Susan Vissers Lisa - Boston Scientific Corp. Michael F. Mahoney - Boston Scientific Corp. Daniel J. Brennan - Boston Scientific Corp. Keith D. Dawkins - Boston Scientific Corp. Kenneth Stein - Boston Scientific Corp..

David R. Lewis - Morgan Stanley & Co. LLC Bob Hopkins - Bank of America Merrill lynch Michael Weinstein - JPMorgan Securities LLC Joshua Jennings - Cowen & Co. LLC Frederick Wise - Stifel, Nicolaus & Co., Inc.

Vijay Kumar - Evercore ISI Larry Biegelsen - Wells Fargo Securities LLC Matt Miksic - UBS Securities LLC Chris Pasquale - Guggenheim Securities LLC.

Ladies and gentlemen, thanks for standing by. Welcome to the Boston Scientific Q3 2016 Earnings Call. During today's conference, all participants will be in a listen-only mode. Later, we will conduct a question-and-answer session; instructions will be given at that time. As a reminder, today's conference is being recorded.

I would now like to turn the conference over to Susie Lisa. Please go ahead..

Thank you, Shannon. Good morning, everyone, and thanks for joining us. For those of you having issues with the webcast, we apologize for the technical issues. We're working with NASDAQ and ask you to consult our Investor Relations section of our website to see the dial-in number.

With me on today's call are Mike Mahoney, Chairman and Chief Executive Officer and Dan Brennan, Executive Vice President and Chief Financial Officer. We issued a press release earlier this morning announcing our Q3 2016 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 up to one hour.

Mike will provide strategic and revenue highlights of Q3 2016, Dan will review the financials for the quarter and then Q4 2016 and full year 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 changes in foreign currency exchange rates and sales from the acquisition of the American Medical Systems, AMS, Male Urology portfolio over the prior year period.

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

They include, among other things, 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 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 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. Good morning, everyone. Our third quarter 2016 results were excellent and reinforce the success of our category leadership strategy and the strong execution of our global teams. We continue to grow faster than the market in most all of our business units, while consistently improving operating income margin.

As a result, we continue to deliver strong double-digit adjusted EPS growth. Importantly, we are investing in new adjacencies, capabilities and markets that position Boston Scientific for a very exciting future. In third quarter 2016 we drove operational growth of 10% and organic revenue growth of 9%.

Normalized for currency and excluding the impact of one month of sales of the AMS acquisition, which anniversaried on August 3.

Of note, we delivered this 9% organic growth against our toughest comparison of the year and we leveraged that growth with a 120 basis point improvement year-over-year in adjusted operating margin of 24.3%, which beat the high end of our guidance range by 30 basis points.

Thus 9% organic revenue in the quarter was leveraged to 12% EPS growth or $0.27 per share, which was at the high end of our guidance range. For the full-year 2016, we're maintaining our strong guidance and pulling up the low end of our previous ranges and Dan will provide the details in a few minutes.

I'll now provide some highlights on Q3 results and our Q4 2016 outlook. In my remarks all references to growth are on a constant currency, organic, year-over-year basis and they exclude the one month benefit of AMS unless otherwise specified.

Organic revenue growth of 9% was broad-based across our businesses and regions with particular strength from new global product launches, emerging market expansion and share gains led by innovation and our category leadership strategy. On a regional basis, EMEA led the pack with 12% growth, followed by the U.S. at 9% and Europe at 5%.

Emerging market sales grew 19%, led by an acceleration in growth in China at 26% and Latin America turned in a strong quarter with 21% growth.

Across our businesses for the third straight quarter both our Cardiovascular and MedSurg segments grew sales organically double-digits; 12% for Cardiovascular and 10% for MedSurg and Rhythm Management turned in a strong and consistent performance with second quarter sales up 3%. MedSurg continues to deliver excellent growth and strong profitability.

MedSurg remains a high priority segment for the company with two recent tuck-in acquisitions to enhance category leadership in neuromodulation with Cosman Medical in RF ablation and Endoscopy with the recently announced tender offer for EndoChoice.

9% global growth in Endoscopy was led by double-digit gains in both our biliary and hemostasis franchises with SpyGlass Digital DS and the AXIOS Stent leading the charge in biliary and our newly launched Resolution 360 Clip is driving growth in hemostasis. We continue to see upside from new product launches and strong emerging market growth in Endo.

We're also excited about the acquisition of EndoChoice, which we expect to close by year-end. EndoChoice is focused on the development of innovative products and services for gastroenterology healthcare providers with a portfolio that's particularly well-suited for the ambulatory surgery center.

It also brings a portfolio of value-added services to the ASC market, including infection control and pathology services. This acquisition will further enhance the position of Boston Scientific as the global leader in the field of GI endoscopy. As previously announced, we expect to pursue strategic options for EndoChoice's FUSE colonoscope business.

We plan to provide an update at or around the time of closing of this transaction. Turning to Urology and Public Health, Uro/Public Health grew double-digits for the third consecutive quarter, up 13% in Q3. We're a strong category leader in the Urology segment and we delivered broad-based growth across the combined Boston Scientific and AMS portfolio.

