Q3 2022 Boston Scientific Corp Earnings Call
Good morning, and welcome to the Boston Scientific third quarter 2022 earnings 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 an 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 Lauren Taylor Vice.
President Investor Relations. Please go ahead.
Thank you Andrew and 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 Brennan Executive Vice President and Chief Financial Officer, We issued a press release earlier. This morning announcing our Q3 2022 results, which included reconciliations of the non-GAAP measure.
As 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 one hour, Mike and Dan will provide comments on Q3 performance as well as the outlook for our business, including Q4, 'twenty two and four.
The year 'twenty two 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. Ian Meredith and 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 fluctuation and organic revenue growth further excludes acquisitions and divestitures were there for which there are less than a full period of comparable net sales relevant acquisitions include excluded for organic growth or prevent us fair pulse illumina surgical which close.
In March August and September of 2021, respectively, as well as Baylis medical which closed on February 14th 2022 divestitures include the BTG specialty pharmaceuticals, which closed on March 1st 2021 guidance excludes the previously announced agreement to purchase the majority stake of M. I Tech, which is expected to close by year end 2022 for me.
For 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 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 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 turned out to be incorrect or a 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.
One 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, thanks, Lauren and thank you to everyone for joining US here today, we're very proud of our performance in third quarter, particularly in light of the ongoing macroeconomic and supply chain head.
Our performance continues to be supported by the strength and diversification of our innovative portfolio and the winning spirit of our global team.
Third quarter 22, total company operational sales grew 14% versus prior year and organic sales grew 11, 5%, which does exceed the high end of our guidance range of 8% to 10%.
This performance is a testament to our category leadership strategy and focus on innovation with strong commercial execution.
Several of our business units grew double digits organically and we believe that nearly all of our businesses and regions grew faster than their respective markets.
Third quarter adjusted EPS of 43 cents grew six 3% versus prior year at the low end of our guidance range of 43 to 45.
Attributable to increased FX headwinds and a slightly higher spend within the quarter.
We are growing nine 2% organically year to date through third quarter and in light of this performance. We are increasing our full year 'twenty two guidance for operational growth to approximately 11, 5% and.
Inorganic growth to approximately 9%.
For fourth quarter 'twenty to revenue, we're guiding to operational growth of eight and a half to 10, 5% and organic growth of 7% to 9%.
We're also updating our full year 22, adjusted EPS guidance to $1 71 to $1 74, primarily related to the ongoing headwind from foreign exchange.
Our fourth quarter 22, adjusted EPS estimate is 45 to 48 cents.
Throughout 2022, we have maintained our goal to improve operating margins. While our goal remains we feel it's prudent to provide an updated adjusted operating margin target of approximately 26% considering the continued macroeconomic pressures on.
On a full year basis. This does represent approximately 70 basis points of margin expansion versus 'twenty or 2021 rate of 25, 3%.
I'll now provide additional third quarter highlights along with some comments on our future outlook.
Originally the U S delivered operational growth of 12% versus prior year.
<unk> growth was realized across most all of our businesses business units, particularly cardiovascular in endoscopy and include an approximate 300 basis point tailwind from acquisitions.
Middle East I'm, sorry, Europe , Middle East and Africa grew 15% on an operational basis versus prior year, we continue to see excellent execution fueled by our innovative portfolio with seven of the eight business units growing double digits.
Sales growth accelerated within our growth emerging market countries within Europe with notable strength across cardiology and peripheral interventions.
In Asia Pac, we grew 15% operationally with strong growth in China, India, and ASEAN countries, while our Japan results saw some impact from Covid within the quarter, we continue to see strength driven by new products, including polar ex watchman flex and resume.
Our team in China delivered excellent results in third quarter with growth growth of 36%.
Growth was primarily driven by our ICT business within cardiac vascular P. I in our CRM business units supported by new and ongoing product launches across the portfolio.
Turning to Latin America, the team executed another exceptional quarter growing 29% operationally.
All business units are major markets grew double digits in third quarter and across the portfolio more than 10, new products were launched enabled by a remote training and support.
I'll now provide some thoughts on our business units, starting with urology and public health, which grew organic sales, 13% and 16% on an operational basis.
The stone management prosthetic urology and prostate health franchises, all grew double digits in third quarter with balanced performance across the regions.
We continue to focus on global expansion and are pleased to have received approval and commenced the launches of the space or in both Korea, Mexico and resume in Japan.
Our luminous acquisition did turn organic in September and we remain excited about the global opportunity ahead with the Moses laser technology list of your single use flexible at your reader of scopes, and our broad portfolio of stone management products.
And endoscopy sales grew 10% organically this category, leading business continues to focus on product innovations enhanced by best in class physician education and training.
Growth in the quarter was driven by our biliary and single use imaging franchises with ongoing market development activities, enabling increased utilization of exalt D and other key products.
In Neuromodulation organic revenue grew 3% are.
Our pain franchise sales were flat year over year below our expectations with ongoing reimbursement challenges impacting U S procedures for both vertical flex and spinal cord stimulation.
