Susan Vissers Lisa - Vice President-Investor Relations Michael F. Mahoney - President, Chief Executive Officer & Director Daniel J. Brennan - Chief Financial Officer & Executive Vice President Keith D. Dawkins - Global Chief Medical Officer & Executive VP Kenneth Stein - Senior Vice President & Chief Medical Officer-Cardiac Rhythm Management.

Michael J. Weinstein - JPMorgan Securities LLC Rick A. Wise - Stifel, Nicolaus & Co., Inc. Robert A. Hopkins - Bank of America Merrill Lynch David R. Lewis - Morgan Stanley & Co. LLC Joshua T. Jennings - Cowen & Co. LLC Brooks E. West - Piper Jaffray & Co (Broker) Larry Biegelsen - Wells Fargo Securities LLC.

Ladies and gentlemen, thank you for standing by and welcome to the BSX Q2 2015 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time. As a reminder this conference is being recorded.

I would now like to turn the conference over to our host. Ms. Susan Lisa, please go ahead..

Thank you, Katy. Good morning, everyone and thanks for joining us. With me on today's call are Mike Mahoney, President and Chief Executive Officer and Dan Brennan, Executive Vice President and Chief Financial Officer.

We issued a press release earlier this morning announcing our Q2 2015 results which included reconciliations of the non-GAAP measures used in the release.

We have posted a copy of that release as well as reconciliations of the non-GAAP measures used in today's call to the Investor Relations section of our website under the heading Financial Information. The duration of this morning's call will be approximately one hour.

Mike will begin our prepared remarks with an update on our business progress and his perspectives on the quarter. Dan will then review our overall Q2 2015 financial results as well as guidance for full-year 2015 and Q3 of 2015. During today's Q&A session, Mike and Dan will be joined by our Chief Medical Officers, Dr. Keith Dawkins and Dr. Ken Stein.

Before we begin, I'd like to remind everyone that this call contains forward-looking statements within the meaning of federal securities laws which may be identified by words like anticipate, expect, believe, estimate, and other similar words.

They include among, other things, statements about our growth and market share, new product approvals and launches, clinical trials, cost savings and growth opportunities, our cash flow and expected use, our financial performance including sales, margins, earnings and other Q3 and full-year 2015 guidance, as well as our tax rates, R&D spend, and other expenses.

Actual results may differ materially from those discussed in the forward-looking statements. Factors that may cause those differences include those described in the Risk Factors section of our most recent 10-K and subsequent 10-Qs and 8-Ks 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.

Mike?.

Thank you, Susie, and good morning, everyone. In Q2, Boston Scientific posted another strong result as we continued to execute on our long-term commitments. We delivered worldwide operational revenue growth of 6%, 10% adjusted operating income growth and 12% adjusted EPS growth excluding a $0.02 negative impact from foreign exchange.

These results reflect the high performance of our global teams, our differentiated portfolio and the diversification of our business. As detailed in our May Investor Day meeting, our company remains focused on high performance.

We aim to drive mid-single digit operational revenue growth and consistent operating margin expansion, which in turn will drive double-digit adjusted EPS growth excluding the impact of foreign exchange.

Dan will detail our commitment to this goal with full-year 2015 adjusted EPS guidance of $0.88 to $0.92, which is unchanged from our original guidance in February. Importantly, we've maintained our EPS guidance despite a $0.06 to $0.07 negative impact from FX versus our original expectation of a $0.04 negative impact.

We remain focused on overcoming these FX challenges to deliver against our original adjusted EPS guidance range. Now I'll provide some highlights on Q2. Dan will review the financials and Q3 guidance and then we'll take your questions.

Please note that in my remarks all references to growth are on a year-over-year constant currency basis unless otherwise specified. Now for a few highlights for the quarter, we delivered broad based global revenue of 6%, on target with our goal for consistent revenue growth as we've now grown revenues 6% or better for four consecutive quarters.

This solid and balanced growth is driven by robust execution in our core businesses, strong new product launches, increased traction from our Structural Heart business, continued international expansion and leverage from our acquisitions.

Our MedSurg segment is building momentum and each business accelerated year-over-year revenue growth in Q2 compared to Q1.

Endoscopy's year-over-year growth rate improved from 4% in Q1 to 6% in Q2 and this growth is fueled by our new SpyGlass Digital launch and our expanded capabilities in endoscopic ultrasound which is the fast and emerging growing field of minimally invasive procedures. Neuromodulation revenue accelerated in Q2 growing 9%.

This growth was led by continued adoption of our U.S. market-leading Precision Spectra spinal cord stimulation platform, which offers differentiated capabilities via our Illumina 3D neural targeting and CoverEdge 32 contact paddle. Importantly, we are now entering the primary cell non-rechargeable market in Europe with the launch of Precision Novi.

With the Novi technology, we have leveraged the unique and flexible capabilities of the Spectra platform. We're really excited about its potential to take share in a sizeable market that is incremental to BSC. Turning to Urology and Women's Health, we also improved its top line growing 7% in second quarter after a 3% growth in first quarter.

The acceleration was driven by a comprehensive portfolio and our ongoing international expansion efforts. We are excited about the pending Q3 closing of the AMS male urology acquisition as we are confident that this deal will further strengthen our category leading global urology franchise.

Switching gears, our Cardiovascular group grew 10% in second quarter, with Interventional Cardiology outpacing our market growth estimate with a 7% increase in sales. Growth was well balanced across our IC franchises and geographic regions.

In DES, the SYNERGY Stent now represents approximately 30% of our European DES sales and it remains on track for year-end 2015 U.S. approval. In SYNERGY, with its unique bio-absorbable polymer coating and thin strut is designed from the ground up to promote healing. And we're excited to bring this premium and differentiated workhorse stent to the U.S.

and Japanese market. Also as evidence of our commitment to offering the broadest IC portfolio, we announced earlier in the week that we have initiated the FAST study of our first fully resorbable drug-eluting scaffold system.

