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

David R. Lewis - Morgan Stanley & Co. LLC Rick Wise - Stifel, Nicolaus & Co., Inc. Michael Weinstein - JPMorgan Securities LLC Robert Adam Hopkins - Bank of America Merrill Lynch David Harrison Roman - Goldman Sachs & Co. Brooks E. West - Piper Jaffray & Co (Broker) Larry Biegelsen - Wells Fargo Securities LLC.

Ladies and gentlemen, thank you for standing by. Welcome to Q4 2015 Boston Scientific Earnings Call. At this time all participants are in a listen-only mode. Later we will connect a question and answer session and instructions will be given at that time. And as a reminder, this conference is being recorded.

I'd now like to turn the conference over to our host, Ms. Susie Lisa, please go ahead..

Thank you, David. Good morning, everyone. 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 fourth quarter and full year 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 provide strategic and revenue highlights of the fourth quarter, Dan will review the financials for the quarter and then provide first quarter 2016 and full year 2016 guidance, and then we'll take your questions. 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 on the call organic revenue growth is defined as excluding the impact of sales from divested businesses, changes in foreign currency exchange rates and sales from the acquisition of the American Medical Systems or AMS Male Urology portfolio over the prior year period.

Also note this call contains forward-looking statements within the meaning of federal securities laws which may be identified by words like anticipate, expect, believe, estimate and other similar words.

They include, among other things, 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 Q4 and full year 2015 results and Q1 and full year 2016 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 such 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 fourth quarter, Boston Scientific posted another quarter of strong results and closed out an excellent 2015 as we continue to execute against our strategic plan goals.

At our May, 2015 Investor Day meeting, we outlined plans to drive mid-single-digit organic revenue growth and consistent adjusted operating margin expansion, which in turn will drive double-digit adjusted EPS growth, excluding the impact of FX. We are delivering against these objectives.

In Q4, we grew worldwide sales 5% organically and 10% operationally, which includes the benefit of the AMS Urology business. We also grew adjusted operating income by 10% in the fourth quarter, which represents 100 basis point year-to-year improvement, to 21.7%.

This solid revenue growth and margin expansion drove very strong 18% adjusted EPS growth to $0.26 and our fourth quarter results reflect our focus on delivering meaningful innovation while also providing clinical and economic value to our hospital customers.

Importantly, our Q4 results built upon the consistent momentum generated over the past few years and contributed the following full year 2015 results. For the full year, we delivered 5% organic revenue growth and 8% operational revenue growth, which includes the acquired sales from Bayer Peripheral and AMS.

In parallel with the consistent revenue growth, we are driving strong improvements to our operating margin. In 2014, we delivered 130 basis point improvement in adjusted operating margin. In 2015, we delivered an additional 210 basis point improvement to a full year 22.3%.

And per our previous goals, we continue to expect to deliver 25% plus adjusted operating margin in 2017, with plans to deliver an additional 200 basis points to 300 basis points of improvement by year-end 2020. We delivered full year of 2015 adjusted EPS of $0.93, representing 11% growth for the full year.

It's important to note that 11% adjusted EPS growth includes a significant negative foreign exchange impact of $0.10 versus our original expectation of a $0.04 hit when we originally gave 2015 guidance.

We're very pleased that we were able to overcome this FX headwind while investing in the long-term growth of the company, yet still delivering on our commitment for double-digit adjusted EPS growth.

We continue to believe that Boston Scientific is uniquely positioned to deliver differentiated shareholder value through durable mid-single-digit revenue growth and double-digit adjusted EPS growth via our ongoing operating margin improvement initiatives. We're excited about our 2016 and our plans to build upon our global momentum.

In 2016, we're targeting full year organic revenue growth of 4% to 7% and operational revenue growth of 7% to 10%. We are guiding adjusted EPS to $1.03 to $1.07, which represents 11% to 15% earnings growth. Importantly, this EPS once again includes an expected $0.06 negative impact from foreign exchange.

I'll now provide some highlights on fourth quarter and 2015 results along with thoughts on our 2016 outlook. In my remarks, all references to growth are on an organic year-over-year constant currency basis unless otherwise specified.

Our fourth quarter organic revenue growth of 5% was broad-based across businesses and regions, and was led by exciting new product launches, which continued global expansion and execution of our category leadership strategy.

With the exception of the anticipated 1% decline in CRM sales, all of our other businesses grew organic revenue by at least 6% led by 10% growth in PI. IC had a strong quarter growing 6% against a very tough 10% comp in Q4 2014.

And importantly, all three medical surgical businesses grew revenue at 7% while also improving segmented adjusted operating margin by 90 basis points year-over-year to 34.1%. We delivered another quarter of balanced global growth led by 6% revenue growth in Asia, 5% growth in the U.S. and Europe.

Another highlight was strong 15% revenue growth in emerging markets, led by 20% growth in China and Brazil. The MedSurg businesses continued to deliver. In Endoscopy, we delivered 7% growth in Q4 fueled by the strength of our portfolio, our expanding global commercial reach and ongoing launches of our SpyGlass DS and AXIOS Stent.

SpyGlass DS was launched in July 2015 and is an advanced single use visualization system for the diagnosis and treatment of complex disorders of the pancreas and bile ducts. It's truly a cornerstone product that is highly differentiated and complementary to our core endo portfolio.

Our AXIOS Stent is used for transluminal drainage of pancreatic fluid collections and is also off to a strong start. We'll continue to innovate in endoscopic ultrasound and other exciting therapeutic categories including pulmonary and oncology to further enhance our global leadership in endoscopy.

Urology and public health also continued a strong performance trend, growing 7% organically in Q4 led by laser fibers, capital equipment and strong international growth.

Importantly this quarter we launched LithoVue, a disposable ureteroscope, which provides customers with visualization and navigation capabilities to diagnose and treat stones and other conditions of the kidney, ureter and bladder.