International sales remain very strong with EMEA, Latin American and emerging markets all growing at double-digit rates, AMS sales grew 5% in the quarter, which is a nice acceleration from trend prior to acquisition and importantly, our remediation and integration efforts are both on track.

Our LithoVue Single-Use Ureteroscope continues to launch and is enjoying strong uptake in a variety of accounts. And finally, our growth was assisted by tailwinds from our market share capture post ASTORA's exit from the pelvic health market.

Neuromod grew double-digits, plus 12%, against a strong comp, and robust Precision Spectra sales, now with full-body MRI compatibility, and our Vercise Deep Brain Stimulation platform in Europe. We continue to expect U.S. market entry for Vercise by late 2017, and believe this is an exciting new market opportunity for us.

Cosman Medical, an acquisition announced in July, broadens our Neuromodulation portfolio with RF ablation systems that enable us to offer patients with chronic pain another treatment option in non-opioid therapeutics. We will provide an update on our ACCELERATE clinical trial on our fourth quarter 2016 call.

In Cardiovascular, segment sales grew 12% and reported an adjusted operating margin of 32.8%, up 160 basis points year-over-year. Peripheral Interventions revenue grew 11% and was led by strong balanced global growth in developed and emerging markets.

This is PI's fourth straight quarter of double-digit above market growth, fueled by our category leadership strategy and the depth of our portfolio rather than any single product.

We drove strong growth in the atherectomy and thrombectomy businesses and new product launches are also going very well, including the AngioJet ZelanteDVT catheter, the Innova Vascular Stent and our drug-eluting technologies, Eluvia DES and Ranger DCB.

Finally, we're also pleased with the contribution and integration progress of the spherical embolics platform acquired from CeloNova. We continue to invest in the Peripheral market, particularly in drug-eluting strategies, venous diseases and interventional oncology.

Two important clinical trials were presented in third quarter at the major European Peripheral Congress at CIRSE, our drug-eluting stent Eluvia and the MAJESTIC clinical trial demonstrated an unprecedented 92.5% freedom from total lesion revascularization at two years, and enrollment continues in our global IDE trial IMPERIAL.

This 92.5% freedom from TLR is of particular note given the patient population studied. 65% of patients had severely calcified lesions, and 46% had chronic total occlusions. In addition, we reported results for our Ranger Drug-Coated Balloon from the 105 patient randomized clinical trial studying the superficial femoral artery.

With 94.4% freedom from total lesion revascularization at six months, average lesion length was 68 millimeters. We also posted strong results from our Ranger All-Comers Registry, with 91.9% freedom from TLR at six months and an average lesion length of 135 millimeters. We plan to bring our Ranger DCB to the U.S.

and we'll reveal details of our IDE trial shortly. We're excited to be the only company investing in the complete portfolio of drug-eluting therapies. Turning to Interventional Cardiology, this business segment grew 13% in Q3, led by strong sales in Structural Heart, drug-eluting stents, and PCI guidance or imaging.

SYNERGY continues to penetrate the market, as we grew worldwide DES sales 14% and we remain on track to represent 50% to 60% of our global DES revenue mix by the end of fourth quarter. PCI guidance grew mid-teens as well, with strong IVUS catheter and service sales, augmented by the ongoing global launch of our COMET FFR system.

In Structural Heart, which includes our LOTUS Transcatheter Aortic Valve and WATCHMAN Left Atrial Appendage Closure Device, we are driving growth via our unique innovative platform technologies, and they're resonating with physicians and are supported by the strength of our commercial teams. Both franchises are performing very well.

We continue to expect to deliver Structural Heart revenue at the high end of $175 million to $200 million guidance for 2016. We also recently began the early launch of our LOTUS Edge Valve in Europe. Initial results from our feasibility study of LOTUS Edge will be presented this Sunday at our lunchtime symposium at TCT.

Also at TCT next week, we look forward to a number of LOTUS presentations, including four-year outcomes on REPRISE I, three-year outcomes for REPRISE II, and our LOTUS Edge feasibility study, with a seven-day discharge data. We expect to present results of REPRISE III, our U.S.

pivotal trial and the first to provide head-to-head data, at EuroPCR in May. The WATCHMAN platform also delivered an exciting quarter, with strong growth from opening new centers, as well as driving growth in existing centers.

We are very encouraged to see a strong initial launch in France, where we received higher reimbursement to peers, based on the strength of our data. And we expect to enroll our first patient in ASP 2 (11:52), which is a study examining the use of WATCHMAN in warfarin-ineligible patients, before the end of the year.

Turning now to Rhythm Management, segment sales grew 3% with another impressive gain in adjusted operating margin to 20.1%, which is 320 basis points quarter-over-quarter and a 230 basis point growth year-over-year.

Growth in CRM of 3% was above market and led by worldwide patient growth of 22%, with meaningful share capture from our premium based Brady MRI device. High voltage sales declined 4% globally due to replacement cycle headwinds and competitive pressures in the U.S. and MRI compatible tachy devices.

We continue to be pleased with the growth and momentum of EMBLEM S-ICD, which has been fueled by our recent FDA approval for both MRI and MRI backwards-compatibility, and increased physician acceptance of this differentiated therapy.