FAST is a true second generation fully resorbable scaffold that seeks to address the limitations of the current commercially available devices. We expect to enter CE Mark countries with a second generation FRS device in 2017. Our PCI Guidance business also continued to deliver strong results and we recently submitted our 510(k) for U.S.

clearance of our integrated fractional flow reserve imaging system. We look forward to a limited market release in both the U.S. and Europe in Q4 of this year. And finally, the IC performance was fueled by our strengthening Structural Heart business, which includes our LOTUS percutaneous aortic valve and WATCHMAN Left Atrial Appendage Closure device.

We believe that we're uniquely positioned for the long-term to assist hospitals and physicians with a growing Structural Heart demand due to the unique capabilities of both WATCHMAN and LOTUS. LOTUS continues to penetrate the European market, and we're executing on the pipeline that we detailed at Investor Day.

Our clinical evidence continues to build and we remain on track to complete enrollment in both our REPRISE III IDE and RESPOND post-approval study by year-end 2015. The first 100 days of the U.S. WATCHMAN launch have been very successful and we expect to complete rollout of the first 100 accounts by year-end.

We're very pleased with the implant success rate and the high quality of patient outcomes thus far, which reflect our controlled rollout and proven training program. We have a great deal of clinical evidence demonstrating that WATCHMAN can uniquely benefit a large global patient population. And in terms of U.S.

reimbursement, we will understand more about the national coverage decision, as well as the new technology add-on payment in the back-half of 2015.

So overall, we're very excited about our progress in Structural Heart and expect to deliver full year 2015 Structural Heart revenue at the high-end of the $75 million to $100 million goal that we provided at our May 1 Investor Day.

In Peripheral Interventions, the core business continues to execute and the integration of the legacy Bayer business is going extremely well. Bayer grew at a double-digit rate in Q2 and we're seeing strong commercial and operational synergies with our Peripheral business.

We're also encouraged with the early results of our commercial partnership with C. R. Bard and the Lutonix drug-coated balloon technology. Now, I'll provide comments on CRM.

On our first quarter earnings call, we projected a slowdown in our worldwide CRM sales for the balance of 2015 due to difficult comparisons, replacement headwinds and competitive launches, particularly in the U.S. Q2 global CRM sales did in fact slow to 1% decline, and we continue to anticipate some softness in U.S. CRM sales through year-end 2015.

But it's very important to highlight that our European CRM business delivered mid-single-digit growth for the fifth consecutive quarter. In Europe, we are estimating we are taking share with a differentiated portfolio, including full CRT-D and CRT-P Quad systems, ACCOLADE 3T MRI safe pacemakers, and our second generation S-ICD EMBLEM.

In addition, our industry-leading EnduraLife battery technology continued to differentiate Boston Scientific and set us apart with multiple new independent and contemporary longevity datasets that were recently presented at HRS.

We believe device longevity plays an important role in reducing costly complications associated with replacement procedures and reduces overall healthcare cost. These European CRM results are encouraging and relevant. As we expect to launch the 4 Quad in the U.S. in early 2016 and we are transitioning into a full launch of EMBLEM S-ICD in the U.S.

in Q3. Additionally, we expect to have Ready MRI in the U.S. by year end 2015. So the products driving above market growth in Europe are expected to be available soon in the U.S. as well as Japan. In EP, we're beginning to build momentum with 9% growth in second quarter led by our differentiated mapping and navigation system.

Rhythmia is now accelerating the pace of its global rollout and physician praise of speed, clarity and density of imaging. We're also encouraged by key upcoming launches in EP such as our navigation enabled IntellaNav, Open-Irrigated Ablation Catheter in Europe slated for Q3 2015.

So stepping back to look across all the businesses, our 6% operational revenue growth reflects the strong diversification of our portfolio, our focus on innovation and our ongoing globalization effort. In Q2, U.S., Europe and Asia regions all grew 6% and the emerging markets grew 12% led by 21% revenue growth in China.

Importantly, we believe that we are well positioned to sustain our global performance as several key new product launches are early in their rollout. To highlight a few in Q2, our WATCHMAN Left Atrial Appendage Closure Device launched in the U.S. SpyGlass Digital began its rollout.

Our next generation EMBLEM S-ICD launched in Europe and our primary cell spinal cord stimulation system, Novi, launched in Europe. All of these launches are off to a good start due to the unmet needs they address for patients and the clinical differentiation in the marketplace. And finally, we continue to execute on our margin expansion goals.

On the back of strong adjusted operating margin expansion of 230 basis points versus Q2 2014, we have high visibility on achieving our 25% adjusted operating margin goal in 2017 and continuing improvement beyond 2017. So overall, we're executing well globally and delivering on our strategic plan commitments.

We continue to believe that Boston Scientific is uniquely positioned to deliver consistent, mid-single digit growth and double digit adjusted EPS growth excluding FX. Given our strong pipeline, global expansion opportunities and significant opportunities for margin improvement.

I'd like to thank our employees for their tremendous winning spirit and their commitment to the company. Now, let me turn the call over to Dan for a detailed review of our financials..

Thanks, Mike. I'll start with some overall perspective on the quarter before getting into the details. We generated adjusted EPS of $0.22, achieving the high-end of our guidance range of $0.20 to $0.22 and representing 2% year-over-year growth. Excluding the $0.02 unfavorable foreign exchange impact, Q2 adjusted EPS grew 12% year-over-year.

The strong performance in Q2 was driven primarily by operational revenue growth and gross margin expansion. Our Q2 2015 adjusted operating margin of 22.1% exceeded the high end of our Q2 adjusted operating margin guidance range of 21% to 22% and represents improvement of 230 basis points over Q2 of 2014.