And after closing the AMS Urology acquisition in August, we remain on track to realize our adjusted EPS accretion goals of at least $0.03 in 2016 and $0.07 in 2017. Neuromodulation revenue grew 7% in fourth quarter led by strong growth in both the U.S. and international.

Sales were driven by the market leading Spectra platform and the launch of Precision Novi, our first product of the primary cell non-rechargeable market. In addition, we are seeing really promising uptake of our Vercise Deep Brain Stimulation System due to its Cartesia directional lead system and our partnership with Brainlab. Our U.S.

DBS trial is making progress, and we expect to complete enrollment in 2016 and enter the market in late 2017 or early 2018. Our Cardiovascular group grew 7% in Q4 led by impressive 10% growth in Peripheral Interventions. The core PI business continues to execute and we're very pleased with integration of the legacy Bayer business.

The legacy Bayer business grew over 20% for the second quarter in a row as we continue to grow share in the atherectomy market and we're encouraged by our early results from the global launch of our ZelanteDVT catheter, and the U.S. launch of our Innova Stent for the SFA. We also recently began to enroll our IMPERIAL U.S.

IDE trial for Eluvia, our drug-eluting stent. And remain on track for a European launch of Eluvia this quarter. In addition, we recently closed the CeleNova transaction, which is a synergistic tuck-in acquisition focused on the treatment of liver cancer via localized delivery of chemotherapeutic agents.

And finally in PI, we continue to benefit from our commercial relationship with C.R. Bard and the Lutonix Drug Coated Balloon technology. Interventional Cardiology continues to deliver with 6% growth in the quarter, which represents the sixth consecutive quarter of plus 6% growth in IC. Growth was led by worldwide imaging, U.S.

and European drug-eluting stents, our complex PCI portfolio and Structural Heart. PCI guidance grew low teens globally and we're encouraged by the market enthusiasm of our integrated fractional flow reserve platform. In DES, the U.S. SYNERGY launch is going extremely well.

We anticipate that SYNERGY will represent approximately 50% of our DES revenue mix in the U.S. by the end of 2016. In addition, we're launching SYNERGY in Japan and we'll continue to expand SYNERGY in other international markets.

We also continue to invest in building upon the strong clinical evidence for SYNERGY as we have initiated the EVOLVE short DAPT study. Finally, the IC performance was fueled by our strengthening Structural Heart business, which includes our Lotus aortic valve and WATCHMAN left atrial appendage closure device.

We're truly in an exciting position to drive growth and share gains over the long run in these fast growing markets. Lotus delivered a strong quarter in the European market, as the platform continues to build momentum, despite our near-term size matrix limitations.

Lotus offers physicians excellent control during implantation and best-in-class paravalvular leakage rates. In our RESPOND post-market study, 95.1% of patients had zero to trace PVL. Importantly, we completed enrollment in our REPRISE III IDE study in December, which we anticipate will position us for a late 2017 U.S. market entrance.

We're also pleased to announce completion of the 1,000 patient RESPOND Lotus post-market study and those results will be presented at EuroPCR in May. We're expanding the Lotus platform and expect to launch our next gen 14 French delivery system along with additional sizes in Europe this year. Also in Structural Heart, the U.S.

WATCHMAN launch continues to progress ahead of plan. We're pleased with the implant success rates and the high quality of patient outcomes thus far, which reflect our controlled rollout and proven training program. In addition, Dr.

Vivek Reddy of Mount Sinai recently published in JACC a study highlighting WATCHMAN's cost effectiveness versus both warfarin and novel oral anti-coagulants. In the U.S., we opened more than 100 WATCHMAN accounts in 2015 and expect to open an additional 100 accounts in 2016.

In Europe, we're looking forward to a full launch of our second-gen WATCHMAN FLEX which already has CE Mark. As for U.S. reimbursement, we await a final NCD decision from CMS by February 8 and we remain confident that WATCHMAN will represent at least a $500 million worldwide market opportunity.

So overall, we're very pleased with our progress in Structural Heart and excited about our capabilities and the long-term prospects for this business. We exceeded our full year 2015 Structural Heart revenue goal of $75 million to $100 million and in 2016, we anticipate Structural Heart sales between $175 million and $200 million.

Now turning to CRM, on our first quarter 2015 earnings call we projected a slowdown in our worldwide CRM sales for the balance of 2015 and through first quarter 2016, primarily due to replacement cycle headwinds and competitive launches in the U.S. Our forecast was accurate as global CRM sales declined 1% in Q4.

However, we're very encouraged about our forward-looking CRM position given a strong cadence of new launches expected in the U.S. and Japan in 2016, our leading position and growing awareness of S-ICD, and our replacement cycle headwind becoming more favorable as we exit 2016.

In the U.S., we plan to launch our full X4 Quad system with our Accolade Brady MRI safe system in the first half and EMBLEM MRI safe in the second half of 2016. And we anticipate these releases will strengthen 2016 CRM performance, particularly in the second half. Pacemaker sales again grew 2% and we recently launched X4 CRT-D Quad device.

And while our ICD sales declined 2%, we continue to be pleased with our de novo ICD performance and the EMBLEM S-ICD in particular. EMBLEM continues to drive strong growth and de novo share gains in both Europe and the U.S.

EMBLEM is building momentum globally and we look forward to launching EMBLEM in Japan this quarter with a reimbursement premium and expanding S-ICD to additional international markets in 2016. In Europe, we continue to gain share and grow our CRM business in the mid-single-digit range with our complete portfolio.

These consistent European CRM results are encouraging as we look forward to our anticipated U.S. approvals in 2016. Lastly, in CRM we're continuously mounting third-party evidence of the economic benefits associated with our ENDURALIFE extended battery technology.

