Susan Vissers Lisa - Boston Scientific Corp. Michael F. Mahoney - Boston Scientific Corp. Daniel J. Brennan - Boston Scientific Corp. Ian Meredith - Boston Scientific Corp..

Michael Weinstein - JPMorgan Securities LLC David Ryan Lewis - Morgan Stanley & Co. LLC Bob Hopkins - Bank of America Rick Wise - Stifel, Nicolaus & Co., Inc. Brooks E. West - Piper Jaffray & Co. Larry Biegelsen - Wells Fargo Securities LLC Matthew Taylor - Barclays Capital, Inc..

Ladies and gentlemen, thank you for standing by. Welcome to the Boston Scientific Q4 2016 Earnings Call. As a reminder, this conference is being recorded. I'd now like to turn the conference over to Susie Lisa. Please go ahead..

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

We issued a press release earlier this morning announcing our Q4 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 approximately one hour. Mike will provide strategic and revenue highlights of Q4 2016 and full year 2016.

Dan will review the financials for the quarter and then Q1 2017 and full year 2017 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. Ian Meredith 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 EndoChoice over the relevant 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 Q1 and full year 2017 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. Thanks Mike..

first, to complete enrollment in IMPERIAL IDE for our Eluvia drug-eluting stent; and secondly, enrollment for the IDE trial for our Ranger Drug-Coated Balloon in the U.S. Interventional cardiology continued its above-market growth trend, delivering 12% growth in the quarter and 13% for the full year.

IC growth was led worldwide by continued strength in drug-eluting stents, PCI Guidance and structural heart. Global DES sales grew double-digit, led by SYNERGY, which ended the year at the high end of our guidance range for 50% to 60% of our worldwide DES mix. We're also really pleased to announce the recent approval of SYNERGY in China.

PCI Guidance also grew double-digits on strong performance in both IVUS and our COMET fractional flow reserve platform. IC performance was also fueled by our structural heart business, which includes the LOTUS Aortic Valve and WATCHMAN Left Atrial Appendage Closure.

As we disclosed last month, 2016 structural heart revenue exceeded our $175 million to $200 million guidance range. And we expect revenue from these two franchises to contribute approximately $300 million in 2017. 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. LOTUS offers physicians unparalleled control during implantation and best-in-class paravalvular leakage rates.

Importantly, we continue to enhance the LOTUS platform via LOTUS Edge, which is a more flexible and lower profile delivery system, and Depth Guard which minimizes LVOT interaction during deployment.

We expect to present RESPOND extension data on LOTUS with Depth Guard at EuroPCR in May, which will provide further insight into reducing our PPM rates, while maintaining best-in-class PVL rates. We plan to restart the REPRISE EDGE study in Q2 and launch LOTUS Edge in Europe in Q3.

We're also excited to present pivotal trial REPRISE III at EuroPCR in May and believe we remain on track for a second quarter PMA filing and FDA approval by year-end 2017. The WATCHMAN platform also delivered an exciting quarter with strong growth from existing centers and a continued steady pace of opening new centers.

We ended 2016 with over 200 U.S. WATCHMAN centers and expect to close 2017 with approximately 350 centers. This quarter we plan to enroll our first patient in ASAP 2, which is a study examining the use of WATCHMAN in warfarin-ineligible patients and SALUTE, a trial specifically designed to pursue regulatory approval in Japan.

So overall, we're extremely pleased with our progress in structural heart and excited about our capabilities and long-term prospects for this business. Global CRM sales accelerated to a very impressive 8% growth in the quarter, and 3% for the full year 2016 .In Q4, we delivered double digit growth in the US and low single digit growth overseas.

The US strength reflects continued share gains with our ACCOLADE MRI Brady platform as well as strong global growth in EMBLEM S-ICD and Quad X4 CRT-P. In the quarter, Japan grew double digits on strong S-ICD adoption, and we're launching our MRI-compatible version of EMBLEM later this quarter in Japan.

In CRM in 2017, we're very excited about our upcoming next generation high-voltage launches. The RESONATE family of ICDs and CRT-Ds will bring multipoint pacing to our CRT products.

Updated best-in-class longevity labeling, via our EnduraLife batteries across all families of high-voltage devices and the first and only validated heart failure predictive diagnostic in HeartLogic. The clinical data supporting HeartLogic was presented as a late-breaker at AHA in November.

And we have CE Mark in hand, and we'll begin the RESONATE launch in the EU shortly. US approval is expected in Q3.

Turning to electrophysiology, we grew sales 5% in the quarter, and importantly, we're excited about our new RHYTHMIA HDx platform, which provides significant improvements in workflow efficiency and performance, and also enables the platform to support future innovative features and functionality.