In SCS, while international growth was very strong with broad demand for wave rider Alpha our U S. SCS sales were impacted by a pre authorization denials, despite strong patient demand and I go into physician interest in our fast therapy.
We have a team in place focused on supporting the Preauthorization documentation requirements. However, we do anticipate that challenges will continue to persist in the fourth quarter.
And deep brain stimulation in the U S EMEA and Latam regions grew double digits in third quarter globally, we're seeing stable underlying DBS procedure growth and we continue to see momentum in the U S. As we moved into full launch of our <unk> integrated imaging and programming platforms.
Cardiology delivered another excellent quarter with organic sales growing 13% and operational sales growing 16.
Within cardiology, interventional cardiology therapies organic sales grew 11%.
This coronary therapies franchise performed well in third quarter, driven by strong performance in our international regions, particularly with our differentiated imaging franchise.
Importantly, we recently completed an enrollment in our agent <unk> trial. This is the very first U S trial for a coronary drug coated balloon to treat in stent restenosis.
And we expect to launch in Japan in 'twenty, three and the U S. In 2024.
Our structural heart valves franchise did grow double digits in third quarter again with continued strength in Europe with our accurate neo two tablet platform.
Additionally results from the protected <unk> trial were presented as a late breaker at TCT.
Recall that protected tavern trial studied our cerebral embolic protection device Sentinel whatever versus unprotected <unk>.
With a reduction in the primary endpoint of overall stroke, while the reduction in the primary end point of overall stroke did not reach statistical significance, a secondary analysis demonstrated a clinically meaningful 63% relative risk reduction in severe disabling stroke.
Turning to watchman organic sales grew 26% in third quarter global growth continues to be very strong further supported by the U S. FDA approval of an expanded label to include depth, giving physicians and patients choice adapt or always see in the first 45 days post implant.
We continue to focus on innovation in this space with a true steel, which is our new <unk> sheath and we also highlighted our next generation flex device watchman flex probe at our TCT investor event in September .
We expect flex pro to build on our second generation flex with additional sizes and the device coding designed to enhance healing.
In cardiac rhythm management organic sales grew 7% versus prior year, we had another strong quarter performance as we continued to focus on lifetime patient management from diagnostics to implant with our broad portfolio.
Within core CRM or low voltage franchise grew mid single digits and high voltage grew low single digits.
Our diagnostics franchise continues to perform very well we're pleased to have received CE mark for our implantable cardiac monitor Lux Dx.
And we have commenced our commercial launch.
I'll, let you physiology sales grew 26% on an organic basis and 83% on an operational basis.
We continue to see strength in our comprehensive international portfolio, which grew 45% organically and this includes two months of contribution from fair pulse.
Physician demand for polar <unk> in Japan, and fair pulse and polar X in Europe remains very strong and we continue to see increased utilization at existing centers, while we are expanding into new accounts.
In addition, we're pleased to have launched fare a pulse in Australia, and Singapore under special access and we anticipate approval in 'twenty three.
The valence integration continues to go well with a differentiated transsexual access portfolio growing double digits in the quarter and remains on track to achieve our full year expectations.
In peripheral interventions organic sales grew 12% with broad growth across all major franchises and regions.
And arterial our differentiated drug eluting portfolio grew double digits in the quarter and we received FDA approval for a line extension of ILUVIEN.
And commence launch of the longest length of drug Eluting stent for peripheral arterial disease in the U S.
The interventional oncology business had another very strong quarter with great growth and continue to strengthen our cancer therapies ACX and thorough sphere.
We're pleased to have closed on the acquisition of the Citi sorry.
Video and the gel embolic materials technology subsidiary <unk> as the first gel embolic with an indication for the peripheral vasculature and a complementary addition to our portfolio.
We look forward to launching this technology within the U S in 2023.
In alignment with our overall commitment to progress our environment, social and governance efforts. The Pie Division announced collaboration with a health care data platform to Vida aiming to provide insights to help better address healthcare disparities within various disease states.
We remain committed to driving sustainable innovation to Boston scientific and despite the persistent macroeconomic pressures we continue to invest for the long term in R&D.
Execute strategic tuck in M&A with a focus on improving patient outcomes today and into the future.
We're also excited about the opportunities ahead and remain focused on our long term financial goals continuing to grow sales faster than the markets operating margin expansion double digit adjusted EPS growth and strong adjusted free cash flow generation.
Before I turn it over Dan I do want to make take a moment to share that our chief Medical officer, Dr. Ian Meredith will be retiring in April of 2023.
We're extremely grateful for his strong contributions, particularly his dedication to patient clinical science and meaningful innovation.
And as great sense of humor.
With that I'll now turn things over to Dan to review, our financial performance in more detail. Thanks, Mike.
Third quarter consolidated revenue of $3 billion and $170 million represents eight 1% reported revenue growth versus third quarter of 2021 and reflects a $162 million headwind from foreign exchange higher than our expectations due to the continued strength of the U S dollar.
Excluding this 550 basis point headwind from foreign exchange operational revenue growth was 13, 7% in the quarter.
