Q4 2020 Boston Scientific Corp Earnings Call
[music].
Good morning, and welcome to the Boston Scientific fourth quarter, 'twenty and 'twenty financial results Conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero on your telephone keypad.
After todays presentation, there will be and opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Susan Lisa Vice President <unk>.
Best of relations. Please go ahead.
Thank you Andrea good morning, everyone and thanks for joining US with me on today's call are Mike Mahoney, Chairman and Chief Executive Officer, and Dan Brennan, and Executive Vice President and Chief Financial Officer, We issued a press release earlier. This morning announcing our Q4 'twenty and 'twenty results, which included reconciliations of the non-GAAP measures used and the release, we have posted a copy of that release.
And 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.
And at this morning's call day, approximately one hour Michael focus his comments on Q4 performance inclusive inclusive of the impact of the COVID-19, pandemic as well and future catalysts and the outlook for our business, including Q1 and fiscal year 'twenty 'twenty, one guidance, Dan will review the financials for the quarter and provide more details regarding our Q1 and fiscal 'twenty one guidance and then we'll.
Your questions during today's Q&A session, Mike and Dan was joined by our Chief Medical officers, Dr. Ian Meredith and Dr. Ken Stein.
Before we begin I'd like to remind everyone that on the call operational revenue excludes the impact of foreign currency fluctuation and organic revenue further excludes the impact of certain acquisitions, including Virtu flex through Jan and BTG through August 15th and there are no prior period related net sales as well as the divestitures of the global Embolic microspheres.
Curious portfolio and the entry either and health franchise.
Guidance excludes the recently announced preventive acquisition and assumes and April one divestiture of the BTG and specialty pharmaceutical business on this call all references to sales and revenue unless otherwise specified are organic average daily sales normalize the sales growth for a difference and selling days year over year finally growth goals.
6% to 8%, excluding COVID-19 represent comparisons between time periods, and which results are not materially impacted by the COVID-19 pandemic of note. This call contains forward looking statements within the meaning of federal Securities laws, which may be identified by words like anticipate expect believe estimate and other similar words. They include among other.
Things and the impact of the COVID-19 pandemic upon the company's operations and financial results statements about our growth and market share new product approvals and launches clinical trials cost savings and growth opportunities our cash unexpected use our financial performance, including sales margins.
And margins and earnings as long as our tax rates R&D spend and other expenses factors that may cause such differences include those described and the risk factors section of our most recent 10-K and subsequent 10 Qs filed with the SEC. These statements speak only as of today's date, and we disclaim any intention or obligation to update them at this point I'll turn it over to Mike for his.
Comments. Thank you Susie thanks for joining us today as we finish up the challenge in 'twenty and 'twenty I'm very proud of how the Bse team has responded and how we're able to serve patients while keeping our employees safe and leveraging this year's challenges interest.
The strengthening of our portfolio and digital capabilities.
We're excited about the outlook in 2021 and beyond and expect to return to growth supported by our category leadership positions innovative pipeline and ongoing expansion into higher growth markets.
We are well positioned to emerge from the headwinds of the pandemic and a strengthened position given our innovative and diversified portfolio and our global team.
As we pre announced on January 12, two for 2020 sales declined 8% on organic basis, which included 370 basis points of negative impact from the sales return reserve related to our conversion to a consignment inventory model.
For our next generation and watchman flex device and the U S.
Organic sales, excluding the impact of this watch because I'm and grew low single digits and October down low single digits and November and then declined low double digits and December.
COVID-19, pandemic intensified and the Europe, and the U S and particular.
Our fourth quarter sales results were largely consistent with our third quarter 'twenty results, which declined 6% organically, which included a two and a 30 basis point impact from watchman consignment for.
For the full year 2020 operational sales declined seven 8% and organic sales declined 11, three both of which include the 170 basis point impact from watchman.
Today, We also announced Q4 adjusted operating margin of 18, 3% and adjusted EPS of <unk> 23, which includes approximately 730 basis points and 13th sense of charges, respectively related to watch because Simon and Lotus edge discontinuation.
Importantly, we do not expect any material charges related to watchman consignment or Lotus in 'twenty and 'twenty one.
Adjusted operating margin for the full year was 19, 3% with adjusted EPS of <unk> 96, reflecting the impact of reduced procedure volume due to COVID-19 as well as the impact from the shift to watch the consignment and Lotus.
Full year, 'twenty and 'twenty cash flow was strong despite the COVID-19 impact at 2 billion and adjusted free cash flow with free cash flow at $1 1 billion.
Our 'twenty and 'twenty financials are clearly a negative outlier to our pre pandemic six year track record of excellent results. We believe will return and delivering strong results in 2021, thanks to our strategy of category leadership in key markets portfolio diversification into high growth Adjacencies.
We continue to execute against our strategic objectives and drive towards ex Covid financial goals for 6% to 8% organic sales growth operating margin expansion and double digit adjusted EPS growth with improved ability to deploy our healthy free cash flow.
We're excited and turn the page and 2020 and confident and our plans to build on our global momentum and 21 and beyond and we are reinstating guidance for Q1, and 2021 full year, which is based on our underlying COVID-19 impact assumptions.
These assumptions reflect and ongoing meaningful impact from the pandemic and first quarter and.
Proven and second quarter, and a return to more normal procedure levels and second half 'twenty one.
Our guidance also excludes the recently announced prevent this acquisition and assumes and April 1st divestiture of the BTG spec pharma business.
We're targeting in 'twenty and 'twenty, one organic revenue growth of 12% to 18% versus 'twenty, and 'twenty and flat to up 5% versus 2019, both excluding the impact of acquisitions and divestitures and Dan and give more details.
Given the expected weighted impact of COVID-19, and we expect to see organic revenue accelerate over the course of the year or guidance full year adjusted EPS of $1 50 to $1 60.