And recently another third-party dataset from the EuroPace was published, demonstrating the six-year survival of BSC CRT-Ds over our competitors. Also, a recent U.S. study modeled a 14% reduction in Medicare cost from a two-year increase in ICD battery longevity.

And an Italian study showed Extended Longevity drove a 29% to 34% reduction in long-term healthcare cost over a 15 year period. Turning to our EP business, we delivered 8% growth in the quarter. Our Rhythmia platform continues to roll out nicely driven by new installations and higher case volumes.

We have a strong Rhythmia customer pipeline in 2016 as well as new platform enhancements scheduled for release. We did see some softness in EP in the fourth quarter primarily driven by the delay in our European launch of our IntelliNav ablation catheter, which we anticipate launching later in first quarter.

We continue to strengthen our EP business and we look forward to continued progress in 2016. Our strategy of category leadership is working and it's helping us to become a stronger partner with our global customers.

As the healthcare environment continues to evolve, we're building new capabilities to support our customers beyond our product portfolio with our Advantix solutions offerings. These offerings are focused on driving operational excellence within cardiovascular and GI labs, and improving the standardizing care for chronic cardiovascular diseases.

And just last week, we announced an alliance with Accenture to develop a data-driven digital health solution to improve patient outcomes and reduce cost to treat patients with chronic cardiovascular diseases.

So to wrap up my section, our company has great momentum and our 2015 results reflect the strength of our portfolio and our ongoing investment in the faster growth markets, our globalization efforts and execution of our global teams.

More importantly, we believe that we are well-positioned to continue and strengthen our performance track record in 2016 and beyond. I'd really like to thank our employees for their winning spirit and a great commitment to Boston Scientific. Now let me turn the call over to Dan for a more 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 earnings per share of $0.26, exceeding the high-end of our guidance range of $0.23 to $0.25, and representing 18% year-over-year growth in the quarter.

Excluding a $0.03 unfavorable foreign exchange impact, Q4 adjusted earnings per share grew 31% year-over-year. The strong performance in Q4 was driven primarily by operational revenue growth and gross margin expansion. Our Q4 2015 adjusted operating margin of 21.7% represents an improvement of 100 basis points over the fourth quarter of 2014.

For the full year 2015, total company adjusted operating margin expanded by 210 basis points over the full year of 2014 and we effectively offset a $0.10 FX headwind through operational savings and initiatives. Our full year 2015 adjusted earnings per share of $0.93 represents 11% growth and 23% growth excluding FX versus 2014.

Now for the P&L highlights. For the fourth quarter of 2015, consolidated revenue of $1.978 billion represented operational growth of 10%, which excludes the impact of foreign exchange. Excluding an approximate 500 basis point contribution from the AMS Male Urology portfolio, organic revenue growth was 5% in the quarter.

On an as-reported basis, revenue grew 5% year-over-year. The foreign exchange impact on sales was a $110 million headwind compared to the prior year period, which was about $25 million worse than we assumed in our Q4 guidance range. Adjusted gross margin for the fourth quarter was 72.8%, increasing 140 basis points year-over-year.

The increase resulted primarily from cost improvements driven by our value improvement programs, as the impact of foreign exchange was negligible in the quarter. For the full year 2015, adjusted gross margin was 72% compared to 70.7% for the full year 2014.

The 130 basis point full year adjusted gross margin improvement was driven by benefits of 180 basis points and 50 basis points from cost improvement and FX respectively. This was partially offset by 100 basis points of headwind attributed primarily to price.

Adjusted SG&A expenses were $757 million or 38.3% of sales in the fourth quarter, down 10 basis points year-over-year. The Q4 rate includes 80 basis points of higher spend related to fixed asset write-offs, employee related benefits and litigation fees. Our full year 2015 adjusted SG&A rate of 37.4% is down 50 basis points versus the full year 2014.

As a reminder, the medical device tax has been suspended for 2016 and 2017, which would benefit our adjusted SG&A rate by roughly 100 basis points annually.

We're pleased to see that this tax has been temporarily suspended and intend to reinvest virtually all of the benefit into jobs, innovation, R&D, collaborations with universities and other initiatives that will help treat patients and sustain top line growth over the long-term.

We expect the reinvestment of approximately 100 basis points to be split roughly equally between R&D and SG&A.

Our guidance for full year 2016 assumes our adjusted SG&A rate will come down by a total of 140 basis points at the midpoint, which breaks down into 50 basis points from the medical device tax suspension and 90 basis points from operational improvements.

Adjusted research and development expenses were $238 million in the fourth quarter or 12% of sales. For the full year 2015, adjusted R&D expenses were $850 million or 11.4% of sales. We expect our full year 2016 adjusted R&D rate to be roughly 11.5%.

Again, this includes a 50 basis point increase due to the reinvestment of the medical device tax, offset by increased efficiency and improved utilization of our global footprint. Royalty expense was 0.9% of sales in both the fourth quarter and the full year 2015.

This represents a 60 basis point reduction compared to the full year 2014 rate, and we expect our royalty rate to remain at approximately 1% of sales in 2016. On an adjusted basis, operating income was $429 million in the quarter, or 21.7% of sales, up 100 basis points year-over-year.

We are very pleased with our consistent adjusted operating margin improvement throughout 2015 as we saw year-over-year improvement of at least 100 basis points in each of the four quarters.

Rhythm Management's adjusted operating margin in Q4 was 13.9%, down substantially from Q3 2015, which resulted in a second half 2015 Rhythm Management adjusted operating margin of 15.9%, falling short of our expectation of 17% due to the timing of manufacturing variances and reserve charges as we transition our portfolio and prepare for new product launches in 2016.

Full year 2015 Rhythm Management adjusted operating margin of 15% represents an improvement of 160 basis points over the full year 2014. And turning to 2016, we expect Rhythm Management adjusted operating margin to increase sequentially in Q1 versus Q4 of 2015.