This is the second consecutive quarter where total company adjusted operating margin expanded by at least 200 basis points over the prior year quarter, and despite significant FX headwind, our goal for the full year 2015 remains double digit adjusted EPS growth. Now, I'll provide a detailed review of our Q2 business performance and operating results.

Unless stated otherwise, references to quarterly results increasing or decreasing are in comparison to the second quarter of 2014 and all revenue growth rates are given on a year-over-year constant currency basis.

For the second quarter of 2015 consolidated revenue of $1.843 billion represented operational revenue growth of 6%, which excludes the impact of foreign exchange and the divested Neurovascular business. On an as-reported basis, revenue declined 2% year-over-year.

Excluding an approximate 170 basis point contribution from the Bayer Interventional acquisition, organic revenue growth was 4% in the quarter. The foreign exchange impact on sales was a $141 million headwind compared to the prior-year period and it was only $1 million worse than we assumed in our Q2 guidance range.

I will now provide more details on the revenue results for our seven businesses which roll up into the three reporting segments. I'll start with MedSurg where the total group sales of $583 million grew 7% and adjusted operating margin was 30.4%. This represents an increase of 20 basis points over Q2 of 2014 and 140 basis points sequentially.

Endoscopy sales grew (14:50) 6% worldwide, driven by double-digit growth in biliary, the largest franchise, fueled by SpyGlass DS and the AXIOS Stent System from our recent acquisition of Xlumena. Latin America continued to stand out with growth north of 30%.

Urology and Women's Health posted solid worldwide sales growth of 7%, driven by strong Urology performance in the U.S. and Europe. Pelvic Floor revenue grew low single digits globally against a market that we believe is down slightly. Emerging markets revenue growth was impressive in the quarter, up almost 40%.

To close out the MedSurg results, our worldwide Neuromodulation business posted solid sales growth of 9% and we're encouraged by the early launch of our Precision NOVI primary cell device in Europe, which gives us our first entry into a $200 million plus OUS non-rechargeable market.

Turning now to the Cardiovascular group, which consists of the Interventional Cardiology and Peripheral Interventions divisions, global sales for the group totaled $743 million and grew 10%. Cardiovascular group adjusted operating margin for the quarter of 30.5% represented a 440 basis point improvement year-over-year on strong stent volumes and U.S.

WATCHMAN revenue contribution. We expect Cardiovascular segment adjusted operating margin expansion to moderate in the second half of the year primarily due to the timing of clinical spend. Worldwide interventional Cardiology sales of $515 million grew 7%. Growth in IC was strong across all regions, with the U.S. up 8%, Europe up 5%, and Asia, up 11%.

DES sales grew low single digits globally, with Asia's DES revenue growing double digit for the second straight quarter. This was driven by the continued strength of the Promus PREMIER stent in Japan and strong uptake of Promus PREMIER in China.

Worldwide complex PCI solutions also grew low single digit led by solid performance in Imaging, particularly in Japan.

Our Structural Heart franchise was the largest contributor to worldwide IC revenue growth in the quarter, and as Mike mentioned, we're comfortable with the high end of our $75 million to $100 million revenue goal for the full year 2015.

The strong growth in IC is a combination of the complex PCI and DES businesses growing slightly above market and strong contributions from WATCHMAN and LOTUS. The comps in our IC business become much more challenging in the second half of this year.

We remain focused on driving above market growth by providing the interventional cardiologist with the broadest portfolio of technology and differentiated products to treat the most complex coronary cases.

Peripheral Interventions delivered worldwide revenue growth of 16% driven by strong double-digit growth in the acquired Bayer business and 4% growth in the legacy Boston Scientific PI business. The distribution deal with C. R.

Bard for their Lutonix Drug Coated Balloon drove pull through of our broader PI portfolio and Interventional Oncology grew mid-single digits on the performance of new product launches and a focus on the interventional radiologist globally.

Turning now to our Rhythm Management group which includes our Electrophysiology and Cardiac Rhythm Management division, worldwide Rhythm Management sales in Q2 of $517 million were flat to Q2 of 2014.

Rhythm Management's adjusted operating margin for Q2 of 14.1% represents a 190 basis point improvement year-over-year, the sixth consecutive quarter of Rhythm Management adjusted operating margin improvement of 100 basis points or more versus the prior year.

As a reminder, we expect Rhythm Management's adjusted operating margin expansion to accelerate in the second half of the year given the launch timing and favorable gross margin profile of the EMBLEM S-ICD and ACCOLADE product lines.

We believe that we can drive at least 200 basis points of improvement in the second half of 2015 versus the first-half rate of 14.1%, marking significant progress towards our goal of achieving a Rhythm Management adjusted operating margin north of 20% by 2017.

Worldwide Electrophysiology revenue was up 9% with high single-digit growth in both the U.S. and Europe, and we are encouraged by our first-half performance in EP and the capabilities we are building globally.

For the Cardiac Rhythm Management division, Q2 worldwide sales decreased 1%, consistent with expectations given replacement headwinds, difficult comparisons, and competitive launches. On a worldwide basis, defib sales of $335 million grew 1%. U.S.

defib revenue declined slightly on replacement headwinds and continued market penetration of CRT-D Quad systems. As Mike mentioned, we're excited to transition to the full U.S. launch of EMBLEM in Q3 and launch our own Quad system in the first half of 2016. Worldwide pacer sales totaled $125 million and declined 4%. The decline was primarily U.S.

driven as we experienced share loss to competitors with MRI safe capabilities. We expect to have our MRI compatible pacemaker approved in the U.S. in Q4 of this year. As we communicated last quarter, we expect global CRM year over year revenue growth to be relatively flat in the second half of this year.