Sales from the acquisitions of Ferro pulse through July luminous through August and Balas contributed 220 basis points, resulting in 11, 5% organic revenue growth exceeding the high end of our guidance range of 8% to 10% growth versus 2021.
Continued foreign exchange headwinds and slightly higher spend on R&D investment across the portfolio largely offset our topline outperformance, resulting in Q3 adjusted earnings per share of <unk> 43 achieve.
Achieving the low end of our guidance range, representing six 3% growth versus 2021.
Adjusted gross margin for the third quarter was 77% in line with our expectations. The macroeconomic environment continues to be challenging, particularly related to inflationary pressures and availability of materials, which have largely offset a slight improvement in freight costs for full year 2022, we continue to expect adjusted gross margin.
To be slightly below 78%, which includes $375 million and macroeconomic headwinds versus 2019. These headwinds are predominantly from increased freight costs and unfavorable manufacturing variances primarily related to direct material cost and availability with a smaller portion attributable to.
Increased labor costs.
Recall unfavorable manufacturing variances are recognize over approximately six months in line with our inventory turns.
Third quarter adjusted operating margin was 25, 5% slightly lower than our expectations.
We continue to focus on our global goal of.
Operating margin expansion, but believe it is prudent to update our operating margin target to allow for the flexibility to weigh near term spend discipline with investments to continue to fuel top line growth. We now expect full year adjusted operating margin to be approximately 26%.
One time charges within the quarters results included a minor write off related to the discontinuation of our <unk> program in.
In addition, we recognized a GAAP charge attributable to an intangible asset impairment of $125 million, primarily related to vertical X as the business continues to face reimbursement challenges impacting the revenue outlook for the product on.
On a GAAP basis, the third quarter operating margin was 11, 3%.
Moving to below the line adjusted interest and other expense totaled $91 million in Q3 higher than our expectations driven in part by FX losses from certain unhedged currencies.
Our tax rate for the third quarter was 11, 9% on an adjusted basis, including discrete tax items and the benefit from stock compensation accounting. Excluding these items, our operational tax rate was 14% in line with expectations.
We ended Q3 with $1 $440 million fully diluted weighted average shares outstanding.
Adjusted free cash flow for the quarter was $626 million and free cash flow $320 million with $470 million from operating activities less $150 million net capital expenditures. We now expect our full year 2022, adjusted free cash flow to be approximately.
$2 billion.
Our total legal reserve as of September 30 was $304 million, a decrease of $210 million versus June 30, primarily related to mesh and certain IP litigation payments.
As of September 32022, we had cash on hand of $338 million our top.
Priority for capital allocation remains high quality tuck in M&A, and we will continue to assess opportunities in conjunction with our financial goals as of September 30, our leverage was two five times and we now expect year end leverage to be at or slightly below two five times.
I'll now walk through guidance for Q4, and the full year 2022.
We expect full year 2022 operational revenue growth to be approximately 11, 5% versus 2021, which excludes an approximate 500 basis point headwind from foreign exchange based on current rates 100 basis points higher than our previous expectations, excluding a 250 basis point contribution.
From the acquisitions of preventive Farah pulse, luminous and balas and $13 million of pre divestiture specialty pharmaceutical sales in 2021, we now expect full year 2022 organic revenue growth to be approximately 9% versus 2021, reflecting our strong Q4.
Performance and confidence in continued consistent procedural growth.
We expect fourth quarter 2022 operational revenue growth to be in a range of eight 5% to 10, 5% versus 2021, which excludes an approximate 650 basis point headwind from foreign exchange based on current rates.
Excluding a 150 basis point contribution from the acquisition of Bayless, We expect fourth quarter 2022 organic revenue growth to be in a range of 7% to 9%. We continue to expect our full year 2022 adjusted below the line expenses to be approximately $350 million.
Full year 2022 operational tax rate expert expectations remain unchanged at approximately 14% with an adjusted tax rate of approximately 13%, including the benefit of the accounting standard for stock compensation and discrete tax items recognized year to date.
Our tax rate expectations reflect current legislation, including a provision on the treatment of R&D expenditures. We continue to believe there's bipartisan support to reverse this provision and if such legislation were to be enacted we would expect our full year tax rate to revert to its historical range of approximately 11% operational and 10% adjusted.
We expect our fully diluted weighted average share count of approximately $1 443 million shares for Q4, 2022, and $1 440 million shares for the full year 2022.
Our long term hedging strategy continues to be effective at minimizing FX impact on EPS and we are largely hedged through 2023 at current rates. We now anticipate FX headwinds on our full year 2022 adjusted earnings per share of <unk>, <unk>, which is <unk> <unk> unfavorable versus previous expectations due to the continued strengthening of the U S.
S dollar as a result, we are updating our full year adjusted earnings per share range to $1 71.
To $1 74.
Representing 5% to 7% growth versus 2021, we expect fourth quarter adjusted earnings per share to be in a range of 45 to <unk> 48.
One quick housekeeping item before I turn it back over to Lauren we continue to expect a full year 2022 preferred stock dividend expense of approximately $55 million related to our May 2020, mandatory convertible preferred stock offering using the if converted method. These shares will mature on June one 2023.