In Europe, our CRM business grew above market for the 10th consecutive quarter and in Japan, our above market growth was driven by strong launch of EMBLEM S-ICD, transvenous tachy MRI and 3.0 T Brady MRI.

We also achieved important CRM clinical milestones in the quarter, including the first patients enrolled in the APPRAISE ATP trial, to help clinicians understand which ICD patients could benefit from anti-tachycardia pacing, and which may be harmed.

Also, our MultiSENSE trial was accepted as a late breaker for the upcoming AHA Scientific Sessions in New Orleans. MultiSENSE is an international multicenter non-randomized study which is designed to develop and to evaluate prospectively a multi-sensor based algorithm for the early detection of worsening heart failure.

In Electrophysiology, 5% growth was led by strength in international markets. In Europe, we are pleased with the early feedback of our IntelliNav OI catheter, which was launched in the second quarter. We expect to launch this catheter in the U.S.

in four quarter which, combined with IntelliNav XP and MIFI XP catheters, will unlock the use of RHYTHMIA to a higher mix of procedures.

We remain bullish that continued penetration of our next-generation mapping and navigation system RHYTHMIA HDx and the commercialization of our complete portfolio of Nav-enabled therapeutic catheters will strengthen our global EP business and improve growth in 2017.

So, to wrap up, I'd really like to thank our employees for their incredible winning spirit, terrific execution and commitment to the company. So, with that, I'll turn it over to Dan for more details on the P&L and guidance..

Thanks, Mike. In Q3 we generated organic revenue growth of 9% versus our 7% to 9% guidance range and adjusted earnings per share of $0.27, representing 12% year-over-year growth and hitting the high end of our guidance range of $0.25 to $0.27.

The double-digit adjusted EPS growth in Q3 was driven primarily by strong revenue growth and solid gross margin, which was at the high end of our guidance range.

Consolidated revenue of $2.105 billion represented operational revenue growth of 10%, at the high end of guidance and reflects an immaterial impact from foreign exchange, which was in line with guidance.

Excluding an approximate 100 basis point contribution from the AMS Male Urology portfolio acquisition for the month of July, organic revenue growth was 9% in the quarter and 11% on an as-reported basis. As a reminder, we completed the acquisition of the AMS Male Urology portfolio on August 3 last year.

So, August and September AMS sales were included in our organic sales growth calculation. Adjusted gross margin for the third quarter was 72.5%, at the high end of our guidance range and consistent with prior year despite a year-over-year negative 120 basis point impact from foreign exchange.

In Q3, as expected, we had lower inventory charges than in Q2 and we're now realizing the full benefit of the lower 2016 standard cost of our products due to ongoing value improvement programs.

We continue to expect full year 2016 adjusted gross margin to be approximately 72%, which includes an expected 75 basis point to 100 basis point negative impact from unfavorable foreign exchange.

Adjusted SG&A expenses were $763 million or 36.2% of sales in Q3, down 70 basis points year-over-year, as we realized the benefit of our targeted initiatives focused on reducing SG&A offset partially by the reinvestment of the Medical Device Excise Tax benefit.

We continue to believe our full-year rate will be approximately 36% which would be a 140 basis point improvement compared to 2015. Adjusted research and development expenses were $232 million in the third quarter, or 11% of sales, which is down 70 basis points year-over-year.

We continue to expect our full-year 2016 adjusted R&D rate to be approximately 11% of sales. Royalty expense was 0.9% of sales in Q3, roughly flat year-over-year.

Q3 2016 adjusted operating income grew 17% year-over-year and adjusted operating margin of 24.3% was above our guidance range of 23% to 24% and represented a 120 basis point improvement over Q3 last year, the ninth consecutive quarter in which we have expanded adjusted operating margin by 100 basis points or more over the prior year comparable period.

The Rhythm Management team delivered an adjusted operating margin of 20.1%, up 230 basis points year-over-year. The increase year-over-year is a result of realizing the full benefit of 2016 product cost and leveraging the improved top line performance of the global business.

For the first nine months of 2016 Rhythm Management adjusted operating margin is 17.9% and we continue to believe that that segment is on track to deliver an adjusted full-year operating margin of 20% in 2017.

With total company adjusted operating margin for the first nine months of 2016 at 24.3%, this positions us well to achieve our full-year adjusted operating margin guidance of 24% to 24.5%, and we remain on track to reach our goal of 25% plus in 2017.

We will provide more guidance on 2017 adjusted operating margin with our Q4 earnings call in February. Now, I'll move on to interest and other expense. Interest expense for the quarter was $58 million, roughly flat to Q3 of 2015. Our average interest expense rate was 3.9% in Q3 this year, compared to the same 3.9% in Q3 of last year.

Other expenses was $33 million in the quarter, and includes approximately $20 million of impairment charges related to certain of our strategic investments. Other expenses for the quarter, primarily included foreign exchange losses related to our hedging program.

Our tax rate for the third quarter was 11.2% on a reported basis and 12.4% on an adjusted basis.

We are making progress towards finalizing our conditional stipulation of settled issues with the Internal Revenue Service and expect to make a series of payments related to the settlement, most of which we expect to remit during the second half of 2017 and into the first half of 2018.