Despite this flat revenue outlook, we expect to deliver significant year over year adjusted operating margin expansion in Rhythm Management. Turning now to the P&L. Adjusted gross profit margin for the second quarter was 71.3%, up 100 basis points year over year.

Gains from our value improvement programs and our FX hedging program positively impacted gross margin by 150 basis points and 100 basis points respectively and this was offset partially by 150 basis points of negative price and mix. Adjusted SG&A expenses were $688 million or 37.3% of sales in the quarter.

Our Q2 2015 adjusted SG&A rate was down 90 basis points from Q2 of last year and we continue to believe our full-year 2015 adjusted SG&A rate will be in the range of 36.5% to 37.5%. Adjusted research and development expenses were $200 million in the second quarter or 10.9% of sales.

This adjusted R&D rate is roughly flat both sequentially and year over year. We still believe our full year adjusted R&D rate will be in the range of 11% to 12% of revenue and are expecting a sequential uptick in R&D spending as a percent of revenue particularly in the Cardiovascular segment.

Royalty expense was $18 million in the quarter or 1% of sales, consistent with our guidance. On an adjusted basis, pre-tax operating income was $408 million in the quarter or 22.1% of sales, up 230 basis points year-over-year and exceeding our Q2 adjusted operating margin guidance of 21% to 22%.

Adjusted pre-tax operating income grew 10% driven by a 28% increase in our Cardiovascular segment. GAAP operating income which includes GAAP to adjusted items of $189 million was $219 million in Q2 2015.

The primary GAAP to adjusted items for the quarter included restructuring related charges of $16 million, contingent consideration expense of $19 million, and amortization expense of $116 million. As of June 30, our total legal reserve was $1.117 billion. Now, I'll move on to other income and expense.

During the quarter, we completed an offering of $1.850 billion of senior notes, with an average interest rate of 3.4%, arranged a new bank term loan of $750 million and refinanced a $2 billion revolving credit facility with a new $2 billion revolving facility maturing in 2020.

We used a portion of the net proceeds from the notes offering to redeem $1 billion of outstanding notes due in 2015 and 2016 with an average interest rate of 6.3%. The remaining net proceeds of the notes offering, together with the borrowings under the $750 million term loan, are expected to fund the purchase price for the AMS male urology portfolio.

Interest expense for the quarter was $106 million, which includes a pre-tax charge of approximately $45 million associated with the senior note refinancing.

Excluding this charge, our interest expense for the quarter was $61 million, compared to $54 million in Q2 of last year, and the increase was primarily due to a one month period during which we incurred interest on the $1.850 billion of newly issued notes as well as the $1 billion of outstanding notes due in 2015 and 2016 prior to their redemption.

Our next bond maturity of $250 million is not due until January 2017. Other expense was $8 million, and this consisted primarily of foreign exchange losses incurred during the quarter. Our tax rate for the quarter was 2.9% on a reported basis and 13% on an adjusted basis.

Our Q2 adjusted tax rate includes slightly more than $1 million of unfavorable discrete tax items. And we continue to expect our full year 2015 adjusted tax rate to be in the range of 13% to 15%.

Finally, as mentioned, Q2 2015 adjusted EPS of $0.22 includes $0.02 of unfavorable FX and represents 2% year-over-year growth or 12% growth excluding the impact of foreign exchange. On a reported GAAP basis, Q2 2015 EPS was $0.08 and includes net charges and amortization expense totaling $192 million after tax.

GAAP EPS of $0.08 compares to breakeven on a GAAP basis in the prior year period. Moving on to the balance sheet, DSO of 59 days decreased four days compared to June of 2014 due primarily to strong collections in Europe.

Days inventory on-hand of 163 days was up 10 days compared to June of last year, and up seven days compared to December of 2014 due to higher inventory in advance of launches, and lower cost of goods sold driven primarily by standard cost improvements and favorable product mix.

Adjusted free cash flow for the quarter was $406 million, compared to $262 million in Q2 of last year. This increase was primarily due to higher adjusted operating profit, lower capital expenditures, and a continued focus on working capital management. We continue to expect our full year 2015 adjusted free cash flow to be approximately $1.3 billion.

Capital expenditures were $46 million in Q2 of this year compared to $64 million in Q2 of last year. The decrease is attributable to timing and we still expect CapEx to be roughly $260 million for the full year 2015.

There were no share repurchases in the quarter, consistent with our decision to temporarily suspend the share repurchase program following the announcement of the agreement to acquire AMS men's health and prostate health businesses. Near-term, our capital allocation priorities are debt repayment, maintaining flexibility and tuck-in M&A.

Beyond the 12 to 18 month suspension period, any continuation of our share repurchase program would be subject to business development opportunities, market conditions, our stock performance, regulatory trading windows and other factors consistent with prior guidance and we expect to end 2015 with between 1.360 billion shares, and 1.370 billion fully diluted weighted average shares outstanding.

And since we plan to keep the buyback suspended for some or all of 2016, we expect the 2015 trend in fully diluted weighted average shares to continue into 2016. I'd like to conclude with guidance for Q3 and full year 2015. As a reminder, AMS is excluded from our guidance as the transaction has not yet closed.

For Q3 2015, we expect consolidated revenues to be in a range of $1.790 billion to $1.840 billion. If current foreign exchange rates hold constant, we estimate the headwind from FX should be approximately $125 million or 680 basis points relative to Q3 of 2014.

On an operational basis, we expect consolidated Q3 sales to grow year-over-year in a range of plus 4% to plus 6%. We expect adjusted gross margin for the third quarter to be in a range of 71.5% to 72.5%, reflecting the favorable gross margin profile of key new product launches.