At which point the dividend expense will retire and our share count will increase based on our share price at the time of conversion and each of the conversion scenarios, the resulting impact to EPS should be immaterial.
For more information please check our Investor Relations website for Q3, 2022 financial and operational highlights, which outlines more details on Q3 results and the MSC EPS share conversion.
In closing I'm proud of the results we've achieved year to date with continued revenue momentum and despite a challenging macroeconomic environment. We remain focused on operating margin expansion balanced with investment in our innovative portfolio to drive continued above market top line growth and with that I'll turn it back to Laura who will moderate the Q&A. Thank.
Thank you Dan.
Andrew 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 limit yourself to one question Andrew. Please go ahead.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad to withdraw your question. Please press Star then two.
Again, please limit yourself to one question.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Robbie Marcus with Jpmorgan. Please go ahead.
Great. Thanks for taking the question and congrats on a great top line quarter I'll also add congratulations to Dr. Meredith on a very well deserved retirement.
Maybe for my question.
It really was a strong topline double digits organic.
Fourth quarter continues to look good in guidance I think the one.
Area, where we're seeing a little pressure on margin. So Dan I was hoping you might be able to give us.
Early look.
Into next year, how elevated.
Is the spending there is a lot of moving pieces with opex in currency and the share count.
Do you think the street's generally in a decent spot for next year with returning to more normalized margin expansion or do you think it's still going to be a pressured year end 2023.
<unk>.
Sure Ravi I think obviously early to comment on our 2023, specifically, but I think I can probably give you. Some commentary that there would be helpful. First you mentioned the share count that that shouldnt really be a driving factor because I had mentioned on the conversion of the mcps that that Shouldnt really impact next year's EPS.
Once converted.
Let me, let me look at Q3 first though.
If you look at EPS for the quarter given the reported revenue at the high end of the range, it's probably reasonable to expect that we would have been at the high end of the EPS range, which was <unk>, 43% to 45%.
We achieved 43, which is two cents lower than the <unk> 45, a penny of that is from the incremental FX headwind and a penny is from lower operating income percentage versus expectations in the quarter I think the FX impact I think is well understood given the strengthening of the U S. Dollar so not a lot of additional commentary there relative to our operating income percentage.
Our goal is to be 26% for the full year and this involves balancing certain initiatives to reduce expenses in the short term to offset the supply chain and inflation headwinds while at the same time continuing to fuel our top line, which has been performing very well. If you look at the P&L components of a 26% adjusted margin scenario in 2002.
'twenty two it would likely have gross margin higher than 2021, SG&A lower than 2021, and R&D slightly higher in 2021, and we think this is an appropriate and keep in mind as Mike said this would be 70 basis points higher than the 2021 adjusted operating income margin full year of 25, 3% and in.
In line with the 2021 second half and importantly in line with 2019 full year, while absorbing $375 million of supply chain and inflation headwinds.
Compared to 2019, so I feel very good about how we're balancing that in and looking at that 26 as a very successful number for the year specific to 2023 again. Our goal is always to continue to increase operating margin long standing goal of doing that 50 basis points per year. If you look at the $25 three last.
Year will be 70 basis points as I said are.
Advanced on that and in 'twenty two.
Two if we hit that 26 and then.
Even with where we were in 2000 2019 in the second half so more to come as we as we evolve and deliver guidance likely in that February timeframe, but I feel good where we are in 'twenty, two and look forward to continuing the journey in 'twenty three and beyond.
Great I appreciate the color. Thanks.
The next question comes from Larry Nicholson with Wells Fargo. Please go ahead.
Good morning, Thanks for taking the question.
Wanted to ask about Neuromodulation, Mike could you talk a little bit about more about the reimbursement challenges. There what channels are you seeing that in and it seems like all your businesses are consistently growing around the corporate growth rate, except neuromodulation. So what what's the plan to accelerate the growth in that business.
And let me just also extend my congratulations to Dr. Meredith I wholeheartedly agree with your comments earlier, especially about his sense of humor. Thanks for taking the questions.
Hey, Larry Yes, we're quite proud of the performance.
Nearly every business grew double digits and faster than the peer group and every region as well you saw the growth in Europe , and China and all of US were quite proud of the results in the quarter.
And really through the year neuroma.
Broken down into two pieces the deeper in stimulation franchise is doing extremely well.
Growing strong double digits U S Europe , and a nice pipeline.
And we're not seeing.
Really some of the macro headwinds in the GBS business.
On the spinal cord stimulation business as you know this market has been tough to call.
Over the past few years during the pandemic and now as we're essentially hopefully getting out of the pandemic.
The markets, we think in the low single digits potentially mid single digit range now so it has come down a bit.
In terms of the overall market growth rate, we believe what's hurting the market not necessarily be as Boston scientific because you've seen some competitive results already and you've seen this trend throughout the year.
Has been in the spinal cord stimulation market in the U S and we're seeing more pre authorization denials.
In the U S.
We are seeing strong patient funnels.
So our team is essentially really focused on building additional capabilities to help our physician customers manage those preauthorization dialysis patients need the products the product side as you work I think this is more of an industry challenge right now.