For Q1, 'twenty, one sales trends in January and continued to be challenging due to the impact of the Covid. However, we anticipate that our sales trends will improve throughout Q1, as COVID-19 trends stabilize and vaccine access improves.
As a result, we first we forecast first quarter 'twenty, one organic revenue and a range of down three to up three versus 'twenty, and 'twenty and down six to flat versus 2019, both excluding the impact of acquisitions with adjusted EPS of 28 to 34 cents.
I'll now provide some brief highlights of Q4 and 2020 results along with thoughts on our 'twenty one outlook. So.
And so returning back to Q4 regionally the U S is down 9% and operational basis inclusive of the 600 basis point watchman impact.
Both Europe Middle East Africa, and Asia Pac were also down 6% operationally.
Operationally emergent sales mark and emerging market sales declined 9% and China was down seven.
China results include a 10% point negative impact from the day S tender sales return reserves.
And outside this impact China had excellent sales and IC imaging complex coronary <unk> structural heart, urology and pelvic health and.
And we expect double digit growth from China, and 2021, given the momentum and these franchises the diversification of our portfolio and with drug Eluting stents now representing approximately 5% of our China revenue mix in 2021.
I'll now provide some additional commentary and our business units urology and pelvic health sales grew 1% and organic basis and the quarter normalizing for the intrauterine health divestiture Paul.
And your sales declined 7% and Q4 growth was led by continued strength and with a view space or and resume.
And Q4 of Litho view grew double digits and crossed the threshold of treaty and 200000 patients cumulatively.
We recently launched space, our view hydrogel, which is visible under Cte imaging and helped drive full year growth for that franchise and north of 20% versus 2019.
And for Endoscopy Q4 sales also grew 1% with a broad based recovery across regions and notable strength strength in infection prevention.
Full year 2020 sales declined 6%.
Our exalt D launch is receiving strong physician feedback and we continue to expand our global account base. Unfortunately hospital systems. During Covid has COVID-19 restrictions have made adoption of exalt D more challenging and we do expect the exalt D to build momentum throughout 2021 and remain bullish on the significant multiyear runway.
The pandemic continues to be a short term headwind and driving exalt D access.
We will also continue to build the body of clinical evidence and are very encouraged by uptake of the transitional pass through payment for exalt D and the outpatient setting.
The launch of Spyglass discover and continues to go well and we continue to target launch of our single use blocker scope and the second half of 'twenty and 'twenty one.
We're also pleased to have recently launched their eyes prototype, which complements our high growth and aluminum surgery portfolio.
And cardiac rhythm management Q4 sales declined 6% with both high and low voltage performance similar to overall CRM.
Full year sales declined 12% in 'twenty and 'twenty, one and we anticipate beginning enrollment soon and modular a T. P. Our dual track clinical study for a standalone <unk> pacemaker as well and survive anti tachycardia pacing to emblem S ICD patients.
Our high voltage business is now nearly three times the size of our low voltage business, so increasing and access to emblem S. ICD for appropriate patient populations is a significant driver for this lead those pacemaker work and <unk>.
Currently our Lux Dx implantable cardiac monitor is off to an excellent launch, giving us high quality ECG signals arrhythmia algorithm performance and streamlined back and monitoring.
We're also excited about our recent acquisition of preventive solutions, which grew at 30% and 2000 $20 million to $158 million by offering best in class detection algorithms, a broad portfolio with body Guardian. Many that covers all four modalities of ambulatory ECG monitoring and establishes a strong position for BSC and the field of <unk>.
<unk> diagnostics.
We expect to close the deal by mid 'twenty, one after which we'll be uniquely positioned across all diagnostic therapies, including a D. C. G. Lux Dx, our implantable cardiac monitor and heart logic as well as implantable and ablative therapies.
Electric and <unk>.
Actual physiology sales were down, 2% and Q4 and 14% for the full year and December we did begin the full launch of polar X. The second generation single shot Cryoablation catheter in Europe, and physicians are noting polar <unk> ease of use and attractive procedure duration.
Stable point, our novel <unk> and therapeutic catheter with direct sense was also recently approved in Japan and is receiving positive EU physician feedback early and the commercial launch.
And Neuromodulation and Q4 organic revenue declined 12%, but grew sequentially from Q3, why full year and Neuromodulators were down 16%.
The fourth quarter decline was primarily due to a higher rate of spinal cord stimulation patient cancellations and November and December due to the Covid surge.
We expect the majority of these procedures to be rescheduled and are pleased to have launched our next generation wave rider Alpha SCS system at NASS last month.
Alpha offers a fast and contour paresthesia free waveforms with MRI capability supported by our Coke need us software solutions that enhance the physician's ability to identify and manage and maintain SCS patients.
We also recently received U S approval of our precise and genus platform, which expands our MRI capabilities and both the rechargeable and non rechargeable segments with Bluetooth communication between the implant the patient remote and the physician programmer.
Turning to interventional cardiology and Q4, our sales declined 23% organically, but that includes an approximate negative 1600 basis point impact related to the transition to watchman consignment and for the China tender reserve.
Full year IC sales were down 18%, including the 720 basis point impact related to the same reserve items.
And watchman franchise accelerated its recovery and Q4 with 18% growth excluding the impact of the watchman consignment.
Our U S launch of Watchman Flex has gone extremely well with positive physician feedback and device performance and safety and.
And a higher than expected conversion rate and a shift to a consignment model.
This program to shift has now concluded and we target a complete conversion to flex by mid 2021.
We're also continuing to invest and clinical trials to expand the patient and the indication for watchman flex and we expect to complete enrollment of the option trial by year end.
Within coronary therapies, we continue to improve our sales mix each year via the growth and innovation of our complex PCI franchise.