Finally, Q3 2016 adjusted earnings per share of $0.27 includes approximately $0.01 of unfavorable FX and represents 12% year-over-year growth or 17% growth excluding the impact of foreign exchange. Earnings per share upside from the strong revenue and margin performance was partially offset by the $0.01 of impairment charges we recorded.

On a reported GAAP basis, which includes net charges and amortization expense totaling $140 million after tax, Q3 2016 EPS was $0.17. Adjusted free cash flow for the quarter was $440 million compared to $394 million in Q3 last year.

And we continue to pursue inventory management initiatives designed to improve the working capital contribution to cash flow. Given the strong adjusted free cash flow generation year-to-date this year, we believe we can achieve our full year adjusted free cash flow guidance of $1.6 billion.

In Q3 we used cash primarily to fund previously agreed legal settlements as well as business development activities. As of September 30, 2016 we had cash on hand of $237 million and near-term our capital allocation priorities continue to be managing contingencies and pursuing tuck-in M&A.

We ended the third quarter with 1.380 billion fully diluted weighted average shares outstanding.

Consistent with our prior guidance, we expect our share count to increase by less than 5 million through the end of 2016, as consistent with our commitment at the time of the AMS Men's Health acquisition last year, we plan to keep the buyback suspended for the balance of 2016.

We expect this to result in a fully weighted average share count of approximately 1.380 billion shares for full year 2016. I'll now walk through the guidance for the fourth quarter and the full year 2016.

For the full year, we now expect consolidated revenue to be in a range of $8.335 billion to $8.385 billion, which represents year-over-year growth of 9% on an organic basis, 12% on an operational basis and 11% to 12% on a reported basis. We continue to expect foreign exchange to be a headwind of approximately $70 million for the full year.

Turning to adjusted earnings per share, we now expect full year 2016 adjusted EPS to be in a range of $1.09 to $1.11, representing 17% to 19% adjusted earnings growth, which continues to assume the full year negative impact of FX will be $0.05. On a GAAP basis, we expect earnings per share to be in a range of $0.32 to $0.34.

Now turning specifically to the fourth quarter, we expect consolidated revenue to be in a range of $2.140 billion to $2.190 billion. This represents year-over-year growth in a range of 7% to 9% operationally. We expect the foreign exchange impact on Q4 revenue to be a slight tailwind.

For the fourth quarter, adjusted earnings per share is expected to be in a range of $0.27 to $0.29 per share and GAAP earnings per share is expected to be in a range of $0.15 to $0.17 per share.

Please check our Investor Relations website for Q3 2016 financial and operational highlights, which outlines Q3 results as well as Q4 and full year 2016 guidance, including P&L line item guidance. And with that, I'll turn it back to Susie, who will moderate the Q&A..

Thanks, Dan. Shannon, let's open it up to questions for the next 30 minutes or so. In order to enable us, to take as many questions as possible, please limit yourself to one question and one related follow-up. Shannon, please go ahead..

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Our first question comes from the line of David Lewis with Morgan Stanley. Please proceed with your question..

Good morning. A couple of financial questions this morning. So, just first off, Dan, I know, it's a bit early, but I think 2017 numbers, consensus is sort of in the upper part of mid-single-digits and around sort of 13% earnings.

I'm wondering, if you could offer sort of any refinement, just given the strength we've seen here on 2016 and if you can, kind of refine this early, any headwinds or tailwinds we should be thinking about on the top line and bottom line, heading into 2017? Then I had a follow-up..

Yeah. David I don't think, we're going to provide any specific guidance for 2017, we'll do that as you would expect on our call in early February. We have been very public about saying that we believe next year is a mid-single-digit year in terms of revenue growth. But I wouldn't provide really any more than that at this point..

Okay. And maybe just two quick ones, one clinical one, one margin question. So for Dan, you eclipsed 20% margins here in CRM this quarter, I guess the question now is that's happening a lot earlier that many would have expected two years ago.

So where can CRM margins go now? And then for fourth quarter margins to deliver the earnings, you need to do better year-on-year, with margins in the fourth quarter than you did in the second quarter and third quarter.

So where can CRM go and the confidence in the fourth quarter margin? And then maybe for the clinical team, when do you think, we're going to get the first read on what the true pacing rates for LOTUS Edge? And I'll jump back in queue. Thank you..

Sure, David. I'll take the Rhythm Management operating margin, turn it over to Keith and Mike for the clinical question. So obviously very pleased to be at that 20% here in Q3 for Rhythm Management operating margin. It's 320 basis points sequentially and 230 basis points year-over-year.

As you would expect in any given quarter, you'll see some variation in that. Would actually expect that to go back down in Q4, a little more spending in Q4 on SG&A initiatives and such.

The full year should be about 18% which is what we've said consistently, that we would be this year and I think that puts us right in line to get to that 20% next year in Rhythm Management, which as part of us getting to 25% plus as a company, I think, gives us the confidence in both those numbers.

So, I don't think we're going to talk more specifically about the 20% where it would go from there. Certainly it goes north of that. We're not going to stop at 20% in 2017. Just as a company, we're not going to stop at 25%.

