate Maulik for his many contributions to Neuromodulation in Boston Scientific throughout his career. With that, I'll pass it over to Dan to provide more details on the financials.
Dan Brennan: Thanks, Mike. Second quarter 2023 consolidated revenue of $3.599 billion represents 11% reported revenue growth versus the second quarter of 2022 and reflects a 100 basis point headwind from foreign exchange, in line with expectations. Excluding this $33 million headwind from foreign exchange, operational revenue growth was 12% in the quarter. Sales from acquisitions and divestitures contributed 30 basis points, resulting in 11.6% organic revenue growth, exceeding our guidance range of 7% to 9%. Q2 2023 adjusted earnings per share of $0.53 grew 20.7% versus 2022, exceeding the high end of our guidance range of $0.48 to $0.50, driven by strong sales performance and a favorable effective tax rate in the quarter. Adjusted gross margin for the second quarter was 72%, slightly ahead of our expectations, resulting in an adjusted gross margin of 71.2% for the first half of 2023.
We continue to expect second half gross margin to be lower than the first half of 2023 and in line with the second half of 2022, largely due to timing of foreign exchange movements in 2022. Second quarter adjusted operating margin was 26.8%, slightly ahead of expectations, predominantly driven by strong top line performance and partially offset by slightly higher SG&A spend. We continue to focus on adjusted operating margin expansion and are maintaining our full year 2023 goal of approximately 26.4% adjusted operating margin, which would represent 80 basis points of improvement versus the full year 2022. On a GAAP basis, the second quarter operating margin was 14.3%. Moving to below the line, second quarter adjusted interest and other expenses totaled $93 million, slightly higher than expectations, driven by FX volatility in certain unhedged currencies.
On an adjusted basis, our tax rate for the second quarter was 9.8%, slightly below expectations due to certain discrete tax items and a lower than anticipated operational tax rate of 13.2%, driven by our geographic mix of earnings in the quarter. Fully diluted weighted average shares outstanding ended at 1,456 million shares in Q2, which includes the issuance of 23.98 million common shares upon the conversion of our mandatory convertible preferred stock on June 1 of this year. Free cash flow for the quarter was $514 million, with $658 million from operating activities, less $143 million net capital expenditures. Excluding special items, adjusted free cash flow was $730 million. We continue to target full year 2023 adjusted free cash flow in excess of $2.3 billion.
As of June 30, 2023, we had cash on hand of $426 million and our leverage was 2.4 times, in line with our expectations. I'll now walk through guidance for Q3 and the full year. We expect full year 2023 operational revenue growth to be in a range of 11% to 12%, which excludes an approximate 50 basis point headwind from foreign exchange. Excluding the impact of closed acquisitions and divestitures, we expect full year 2023 organic revenue growth to be in a range of 10% to 11% versus 2022. We expect third quarter 2023 operational revenue growth to be in a range of 8% to 10% versus Q3 2022, excluding an approximate 50 basis point tailwind from foreign exchange based on current rates. Excluding the contribution from closed acquisitions and divestitures, we expect third quarter 2023 organic revenue growth to be in a range of 7% to 9%.
We continue to 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%. Under current legislation and forecasted geographic mix of sales, we now expect an adjusted tax rate of approximately 12.5%, reflecting favorable tax discretes recognized in the second quarter. We expect a fully diluted weighted average share count of approximately 1.475 billion shares for Q3 2023 and 1.464 billion shares for full year 2023. We expect full year adjusted earnings per share to be in a range of $1.96 to $2, representing 15% to 17% growth versus 2022, which we believe delivers top tier financial performance. We continue to anticipate a neutral impact from FX on our full year 2023 adjusted earnings per share and we expect third quarter adjusted earnings per share to be in a range of $0.46 to $0.48.
For more information, please check our Investor Relations website for Q2 2023 financial and operational highlights, which outlines more details on Q2 results and 2023 guidance. In closing, I'm very proud of our first half financial performance with top tier organic revenue growth of 13%, adjusted operating margin of 26.2% and adjusted earnings per share growth of 20%, all contributing towards our top-tier financial goals. I look forward to continued momentum in the second half of 2023. And with that, I'll turn it back to Lauren, who will moderate the Q&A.
Lauren Tengler: Thanks, Dan. Kyle, let's open it up for questions for the next 35 minutes or so. In order for us to take as many questions as possible, please limit their self to one question. Kyle, please go ahead.