Assuming a more normalized adjusted R&D rate in Q3 of 11% to 12%, we expect adjusted operating margin in the third quarter to be approximately 22.5%, plus or minus 25 basis points. Finally, adjusted EPS is expected to be in a range of $0.21 to $0.23 per share and reported GAAP EPS is expected to be in a range of $0.10 to $0.13 per share.

For the full year 2015, we now expect consolidated revenue to be in the range of $7.275 billion to $7.375 billion, which represents a year-over-year growth of 4% to 6% operationally. If current foreign exchange rates hold constant, we expect the FX headwind to be roughly $460 million for the full year 2015.

Based on our strong first half and expectations for the second half of the year, we now expect our full-year 2015 adjusted operating margin to be approximately 22.5% plus or minus 25 basis points. This represents an improvement of roughly 230 basis points over the full-year 2014.

And as a reminder, our initial full-year 2015 adjusted operating margin guidance contained a midpoint of 22%, which we raised to 22.25% on our Q1 earnings call, and our current guidance of 22.5% represents the second consecutive quarter where we will have raised the midpoint of our full-year adjusted operating margin by 25 basis points.

Finally, we are reiterating our full-year adjusted EPS guidance range of $0.88 to $0.92. Recall, this range includes a $0.06 to $0.07 impact from unfavorable FX. We're proud that our team is focused on overcoming these FX headwinds to deliver against our original guidance range.

The high end of our adjusted EPS guidance range represents double-digit growth and based on current rates, approximately 15% growth at the midpoint when you exclude the impact of foreign exchange. On a GAAP basis, we expect EPS to be in a range of $0.28 to $0.34.

I encourage you to check our Investor Relations website for Q2 2015 financial and operational highlights which outlines Q2 results, as well as Q3 and full-year 2015 guidance, including P&L line item guidance. So, with that, I'll turn it back to Susie who will moderate the Q&A..

Thanks, Dan. Katy, Let's open it up to questions for the next 25 minutes or so. In order to enable us to take as many questions as possible, please limit yourself to one question and one related follow-up. Katy, please go ahead..

Thank you. And our first question comes from the line of Mike Weinstein at JPMorgan..

Thank you. Good morning.

Can you hear me okay?.

Hear you well. Good morning..

Perfect. Thanks, guys. So, two items and I'll start maybe with Structural Heart. So, you had talked at the Analyst Meeting about LOTUS market share trending north of 10% in Europe. Could you just spend a minute on that? I think there was some back and forth at the meeting, just trying to get a sense where LOTUS is at this point.

Is there anything more you can give us there? And then are there any metrics you can share on the WATCHMAN launch at this point in the U.S.? And how should we think about the dependence upon reimbursement either the NCD or the add-on payment in order to drive growth in 2016 and beyond? Thanks..

Sure. Thanks for the question. Good morning. Overall, as we mentioned in the script there, we're very pleased with the performance of Structural Heart overall. We took the guidance up to the high end of the range of $75 million to $100 million, which includes as you indicated, WATCHMAN and LOTUS.

And I do think having the combination of LOTUS and WATCHMAN does uniquely position us in a competitive Structural Heart field, particularly given the lead that we have in the U.S. with the WATCHMAN platform globally.

So starting with WATCHMAN, your first question, the great news is we're on track and actually slightly ahead of schedule in terms of our year-end goal of driving 100 large account openings in the U.S. So, we're actually ahead of pace there, which is very encouraging.

We indicated during the script we're very pleased with the clinical results that we're receiving and a lot of that's due to the very measured and we believe thorough training program that we've put in place.

The implants to-date are being split pretty equally across interventional cardiologist and electrophysiologist which supports our commercial model. And in terms of the reimbursement, nothing really new to report there. We're going to learn a lot more in the second half of 2015, starting with the NCD.

We should learn more about the NCD in November with a final decision in first quarter of 2016. That public comment period was closed in June, and we had over 80 supportive comments and very nice support from HRS, APC and SKY (33:59). So, really happy about our launch of WATCHMAN.

Turning to LOTUS, we continue to be on track with the pipeline that we laid out at the Investor Day meeting in terms of the additional valve sizes and the 14 French catheter as well. And in terms of the share, kind of similar to the feedback that we had at Investor Day.

We have about a 90% reorder rate with our existing customers in TAVR which is great given the number of competitors in Europe. Once customers use LOTUS, 90% of the time they continue to reorder consistently. And we have about what we estimate a third of the market share in the accounts that we're currently penetrated in Europe.

So, we'll continue to expand new accounts as we continue to expand our training programs, and we make very good progress, we believe, in the second quarter..

Keith, do you want to add anything?.

Just to say, Mike, that on the clinical side the Berlin valve meeting in September we'll have the important data sets including the 250-patient REPRISE II extension one year data and the first 500 patients, that's half the patients of the RESPOND post-market study. And then more important (35:19) data coming out of (35:21) in October..

Thanks, Keith.

So, Mike, what's the appetite as well as the balance sheet bandwidth for additional M&A post the AMS acquisition?.

Well, we're always – as you know, we've always been, we think pretty smart with our acquisitions. So over the last few years with the Bayer acquisition, EP, Alliant (35:46), and now the AMS, that we've moved into faster markets.

In terms of capacity, we saw, as Dan indicated in his script, we have capacity for tuck-in M&A, which is what we've historically done since I've been here. And so I think you'll see us continuing to be active in the tuck-in M&A area, so long as it hits our strategic fit and financial guidelines that we lay out..

Okay. Thanks, Michael. I'll let some others jump in..

The next question comes from the line of Rick Wise with Stifel. Please go ahead..

Good morning, everybody. Turning to the U.S. CRM businesses, you both said I think you expected some additional headwinds from a product, competitive point of view.