Although drug Eluting stents continues to be a challenge from a pricing standpoint D. S. Now represents 7% of total company sales and 2020.
And we continue to differentiate with new product launches such as synergy XD and 48 millimeter as well as the newly approved Megatron and the U S.
Our complex PCI portfolio is an important growth driver with new products such as commented if you go and Nextgen rotor probe.
And we expect our global PCI and imaging franchise to be 50% larger than D. S in 'twenty and 'twenty one.
And Teva accurate Neo two is performing very well and Europe, given its excellent ease of use low rates of PDL and best in class pacemaker rates and hemodynamics.
We continue to focus on and the euro to U S IDE enrollment and and mitral later this year. We will begin an early feasibility study and the U S for millipede, a transcatheter angioplasty or bring system for patients with functional mitral regurgitation.
And peripheral interventions Q4 organic sales grew 5%, which was an acceleration from Q3 and reflected overall mix.
High acuity as well as category, leading portfolio and a broad cadence of new product launches.
Full year sales declined 3%.
And the BTG Interventional medicine business grew 12% and the quarter led by high teens growth and ethos, and a new council, new reimbursement and market penetration and the pulmonary embolism.
We continue to have best in class clinical evidence of our ecosystem will add to our breath and research with anticipation of high Pizza and trial. The first global head to head study of interventional therapy for pulmonary embolism compared to standard anti coagulation.
And arterial our drug Eluting portfolio grew mid Twenty's as we launched the Ranger D C B and the U S and saw uptake of the and tap for ILUVIEN and the market continues to cover as additional long term datasets continue to show no mortality risk associated with Paclitaxel devices and.
And then we expect our drug eluting portfolio to exceed $150 million in 2021.
I'd also like to highlight briefly two important sustainability accomplishments this quarter inclusion and the Dow Jones sustainability index and the Newsweek's America's most responsible company to 'twenty and 'twenty one list. These.
And these reclamation recognitions are gratifying reflection of our commitment to sustainable economic environmental and social practices.
So overall, we're very optimistic on the outlook for 'twenty and 'twenty, one and beyond the high acuity nature of our portfolio multiple product launches and the diminishing impact from the COVID-19 pandemic should all help BSC to execute well and significantly improved performance in 'twenty one.
We will continue to execute our category leadership strategy and diversify the portfolio into high growth markets like the prevent this acquisition, which is expected to add and exciting growth diagnostics platform with excellent long term prospects. This deal is the latest example of our strength and balance sheet and compelling and venture portfolio, which enables us to continue.
To continue to develop multiple high growth market opportunities and <unk>.
This and the excellent work of our health care economics, and Reg teams and 2020 led to multiple product approvals and reimbursement wins.
That also position us well to go forward.
We continue to drive towards ex Covid financial goals for 6% to 8% organic revenue growth and margin expansion to drive strong cash flow and double digit adjusted EPS and finally, we continue to live our values with enduring commitment to states to sustainable business practices and.
Grateful to our employees and for their winning spirit and now I'll turn things over to Dan.
Thanks, Mike.
Quarter consolidated revenue of 2 billion and $708 million represents and reported revenue decline of six 8% and reflects a $44 million tailwind from foreign exchange on and operational basis revenue declined eight 3% and the quarter, excluding the impact of the divestiture of our intrauterine health franchise organic Rev.
<unk> declined 8% and includes a $106 million or a 370 basis point headwind from the sales return reserve related to our conversion to a consignment inventory model for our left atrial appendage closure franchise with the launch of our next generation Watchman flex device and the United States, which is now substantially complete.
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The mid quarter discontinuation of Lotus edge created a $15 million headwind and the quarter.
And as Mike detailed these results are largely consistent with third quarter results as the impact of the COVID-19 pandemic increased in December after our revenue was trending flat to 2019 through October and November.
Q4, adjusted earnings per share of 23 <unk>.
<unk> includes a negative <unk> <unk> impact from the watchman consignment sales return reserve as well as a negative <unk> <unk> impact from the discontinuation of Lotus edge, primarily related to inventory charges.
Our full year 2020, consolidated revenue of $9 billion and $913 million declined seven 7% on a reported basis and seven 8% on and operational basis, which includes 350 basis points related to the acquisitions of Virtu Flex and BTG and is net of the divestiture of our legacy.
And he embolic beads portfolio and intrauterine health franchise. Excluding this net contribution organic sales declined 11, 3%, including a 170 basis point headwind from the transition to watchman consignment.
In addition to top line challenges, resulting from the COVID-19 pandemic full year 2020 adjusted earnings per share of <unk> 96 <unk> includes.
<unk> includes several charges 10 related to the transition to watchman consignment.
<unk> related to Lotus edge inventory charges, and <unk> <unk> due to inventory charges related to the lower demand at the onset of the pandemic. This was partially offset by a net <unk> <unk> tax benefit.
Adjusted gross margin for the fourth quarter was 64, 9%, including a 440 basis point negative impact from Lotus edge inventory charges. Excluding these inventory charges Q4, adjusted gross margin was equal to Q3, adjusted gross margin of 69, 3% and in line with our expectations.
Despite a larger impact from the transition to watchman consignment.
Looking forward, we expect production in Q1 of 2021 to be at similar levels to Q4, 2020, which means relatively more normal levels of manufacturing variances, although still negative with volumes not yet back to historical levels. As a result, we expect to materially worked through the lagging impact of unfavorable manufacturing variances.
<unk> capitalized on the balance sheet within the first half of 2021.
Fourth quarter adjusted operating margin was 18, 3% or 25, 6%, excluding a 300 basis point headwind related to the watchman consignment transition and a 450 basis point headwind related to the discontinuation of Lotus edge.