So, there is more room in that Rhythm Management segment to increase well beyond 20%, as the company goes to what we said publicly our goal of 27% to 28% operating margin by 2020..

Yes. So, just on LOTUS Edge, good morning, David, just a couple high level comments and Keith could maybe highlight TCT, which we have an important investor meeting on Monday, quite a bit more detail there. But overall, we're really pleased. We continued to deliver our overall Structural Heart commitment in terms of our guidance.

We guided to the high end of our $175 million to $200 million range for WATCHMAN and TAVR. Really pleased about the CE Mark for LOTUS Edge that we received among the (27:01) valves, we're very early in that phase.

But over the long-term, particularly as you point to the end of 2017 and the future, 2018 and 2019, we believe we're very well positioned with our LOTUS platform in terms of our launch into these large global markets and eventually Japan, well positioned to gain share.

We believe we have the very unique capabilities in terms of our operator control and physician control of the device, excellent PVL rates and our focus on improving the pacemaker rate. So, our aim will be to take significant share in these larger markets, and we're building momentum there.

So Keith, if you want to touch on TCT?.

Yeah, sure. David, this Sunday, the 30th, the LOTUS lunchtime symposium of TCT will be the first presentation of the first human use early feasibility data of Edge. Only 21 patients, but will certainly give us a guide, and we can discuss those data in more detail at the Investor Meeting on Monday morning at TCT.

Also at TCT, we'll have the four-year outcomes for REPRISE I, the three-year outcomes for REPRISE II, and you'll get more Edge data at ACC and further Edge data, and of course our pivotal trial data REPRISE III primary endpoint at EuroPCR..

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

Thank you and good morning, and I apologize for the background noise, I'm in an airport. So, first of all, just on behalf of the MedTech investment community, I'd like to thank you for a great third quarter, certainly some that have gone before you were starting to make investors nervous. So, congrats on a great quarter.

I wanted to ask a modeling question of Dan and then a product question for Mike.

So, first just on the modeling side, it's a little thing, but it stuck out to us, which was that your other income line was an expense of $33 million, and that hit EPS by probably up to $0.02, and I know you mentioned something in the prepared comments, but I'd just love to get a little bit of a better sense for what caused that uptick, and just where that line item goes from here, does it go back down to normalized levels that we've seen in the past? I just would love some comments on other income..

Sure, Bob. As you say, in the prepared commentary, we talked about a $20 million impairment in the quarter. We have an investment portfolio now that's over $300 million. So, as you'd expect, you may see impairments from time-to-time, it's not a regular occurrence.

So that is the difference basically between the year-over-year comparison of that line, is that impairment, and it was worth about $0.01 overall. So, without that, we would have been a penny higher, but that should not be a regular occurrence – time-to-time, but certainly not a regular occurrence..

Okay. So that line item goes back down to normalized levels. And then on the product side, I just wanted to get two quick updates. One is the timeline for MRI-safe ICDs in the U.S.

still the same as your previous guidance, which I think was the end of 2017? And then, on WATCHMAN, I'm trying to gauge the impact at the start of the post approval study, what kind of impact that might have had on the NCD and the availability of reimbursement? So now that we've got that up and running, does that have a strong incremental impact on the ability of folks to get WATCHMAN properly reimbursed? Thanks very much..

Sure..

Yeah. On the MRI-safe, no changes to our timeline there. We anticipate likely fourth quarter 2017. And importantly, in that category, we were down in the U.S. and down globally. But, our European business continues to do well, as our Asian business does, with our full line of MRI-safe products and the S-ICD continued to do very well.

So despite not having it for what will be a decent a part of 2017, the pacer business continues to do very well. We're doing very well outside the United States, and S-ICD is continuing to support us and differentiate that platform.

So we're very bullish on the future of our CRM business in the portfolio and despite that, the team continues to drive operating income margin improvements. So really nice job there. With WATCHMAN, we're continuing to build momentum there.

As you mentioned, the reimbursement headwinds really are beginning to neutralize, based on the advances that we've made there. We continue to open up new centers and we're really tracking, we're not giving you much visibility to that. In the future we will determine how to do that.

But we're continuing to focus on our utilization rate and driving more physician awareness, more patient awareness, and in parallel, doing a really nice job on physician training, so oftentimes training multiple physicians at the same site to increase utilization and in parallel, we're opening up a new center.

So again, on the Structural Heart side, we're at the high end of our range, $175 million to $200 million, and WATCHMAN contribution is significant within there..

The next question comes from the line of Mike Weinstein with JPMorgan. Please proceed with your question..

Thank you. And again, congrats on a nice quarter. 3Q by and large looks a lot like 2Q, so I actually have a couple of finance questions for Dan.

The first question is, with the mesh liabilities and the IRS tax payments, can you fund that from OUS cash, or are you going to have to do any borrowing for that?.

Our plan is not to have to do any borrowing on that. We should have full access to our cash through 2017, and don't anticipate any borrowings necessary..

Okay. Second quick one, Dan, do you know at this point based on current rates what you think FX would mean to the bottom line in 2017, and simply we don't have a good visibility on your FX hedges and where they are and how they roll off.

Do you have any insight to that at this point?.