I'm just curious, was it better – it was a little worse than I expected, the pressure was a little greater, was it better or worse than you expected? And just as part of that, obviously, you're doing great in Europe with the mid-single-digit growth with the full sort of next wave portfolio.

Is that the way we should think about the kind of growth we could see in the United States once you have that in 2016 and beyond?.

The answer to your question is yes. That's really why we articulated that. We grew over 5% in Europe with that new cadence of product. And it's been a consistent, I believe, five quarters in a row of performance like that despite the tough comps in Europe.

So, we have a very strong portfolio, and that's the portfolio that we'll be launching essentially in 2016 in the U.S. and then later in Japan. So, overall, it's kind of – the U.S. has some pressure. We called it last quarter. We'll continue to see some softness there. So, we anticipate kind of maybe flattish growth in the second half overall CRM.

But we really build a lot of momentum going into 2016 with that portfolio and the launch of EMBLEM in the U.S. in the back half as well. So, I think the other good news is for CRM overall, if you look at the trailing 12-months, we're up 2% to 3%. And so I think if you look at longer-term perspective, we're up two to three points.

And given the strength in Europe and as we position the portfolio in the U.S. for 2016, we're positive about, very enthusiastic about driving above-market growth over that time period..

Okay. And just turning to operating margins, just – Dan, if I'm reading it right, obviously, you had terrific year-over-year expansion. It looked great. It was – on a sequential basis, everything stepped down a little bit from the first quarter.

Is that currency? Is that something about the OpEx that we should be sensitive to? Obviously, you're reiterating your confidence about the year and the second half..

Yes, Rick. It really is more about the OpEx, and we had talked about that on the Q1 call. But Q2 is historically and should prove again this year to be the highest OpEx quarter of the year, primarily driven by the significant amount of tradeshow activity in all the divisions.

Think PCR and DDW and AUA and all the different – HRS, all happen in the second quarter. So, that's really the key driver. And recall, our range was 21% to 22%, so we called that that was going to be down from Q1, and were able to deliver 22.1%..

Thank you so much..

And our next question comes from the line of Bob Hopkins with Bank of America. Please go ahead..

Thanks and good morning. So just a couple of quick questions. I want to focus mine again on WATCHMAN. And first, Mike, I was just wondering if you could talk a little bit about the demand side of the equation.

I realize fully that this is a controlled rollout, you need to be careful about training, but in the centers where you are rolled out, what are you seeing from the demand side, either for physicians and patients, anything that's kind of surprised you in the early going and again, particularly interested in terms of just demand for the product in the centers that you're launched..

So we have Dr. Stein here. I thought maybe he'd provide some commentary on your question then I can add on to it..

Yeah, Bob. I mean, we've been really gratified at the demand where we've launched it. I mean, really, we've been really carefully controlling the number of sites as we bring them on. As Mike mentioned in his script, we're actually bringing them on a bit faster than we had thought we would when we spoke at the Investors Day.

But that really is what's throttling use of the device at this point. We have folks really asking us, joining all of our training programs.

And it's early to say who are the patients who are getting it but what we've seen to-date, both in terms of patient selection and in terms of patient outcome is really right in line with what we expected to see based on our prior clinical trials..

And then the other thing I wanted to ask about as it relates to WATCHMAN is just a little bit more specific on the reimbursement side, relating to the add-on payment. I was wondering if you could set some expectations for us.

How confident are you that you will get that add-on payment? And if you don't get it, does that change the way you think about the rollout of the product and the demand for the product in 2016?.

Well, I think we really won't to provide any additional comments on the – on our – kind of giving a percentage on that. We're very confident in the data of WATCHMAN as Dr. Stein has articulated. We're very pleased with the clinical outcomes that we're seeing in the launch.

And so we think the submission has unprecedented clinical data for it, but we won't provide any further comments in terms of putting odds against it. And hopefully at the end of the 3Q earnings call, we'll have better visibility to it..

But I mean if you don't get it, does that matter to demand.

So, we'll move away from how confident are you that you will get it, but if you don't, does that have a big impact, you think, on the rollout of the product?.

Well, I think, we're having a lot of success right now. So, we'll open 100 centers this year and so, there is a strong demand for it. It delivers an unmet patient need for patients who suffer from atrial fibrillation or at risk for stroke.

Ken, if you have any additional thoughts on it?.

Just the only other thing that I just want to draw attention to is in addition to the NTAP, CMS has also proposed reassigning into a new higher class DRG....

Right..

...as opposed to the DRG 251, they proposed reassignment to 273, 274 which would represent a 20% increase – anticipate reimbursement to hospitals. And we'd expect running about that roughly in the same timeframe as the NTAP..

Great. Thanks very much..

Our next question comes from the line of David Lewis with Morgan Stanley. Please go ahead..

Good morning. Just two quick questions. I guess first, Mike, I'm thinking about SYNERGY and that number you gave us of 30% mix ex-U.S. and that obviously suggests to a lot of us that conversion has been a lot tougher for SYNERGY and there's obviously been more sensitivity to price and value. So, I guess two questions off of that.

I guess how would you expect U.S. mix to track relative to the ex-U.S.

experience? And then, just given your comments on FAST, I guess the question I have is, is FAST worth it? I mean, can you actually demonstrate better outcomes with FAST than SYNERGY? Is that investment for shareholders a good investment in your view?.

Starting with SYNERGY, I think the big difference in the U.S. and Europe, really the difference in Europe as well as Japan as well, is high variance, much higher variance of pricing country-to-country. So, we have been very thoughtful about which countries we launch SYNERGY in and which countries we don't.

And so, as you said, it represents 30% of our overall Europe DES revenue mix but it represents greater than 50% of our share in approximately the 10 EU countries that we're selling it into. So, where we sell it, we drive over 50% share and those accounts are paying a premium. And there's many countries that we don't sell it at all.