On a GAAP basis operating margin was negative 0.3% and includes a $131 million goodwill impairment related to the announced sale of specialty pharmaceuticals, and additional $64 million and charges related to the discontinuation of Lotus edge and $18 million and litigation related expenses.
Moving to below the line adjusted interest and other expense totaled $108 million, resulting in full year adjusted interest and other expense of $429 million inline with expectations at the beginning of the year the cost of the make whole call for early pay down of a portion of our May 22 bonds was.
More than offset by a gain on investments and the fourth quarter, a separate $363 million gain based on our investment in <unk> is included in our GAAP results and excluded from adjusted results.
Our tax rate for the fourth quarter was 38, 8% on a GAAP basis, and nine 4% on an adjusted basis, our full year tax rate was minus one 7% on a GAAP basis and five 2% on an adjusted basis, which is comprised of and operational rate of 11, 2%.
Less 150 basis points of benefit from stock compensation, and 450 basis points benefit from discrete items recognized during the year. The most significant of which was an $88 million non cash benefit driven by the Q3 completion of the IRS examination of our 2014 to 2016 tax.
<unk> and a favorable position compared to our reserves.
Adjusted free cash flow for the quarter was $552 million and free cash flow was $520 million with $673 million from operating activities less and $153 million net capital expenditures. Despite the pandemic, we generated very solid full year adjusted free cash flow of 2 billion.
In line with 2019 and free cash flow of $1 1 billion.
With $1 5 billion from operating activities less $364 million and net capital expenditures for 2021, we aim to meet or exceed 2020, adjusted free cash flow with headwinds of increasing inventory and accounts receivable as we return to more normalized volumes as of December 31 2012.
We had cash on hand of $1 $7 billion, and total liquidity, including available credit facilities of $4 5 billion.
Our top priority for capital deployment remains tuck in M&A, we have capacity to pursue additional business development opportunities, while continuing to remain active within our venture capital portfolio and take advantage of opportunistic share repurchases as we did and December during the quarter, we repurchased $535 million and shares and pay.
And early $250 million of our May 2022 bonds. The total is roughly equivalent to the expected proceeds of the divestiture of asbestos and pharmaceuticals, which is expected to close in the first half of 2021.
With respect to our legal reserves, we booked $18 million in Q4 to true up our mesh reserve, including additional legal fees and some litigation outside the United States.
Our total legal reserve of which mesh is included was $569 million as of December 31, 2020.
And Theres been no material change to the U S mesh claims outlook over the last three years, but during 2020, we incorporated Estimable International claims one time claims made by a coalition of state attorneys general and adjustments to our legal fee reserve materially all U S claims have been settled or in the final stages of settlement and we continue.
The work to fully resolve global mesh claims however, given the nature of resolving the final claims and given COVID-19 related delays and the courts, we expect a full global resolution to lag into 2022.
I'll now walk through guidance for full year, 2021, and Q1 and 2021.
As Mike stated our guidance is based on assumptions that the impact of the Covid pandemic in Q1, and 2021 will drive similar results to Q4 2020 improve.
Improve into Q2, 2021 and that the second half of 2021 will return to relatively normal procedural volumes with this high level trend, we're widening our topline guidance range to account for some degree of variability, while still trying to provide insight and direction.
Likewise, our EPS guidance range, but will be wider to allow for flexibility and spending levels as the COVID-19 specific cost containment measures implemented in Q2 2020 were largely concluded as of year end.
We will continue to manage spending prudently, but we are making the necessary investments to ensure we are ready to capitalize on momentum post COVID-19 world.
Our guidance assumes the divestiture of specialty Pharmaceuticals closes April <unk> 2021, the midpoint of first half 2021 expectations and does not include assumptions for acquisitions that have not yet closed including preventive solutions.
So for the full year, we expect 2021 organic revenue growth to be and the range of 12% to 18% versus 2020. This includes a tailwind of $179 million and watchman sales return reserves that were booked in 2020.
A headwind of $62 million from 2020, Lotus edge sales and excludes a 300 basis point tailwind from foreign exchange as well as 190 basis points from the divestiture of our intrauterine health franchise and specialty Pharmaceuticals. This guidance represents revenue growth of zero percent to 5% versus.
2019, excluding the impact of acquisitions and divestitures and includes a $50 million headwind from 2019 Lotus edge sales. This calculation excludes 2019 sales of divested businesses embolic beads, intrauterine health and specialty pharmaceuticals, and excludes projected 2012.
And one sales of acquired businesses vertical <unk> and BTG prior to 24 months post close and therefore full year 2019 sales exclude $50 million and sales of our embolic beads portfolio and intrauterine health franchise as.
And as well as $81 million and specialty pharmaceutical sales.
And at the midpoint of guidance 2021 sales exclude approximately $305 million and sales of <unk> through may and BTG interventional medicines through mid August as well as $35 million specialty pharmaceutical sales through March.
For Q1, and 2021, we expect organic revenue growth to be and a range of minus 3% to plus 3% versus 2020, including a headwind of $21 million from Q1, and 2020 Lotus edge sales and excluding a 400 basis point tailwind from foreign exchange as well as 20 base.
And this points from the divestiture of our intrauterine health franchise. This guidance represents down 6% to flat versus 2019, excluding the impact of acquisitions and divestitures for this calculation 2019 sales exclude $15 million and sales of our embolic beads portfolio and intra uterine.
And health franchise and at the midpoint of guidance 2021 sales exclude approximately $125 million and sales of Virtu flex and BTG interventional medicines as well as a $35 million specialty pharmaceutical sales.
In terms of adjusted operating margin, we expect Q1 2021 to be below 2019, Q2 to improve and the second half of 2021 to be at or exceeding the full year 2019 level of 26, 1%.