We're launching the HDx platform in Europe and expect to launch in the US in second quarter. We continue to strengthen our EP business, and we look forward to multiple therapeutic catheter launches in the second half of 2017 in the EU and the US. Our strategy of category leadership is working.

It's helping us become a stronger partner to our global customers. Our company has excellent momentum going in 2017, and our outstanding 2016 results reflect the strength of our portfolio, our investment in the faster growth segments, our globalization efforts and focus on improving profitability.

We believe we are poised for a strong 2017, and we're very well positioned to continue and strengthen our performance track record in 2018 and beyond, as we enter significant new markets with the differentiated products and platforms that address the unmet needs of physicians and their patients.

I truly want to thank our employees for their high performance results, their winning spirit and commitment to advancing science and improving the lives of patients around the world. Now, let me turn the call over to Daniel for a detailed review of our financials..

Thanks, Mike. Fourth quarter consolidated revenue of $2.191 billion represented 11% growth on both an operational and reported basis. This strong top line reflects an unexpected $20 million headwind from foreign exchange, compared to an immaterial tailwind expected at the time of guidance.

Excluding an approximate 40 basis point contribution from EndoChoice acquisition that closed at the end of November, organic revenue growth was 10% in the quarter compared to our guidance range of 7% to 9%.

We delivered Q4 adjusted earnings per share of $0.30, representing 14% year over year growth and exceeding the high end of our guidance range of $0.27 to $0.29.

The double digit adjusted earnings per share growth in Q4 was driven primarily by strong revenue growth, and would have further exceeded our guidance range if not for certain inventory charges related to our LOTUS Edge voluntary field action. I'll provide more details on the inventory charges shortly.

Our full year 2016 consolidated revenue of $8.386 billion grew 12% on both an operational and reported basis and 10% organically, which excludes the contributions from the AMS male urology portfolio and EndoChoice acquisitions in their respective periods.

Full year 2016 adjusted earnings per share of $1.11 represents 20% growth, and excluding the $0.06 FX headwind that we effectively offset through operational savings and initiatives, adjusted earnings per share grew 26% versus 2015.

Adjusted gross margin for the quarter was 72.6% compared to 72.8% in Q4 of 2015, and includes the year over year negative 120 basis point impact from foreign exchange.

As a result of the LOTUS Edge voluntary field action initiated in November, in which we paused our European limited market release due to an issue with the deployment pin, we recorded inventory charges equivalent to approximately 50 basis points. Absent these charges, gross margin would have exceeded the high end of our guidance range.

As disclosed last month, we believe we've identified both the issue and the solution to fix the deployment pin, which is a combination of minor process and specification changes and remain on track with our expected US timelines.

For the full year 2016, adjusted gross margin was 72%, consistent with the prior year, despite the year over year negative 90 basis point impact from foreign exchange. Costs related to our new Malaysia manufacturing plant and AMS integration and quality remediation expenses.

Adjusted SG&A expenses were $801 million or 36.5% of sales in Q4, down 170 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.

As we disclosed during the year, we spent the entire medical device excise tax benefit, but the majority of that reinvestment took place in Q2 through Q4. We continue to make progress on our margin expansion targets, as our full year 2016 adjusted SG&A rate of 36.1% is down 130 basis points versus full year 2015.

Adjusted research and development expenses were $251 million in the fourth quarter, or 11.5% of sales, which is down 50 basis points year over year. For the full year 2016, adjusted R&D expenses were $914 million or 10.9% of sales compared to 11.4% of sales in 2015.

Royalty expense was 0.9% of sales in both Q4 and the full year 2016, which is roughly flat year over year for both periods.

Q4 2016 adjusted operating margin of 23.7% increased 200 basis points year over year and was slightly below our guidance range of 24% to 24.5% due to the inventory charges recorded in connection with the LOTUS Edge voluntary field action. Excluding these charges, operating margin would have been at the midpoint of our guidance.

And even with these charges, Q4 represents the 10th 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 17.9% for both Q4 and the full year 2016.

This represents a year over year adjusted operating margin increase of 400 basis points for Q4 and 290 basis points for the full year, as the team continues to make progress on gross margin, focuses on expense control and leverages the improved top-line performance of the global business.

For the full year 2016, total company adjusted operating margin of 24.1% expanded by 180 basis points over the full year 2015. We believe this sets us up well to deliver on our 2017 adjusted operating margin guidance in the mid-25% range, discussed in more detail shortly, and our longer-term 2020 adjusted operating margin target of 28%.