In the U.S., there is less variance in the pricing across the hospital system. So, as a result of that, we do expect the share to be quite significant in terms of the mix of SYNERGY. So, we do believe it deserves a premium but it will be a premium that won't inhibit its adoption.

So, we do believe this will be a share taker and will represent a significant percentage of the mix in the U.S. once we launch it. On fully resorbable, we're committed to innovation. And we're only going to bring this to the market in Europe and in the U.S. if it delivers unmet clinical needs.

So, we don't believe the existing generation products are able to deliver in a workhorse environment, and we're only going to drive the investment in FRS through the CE Mark and/or the FDA if we're confident that it delivers on the commitments and promise that we'd want it to.

Because we believe with SYNERGY, we have a best-in-class differentiated platform with a very large lead in the U.S. And so, we're not going to – we're going to really maximize that and we're going to be really smart about our FRS commitments..

Okay. That's very helpful, Mike. And then, Dan, just on CRM margins (45:47) obviously they've been flat or stable the last three quarters. I know you mentioned EMBLEM will give you a boost here in the back half of 2015. So, you pick up 200 basis points on EMBLEM, that kind of gets you to 16%, 17% depending how you cut the math.

How do you get the next 200 to 300 basis points over the next 18 or so months?.

Well, I think one thing that you see first of all from the first half of this year is that EP is growing, and that's been a big part – I mean, CRM gets a lot of the focus, but think Rhythm Management, that also includes EP. And EP grew 6%, grew 9%, so that's a piece of it.

And then the other part, and I think you correctly call it out, is we have significant gross margin enhancing products coming out on the CRM front. So, if you think EMBLEM, you think ACCOLADE and you think our Quad system in the first half of next year in the U.S., those are all accretive to CRM gross margin.

So, the benefits of that are all seen in the overall Rhythm Management.

And the last piece I would say is as we talked about our plant network optimization, the work on the most recent one, which is the benefit of moving a lot of the Electrophysiology products from Northern California to our plant in Costa Rica, the work on that finishes at the end of this year and we'll start to accrue the benefits of that in 2016 and beyond.

So, all those in addition to the many other specific programs in SG&A and R&D to drive efficiencies, has us confident that we'll hit that north of 20% number by 2017..

Okay..

Just on SYNERGY and FAST, Keith, do you want to comment anything?.

Sure. Yeah, David. Just a couple of things. So in relation to the mix of SYNERGY in Europe, of course, we don't have reimbursements in France yet, which we're anticipating in Q4 and France is the largest DES market in Europe, so that will make a significant difference.

And then with regard to FAST, I think we all agree that the currently available commercial FRS product is not a workhorse product with sub mid-single digit (47:56) market share four years after CE Mark. So we think and we're confident that we can improve on the acute performance of FRS with our differentiated FAST technology.

And that's the purpose of this first human use study to study the acute performance of our FAST products and we'll give more details of that at TCG (48:20) this year..

Great. Thank you very much..

And your next question comes from the line of Josh Jennings with Cowen & Company. Please go ahead..

Hi. Good morning. Thanks a lot for taking the questions. I was just hoping for an update on the subcutaneous ICD platform, if there's anything new to report on the reimbursement front, any color on the European rollout. I know it's been still very early.

And then any details on the launch plan in the U.S.? And then just lastly if you're continuing to see sequential sales growth for the subcutaneous ICD and whether there may have been any disruption this quarter in the U.S.

with the EMBLEM planned launch in Q3?.

Sure. Thank you for the question. On reimbursement, the majority of the U.S. population's currently covered with the S-ICD. We estimate we're covering about 200 million lives today, including Medicare beneficiaries, about two-thirds of the Medicaid population and about 40% of the private pay market.

And we continue to work on the private pay market, and we continue to make progress there. So, overall, in reimbursement, it's really not much of a headwind, and we continue to make good progress on the private side. EMBLEM really is off to a very strong start in Europe.

We're not going to break out the EMBLEM sales in Europe, but we received very strong momentum off of that new launch. Physicians are very attracted to the 20% thinner design and longer battery life and also the ability to track patients remotely with the patient monitoring.

In the U.S., you're really going to see a launch that'll take place more in the back half of Q3. And so, we're transitioning to that product in the U.S., and you'll see more of an impact in the U.S. in the fourth quarter.

But the product itself, as you know, it offers unique features, it also offers much stronger gross margins that are accretive to the company. And we're excited about the future of it.

So, Ken, if you had any other thoughts on EMBLEM at all?.

Yeah. I mean, I think the only thing to add, again, very early, but we've been pleased with the demand that we're seeing from docs in the U.S. who want to get access to the device as we launch it again, driven by what Mike said. It's substantially thinner. It's got a 40% longer battery. It's remote monitoring capable. And so, folks are interested in it.

And then, also just to highlight that we're going to continue to develop clinical data supporting the use of the S-ICD really as a first-choice device for the broad category of patients getting ICDs for primary prevention.

Really pleased by the pool of data that was just published in the Journal of the American College of Cardiology and recently announced our first patient enrollment in our UNTOUCHED clinical trial, which is really designed to show that outcomes with the S-ICD in the primary prevention population are at least as good as they are with transvenous devices..

Great. Thanks for that. And just one quick follow-up, a product-specific question or more on the Bayer acquisition and your Jetstream product on the atherectomy side.

There's a MEDCAC Meeting yesterday that convened to dive into the Peripheral Intervention space and there had been some speculation that atherectomy reimbursement could be called into question. It seemed benign.

But can you just give us an idea on how the Jetstream product is doing relative to internal expectations and maybe any commentary on your outlook for the sustainability of atherectomy reimbursement that's so strong. Thanks a lot..

Thank you. In the script, we discussed the – really the Bayer integration is going very well. We won't break out the thrombectomy and atherectomy sales separately given the size of the PI business.