We're working with them to streamline that authorization process to get patients through the funnel and physicians to get paid so we do anticipate that headwind will persist in fourth quarter, hopefully it will get better in 2023.
Like our competitors will have easy comps in 2023 based on this so that helps mathematically, but fundamentally we need to improve the.
Help our patients and customers with this preauthorization hiccups and some of the capabilities. We're building to assist them with that but I think it's more of a.
Class issue right now than our Boston scientific issue.
Thank you so much.
The next question comes from Joanne Wuensch with Citi. Please go ahead.
Alright, Thank you very much for taking the questions.
Can you spend a little bit of time on watchman franchise.
<unk> had over the last 12 months increased competition, but an improved label and sort of.
Our broader geographic reach can you pick apart how those segments are going or how those headwinds and maybe not headwinds are impacting the franchise. Thanks.
Sure the watchman business had a terrific quarter that grew 26%.
Think of that growth coming from the U S. We have launched recently in Japan, all, albeit a bit slower given the COVID-19 situation, there and the need for more proctor them, but that should have it.
A bigger impact for us in 'twenty three similar results in China, I would say same commentary a bit slower out of the gate given some of the COVID-19 restrictions, but should get better in 'twenty three.
We've also continued to gain share in Europe , which I think is important but by far the most important market. The U S and the team there has done an excellent job.
It's really comment similar to previous calls you did call out the DAP label.
That did have some additional momentum for us in third quarter as some some physicians.
Kind of converted back to watchman flex now that we've had that label and really it's the it's the consistent ease of use the safety benefits and the support that the implanting cardiologist or EP is receiving from the refer the referring community is getting more and more confident and watchman in particular.
Quarter, and so we expect the market to continue to be quite healthy, we're calling it roughly 30% growth.
We're investing in the clinical trials that youre aware of with option and champion to further widen the market opportunity for it and we have a very strong pipeline of new products coming behind what is already a differentiated from our competitor watchman flex product. So we think we're in really good position here and we're going to continue to grow the market and inverse.
To have this be one of our top growth drivers.
Thank you very much.
The next question comes from Vijay Kumar with Evercore. Please go ahead.
Hey, guys. Thanks for taking my question, Dan maybe one for you on the financial side here.
The 26% operating margin for the year that would imply Q4.
The pretty steep ramp in Q4 are we thinking about margins right now.
Then when you think about those margins.
What sort of FX impact be.
Next year at current rates any anything to think about.
Our balance sheet inventories, which was.
This had been capitalized that flows through the P&L for next year any impact for our 22. Thank you.
Sure relative to <unk>.
So again Vijay.
Yes, I meant the yeah.
Inventory impact for 'twenty, two sorry 'twenty two.
Yes, right got that specific to.
Q4, So your math is right right were 25, 5%.
Year to date adjusted operating margin. So it implies a 27 five for the fourth quarter to get to the full year 'twenty six we believe we have the plans in place to do that there's a bit of a seasonality that helps if you look back over the past few years Q4 is.
Usually the highest margin quarter, we have both gross and operating so we're looking for that trend to continue here in Q4. So.
Yes.
It requires a strong Q4, but we believe we have the plans in place to deliver that specific to 'twenty three I, probably can be a little bit helpful on that.
I think somewhat unique to us and our hedging program, we do hedge out multiple years.
In that program. So as I mentioned in my commentary, we are largely hedged for 2023. So if rates were to stay where they are today I think you'd likely see an impact in 'twenty three.
Pretty similar to what you see this year on an earnings per share recall at the operating margin percentage level, you don't see much benefit from.
From FX, you see that in the gross margin, but then because our.
The majority of our Opex dollars are dollar denominated you lose that in the Opex section of the P&L. So the operating margin contribution from FX is.
It's very minor so not much to talk about there, but relative to EPS impact I would say likely similar to what you see this year assuming rates remain constant.
Thanks, guys.
Thanks Your next question.
The next question comes from Travis Steed with Bank of America. Please go ahead.
Hey, Thanks for taking the question and also congrats to Ian Meredith.
I might have missed it earlier, but can you remind us again, the moving parts on what drove the higher opex in the lower op margin guide for 2022 versus three months ago, just as a quick clarification and then the question I was going to ask one more on the analyst day last year, you were committed to a double digit EPS growth CAGR since you're closer to 7% is that double digit EPS CAGR is still good.
And the starting point for 2023.
Still be in that double digit range, given the macro pressures that we're in.
Yeah on the double digit.
Earnings per share.
That's always been our growth goal and we've achieved that many years. The issue. This year is a change in tax legislation that was that went into effect.
In January .
And that is.
It's about 6% overall for the year. So if that were if.
That were the old.
Legislation, we would be we'd be solidly double digits. So on the R&D.
It's a provision on the amortization of R&D within within tax and so that's really the kind of the stickiness folks who get into double digits. This year double digit remains our goal going forward as we've talked as we talked about at Investor day.
And then your first question was.
Just comment there's a lot of focus on.