In the fourth quarter, we recorded a total litigation related charge of $172 million, of which $170 million related to mesh and the remaining $2 million increase related to other legal matters.

During the quarter, we became aware of additional mesh claims as we continued working through the settlement evaluation process, and have now reached conditional, final or near final settlement on 31,000 of our 42,000 claims.

To determine our reserve, we continually assess the volume of known claims, estimated cost to resolve each claim, an estimate of the future claims, and the cost to defend each claim in order to calculate the required reserve and make any necessary adjustments.

Having now settled or reached agreement in principle with nearly three quarters of all outstanding claims, we continue to reduce the risk on our balance sheet. Now I'll move on to interest and other expense. Interest expense for the quarter was $58 million, roughly flat to Q4 of 2015.

Our average interest expense rate was 4% in Q4 compared to 3.9% in Q4 of 2015. Other expense was $7 million in the fourth quarter, and primarily included a net gain on investments of $13 million offset primarily by foreign exchange losses related to our hedging program.

And for the full year, interest and other expenses were $233 million and $37 million respectively. Our tax rate for the fourth quarter was negative 39.7% on a reported basis, and 11.2% on an adjusted basis. And for the full year, our tax rate was a negative 95.9% on a reported basis and 12.4% on an adjusted basis.

The favorability in our adjusted tax rate versus guidance was due to a better than expected and sustainable geographic mix of profit. We're making good progress towards finalizing our conditional stipulation of settled issues with the Internal Revenue Service for the 2001 through 2007 tax years.

We've now reached an agreement in principle with the IRS as to the resolution of the same transfer pricing issues for the 2008 through 2010 tax years, although final agreement is pending, additional calculations of tax and documentations.

As previously disclosed, we expect to make a series of payments related to the settlement, most of which we expect to remit during the second half of this year and into the first half of next year.

Furthermore, as a result of the settlement, we expect to have access to at least one additional year of O-US cash, which should put us through the end of 2018.

Finally, Q4 2016 adjusted earnings per share of $0.30 includes approximately $0.02 of unfavorable FX and represents 14% year over year growth or 21% growth excluding the impact of foreign exchange.

The additional $20 million of negative FX on the top line created an additional $0.01 of unfavorable FX, which effectively offset the net gain on investments recorded in the quarter. On a reported GAAP basis, which includes net charges and amortization expense totaling $291 million after tax, Q4 2016 earnings per share was $0.09.

For the full year 2016, we reported adjusted earnings per share of $1.11 at the high end of our guidance range while absorbing $0.06 of unfavorable FX. Full year 2016 adjusted earnings per share grew 20% over the prior year and 26% excluding the impact of foreign exchange.

On a reported GAAP basis, 2016 earnings per share was $0.25 compared to a full year 2015 GAAP loss per share of $0.18. Adjusted free cash flow for the quarter was $454 million compared to $448 million in Q4 of 2015. In the quarter, we used cash primarily to fund previously agreed upon legal settlements as well as business development activities.

As of December 31, 2016, we had cash on hand of $196 million. Our full year 2016 adjusted free cash flow of $1.607 billion met our stretch goal for the year and represents growth of 18% over the full year 2015.

Capital expenditures for the full year 2016 totaled $376 million, slightly ahead of our $350 million target, as we made opportunistic land and equipment purchases to help invest for additional capabilities and to build future capacity.

Recall that the higher CapEx spend in 2016, which compares to $248 million in 2015, largely reflects the greenfield build of our Malaysia facility. We initially expected an incremental $100 million benefit to free cash flow in 2017 as significant portions of the construction are now behind us.

However, we now expect a slightly smaller incremental benefit of $75 million, resulting in a targeted $300 million in CapEx in 2017 due to additional investments in LOTUS Valve and SYNERGY manufacturing equipment due to higher than planned volumes as well as campus consolidation and plant network optimization activities that were both included in the restructuring program, which was not approved until mid-2016.

This higher CapEx investment is reflected in our adjusted free cash flow guidance for full year 2017 at $1.750 billion. Near term, our capital allocation priorities continue to be managing contingencies, pursuing M&A, and as of January 1, 2017, share buybacks as our share buyback program is no longer suspended.

Any purchases under our share repurchase program would be subject to business development opportunities, market conditions, our stock performance, regulatory trading windows and other factors. We ended Q4 with 1.377 billion fully diluted weighted average shares outstanding.

And we expect a fully diluted weighted average share count of approximately 1.395 billion for Q1 2017 and full year 2017. I'll now walk through the guidance for Q1 and the full year 2017.