But that business, the legacy Bayer business grew double digits, much faster than they had prior to joining BSC, given the synergies that we have with our commercial and core portfolios. So, we're very pleased with it. We continue to see strong demand for the Jetstream product, as well as our below the knee product – blanked the name – Rota (52:35).

Sorry. So, I'll turn to the MEDCAC Panel, I think, we welcome that type of dialogue. It reinforces a lot of the clinical research and trials that we've invested for many years in our Peripheral business. And we continue to be confident in the clinical evidence that the PI business generates.

And as you indicated in your comments, we don't anticipate a significant change based on that panel..

Great. Thanks again..

Our next question comes from the line of Brooks West with Piper Jaffray. Please go ahead..

Hi, guys. Thanks for taking the questions. Mike, just following up on the last question, specifically on Lutonix. Can you guys give us a little bit better idea of the scale and opportunity for the U.S.

drug-coated balloon partnership? And then just a little bit more detail on kind of how that product was received when you all launched it in Q2?.

Yeah. So, the alliance we have with Bard really works for both companies, given their investment in Lutonix balloon and our capabilities in atherectomy, thrombectomy and some of the complex PI procedures. So, the alliance is going well. It's very early.

So, we're not going to break out separate sales or give kind of hospital account information given the competitiveness of that field. But I would say the early innings of it are very positive. The companies are working well together. They have excellent registry data that they've presented.

And we have a very strong commercial team with a very wide portfolio to help them to leverage that. So, we're bullish about the alliance, but we're going to steer away from providing specific sales breakouts or account information..

Do you see that though, Mike, as something that could be a $100 million product for Boston at some point?.

Yeah. You'd have to ask Tim Ring and the Bard team that..

All right. And then one for Ken. Just on the growth trends in Electrophysiology. Can you – just a little bit more on what's driving that. Is that catheters? Is it the diagnostic piece you got from Bard? How is the rollout of the Rhythmia system going? Just any kind of detail on trends you could give us there would be very helpful. Thanks..

Yeah. I'm not going to break it out specifically by product category, Brooks. Rhythmia, again, we are I would say well into the early phase of the launch and really very pleased with how the system's performing. It is really the first next-generation mapping system for arrhythmias – high density, high resolution.

I can't tell you the number of cases that I've gone out and been with colleagues where you do the case and you finish and they say, gosh, we just never could've done this procedure successfully with any of the previous mapping systems.

So, so far, everything that we've seen with it during the early launch has validated all of our thoughts when we purchased the technology..

Okay..

Katy, we'll take one more, please..

Okay. Our last question then comes from the line of Larry Biegelsen with Wells Fargo. Please go ahead..

Hey, guys. Thanks for fitting me in. Two questions here. First, so, Dan, I couldn't help but mention you said early on that you've grown 6% or better the last six quarters per Mike's commentary. But the guidance assumes a bit of a deceleration.

So, basically, are you saying that it's going to be difficult to grow 6% operationally in the second half of this year? And that $61 million this quarter for interest expense, is that what we should assume for Q4 in 2016 once the AMS deal closes? I did have one follow-up question on WATCHMAN. Thanks..

Sure, Larry. So, in terms of the second half revenue, I think there's really three key things that are the headwinds on the back half of this year. The first, and we mentioned this, is the IC comps. So, when you think of Interventional Cardiology last year in the second half, that grew 8% in Q3 and 10% in Q4, so 9% overall in the second half.

So, we're up against much more significant comps on the IC side. We now are looking at CRM. We talk about that being flattish for the back half of 2015. Obviously feel good about the new launches we'll have in late 2015 and early 2016, and with Mike's comments, believe we're on the right side of a share gain strategy beyond that.

But the next two quarters, should be flattish in CRM. So, those two – plus when you think of the operational revenue growth rate, in the first half of this year, we've had six months of Bayer revenue contribution, and in the second half, we'll only have two months without a comparable from the year prior. So, I think those are the real headwinds.

We obviously have tailwinds as well. We're excited about the launch of WATCHMAN, and we're excited about, as Dr. Stein mentioned, Rhythmia, LOTUS in Europe, things like that. But the balance of it, we think 4% to 6% is the right range..

But Dan, the $61 million per quarter, and then for interest expense, once AMS closes? Just lastly on WATCHMAN, I think this has kind of been asked a few different ways on the call, but how common are the local non-coverage decisions in place for – that have been put in place for Lariat and how much do you think that's impacting the early uptake? And that's it for me, guys.

Thanks for taking the questions..

Sure. I'll take the interest one quickly and then turn it over for the second one. I'd say the net of the new debt at the favorable rates offset by the fact that we have incremental debt for the AMS acquisition probably puts us in a $10 million to $20 million a year increase in overall interest expense, on an annual basis..

And, Larry, just on WATCHMAN, not a whole lot new there. Just to reinforce, the vast clinical data that we have with WATCHMAN. I would argue is quite a bit different than what we've seen with Lariat in the U.S. So, it's difficult to even put those platforms in the same bucket.

And so, the good news is we've enrolled our first 50 centers faster than planned and we'll likely enroll our second set of 50 centers, the goal of 100 centers faster than plan and we're delivering very good outcomes.

And we're receiving strong uptake from it and we'll get more on the reimbursement pathway as we mentioned with the NCD in November and the NTAP as well. So, we like the momentum that we have and as Dr. Stein said, we'll continue to layer on more and more clinical evidence on top of WATCHMAN to further differentiate it..

Thanks for that..

Okay. Thanks, Mike. And with that, we'd like to conclude the call. Thanks for joining us today. We appreciate your interest in Boston Scientific. Before you disconnect, Katy will give you all the pertinent details for the replay. Thank you..

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