Yeah. I think it probably makes sense to hold that until the February earnings call and give all the guidance package all together as opposed to kind of doing something one-off here. But have faith we'll give you full information on what we see as of February..

The next question comes from the line of Josh Jennings with Cowen & Company. Please proceed with your question..

Hi. Good morning. Thanks a lot for taking the question. I just wanted two quick questions on CRM, post the MRI-safe pacemaker approval, you clearly had two quarters of significant success getting back share, any incremental color you can provide on how you've been so successful, anything in the market dynamics.

And then any – also I was just curious about why we – should we be thinking of your pacemaker recovery as a precedent for ICD recovery once you have MRI-safe high-voltage approval?.

Thanks for the question Josh. We're pleased, we signaled at the end of the Q2 call that we thought overall CRM would be in line with 2Q, which we're pretty close to that. And we think fourth quarter will likely be in line with third quarter results.

So, pretty consistent performance across our CRM business and you highlighted particular strength in pacemaker, really strong since the launch of our new products.

I think it's a combination of an excellent lead, the ability to deliver that lead, excellent battery longevity in our pacer line, very strong commercial team, and a consistent actually stronger performance in the U.S. than we saw globally upon launching these products. So, the commercial team has done very well, and physicians are very comfortable.

I don't know, Ken, if you have any additional comments on our MRI pacer from a physician standpoint?.

Yeah. Thanks, Mike.

Josh, I think what's really helping drive the growth is the differentiated features we have in our Brady platform on top of MRI, including automated remote daily monitoring of these devices, including the performance of our newly released INGEVITY lead, we've had really fantastic feedback from clinicians since commercial release of that lead, validating excellent results we saw in the clinical trial.

And I think in terms of what does that portend for tachy, I think we take a lot of pride in looking at how the portfolio is delivering in Europe, where we do have full approval of our tachy MRI products, including backwards compatibility to our previously released products and have MRI approval, both for traditional transvenous devices as well as for our S-ICD.

And we believe that the same performance that we're seeing in Europe, where we have the full portfolio approved portends what we are we're going to see in the U.S..

Great. Thanks for those answers and just a follow-up. One of your big competitors has had a recall of their high voltage platform. They've had to design around, but how are you thinking about this as a potential opportunity for Boston going forward in front of MRI-safe approval on the high voltage side. Thanks a lot, gentlemen..

Well, I think, what we've done is, we very consistently promoted and we promoted with proof, the unique benefits of our ENDURALIFE battery technology as being best in class and that's really been proven out from nine independent studies, contemporary device longevity. So even prior to some of the challenges that St.

Jude has seen, we've been very clear to the marketplace that we have very unique battery technology and also excellent remote monitoring.

So I think those two features stand the test of time and really have been the anchor of our strategy for a number of years now and we believe over time particularly as healthcare modifies and more outcome-based that having that type of capability is enjoyed by – certainly by patients and also by physicians.

So we think those unique strengths combined with our commercial team put us in a good position to compete..

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

Morning, everybody. Just to start with another LOTUS question. Mike, with LOTUS Edge approved and clearly some clarity on maybe better outcomes achieved with lower depth implant, when do you more broadly rollout the technology and this procedure approach to a broader audience? And maybe just tie that in as well to Dr.

Meredith's appointment, as much as I'll miss Dr. Dawkin's dulcet tones and eloquent commentary, why the change now and bringing him in-house? What can you achieve with Dr.

Meredith in-house versus out in the world?.

Well, first I'd like to thank Keith. He's done a remarkable job at Boston Scientific. He has been here for nine years.

He brings the patient focus first to our Executive Committee and has really helped, along with Kevin and our broader team, led the turnaround and sustained growth of our Interventional Cardiology business and moving to Structural Heart. So, Keith, done a terrific job, transition very smooth at the end of the year. Dr. Meredith is joining.

Ian is very well known in the Structural Heart community. Structural Heart is a big investment and a key focus area for the company. And so there will be a seamless transition and Ian will begin early in the year. So you'll see him at various investor conferences and so forth. But Keith did a great job of transitioning.

And again, I think just to repeat some of the comments earlier, we're very bullish on the future of our LOTUS platform for the reasons we've articulated with the PVL rates, the controlled release of this device and the enhancements that Depth Guard and LOTUS Edge promise to deliver. And we're being very appropriate in terms of the rollout of that.

And at TCT we'll provide some additional information on pacemaker rates on some early clinical studies, as well as some additional commentary from Tom Fleming, Keith and Kevin Ballinger..

Just to follow-up, Mike, on AMS. Obviously Urology had a good quarter on multiple fronts. Can you talk about AMS, where are you in the – in achieving the sales synergies that you hoped for? Are you starting to see it, and is that side of the story where you expected it would be, are you ahead, behind, just any perspective there would be very welcome.

Thank you..

Yeah, I would say, overall we're likely slightly ahead on the cost synergy side, done a very nice job with that. We're certainly ahead overall in terms of the strategic value of the acquisition, given the overall strength of our Urology business.

And as a standalone business, the AMS business grew 5% in the quarter, which is slightly ahead of their kind of historical performance. So, we think in our hands, the standalone business is performing better and it will perform better.