For the full year, we expect consolidated revenue to be in the range of $8.675 billion to $8.875 billion, which represents year-over-year growth of 5% to 7% on an operational basis, including an approximately 70 basis point contribution from EndoChoice, and 3% to 6% on a reported basis.

We expect foreign exchange to be a headwind of approximately $125 million for the full year 2017. We expect our adjusted gross margin for the year as a percentage of sales to be in a range of 72% to 73% for the full year, which assumes a negative FX impact of 50 basis points.

We expect this headwind to be offset by favorable mix, standard cost reduction programs and the ramp of accretive new products.

We expect full year adjusted SG&A to be in the range of 35% to 36% of sales as we continue to see the benefits of programs currently underway continuing to offset our reinvestment of the medical device tax suspension benefit.

In 2017, we will again reinvest the full benefit of the suspension with strong investments in structural heart and other exciting and durable growth platforms. Full year adjusted R&D is expected to be in a range of 10.5% to 11.5%. And we expect our royalty rate to remain at approximately 1% of sales for the year.

This implies a full year 2017 adjusted operating margin in a range of 25% to 26%, which would deliver on our goal from both our 2013 and 2015 Investor Days to deliver 25% plus adjusted operating margin in 2017. At the midpoint of 25.5%, this would represent 140 basis points of improvement over the full year 2016.

We forecast our 2017 adjusted tax rate between 12.5% and 13.5%, including approximately a 125 basis points of benefit from adopting the new accounting standard for stock compensation. Absent the new standard, we would have forecasted an adjusted tax rate of approximately 14%.

This forecast is approximately 100 basis points lower than the previous direction we provided due to the sustainable favorability in our 2016 tax rate as well as the access to the additional year of OUS cash that I mentioned. We continue to expect our tax rate to rise by 100 basis points annually for the next few years.

As a result, we expect full year 2017 adjusted earnings per share to be in a range of $1.22 to $1.26, representing 10% to 13% adjusted earnings growth, which now assumes the full year negative impact of FX will be approximately $0.08 or approximately $0.02 per quarter compared to our previous expectations of $0.06 to $0.07, due to the volatility in rates we've seen over the last few months.

In addition, our EPS guidance includes a $0.02 benefit from the accounting change related to stock compensation, the majority of which will occur during the first quarter due to vesting of our annual grants. On a GAAP basis, we expect earnings per share to be in a range of $0.86 to $0.91.

Turning to Q1 2017, we expect consolidated revenue to be in a range of $2.050 billion to $2.100 billion. This represents year-over-year growth in a range of 6% to 8% operationally, including the 70 basis point contribution from EndoChoice. We expect the foreign exchange impact on Q1 revenue to be a $20 million headwind.

For the first quarter, adjusted earnings per share is expected to be in a range of $0.29 to $0.31 per share and GAAP earnings per share is expected to be in a range of $0.18 to $0.21 per share.

As a reminder, our Q1 2016 operating margin of 25.1% was the highest of the year and resulting adjusted earnings per share of $0.28 was also higher from not yet spending the full benefit of the medical device excise tax suspension.

Please check our Investor Relations website for Q4 2016 financial and operational highlights, which outlines Q4 and full year results, as well as Q1 and full year 2017 guidance, including P&L line item guidance. So, with that, I'll turn it back to Susie, who will moderate the Q&A..

Thanks, Daniel. David, 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. David, please go ahead..

And the first question will come from Mike Weinstein with JPMorgan. Please go ahead..

Good morning and thanks for taking the questions and also congrats on another fantastic quarter. Maybe just a couple items.

So, number one, Dan, could you share with us your thoughts on the cadence of organic growth over the course of the year? Obviously your comparisons get more difficult and so would love to just get your thoughts in terms of how the year plays out, number one.

Number two, the CRM business benefited particularly on the ICD side from the challenges at St. Jude. Just can you give us your thoughts on sustainability? Then I'll sneak in a third, which is just the comment on the ACCELERATE trial, Mike, basically it sounded like you were trying to enroll some more patients at the corrected or new lead position.

Is that accurate? Thanks..

Sure, Mike. Thanks. I'll take the cadence of growth and then Mike can take the other two. In terms of that, I think it really comes down to comps. So obviously very pleased with the organic revenue growth of 10% in Q4 and the full year last year, and believe we've got good momentum heading into 2017.

And I think the overall guidance that we have from what we've seen compares very favorably to our peers. When you look at comps, I think that's really where that the Q1 and then the rest of the year story comes in. Our comp for Q1 in 2017 is 8%, so slightly lower than the next three quarters, which are 10%, 9% and 10%.