And we forecast our full year 2021 operational and adjusted tax rate to be approximately 11% with minimal benefit from the accounting standard for stock compensation. As this benefit is primarily recognized within the first quarter we.
We expect adjusted below the line expenses, which include interest payments dilution from our venture capital portfolio and costs associated with our hedging program to be approximately $400 million to $425 million for the year we.
We expect a fully weighted diluted.
Fully diluted weighted average share count of approximately $1 billion 435 million shares for Q1, 2021, and $1 billion and 436 million shares for full year 2021.
We expect adjusted earnings per share for the first quarter to be and a range of 28 to 34.
Which includes approximately one and from specialty pharmaceuticals, and for the full year to be and a range of $1 50.
To $1 60.
Compared to $1 58.
Adjusted earnings per share earned in 2019 and excludes specialty pharmaceuticals Q2 to Q4 of 2021. Please.
Please check our Investor Relations website for Q4, 2020 financial and operational highlights, which outlines more detailed Q4 results and with that I'll turn it back to Susie who will moderate the Q&A. Thanks, Steve.
And Andrew let's open it up to questions for the next 30 minutes or so in order to enable us to take as many questions as possible and isn't yourself to one question and one related follow up Andrew. Please go ahead.
Thank you we will now begin the question and answer session.
Ask the question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys if any that any time. Your question has been addressed and you'd like to withdraw. Your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
First question comes from Bob Hopkins of Bank of America. Please go ahead.
Oh, great Thanks, and good morning.
Good morning.
Mike just to start if okay I wanted to ask a big picture question.
Obviously, historically investors are used to to Boston and growing.
Above med tech peers and with the the 'twenty 'twenty One guide you're giving US today is I think you said zero to 5% organic revenue growth over 2019 and.
Zero to five is not a premium to what we're hearing from others and it's actually below some that have guided for that same time period. So when do you think Boston can once again and start to show revenues did look better than your peers is that is that now more of a 2022 event in your mind. Thank you.
Sure. Thanks, Bob.
We believe pre Covid as you know we grew faster than our peer group for multiple years in a row and I think.
Excluding we've had obviously challenged in 2020 with Covid. So we see as Covid wanes and Covid eventually towards as we go to the second half of the year as the impact.
Diminishes and as vaccines rollout and the business becomes more normal we will then grow faster than our peer group just like we used to so during the period were impacted were impacted 20 months of Covid impact in 'twenty and 'twenty and we're seeing some impact from first quarter.
And we think that's going to diminish quite a bit and second quarter.
And as vaccines rollout and patient demand increases and we expect a very healthy second half of the year. So the.
And the normal guidance of zero to 5% over 19 is clearly not.
What we do expect and a COVID-19 free environment. So it really reflects the impact of Covid and Q1 and some impact in Q2. It depends maybe Q2 will be better depends on what happens and the vaccine rollout, but it lays out a COVID-19 impact for really the first half of the year and getting back to at market if not above market.
Growth in second half consistent with what we've done in the past.
Given the strength of the portfolio.
Okay, and thank you for that and I, just I did want to and that's kind of product related question because there's been a there's been a couple of pieces of sort of negative news and just and the last week frankly on S ICD and preventive and so I'm just curious.
And how big of businesses and I D. S. ICD and is the problem fixed and then on preventive connect business keep growing 25%, 30%, it's nobody downstream burst and decision isn't reversed with lump sum some thoughts on that and thank you.
Sure Bob I'll take the prevent this one and then turn it over Dr. Stein in a minute for the S. ICD commentary. So it prevents us we're very excited about this acquisition as you know the business and.
Talk about the reimbursement piece to the business grew $160 million and 2020 it.
And grew over 30% growth and as you know there's also besides the broadest diagnostic portfolio that they offer with a short term holter and long term holter and caught event monitoring and we also add our implantable cardiac loop recorder. So we believe we have the most comprehensive diagnostic portfolio versus our peer group.
With that full suite of products and importantly, if you look at prevents us.
The long term Holter segment is obviously very important and represents call it 10% to 15% of their sales and it's a fast growing market and the reimbursement.
Situation, there I would call that fluid and so we expect to see additional meetings and the near future and we'll see where that plays out in terms of that reimbursement. We don't think the current reimbursement level is consistent with the clinical results effectiveness and amount of work and labor required for long term holter, but I think that reimbursement.
Position will be fluid, but I think what's unique to prevent us and Boston is the mix of the portfolio. So although the long term holter market was growing the fastest and may and the future depending on what happens with reimbursement. We also have well over 80% of the product mix was growing over 20% and the other.
Modalities, including <unk>, and others and the uniqueness of their device, they're able to switch from a long term holder of short term holter across these four modalities given the software. They have so I think the the mix of the products is helpful. The reimbursement and the other three categories. It was actually slightly improved and so I think we have.
The nice flexibility to move patients seamlessly across that continuum of diagnostics, the reimbursements improved and some areas. There is obviously a headwind with long term holter and I think there will be a quite a few discussions on that aspect and the future. So I think given the mix of products and the benefit for BSC.
And we're quite happy with that acquisition and comfortable that it will grow very healthy.
In terms of S ICD, Dr Stein and I'll turn.
That over to you in terms of that question yes.
Yeah. Thanks, Thanks, a lot and Mike and thanks, Bob and I and I think what you're referring to is.
The FDA classification and those are.
And recent advisory regarding the electrode that's a critical part of the S. ICD system and I think it's really important just to emphasize to everyone who's listening in.
And this particular case we.
Did not issue the advisory because of the rate of the issue that we were seeing the rate is actually only 0.2%, it's 41 months and.
And that rate is at least as good if not actually better than the best transient suites that are out there on the market and so in this case, we advised the clause with the advisory we were able to give physicians better education, and how to detect and how to diagnose the issue.