With more noticeable improvement in Q2, as we begin to realize the full benefit of 2016 product costs and leverage the improved top line performance expected from the global CRM and EP franchises.

And the second half 2016 Rhythm Management adjusted operating margin is also expected to benefit from our plant network optimization program completed at the end of 2015, which transferred a portion of our EP manufacturing to lower cost locations.

The net of all these factors drive our expectation for full year Rhythm Management adjusted operating margin to approach 18% for the full year 2016 and we remain confident in 20% plus in 2017. GAAP operating income, which includes GAAP to adjusted items of $700 million, was a loss of $271 million in Q4 2015.

The primary GAAP to adjusted items for the quarter included; restructuring related charges of $26 million, acquisition-related SG&A expenses of $15 million, contingent consideration expense of $37 million, amortization expense of $135 million, and litigation-related charges of $456 million.

The $456 million in litigation-related net charges were primarily related to increases in our litigation reserve for a recent appellate court ruling in Maryland in the Mirowski case. With the remainder related to a combination of increases in our transvaginal surgical mesh product liability reserves and other adjustments.

The Mirowski case traces back to the mid-2000s and relates to licensing agreements on patents that have expired. We continue to believe that the facts and the law do not support the court's findings or the amount of the damages and we plan to seek review of the judgment by the Maryland Supreme Court.

We increased our mesh reserve this quarter, as we became aware of additional claims during the quarter, as we continued to work through the settlement evaluation process. Currently, our known claim count is approximately 35,000, and we've agreed in principle to settle over 10,000 of those 35,000 claims.

We intend to continue to contest cases against us vigorously, while also looking to settle when reasonable terms are presented. Our total legal reserve was $1.936 billion as of December 31, 2015. Separately, a case was recently filed against Boston Scientific in West Virginia, regarding the resin used in our transvaginal mesh products.

We are confident that the resin used in the manufacturing of these devices is neither counterfeit nor adulterated, and meets required material bio-compatibility and design specifications.

We've provided information and materials to DEKRA, a European Notified Body, the FDA and the Department of Justice regarding the resin, our quality processes and our commitment to producing medical devices of the highest quality. Now I'll move on to other income and expense.

Interest expense for the quarter was $59 million compared to $54 million in Q4 of 2014. The increase was primarily due to the incremental debt raised in Q2 of 2015 to finance the AMS Male Urology portfolio acquisition. Our average interest rate was 3.9% in Q4 2015 compared to 4.8% in Q4 2014.

The lower interest expense rate in Q4 2015 was primarily due to lower average cost of debt resulting from the senior notes refinancing completed in Q2 of 2015. Other expense was $10 million and this consisted primarily of foreign exchange losses and investment losses incurred during the quarter.

Our tax rate for the fourth quarter was 58% on a reported basis and 0.2% on an adjusted basis. Our Q4 adjusted tax rate includes $3.9 million of favorable discrete tax items and other one-time benefits, primarily related to foreign exchange. Excluding these items, our Q4 operational tax rate would have been 13%.

Now, I'll provide a bit more detail on our full year 2015 adjusted tax rate, where our guidance as of the third quarter had been 13%. As you may know, the U.S. R&D tax credit was permanently reinstated in December, which benefited the full year 2015 adjusted tax rate by slightly more than 100 basis points.

We've decided to reinvest this benefit in our tax structure to improve long-term flexibility in our capital structure, the net result of this being a 13% adjusted tax rate for the full year, excluding discrete and one-time tax items and a 9.2% rate including them.

After this one-time reinvestment, we continue to expect an approximately 100 basis point increase in our adjusted tax rate annually, and therefore continue to expect our full year 2016 adjusted tax rate to be approximately 14%.

Finally, as mentioned, Q4 2015 adjusted EPS of $0.26, includes approximately $0.03 of unfavorable foreign exchange and represents 18% year-over-year growth or 31% growth excluding the impact of foreign exchange.

On a reported GAAP basis, Q4 2015 EPS was a loss of $0.11 and includes net charges and amortization expenses totaling $504 million after-tax. The GAAP loss of $0.11 compares to a GAAP loss of $0.23 in the fourth quarter of 2014.

For the full year 2015, we reported adjusted EPS of $0.93, exceeding our guidance range, while absorbing $0.10 of unfavorable FX. Recall this is $0.02 more than we expected as of our Q3 2015 earnings call and $0.06 more than we had expected at the beginning of 2015.

Full year 2015 adjusted EPS grew 11% over prior year and 23% excluding the impact of foreign exchange. On a reported GAAP basis, 2015 EPS was a loss of $0.18 compared to a full year 2014 GAAP loss per share of $0.09. Moving on to the balance sheet. Days sales outstanding of 59 days increased one day compared to December of 2014.

Days inventory on hand of 163 days was up seven days compared to December of last year, due primarily to the acquisition of the AMS Male Urology portfolio. Capital expenditures were $86 million in Q4 2015, compared to $79 million in Q4 2014. For the full year 2015, capital expenditures were $248 million.

For the full year 2016, we expect capital expenditures to be roughly $100 million higher primarily due to the construction of our new manufacturing facility and distribution center in Malaysia. Beyond 2016, we expect capital expenditures to return to our historical run rate of approximately $250 million annually.

Adjusted free cash flow for the quarter was $448 million compared to $508 million in Q4 2014. Our full year 2015 adjusted free cash flow of $1.366 billion represents growth of 8% over the full year 2014.

For 2016, we expect full year adjusted free cash flow to exceed $1.5 billion, representing growth of 10%, and have a stretch goal to exceed $1.6 billion for the year with initiatives aimed at improving the working capital contribution to cash flow.

In Q4, we repaid $150 million of our term loan and expect to repay an additional $250 million by the end of 2016, at which time we expect our debt leverage will be consistent with our goal of returning to pre-AMS debt leverage by year-end.