And more importantly, the complementary nature of the two businesses, with stone, BPH, ED is a very comprehensive package for our commercial teams to take to customers. And not only is it very broad-based, but it also has unique clinical differentiation. So, the combination of the two makes our legacy portfolio stronger.

And so, overall we're clearly at or ahead of our internal deal models on the overall acquisition..

Thanks..

The next question comes from the line of Vijay Kumar with Evercore ISI. Please go ahead with your question..

Hey, guys. Congratulations on a nice quarter. I had two quick ones. Maybe I'll start with on the Structural Heart side. On LOTUS, can you maybe talk about competitive dynamics in Europe. Are you still gaining share? I know that you guys are not yet there in France.

So maybe any perspective on that would be helpful?.

Sure. Yes, we are probably not going to give you as much detail as you'd like. Again overall, we're at our high-end of our guidance projected for our Structural Heart, obviously LOTUS is a key component to that. We're still, I think, it's safe to say, we're growing faster than the market in Europe.

And what's important to note is, we don't have all the – all of our ammunition yet with LOTUS. We don't yet have our largest valve and our smallest valve. And so we're doing quite well in the market with three valves and we'll be excited about getting the additional two valve sizes for the full matrix.

And I think, what's really different is kind of the same drumbeat. It's a different device, it's a next-generation platform that doctors really enjoy the control that they have with it.

And so it's – I wouldn't say it's easy, but it's easier to differentiate this valve than some of the other balloon expandable devices that they have options to use in Europe. So we're very bullish on the future of it.

In terms of France, we expect to have reimbursement by year-end 2017, so hopefully we'll see some upside from France reimbursement, ideally in the fourth quarter 2017..

Great. And then maybe one quick one on MedSurg. Again I think, this has been a phenomenal segment for you guys.

And if I look at those really, really strong growth rates you've put up, can you help us understand, what's the underlying growth rate versus what's been the contribution from new products, right, because it's kind of hard for us to model and any sort of new product cadence that you have lined up for 2017, I think would be helpful..

Yeah. So our MedSurg business, particularly Endo and Uro doesn't have the – call it singular blockbuster devices or platforms like SYNERGY or WATCHMAN or LOTUS does. So Endoscopy is a very broad-based portfolio, as is Urology.

We have some kind of star platforms in Endoscopy with our AXIOS Stent and our SpyGlass digital, but it's really a very broad-based portfolio that we continue to layer on new innovations to broaden out the adjacencies that we compete in similar to the recent acquisitions that we've done with EndoChoice and CeloNova.

So really not one big product, but overall, you're seeing us increase the R&D spend in those businesses over the past few years. We've been more active in M&A in the Endoscopy, Uro and Neuromod area. And importantly, they were under-scaled outside the U.S. And we've put a lot of investment outside the U.S.

over the past few years, and that continues to pay off, and that's not a one-time payoff, it will continue to payoff, as well as emerging markets. So it's really not a one product story, and it's very diversified strength in those businesses.

Keith, there was something else on LOTUS TCT or did we cover that sufficiently?.

I think we covered it sufficiently. French reimbursement is important, because France is the second largest European market with a high penetration of TAVR, TAVI and so we're looking forward to bringing the product to France. Obviously, there are French investigators in our trials, and they've been impressed with the acute performance of LOTUS..

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

Good morning, guys. Thanks for taking the question. And Keith, good luck in your new endeavors. I'll miss working with you. Two product related questions. First on Neuromodulation and the ACCELERATE trial. You mentioned that you would give an update on the Q4 call in February.

NANS this year is January, so does that mean we're not going to see the ACCELERATE data at NANS? And I have one other question. Thanks..

Thanks, Larry, good morning. Yeah, our plan is to provide an update on the ACCELERATE trial at our fourth quarter 2016 earnings call, which is shortly after NANS, I believe. So our plan is to provide some additional color at that call, fourth quarter 2016..

So Mike, just to be clear, no data at NANS, is that what you're saying?.

Yeah. Our plan is to provide additional insight in the fourth quarter....

Okay..

...2016 earnings call..

Clear. Thanks. And then on drug-eluting stent growth, obviously very strong this quarter. I think it accelerated to 14% from 9% last quarter. Was that balanced across geographies, and then, I know Keith, I think new competition will probably become more prominent at TCT, given the Biotronik data coming and the Medinol data coming as late breakers there.

So any kind of previews from you on the competitive dynamics there? Thanks for taking the questions..

Thanks, Larry. I think the difference between some of the competitors and SYNERGY is that we have a very large dataset with SYNERGY. We now have approximately 20,000 patients in multiple clinical trials in a lot of high risk subsets of patients.

And as you know, from the two-year data from the pivotal EVOLVE II trial, best-in-class stent thrombosis rates at two years. In fact, no definite stent thrombosis, not a single definite stent thrombosis after the first 24 hours. So we do think safety is an important metric, and we don't think we have any competition in that area.

I think what will be interesting at TCT is some of the longer-term follow up of fully resorbable stents, particularly the three-year data from Absorb II, because if fully resorbable stents get better the longer they're in, in terms of remodeling and so on, that will be an important finding. Clearly the two-year data in that regard were disappointing.