And as they follow their patients post implant.
The FDA classification and what's expected.
The termination is not based on rates of harm.
And I'd tell you overall the impact that we see has been limited and E.
E P community as a whole and grant.
Ignite is the excellent overall performance of the SA CD electrode and the unique benefits that this device offers and it is still the only ICD on the market that can provide distributor relation without touching the heart and vascular system and.
And those considerations frankly, or why the FDA and international regulators have uniformly agreed that the electrode should remain on the market and look to remain available for physicians and and for patients.
Thanks, Ed.
Yes.
The next question comes from David Lewis of Morgan Stanley. Please go ahead.
Okay.
Good morning, and thanks for taking the question Dan.
And I appreciate the comments and the first quarter basically the guide implies kind of no improvement it seems like on the other sort of on the lower and maybe to the mid part of the range I'm just sort of curious does the upper end of that range defined kind of recovery middle part of the quarter and what have you seen here in February relative to January.
Thanks, David and I Wouldnt comment specifically on the other months within the quarter, but what I would say is exactly what Mike said and I reiterated which we think Q1 will look a lot like Q4 right. So if you look at the zero to down six the midpoint of that is down three we were down four in Q.
Four we were down three and Q3, so we're kind of in the Covid World. We believe still in Q1 and our results will be impacted by that.
And you heard Mike answer to Bob's question, I think a lot of a lot of optimism around the.
The second half and getting getting past COVID-19 getting into that.
And that part of the curve and getting back to above peer revenue growth and and margin expansion because the goal for the second half again is to get.
Operating margins above where we were in 2019, just in a COVID-19 world, which we're still in here in Q1.
Those numbers are.
A pretty.
Appropriate guide for Q1 and for the full year 2021, with where we sit today.
Okay and then just two quick follow me for Mike and Mike Just a quick follow up on preventive and it's 15% of the revenue base, but it's probably 30% to 50% of the growth rate of the asset and we haven't seen the merger document yet but to the extent that reimbursement rates can't get revised.
Do you have relief and are you as committed to this transaction when the biggest growth driver obviously is <unk>.
As usual and paired that's number one and just other one is just on watchman and it is consignment comments that you made and the fourth quarter and you think it's Simon was larger than expected.
And what does that tell us in terms of your commercial progress in terms of converting accounts over to flag. So you're feeling a lot better about that flex conversion getting there by mid year based on what we saw and consignment. Thanks so much.
Yes, I'll start with the watchman and ones that consignment really exceeded our expectations.
And we're complete with it you won't see any more consignment charges. This year, nor any lotus charges. So that's good and really what it just shows that the broad adoption and enthusiasm for watchman flex so.
And we'll be easily done with a full watchman conversion and the second quarter.
It's well on its way now and so most of our customers and want to switch to flex given the safety profile and the ease of use and the momentum that has so that really exceeded that we expect to have a great year with watchman and 2021 and beyond the option trial will finish enrolling by year and the champion trial is enrolling now.
There is a portfolio of enhancements behind watchman flex and there's a lot of momentum with that business. So that's really good.
And prevent US yeah, we were excited about it and as I mentioned before as you said the long term holter is the faster growing market.
And.
<unk> done a nice job and taking share and that market and there is some exposure as you said about 15% of that product mix is long term holter, but only about half of that is impacted by the current reimbursement modification given the Medicare mix. There so call that 10 ish million dollars of exposure within that one segment and as I.
Mentioned before the other segments had a modification of a slight tailwind of improvements and reimbursement and again prevent us the only company that can offer that variability and if so if the market shifts a bit more toward towards and caught in the near term.
That's a win for prevent us David.
Market, leading portfolio, there and the businesses outside of long term holter grew nearly 20% in 2020, so the other businesses, although the market growth of those segments aren't as strong as long term holter prevent us gained share against its competitive set in 2020, and we have the ability to move across that portfolio.
And so obviously the long term holter market is a strategic segment is the faster growing segments, where we've gained share.
And we will work with the societies and.
Industry as well as the.
Appropriate authorities to educate as best we can on the.
Clinical efficacy and the costs associated and me.
Doctor side, and you wanted to comment more on that piece of it.
Yeah. Thanks, Thanks, Mike and again, I think sort of disappointed a bit just and the failure of recognize the advantages that you get with a long term versus the short term holter at midnight. The math on this isn't really hard for you to 14 day Holter monitor you get seven times as much data as of yet.
And when you do a two day holter recording and particularly if you're doing the study looking for intermittent conditions like atrial fibrillation is probably the most common reason too to order one of these tests and the diagnostic yield is far greater with the longer term recording and and I think.
And over the long run I don't think that's a heavy lift to convince payers of that proposition.
In the short term again, it just gets back to what Mike said prevent this really is has some unique competitive differentiation it, particularly and the fact that their body Guardian. Many product can do all four of the modes of monitoring short term holter long term holter and event monitoring and <unk> and mobile cardiac and outpatient.
The telemetry.
And so the ability to do that switch remotely.
It's a big advantage and in light of these kinds of payer decisions and also just put that on top of that really industry, leading AI abilities, which are useful within the ambulatory monitoring space and also just really brings and enhanced capability to Boston scientific as a company.
Great. Thanks, so much.
Yes.
The next question comes from Larry <unk> Olsen of Wells Fargo. Please go ahead.
Oh good morning, Thanks for taking the question one on the guidance for Dan and and well maybe two on the guidance first Dan.
<unk> implies sales of about 11 billion and at the midpoint, if I'm doing the math right, which is above your 2019 sales, but EPS are expected to be.
Slightly below at the midpoint for 2021 relative to 2019 I know you gave a lot of helpful color on how to think about the P&L, but at a high level why would sales be meaningfully above in 2021 by EPS.