There were no share repurchases in the quarter, consistent with our decision to suspend the share repurchase program temporarily following the announcement of the AMS Male Urology portfolio acquisition, and near-term our capital allocation priorities are to repay debt, manage contingencies and pursue tuck-in M&A.

We ended 2015 with 1.363 billion fully diluted weighted average shares outstanding. Consistent with our prior guidance, we expect our share count to increase by roughly 5 million per quarter through the end of 2016, as we plan to keep the buyback suspended for the balance of 2016.

We expect this to result in a fully diluted weighted average share count of approximately 1.38 billion for the full year 2016. I'd like to conclude with guidance for Q1 and full year 2016.

For the full year, we expect consolidated revenue to be in the range of $7.9 billion to $8.1 billion, which represents year-over-year growth of 4% to 7% on an organic basis, 7% to 10% on an operational basis and 6% to 8% on a reported basis.

As a result of a stronger dollar, at current rates, we expect foreign exchange to be a roughly $150 million headwind for the full year 2016 on revenue. We expect our adjusted gross margin for the year as a percentage of sales to be in a range of 72% to 73%.

We expect foreign exchange to have an unfavorable impact of approximately 50 basis points on adjusted gross margin in 2016, as hedging contracts from our three-year program are layered in. We expect this headwind to be offset by a favorable mix, market segmentation, the ramp of accretive new products and our standard cost reduction programs.

As mentioned, we expect our full year 2016 adjusted SG&A rate to be between 35.5% and 36.5% of sales, and our full year adjusted R&D rate to be between 11% and 12% of sales. This implies a full year 2016 adjusted operating margin in the range of 23.5% to 24.5%, the midpoint of which represents 170 basis points of improvement over full year 2015.

And importantly, we remain on track to achieve an adjusted operating margin of 25% plus in 2017. Full year 2016 interest expense is expected to be $245 million, about $10 million higher than the full year 2015 due to incremental debt raised in Q2 of 2015. As mentioned, we expect our tax rate for the full year 2016 to be approximately 14%.

As a result, we expect adjusted earnings per share for the full year 2016 to be in a range of $1.03 to $1.07 representing 11% to 15% adjusted earnings per share growth. We expect 2016 adjusted earnings per share to be impacted negatively by approximately $0.06 of FX or roughly $80 million of adjusted income.

In terms of timing, this $0.06 should be roughly $0.02 per quarter in Q1 and Q2 and $0.01 per quarter in Q3 and Q4. Excluding the $0.06 of unfavorable foreign exchange, our full year adjusted EPS guidance range represents growth of 17% to 21%.

Despite this approximate $0.06 hit, we remain confident in our ability to deliver double-digit adjusted EPS growth. Let me walk you through the 2016 adjusted EPS guidance. We delivered adjusted EPS of $0.93 in 2015, representing 11% growth or 23% growth excluding the $0.10 of negative FX impact.

As you know, our stated goal is to grow EPS double-digits, which would imply $1.02 in 2016. Adding $0.03 of AMS accretion, gets us to $1.05 which is the midpoint of our guidance.

We expect unfavorable FX of approximately $0.06 as I mentioned, but our goal is to offset this through operational initiatives and savings as we did in 2015, and as mentioned, the medical device tax is worth roughly 100 basis points on the OM line but we intend to reinvest substantially all of that back into innovation and have developed the detailed plans to do so.

On a GAAP basis, we expect EPS to be in a range of $0.62 to $0.67. Lastly for 2016, our guidance assumes pre-tax amortization of approximately $534 million. Now turning to the first quarter of 2016, we expect consolidated revenues to be in a range of $1.89 billion to $1.94 billion.

If current foreign exchange rates hold constant, the headwind from foreign exchange should be approximately $45 million or 250 basis points relative to Q1 2015. We expect consolidated Q1 sales to grow year-over-year in a range of 4% to 6% organically and 9% to 11% operationally.

For the first quarter, adjusted earnings per share is expected to be in a range of $0.23 to $0.25 per share and GAAP earnings per share is expected to be in a range of $0.11 to $0.13 per share.

I encourage you to check our Investor Relations website for Q4 2015 financial and operational highlights, which outlines Q4 results, as well as Q1 and full year 2016 guidance, including P&L line item guidance. So, with that, I will turn it back to Susie, who will moderate the Q&A..

Thanks, Dan. David, 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. David, please go ahead..

The first question will come from the line of David Lewis with Morgan Stanley. Please go ahead..

Good morning. Just a couple of quick questions on 2016 guidance. So, the first is, your guidance at the top end of the range at 7% was obviously higher than we expected, I guess, we expected 4% to 6%. So, what factors get us to the top-end of that range and specifically what's assumed for WATCHMAN? And then I had a quick follow-up..

Thanks. Good morning, David. Yes, the guidance 4% to 7% is higher than we showed at the recent Investor Day meeting. In terms of getting to the higher end of the range, we certainly have to have some good results on our product launches with SYNERGY, WATCHMAN, ongoing advancements of Lotus.

We have key product approvals that we're expecting the first half, those need to come through. We also are launching a number of key products in Japan with SYNERGY and also S-ICD. So we need some strong execution there and continued emerging market growth. So it's – we've got a lot of product launches, a number of approvals needed.

So to deliver the top-end of that we have to have excellent commercial execution and great execution on the regulatory side. Potentially on some of the downside, we continue to manage, as I mentioned, some of the CRM headwinds, which we anticipate will – after Q1 improve in second quarter and then improve dramatically in the second half of the year..

Yeah. That's very helpful, Mike. And then specifically, I know you mentioned CRM, just to follow-up there.