So we also like the acute performance of SYNERGY. The ease of use for interventional cardiologists worldwide is well appreciated. So we're very confident in SYNERGY, we had a very nice Japanese launch. And we think the appreciation of physicians is matched by the growth that you've seen in this quarter's figures..

The next question is from the line of Matt Miksic, with UBS. Please go ahead with your question..

Hi. Thanks for taking our questions. So I wanted to talk a little bit about the Endo Stitch (48:38) acquisition and the types of strategic investments and adds that you're looking at or thinking about. One of the things that struck us about that was this desire to kind of – to fill out that portfolio, better serve the ASCs.

I think you mentioned in your prepared remarks something like the – sort of the broad line, complete provider of solutions in that specialty.

And just wanted to understand how you're thinking about acquisitions like that, the importance of sort of breadth, if you will, and where, if you see opportunities, also to kind of go deep on the – on sort of WATCHMAN-type innovation, type acquisitions? Then I have one follow-up..

Sure. So we have a pretty active business development group and we're very disciplined in the types of deals that we look at, obviously need to focus on our strategic fit and also strong return.

Dan also mentioned, we had a slight impairment with one of our venture investments, but we have a pretty significant venture investment portfolio that we think will bring strong value to the company, particularly as we look out at 2018 and 2019, which is very exciting.

I think, just in terms of this deal, it's very consistent, the Endo deal with our strategy, which is, one is to continue to strengthen and diversify the company in the faster growth markets. So the MedSurg segment is a significant contributor.

Endo business is a leader, but we were a little bit lighter in terms of our portfolio in the ambulatory surgery center. We also hadn't offered a pathology solution for this business.

So it gives us a capability for, in the surgery center market, which is a nice extension, and expands us into some adjacencies in pathology and fills in a few products in our core business. So it will be a nice tuck-in acquisition, nice cost synergies, and probably on a lower risk scale in terms of integration.

But we've also complemented those deals with some nice strong investments, obviously you mentioned the WATCHMAN acquisition. And also, I think our – hopefully our M&A track record is pretty solid.

We're ahead of our deal model with AMS, we've done a very good job, the PI team with our Bayer acquisition, so we'll continue to look at acquisitions which support the strategy, diversifying to faster growth markets and category leadership, and we're very active in scanning the market in those areas..

Thanks, Mike. And then, the follow-up for Dr. Stein.

I know, Josh asked the question earlier about one of your competitors having a recall, and you certainly have the perspective on this much more than most of us, but doesn't seem like this is going to become any kind of market sort of clinician concern, patient concern event, as we've seen in the long history of CRM.

But if you could maybe help put it in perspective, what you've seen so far, heard so far, any – if you have any concerns that this becomes sort of like a segment issue?.

Yeah. Thanks for the question, Matt. I'm not going to comment about patient management for those patients who are affected by our competitor's advisory, I mean certainly, we take any individual patient safety issue, patient concerns, very seriously. Overall, we do not believe this is going to have any impact on market growth either in the U.S.

or globally..

The next question comes from the line of Chris Pasquale with Guggenheim. Please go ahead with your question..

Thanks. Mike, can you talk a little bit more about the EndoChoice acquisition. The decision, in particular to explore options for FUSE, that product hasn't lived up to expectations yet, but it would seem like, plugging it into a larger sales organization could be the missing piece of the puzzle.

And you guys have had some success historically on the imaging side of the business with SpyGlass, so why not keep that and see if you can realize that potential yourselves?.

Yeah. We probably won't provide a lot of color on that. We certainly like the assets of EndoChoice and we're pursuing options. So we haven't declared fully that we are going to sell that business or retain that business. So more information to come likely at our next earning call, in terms of the status update there..

Okay. And then you mentioned the ongoing replacement cycle headwind in ICDs, which has been an issue you've dealt with for a long time.

What's your latest estimate for when that should turn positive for you?.

So we anticipate especially the likely second half of 2017, the flattening out and ideally a slight improvement on the CRT-D side, on the replacement cycle and then in 2018, on the ICD side.

So some benefit in 2017 and more benefit in 2018, based on the modeling that we've done and that'll also come on the heels of a full 2018 launch of our MRI – full year benefit of our MRI capability..

So just want to maybe close the call, and Dan talked about kind of mid-single digit guidance for next year. We will provide all that detail in second quarter. I think what we're most excited about is the future of the company and we talked quite a bit about the platforms that we'll be entering and markets approaching $8 billion to $9 billion in 2020.

We'll detail this out at the Investor Day, but it's exciting future as we move into a very large market in TAVR expanded indications in the future with WATCHMAN, our drug-eluting technologies, a real commitment that we have to neuro-stimulation expanding to deep brain stimulation and potentially to other areas and really in the field of endoscopy where our team is looking at breakthrough capabilities to take more general surgery approaches to less invasive procedures.

So, there's a lot of new therapies that the business will be entering that we'll show at our Investor Day that really give an exciting future to the company beyond our 2017 guidance that we'll provide in February..

Great. With that, we'd like to conclude the call. Thanks for joining us today and we appreciate your interest in Boston Scientific. Before you disconnect, Shannon will give you all the pertinent details for the replay..

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