With Avnet Society, and others on legislative advocating for that R&D amortization to reverse so that is a one timer that will annualize in 'twenty three and if you neutralize for that and some of the FX were strong double digits for the year exactly.
That's helpful and if you just remind us the moving parts on the 2022 margin guide exactly what you know the higher Opex and what drove the change in op margin again.
Miss that earlier, yes, it's really it's really just a balance within the P&L. So if you think of of where we are versus 2021, you will see higher gross margin, you'll see lower SG&A and you'll see slightly higher R&D. So we're balancing the P&L to try and offset the $375 million of headwinds that we have versus 2019.
And just maintaining the appropriate level of spend in R&D.
R&D line to continue to fuel the top line. So that's really the only the only tweak within there so making sure that we fuel the top line, while still trying to offset the.
Supply chain.
Inflationary headwinds.
And congrats on a good top line.
Thanks.
The next question comes from Cecilia furlong with Morgan Stanley . Please go ahead.
Good morning, and thank you for taking the questions just wanted to ask a bit more color on what you saw exiting September versus July and August across your portfolio and then looking at the <unk> Guide if you could just walk through.
For patients either U S O U S. What youre looking at for China, and then just expected.
Alrighty any impacts from deductible anything you would call out specifically that you incorporated and looks like you guys and thanks for taking the question.
Okay.
Yes.
I don't think we're going to get into the specifics of the quarter I mean, I think the revenue results stand on their own we're super proud of the 11, 5% organic growth in the quarter. So.
That's speaks for itself relative to Q4, obviously, we're giving guidance today, we know where we are through.
Through October .
Through through.
Where we are in October and neuro.
<unk> as Mike said neuromodulator.
A bit challenged in Q4 versus what we might have expected 90 days ago, but the rest of the business has tremendous momentum and again super proud of the.
11, and a half that we delivered in Q3 again with most of those businesses in double digits.
About the regions you saw the U S performance.
In third quarter and for the full year is quite strong, but particularly and also a particular strength in Europe , and Asia Pac and our China business.
Grew over 30% in the quarter.
This is done extremely well this year based on the diversification of the portfolio and the product launches and really the innovation of the team in China and also shut out to the European team.
A very mature market continues to grow double digits.
<unk> kind of western more established markets and very strong double digits in the emerging markets. There. She has seen really balanced growth across each region throughout the year and many of those products as I mentioned in the script.
In Europe , particularly in EP.
We're working on clinical trials to get these products through an approved in the U S.
Hey, Thanks for taking the question.
Youre welcome Justin.
The next question comes from Rick Wise with Stifel.
Please go ahead.
Hi, Dan.
When a rich.
Maybe just.
On the recovery just one large picture and one product question on the recovery and obviously FX is a no.
The fact that it's going to continue but I'm curious to what extent there is some of the other macro headwinds stabilizing or even improving.
Particularly staffing I keep saying to myself.
Staffing where less of an issue maybe you would've grown even more rapidly in staffing is still an issue.
Are things stabilizing in general on the freight costs that are getting worse, and then I have a product follow up question.
Sure on the hospital staffing you've seen some of the big public companies Hospital changed Ah report, maybe it's gotten ink Inc.
Incrementally better, but certainly still a quite a challenge for hospitals.
Despite that.
The procedure volumes are quite healthy despite some of the staffing shortages could they be a little bit better if theres shortages were improved likely.
But theyre doing a nice job of managing it and it's forcing us to be innovative with them on reducing procedure times, which we continue to do find ways through our portfolio. So staffing maybe slightly better, but still a very tough environment for hospitals and might provide some upside over time as that gets better, but it's going to get better.
More slowly not overnight and the other headwinds we've talked about.
And I think the $375 million ish.
Incremental supply chain bucket as supply chain cost versus 19.
The biggest we are seeing some slight improvement in some of the freight areas and we expect some <unk>.
Slight improvements ongoing there in 'twenty three the bigger bucket. That's most impactful is the product cost material cost <unk>.
<unk> and raw materials that we purchase and due to the some of the shortages there.
Tied up some longer term contracts to ensure supply, but those have come in more hefty price increases so that bucket, we don't see getting better in 2023.
So we think we'll carry that forward in 2023 as you annualize those contracts some of the other areas will get more and more efficient.
The productivity of our manufacturing plants and so forth. So as Dan mentioned, we expect to carry many of these supply chain headwinds primarily from material cost into our 2023 plans, but similar to this year. We were did improve margins 70 bps versus 'twenty one.
Our goal will be to continue to improve margins in 'twenty three.
Through that.
That's great and.
And just it's hard to resist asking about ferro pulse.
It sounds like things are going extremely well.
You talk about.
Drivers of the <unk>.
Demand for apparel in Europe , maybe.
Maybe any incremental color on centers opened in just maybe update us remind us if everything still on track for data U S data readout in 'twenty three and approval in 24. Thank you again.
Thanks, Rick of Dr. Stein cover that one yes sure. Thanks, Thanks, Mike and thanks, Rick for the question.
I'm very pleased with the commercial rollout in Europe to date.
In terms of continued.
Procedure growth at the centers, where.