In the fourth quarter, was there anything particular with that third quarter to fourth quarter slight decline, was there anything particular or unique to the fourth quarter that you can cite? And then once again your confidence, what's specifically implied in 2016 numbers? Is that – does 2016 guidance imply an improvement in the CRM business in 2016 over 2015? Thank you..

Yeah. So we're really pleased with quite frankly our overall Urology business and the AMS deal. The business grew 7% in fourth quarter.

And, I'm sorry, was your first question on Urology or is it all CRM related?.

I'm happy to hear about Urology, but I was focused on CRM, Mike..

Sorry. The jetlag from Asia. We'll hold the Uro comments for later I guess. So on CRM, we do anticipate improvement clearly in 2016, as I mentioned, particularly in the second half.

We anticipate the launch of the – the approval of the pacer MRI and the Quad in second quarter and we'll also have favorable comps in second quarter, third quarter and fourth quarter. So we do see a strengthening CRM business in 2016..

Great. Thank you very much..

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

Good morning, everybody. Just a couple of things. Maybe start with the CRM operating margin. Dan, you did a very clear job of laying out the factors behind the 15.9% instead of your 17% goal.

Is the whole of that these variances, and do you come into 2016 thinking that – do we start off with that sort of 17% level or better as we head into the first quarter, first half?.

Thanks, Rick. Yeah, I think the way I would say – characterize that is on the Q3 call, we had talked about kind of being in that 17% range for the back half of 2015. The variances were a piece of it. We also had a little bit higher R&D, about 60 basis points in the quarter.

That's timing, that's just going to come one quarter to another, so that doesn't concern me. The manufacturing and the inventory reserve charges are really in anticipation of the launches that Mike just mentioned around the MRI safe Brady and the Quad launch in the U.S.

So those are kind of out of the way now at this point as opposed to having had to take those in different quarters. So I think, the way I would think of it is, the 13.9% in Q4, I'd expect a little bit of sequential improvement in Q1, not a tremendous amount, just a little bit.

Q2 gets a little bit better than that and really the back half is where it accelerates to get to that overall 18% for the year. So, I wouldn't look for Q1 to be in that 18% range or Q2, but I think the net of the year, we're very comfortable with that 18%..

And just one product specific question, WATCHMAN, a possible NCD is up here real soon. And if I understood you correctly, you're basically saying you think it's still a $500 million market if that early language holds.

But what if the language is basically equivalent to the FDA approval label? Docs are telling us that they're doing four patients a month and that would double if that were the case.

Is that the way you see it and so then is it back to $1 billion market, how do we think about all that?.

Well, overall, we're obviously very proud of our success in 2015 with WATCHMAN, in Structural Heart overall we delivered the high-end of the range there, we opened up 100 accounts. We're going to hear the NCD decision very shortly here. But, overall, we continue to expect guidance is 2016 of $175 million to $200 million.

And our job will be to continue to focus on the penetration rate. With 15 million or so eligible patients, we'll continue to drive training programs, excellent outcomes, and – but for now, we'll continue with our $175 million to $200 million range, and we'll see what happens over the next few days on the reimbursement..

Thank you..

Ken, do you want to add anything?.

Yeah, Rick. I'd say, while we have some concerns about that first draft of the proposed NCD, overall, it was consistent with our expectations, which are that the NCD we expect to be more limited than the full FDA label, likewise always expected to have the registry, et cetera.

And as Mike said, we've always assumed modest penetration into the indicated population and really where we go is much more dependent on our ability to train new physicians to implant the device safely and effectively..

Thanks for that..

The next question comes from the line of Mike Weinstein with JPMorgan. Please go ahead..

Hi. Good morning, guys. So, just one quick follow-up on that.

So, did you say where you ended up 2015 on that Structural Heart number?.

We didn't give a – we guided $75 million to $100 million, and we beat the high end of the range. We didn't give a specific number..

But didn't give the exact number, okay, great..

Over $100 million..

Over $100 million, understood. So, let me ask about SYNERGY and the launch so far, the feedback we're getting is, has been very positive particularly on the deliverability of the product.

It does feel like you are trying to set a premium pricing for the product to the marketplace, can you talk about your success in doing so thus far?.

Yep. We're very pleased with the results. It's really tracking to our plan. In the fourth quarter, we did see U.S. DES growth in the mid-single-digit range and that was against about a 10% comparison from fourth quarter 2015, so we delivered a nice number in the first quarter.

And just as you said, we are asking and we believe we deserve a pricing premium for the product. It's the only bioabsorbable product in the marketplace with excellent stent thrombosis rates and we also have a tiered offering that has excellent market share as well. So, we think we're uniquely positioned with it.

And the great news is we're launching in Japan as we speak, which is obviously a big market, and we also received reimbursement in France. So, we're really positioned well. We're being very careful with the launch of it and similar to our comments at your meeting, we anticipate about 50% of our mix in the U.S. and Japan by the end of the year..

Right.

One product follow-up, Mike, it sounds like Lotus Edge, the timing of introducing that in Europe may be is sliding, just can you provide some clarity on that?.

Yeah. I don't – in terms of sliding, we do anticipate 2016 we will launch Lotus Edge, and so I guess, maybe we did push that a bit, but we are confident in a 2016 launch of Lotus Edge and it really is similar to some of the comments on SYNERGY, we continue to exceed our commitments with Lotus.

We exceeded the high end of our range, we're on track to deliver our 21 millimeter valve.

We'll be launching our Lotus Edge platform and we continue to drive great outcomes on our clinical data, maybe, Keith, you can comment on some of the news you anticipate at EuroPCR?.

Yeah. I mean, I think, Mike, the important thing is, when we commercialize Lotus in the U.S. late in 2017, we'll have Edge, we'll five valve sizes, 21 through 29. We'll have the [i-sleeve] 14 French compatibility and increased flexibility. The 21 valve is already in the clinical trial, so that will give us four valves. That will be followed by the 29.