EPS slightly below and I had one follow up.
Sure I think probably the best way to go through that Larry and maybe just give you a quick walk through.
The components of operating margin, which is really the driver there. So in terms of adjusted operating margin. We expect Q1 will be dilutive to 2019 Q2 improves and then I think the key point is that and what is.
Could largely be characterized as a post COVID-19 world and we get to the second half of 'twenty, one that will be at or exceeding the full year.
Operating margin of 26, 1% and the second half. So why is that and again that corresponds to that period, where you'd have more normalized volumes and and the key really is gross margin and the short term.
It's interesting if you go back and you take a look at 2020 and you adjust out.
Lotus and watchman and then the abnormal variances, we talked a lot about and Q2 from the.
The lower production volumes, you kind of get a gross margin that's around.
Around 70% each of those quarters. So I think we've proven that in a COVID-19 impacted world gross margin is and that approaching 70% range and so that's probably where it is in the first quarter as well and that approaching 70 range because we're still in a COVID-19 world.
We have lower volumes, we actually have more COVID-19 related costs things and the manufacturing plants, we have to do related to COVID-19, including higher freight and other things that in the time that were impacted by Covid were likely in that world now the good news is.
And 2020 and you saw from the cash flow, we were able to deliver very strong cash flow and a lot of a lot of that was working capital, but also reducing our operating expenses. So we took strong measures measures in 2020 to do that as well as those kind of lapsed at the end of 2020, we haven't put a lot of those back in place because we want to invest we want to be going.
<unk> towards the the point, where we are and that post COVID-19 world investing for momentum we're spending smartly, we're obviously, making the right investments, mostly commercially and research and development focused but you're likely to potentially see a little bit of and uptick in spend as a percentage of sales and the first half.
21, however, as we've talked about over the last six months, there is less and travel and Theres lesson and other areas. So long story short when you. When you look at the profile of the elements of operating margin gross margin is likely challenged and the first quarter second quarter.
And we will start to improve and in the back half as it always does any way historically sequentially as you go through the year. So we think that that's a.
And the likelihood and then from an Opex perspective, as you get higher sales, you'll have the SG&A percentage to be lower as a percentage of that which then gets us above that $26, one and the second half so gross margin a little bit less contribution than we might have thought a year ago, and SG&A, probably lower than we thought a year ago, but again key back.
Operating margin expansion and the second half versus 2019.
Perfect and then Mike given how elective procedures or what are your expectations for potential catch up and deferred procedures that we're.
We're obviously deferred in 2019 and thanks for taking the questions.
Yes.
And I'm pretty confident that will happen you saw.
And the second quarter and the impact of some of our businesses like spinal cord stimulators and Europe age.
Well I think.
Nobody ever done and 40% and the second quarter and Euro was down 30% and you saw them snapback very quickly when.
And when the Covid impact improved and the third quarter and then obviously COVID-19 came back stronger again, so I'd say the business responds very quickly.
Once the vaccine once the.
Covid impacts stabilizes and decreases and as vaccines will become more prominent youll see a sharp recovery of these businesses.
Many of our businesses as you saw at fourth quarter Group Pi.
Grew 5% the BTG interventional and grew double digit Paclitaxel grew plus 20% Endo and neuro growth. So some of our businesses are just more impacted namely.
Spinal cord stimulation urology and some of our core CRM IC businesses and as Covid improves we've seen that snaps back pretty quickly and that's where you see a very bullish second half guide when we feel the impact will be minimized.
Thank you.
Yeah.
The next question comes from Joanne Wuensch of Citibank. Please go ahead.
Good morning, everybody.
Two questions.
Exalt D and you've been very forthright and sharing how the pandemic has slowed uptake of this and can we think about how and an improving environment you look to launch it and mark constructive way.
Yes, so the teams.
Doing the best day, Ken I would say and the environment, we placed a number of capital units and U S and some other western markets and Europe, So the capitals and place.
And the sales team is in place the outpatient reimbursement is quite healthy for that product, which is great and they are building new clinical evidence.
And there is near term here the challenge continues to be access.
And our teams accessible to the suites to really drive a what is it.
Kind of a behavior change and using a single use scope.
And so as Covid continues to improve that this will be a great growth driver for us in 'twenty and 'twenty, one and will get better and better each quarter. Just like we're seeing now however, the ability for us to really turn on accounts and higher utilization is difficult given the limitations of some of the rep access and the hesitancy to modify.
Hi.
Kind of Corp practices, and a COVID-19 world.
But we have seen some success for sure and our team.
And the reimbursement is very helpful and as the year and goes on and that'll be becoming more meaningful and growth driver each quarter for us and we will launch the bronchoscope and the second half of 'twenty and 'twenty, one and we believe it'll be nice $2 billion market for us and it's a we think it will follow a very similar path ex COVID-19 as our.
Urology scoped, it as well as our spyglass scope and endo as well. So we have a lot of experience there, we're not and make these devices, you'll see enhancements to exalt D likely and the second half of the year as well and.
And as Covid continues to wane down that business will accelerate in 'twenty one.
Thanks, and my second question has to do with the peripheral intervention business that yes, the business it seems to be gaining momentum and gaining and on the back of BTG also.
Think about that rolling out throughout the year, because Steve you seem to me to be the main drivers to getting to that second half strength that you're talking about thank you.
Sure I'll talk about P. I think as I look at the main drivers watchman flex is going to have a fantastic year and 21 P. I will likely be our fastest growing division and I'll talk about that and a minute endo and euro will do extremely well.
And then SCS and neuroma and have some terrific launches and we can talk about cryo and some other things, but on Ti and specifically they've got a they're set up for very strong year. They grew 5% with COVID-19 impact and fourth quarter.