Where we have opened and being able to open new centers.
As we continue the products launch and I think that the drivers are really what we've always said is the promise of the fera pulse technology right. It's enhanced safety as compared to thermal ablation is proving to be at least as efficacious if not more effective.
And certainly as Mike mentioned in terms of the issue with headwinds with staffing, it's a much more efficient procedure.
And really just couldn't be happier with what we're seeing in terms of outcomes in Europe to date.
We have completed enrollment in our U S. IDE trial that was the advent trial and again still on track to.
Finish follow up for the primary endpoint of that data.
In.
Sure mid mid term next year, and then submit to the FDA and it's all in the hands of the regulators.
Thank you very much.
The next question comes from Matthew O'brien with Piper Jaffray.
Please go ahead.
Good morning, Thanks for taking my question and let me offer my congratulations to Dr. Meredith as well in his retirement.
Sure.
Mike It seems like you're taking a little bit of near term pain right now to continue your spending.
In these growth areas because you continue to be one of the faster growth diversified med tech names out there. So I'm just curious.
If you feel like that momentum is going to continue into 'twenty, three where you can stay one of the faster growth large cap med tech names out there and if it's going to be more of a broad based.
The level of improvement across all the different franchises, where you can keep kind of growing in this double digit range in some areas or if it's going to be a little bit more vocal than what we've seen historically I don't know if its specifically in cardiology or other other areas. Thank you.
Sure what are you seeing the performance. This year is pretty consistent across all of our divisions six or eight grew double digits in the quarter and you've seen similar performance throughout the year because of the <unk>.
Innovation and commercial teams that we have.
Each quarter, we as we've mentioned many times the lower growth markets that that mix of those businesses gets smaller each quarter and we.
Layer on M&A, and new innovation to grow faster, so that's kind of our formula.
It's proven to work pretty well.
As we look at some of the decisions that we make we're very excited about the portfolio of significant launches that we have.
Most of the significant very significant move on <unk> launch.
Moving the needle launches are more in the 'twenty four 'twenty five period, and Thats, where youre seeing the great growth in Europe .
It would be our accurate neo valve.
Agent balloon that we're excited about which we think will change really the script in coronary and that will launch next year in Japan and as Dr. Stein just mentioned, our EP portfolio with fair Paulson and cryo is doing exceptionally well outside the U S and we have other launches so that does require quite a bit of R&D and clinical work will be <unk>.
Rdna persistent trial with <unk>.
Pulse in the coming months here. So we think our R&D spend is.
Is it appropriate to fuel that consistent above market growth over the <unk> and 'twenty three we'll give guidance in February we will have a bit tougher comps in 'twenty three based on the performance of the estimated 9% growth this year, but if you look at where.
We're excited about 'twenty, three will bring and we'll give more guidance there, but if you look at the company.
And what we have for the future based on what we're seeing in Europe , and the clinical science that we're delivering whether it be in our interventional oncology business. Our EP business, we're quite confident in the next MRP that will consistently grow above the peer group.
Yeah.
Yeah.
The next question comes from Matt Taylor with Jefferies. Please go ahead.
Hi, Thanks for taking the question can you hear me okay.
Do you find that.
Thanks, Dan.
So I wanted to circle back and just ask one about Q4, just on the seven to nine organic versus the 11 plus that you did this quarter, obviously the comp is tougher.
But is there anything else you'd call out there or are you seeing anything slow down are you being conservative any highlights on.
The delta quarter over quarter.
I think it's really just the comp which is the better part of 250 basis points more more difficult and neuromodulation.
Lower than the average of the rest of the businesses, but as we've continued to say six of a double digits. In Q3 continued momentum with a lot of the good new product launches we have both in the U S and internationally. So I think the business has great momentum and I think once you clear for the comp it's a great Q4.
If we delivered 9% organic revenue growth for the full year versus 21, I think that'd be a great year for the company.
Great.
Can I ask one follow up I just wanted to know you heard more about pent.
Pent up demand signs from some of the other peers that have reported.
Would you would you are you seeing signs of that start to come due and how do you square that against with.
With staffing getting slightly better what are what are the things that I guess could release over the next couple of quarters too.
With volumes.
Yeah, we think the volume is pretty good.
And.
There is certainly pent up demand, but that's been in the system for a while.
You look at your typical backlog, whether it be in knee replacement or a afib product or whatever and men's health implant oftentimes youre getting a 60 to 120 day weight in the U S and so theres, certainly pent up demand, but I don't see that.
Getting cured in the near term I think there's just a very strong patient demand there.
There is a bit of a staffing shortage, there's only so many labs that a hospital has to do procedures.
And so we see pretty strong volume.
Which I guess is a good sign for the future here. Despite some of the staffing shortages and just hospitals extremely busy lab time, very busy and demand that outstrips the supply in many cases that drive the the wait list, but we don't see that waitlist dramatically changing.
In the coming months.
Thanks, Mike.
Okay.
The next question comes from <unk> Chickering with Deutsche Bank. Please go ahead.