And we'll anticipate Edge around about EuroPCR or just after. Edge is already in clinical trials. So, we're very confident about moving to the 14 French compatibility, which of course makes us comparable with the other competitors in the market..

Right. Perfect. Thanks, Keith. Thanks, Mike..

Yeah..

The next question is coming from the line of Bob Hopkins with Bank of America. Please go ahead..

Great. Thanks and good morning..

Good morning..

So, just wanted to follow up and make sure I heard you correctly on the U.S. ICD and pacemaker pipeline and the timelines for the pipeline. So, specifically, could you just tell us when you expect Quad Pole CRT-D lead approval in the U.S.

and then MRI-Safe pacemaker approval in the U.S.? And then also give us any updated thoughts on MRI-Safe traditional ICD and CRT-D timelines for the U.S., since it feels like that's where Medtronic is having the most success. Thank you..

Sure. I'm really proud of our CRM business. We clearly want to grow faster, but we're in a position now where we can see as we go forward in 2016 and 2017 and beyond, really the strength of the portfolio and I'll give answers to your specific MRI questions in a second here, but we've got these product launches coming second half of 2016.

The S-ICD is really gaining excellent momentum globally, we're expanding that and we're going to be moving beyond the replacement cycle headwind. In terms of the product launches, we feel comfortable with a second quarter launch of both the Quad system and MRI pacer. The MRI pacer likely slipped a little bit out of first quarter into second quarter.

We'll also have EMBLEM MRI approval likely in the third quarter of 2016. So, big approvals in second quarter and third quarter. And then as we go forward with the ICD MRI capability, we'll start that trial very quickly here and we anticipate approval of that product likely in second quarter or third quarter of 2017.

So, we've got a really strong cadence of product approvals coming, MRI capabilities. But I think what's most unique about our offering is this S-ICD momentum that we're seeing around the world. We just received approval in Japan.

We have a 5% premium – reimbursement premium in Japan, continued strong acceptance of the product in training and a multi-year head start. So, as you look to our business going forward, this product cadence will come through, S-ICDs continuing to grow, and our replacement cycle headwind will reverse itself.

So as you look forward to CRM, I really believe that you're going to see this business strengthen in the second half of 2016 and 2017 and 2018..

Great. That's very helpful. Thank you. And then one for Dan, I just want to make sure I understand the margin story, just specifically in the fourth quarter.

Is the right way to think about operating margins in the fourth quarter and all the moving parts that you had very strong gross margin performance, and that you took advantage of a very low tax rate to invest a little bit more in SG&A than you originally anticipated, is that from a big picture perspective the right way to think about Q4 margins?.

Yeah. I think overall, and then as I mentioned in our prepared remarks, we did have 80 basis points of the fixed asset write-offs and the litigation fees. So, I wouldn't call that kind of investing for the future.

So if you take that off, I'd say, again, as we mentioned, very proud of where we ended for the year and the overall improvement we've had over the past two years. If you take 2016 and 2015 together, you'd be looking at almost 400 basis points of operating margin expansion.

So in a given quarter, you'll see fluctuations, but the overall trend is extremely positive..

Great. Thanks for the color..

The next question comes from the line of David Roman with Goldman Sachs. Please go ahead..

Thank you, and good morning, everybody.

Maybe I will switch gears a little to the Urology business and maybe, Mike, you could talk about how the integration is going with AMS and very specifically focus on some of the issues that you may be undertaking to help accelerate top line growth from where AMS was performing at sort of the exit rate of the acquisition?.

I won't give a CRM answer on this one. So, I guess, I just wanted to talk about Urology because I like what we're doing here so much.

So we – again, we had nice results in the fourth quarter, business growing 7% overall, really nice job, particularly in international markets as we continue invest in our stone business and training programs, that's growing very well, double-digits outside the U.S. consistently. And the AMS integration is on track.

Thankfully, the teams did a really nice job in due diligence. We did project some softness the first six months post acquisition as we wanted to bleed down distributor inventory levels to appropriate levels and that's exactly what we're seeing.

So, that's happening and we likely will see continued softness in Q1, but improving in terms of the legacy AMS business, and that's being offset by the BSC legacy business.

As we go forward in the second quarter, we expect the legacy AMS business to grow much closer to the BSC overall growth rate and then we'll see additional benefit on top of that as we see synergies between the BPH portfolio, the stone portfolio, the ED portfolio and the incontinence portfolio overall. So, really we're right on track.

We're going to deliver our EPS accretion commitment of $0.03 in 2016 and I think it's $0.07 in 2017. So, the integration's gone well. We've had exceptionally low turnover and it's being met very well by the customers..

That's helpful. Thank you. And then, maybe just a follow-up on the price/mix environment. As we sort of look at your growth rate, another acceleration potentially on tap for 2016 at the midpoint of your guidance on an organic basis.

Can you maybe just sort of talk about how the pricing and mix environment is shaping up because at least from your – that your peers who have reported earnings results thus far, it sounds like the environment is a tad better, but maybe any thoughts from your perspective would be appreciated..

Sure, David. This is Dan. In terms of price, as you heard, we mentioned it's about 100 basis point drag on gross margin, so you can kind of back into to what that is. Obviously we don't make assumptions about significant improvements in the pricing environment or significant deteriorations in that. It's contemplated within the range.

But as we – as we look at it, it feels stable, so the product lines that have historically declined, are continuing to decline at that historical rate, they haven't moved significantly, and likewise, the ones where prices stay flat and in some cases increase, have stayed pretty constant and stable.

So, over the past 12 months to 18 months, it's felt relatively stable and the guidance for 2016 assumes as that through the year..

And mix?.

Mix – in general for us mix is a good guy. So as we as we sell more of the newer technologies, a lot of which Mike went through that list. The majority of those are accretive to overall Boston Scientific margins, gross margins..