They had the most differentiated portfolio and arterial with our ranger balloon and ILUVIEN and including the interpreter lube yet.
And with respect that business as I mentioned will more than double it will exceed $150 million this year.
And so we're really well positioned there.
And the venous space continues to go extremely well.
And then and interventional oncology, which is really the gem that we acquired with BTG, it's really exceeded expectations in terms of sales results.
And our expanded and more aggressively and Europe, and Asia Pac and I, just got some great reimbursement and Korea, Poland and some other countries, we're expanding indications there. So the composite businesses within P. I will be very healthy and <unk>.
'twenty one.
Thank you.
Yeah. The next the next question comes from Robbie Marcus of Jpmorgan. Please go ahead.
Oh, great and thanks for taking my question you know not to beat a dead horse here, but I wanted to touch on guidance for a second and really just hit on the strategy that you took when approaching it it's still where we're in the middle of Covid and I understand Youre planning for a more normal second half.
But just want to understand you know, especially after last year and 2019.
How how much room is there on the downside should the virus really the impact extend vaccine.
Rollout continues at a slow pace how much downside have you planned for and guidance just trying to think you know how conservative it is versus some of the worst case scenarios.
Sure Ravi I can take that one.
And in terms of the answer I think is an appropriate amount.
So as we look at coming into the year, obviously, the first time, giving guidance and and a year.
And we want to have a range out there that we're confident we can hit and we believe in the ranges. We've given you for Q1 sales and EPS and full year sales and EPS, but those are the ranges that we can hit to contemplate different outcomes. Yes. They are wider than they normally are that's intentional as we mentioned given the uncertainty of where we are and in a COVID-19 environment, but we felt felt it important to kind of beyond the <unk>.
Record of what we think we can do give you some insight into how we see the business both in the short term and again into the second half and full year. So I believe there is an appropriate amount of.
A room on both sides within the guidance ranges.
Got it and and then maybe just a follow up.
And as we look at some of the new product launches. It looks like you have basically your 2020 slate will be launching here with wave rider and we have and <unk>.
And what she touched on you know how should we think about 2022 and beyond I know you have the slide there, but how delayed it has some of your new product launch it's been how is the patient enrollment and Ben and.
And do you expect any gaps and new product launches due to the the trial enrollment environment.
Thanks.
I would say on.
The good news is a lot of the things that we launched in 2020 and Youre going to get big impact in 'twenty, one and 'twenty two because there are some other launches were impacted and 'twenty. So we have we have no shortage of product launches that we're launching right now that will impact 'twenty two as well in terms of the clinical trial I would say, it's a bit and mixed the watchman clinical trials.
Ramped very very quickly.
With the option trial and the champion trial starting.
Some of the trials that require new therapies.
<unk> been a bit slower we are excited about the mitral approval and the U S to do begin that clinical trial and the U S, which is a nice win for US we had some challenges trying to do that overseas given the COVID-19 impact.
And the Exalt D. We already talked about.
And I would say, it's a bit of a kind of a mixed results, depending on which business you're in but and some of that some of the markets that maybe about a six months impact in terms of enrollment timing we're enrolling.
S trial for accurate.
And we're rolling and the U S trial for Cryo. So maybe there was some impact maybe the six month range for I would think most companies in terms of clinical trial work.
Hello, and thanks for Stein or Dr. Meredith any thoughts on that.
So the only thing on that and mind you.
To have a trial I agree with what you said has been and mixed.
Bag, but somehow it's going a little fast are predicted to have or is one of those trials with cerebral embolic protection.
Recruitment is going and.
Well I hate it.
Schedule so so.
Easily portfolio Charles.
Okay.
And Andrew one final question. Please.
Yes, and that question will come from Matt Taylor of UBS. Please go ahead.
Excuse me. Thank you for taking the question.
I wanted to ask one on the assumptions for this year you called out China is growing double digits, which is encouraging face of the stent headwind.
And I was wondering if you could give us any high level thoughts on the different geographies or are you expecting major differences and Europe versus the U S vs.
And Latin America, and recovery any specifics that you can give us there.
Sure.
For 'twenty, one and Youre, assuming for 'twenty, one and I think I'd.
And I'd say the Latam region.
Struggling a bit more with COVID-19 impact.
And some other regions.
From a geographic.
Kind of standpoint Asia is there.
And more effective.
The China business, and we're comfortable with strong double digit growth and 2021, the DDS business as I mentioned is only about 5% of our mix and you've got great balance of our complex coronary pie and other businesses. There. So China will have a strong year. This year you are seeing some some minor flare ups in China with Covid and the near term, but they've done a remarkable.
Michael the job of managing it.
You are seeing some flare ups of Covid and Japan as well.
So I think overall Asia business likely could be stronger.
Given the impact of Covid and U S and Europe had been that kind of similar and.
In terms of the Covid impact and the pace of recovery.
Yeah.
Okay. Thanks, and I just wanted to ask kind of a continuation of an earlier question when youre, assuming the improving organic growth as Covid wins do you think that's going to spill over into 'twenty. Two so you could see a stronger first half of the year in 'twenty. Two is some of that excess demand or held back to me and gets cleaned up.
That's certainly.
Zero, we'd like to see.
And wherever that give and 'twenty two guidance here, but obviously 'twenty two we'll be refreshing and there'll be no COVID-19 impact at all and we assume.
And the year and will be above our peer group back to that kind of six to eight ex COVID-19 range and there certainly is a potential where the volumes are greater.
Given the desire to have these procedures done so that would be a potential nice tailwind for the company.
Thanks, Mike.
Yep.
And this concludes our call and that thanks, Andrew. Please go ahead.
Well, yes, just to conclude the Q&A session and I'd like to turn the conference back over to Susan Lisa for any closing remarks.
Thank you for your attention and your interest and the company.
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