Hey, good morning, guys. Thanks for taking my question now it's been a while since the last harvest Spike have you seen the funnel for patients to get procedures normalize across your product portfolio versus pre COVID-19 levels or are we seeing any bottlenecks within that funnel.
Think about your organic growth and just to be clear this isn't about necessarily nurse staffing in hospitals, but all the touch points across health care systems.
<unk>.
Yeah. Thank you I think it's similar to the last response.
On the region of the World, We did see slowdown in third quarter in Japan.
And you see pockets in China, and sometimes pockets all over the world depending on what happens.
With COVID-19, but overall thats being smoothed out with the.
Line pretty good procedure growth and us doing a bit better.
So again I think as you look to fourth quarter and 23 here.
Staffing shortage is still is an issue it's not going to be resolved in 23 hospitals are being very innovative.
To try to shore that up but it's a strong patient demand.
Common to see longer wait list.
So we do see pretty consistent demand.
But we don't see a quick fix for the staffing shortage, but the underlying demand.
Still strong despite that.
Great. Thanks, so much.
The next question comes from Chris Pasquale with Nephron Research. Please go ahead.
Thanks, I wanted to follow up on the increased player off denials and Neuromodulation talked about helping physicians with documentation, but what about addressing the underlying payer reticence to allow access to those therapies.
More clinical data can help it and what have you had planned on that front.
Okay.
Yeah.
I'm really much more to comment on it teams, there's quite a bit with our.
Clinical studies that we do for product approvals.
Well accepted therapy across.
It's been a it's a pretty mature market in terms of number of competitors in clinical science, that's actually increased quite a bit the last few years.
Part of it is the payers.
We certainly work with our Hematein.
To contact those payers directly and reemphasize that clinical evidence but.
But it's really a bit of a just to some of that.
Recent preauthorization denials that just.
Need to be worked through in terms of their efficiency and we aim to improve that process.
Got you and I don't think Thats really I don't think it's related to any it's not related to the slowdown is not related to any poor clinical data.
There's good clinical data at Boston scientific and our peer group and its well established by the implant or whether it be a pain physician or a orthopedic physician.
It's well proven out I think it's working through some of the mechanics of these pre authorization denials as the issue, but I also think overall the market is a bit slower.
Even excluding that than it was historically.
Okay.
And then renal denervation is going to be a hot topic at AJ Boston had a program there at one time with metrics.
Are you thinking about the potential of that therapy in Boston's ability to participate there and if it does become a new growth driver in <unk>.
Allergy.
Dr. Meredith I'll take that one.
Thanks, Chris It's a good question, yes, we will see.
Mid <unk>.
Contingent study it will come out of the IHA and we just saw the radiance two trial results come out to TCT with ultrasound.
This is a real therapy and <unk>.
Hypertension is an enormous cardiovascular problem globally and we follow this space very carefully.
This is a significant opportunity obviously the the.
Results still.
We improved if you look the two significant variability in the App the trade it <unk> effect and that probably reflects that we've got more to do to understand in whom we should be using this form of therapy, but it's a real opportunity at potentially massive cardiovascular problems, we follow the field.
Closely.
It's one that we have to pay attention to.
Thanks, and congrats Dr. Meredith.
Thank you.
And I understand there is time for one last question and that will be from Matt Mcclintock with Barclays. Please go ahead.
Okay. Thanks, so much for squeezing me in.
Hey, how are you.
So congrats on a really strong quarter.
And Meredith.
We'll certainly Miss your insight and your Oh.
Disposition.
And I guess I'm thankful to get about six months to get this humorous side that everyone's Greg too. So I look forward to that.
Just one.
Hello.
Margins.
Dan you talked about the impact of FX and it seems like that.
Blaine, it's pretty much the <unk> reduction in EPS guide for the year.
Just maybe one question on trajectory is such a strong Q3 here.
Are you adjusting Q4 for EPS and top end of the range or for.
Organic growth.
That strikes me as a little bit conservative just given the strength.
But.
Could you comment on that and then and then maybe youre not talking much about 'twenty, three but the shape of margins.
Theres been a lot of questions around how Florida 23, some of the higher costs will go and if we were to think about.
Is that sort of a front half back half that we should be thinking about for 'twenty three at this point or.
Sure it's too early to say, but any insight you can give on how we should think about.
As they roll through.
Inventory.
Thanks, so much.
Sure Matt lot to chew on in that question.
First I agree with your assertion.
171 to 174 from the $1 74 to 177 adjusted earnings per share guidance for the year that is FX. That's down three FX is the FX impact on EPS was <unk>. It is now six so that is the difference for the 171 to $1 74.
Change in guidance on the revenue for Q4 your comment that it appears conservative I think it's appropriate I think we've looked at all the different variables that are there the momentum in the business and we think that.
The guidance, we gave is appropriate and I think for 2023 I think it's just a bit early I mean, I gave you a little bit of a of a teaser there on FX, given where we are with our hedging program, but I think other than that and obviously that our goal is to continue to to expand operating margin over time, but other than that I'll, probably just let you wait and.
And when we give guidance officially on all the specifics but are super excited about how the Companys performed this year and look forward to continuing that trend in 'twenty three and beyond.
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