Great. Thank you..

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

Hi, guys. Thanks for taking the question. Let me start with Peripheral actually, very strong performance there, you've got a lot going on.

I wonder if you could give us just a little bit more detail on kind of product cadence, market dynamics and if we can see the business kind of continue to perform at this level going forward?.

Sure. The team has done a really nice job. Jeff Mervis and the Peripheral group delivered 20% growth in legacy Bayer business and 10% organically overall, so, obviously very strong growth and a few quarters in a row here, and we're projected to set up really nicely in 2016.

So, I think just a backdrop, the markets there are very healthy, we're seeing nice market growth in atherectomy. Our core business, we just launched a new DVT product and also clearly the growing acceptance of the drug coated technology. So the markets overall are strong, and we really have a unique position in terms of our portfolio.

You've heard a lot about our drug-eluding stent ELUVIA, we'll be the only company with both a drug-eluding stent and a drug-eluding balloon in Europe, and we're also kicking off our ELUVIA IMPERIAL trial in the first half of 2016. So we're uniquely positioned in our DES.

We're also launching a number of our core SFA metal stents in Japan and Asia and China which will help us grow that business, and we also continue to really expand globally.

We've been – we were light weight in terms of the emerging markets in Peripheral five years ago and we put a lot of investment in there and we're starting to see that become more meaningful in places like China and Brazil. And lastly, we commented on the call about our CeleNova deal.

Our Interventional Oncology maybe a little bit different than some competitors' Peripheral business, but that IO business is a strong grower for us and we like that CeleNova transaction, particularly for the emerging markets..

Thanks. And if I could just follow up with one on – Dan, you mentioned earlier the leverage on the balance sheet was going to get back to pre-AMS acquisition levels by the end of the year. Can you just update us on your thoughts on acquisitions and are you seeing valuation expectations come down in the market? Thanks..

Sure, Brooks. So, yeah, just in terms of the leverage levels, that's get – to get back to about a 2.5 times debt-to-EBITDA. We remain on track to do that as we had announced in conjunction with the AMS acquisition by the end of this year.

We did the debt pay down that we needed to do at the end of 2015, and have in our cash flow projections in 2016 to do the remainder to get to that level. So feel very comfortable there. Relative to valuations and M&A, so we're still very active in the market relative to tuck-in M&A. Obviously, screen a lot of different opportunities.

I wouldn't say I've seen significant changes in valuation expectations across the landscape, it would depend on what division and what stage you're talking about. But, in general, the valuations have stayed fairly constant and we are actively in the market obviously looking for tuck-in deals.

And that is part of our cash flow projection for 2016 as well to be able to do some tuck-in deals..

Great. Thanks, guys..

The next question will come from the line of Larry Biegelsen with Wells Fargo. Please go ahead..

Good morning, guys. Thanks for taking the questions. So, Mike, you're one of the few companies that actually showed an acceleration in emerging growth this quarter, I think about 15% organic versus 13% last quarter, a lot of companies have shown the opposite trend.

So, my question is, what's the outlook in 2016? How comfortable – how much visibility do you have on growth in those markets? And any color would be helpful and I had a follow-up. Thanks..

I'm sorry, were you talking the emerging market....

Emerging market..

I'm sorry. Yeah, emerging market growth. I think you had 15% organic in Q4, I think 13% in Q3..

Yeah, we were a little bit slower in the second quarter. And we had nice pick up, really the pickup the second half of 2015 was good, but it was also more consistent with what we expected and did in 2014 quite frankly.

And so it's really a continuation of, ex maybe a soft quarter, one soft quarter, the second quarter, kind of a continuation of what we've been doing in 2014 and what we expect to continue to do in 2016.

So, we had some softness in Russia in the second quarter, we've seen that stabilize a bit, we have excellent growth in China, excellent growth in Brazil and a number of other countries. So, we continue to register new products, add commercial capabilities, we're building R&D capabilities, new education training centers.

I just got back from there last night. So, we put a lot of time and effort in it. We just did a joint venture deal with Frankenman there in our Endo business. So, we feel comfortable about our prospects in the mid-teens rate in emerging markets..

Thanks for that. And then Neuromodulation, I don't think has come up on this call, but you had a nice year in Neuromodulation this year, but obviously the competitive dynamics are changing.

So just color on 2016 and how we should think about growth and trends there and the sustainability of the nice growth you showed in 2015? Thanks for taking the questions..

Sure..

Larry, we'll hit that in a sec, but we're going back to the emerging markets revenue question first with Dan..

Yeah, just one other thing, Larry, on that. So one of the other items with respect to emerging markets is just the foreign currency exchange rates. So if you look back at Q4 and think of our $1.978 billion that we reported again, that included a $25 million negative headwind from FX compared to what we had talked about when we gave guidance.

So kind of adjusted for that we would have been over $2 billion and kind of closer to the higher end of the range and emerging markets obviously is a big piece of that..

Thanks, Dan..

Yeah..

And Neuromod continues to perform well. We grew 7% in the quarter. We grew 8% full year and we had consistently strong growth throughout the year and we really don't see that – we anticipate that trend to continue. Spectra continues to perform very well. The launch of Novi outside the U.S. is picking up.

And we are getting a lot of – we are building momentum in international markets in deep brain stimulation and will hopefully get some good luck and get that clinical trial enrolled in 2016 to position that launch.

So it's a very healthy market right now and there is a lot of patient demand and so we like to see that that market is clearly growing in the mid-single digit range, if not a bit more. So it's a growing market. We have some unique innovation and it's a bit more competitive, but it hasn't slowed down our performance..

Thanks for taking the questions, guys..

Thanks, Larry..

Thank you. With that, we'd like to conclude the call. Thank you very much for joining us today, we sincerely appreciate your interest in Boston Scientific. Before you disconnect, David will give you all the details for the replay..

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