So that's really the cadence as to why Q1 is higher than what you'd see in the last three quarters, is really comes down to overall comps for the company..

Sure and thanks, Mike, a couple comments on CRM. We're obviously really pleased with the performance in the quarter. The business as we talked about grew 8% in the quarter, 3% for the full year, which is we think nicely above the marketplace. And pacer growth has been very strong, 22%.

There is some competitive approvals, which we thought would happen about six months ago. But we still expect to do, grow our pacer business beyond the marketplace in 2017. Really excited about what's going on in defib globally.

The S-ICD continues to be highly differentiated, continues to have strong uptake around the world, and really is a very big differentiator for our defib platform. We have our MRI defib platform approved international markets. We hope to have that done by the end of the year in the US.

And what we're really excited about, I commented briefly on the script is the RESONATE launch, which will be effectively in first quarter in Europe. And we think this is very unique, has very differentiated multipoint pacing.

It even extends our longevity benefit greater based on additional labeling, and also contains – we can detail it more with Ken and also at Investor Day, HeartLogic, which we think is a very differentiated heart failure diagnostic tool only available on the RESONATE platform.

You combine that with we think CRT, our headwind in replacements will become a bit more of a tailwind throughout 2017. So we think the future is bright in CRM, and particularly once we have our defib MRI approval at the end of the year. With respect to your third question, you snuck three in there, very impressive.

With the third one on the novel (34:23) ACCELERATE, really not much more to comment. We were enabled a pre-specified interim review of the data that was constructed as part of the trial design. We obviously took advantage of that.

We feel it's in our best interest, especially given the growth of that division, 12% growth for the full year and 16% in the fourth quarter, and strong momentum internationally and US in spinal cord stim.

So we'll continue to enroll that ACCELERATE trial, Likely take to the end of 2017 to finish enrollment, and we'll report out the results when appropriate likely in mid-2018..

Perfect. Thank you, Mike..

Next we'll go to the line of David Lewis with Morgan Stanley. Please go ahead..

Good morning, and I'll just throw in two to get us back on track, but congrats on a good quarter. Dan, just one on cash for you, and then maybe a broader question on R&D. I guess first of all on cash, so cash flow starts becoming a much bigger driver to the business here over these next three years, specifically kind of 2018 and 2019.

But you do have significant cash outflows this year. Could you sort of walk us through the timing of sort of mesh and tax payments here in 2017? And with the magnitude of those payments, what impact does that have this year on interest or ability to do M&A and buybacks? And then another question sort of financially or maybe broadly for Mike.

Your R&D spread this year is wider than I can remember in past. I maybe wrong about that, but it seems they're pretty widespread. What gets you to the low end and the high end of the R&D investment cycle this year? And I'll jump back in queue. Thank you..

Sure, David. So relative to the cash question, I think as you know, we've a significant effort underway to really to derisk and eliminate a lot of the larger liabilities from the balance sheet, as you mentioned, two of the biggest ones being the tax and the mesh.

The way we would look at that is by the middle of 2018, we should have put the majority of mesh behind us, right. As you heard in the prepared comments, 31,000 out of the 42,000 are behind us now relative to settlement. The payment of that obviously will lag a little bit, but 2017 and into tail end of 2018 is what we would see there.

The tax, we've mentioned that before, a little more than $500 million, and that should be the majority of that in the back half of 2017 and some might trickle into 2018.

So 2017 may be a little bit more constrained on the cash side, although I will say from a credit rating perspective, and our leverage metrics, we start to really free that up as we get to the back half of this year and get back to our capital structure goal. So probably have a little bit more room on that front.

So I'd look at 2017 as putting a lot of those liabilities behind us and really freeing it up for 2018 and beyond..

Yeah thanks, David. On the R&D side, we do spend full year almost 11%. Fourth quarter went up a little bit more at 11.5%. We're actually quite pleased about our ability to invest in R&D, and it really gives us the confidence to deliver a strong 2017. And importantly, as we've outlined, we think we'll accelerate growth in 2018 and beyond.

A big part of the spend, especially you saw the uptick in Q4 as we have a number of significant clinical trials going on, and the weighting of our clinical trial mix within R&D is a bit higher given that. So, we have two significant trials going on at PI and the drug-eluting, which we think will differentiators us for years to come in that area.

We have a lot of clinical work going on in WATCHMAN and significant clinical spend in LOTUS globally. And so we do expect over time that our R&D as a percent of sales will decrease a bit as we march to our operating income targets.

But right now, we're going through a heavier bolus of investment at clinical, which will pay off for the company in 2018 and beyond..

And Mike, sorry, I may have lied. I want to just follow quickly on the clinical spend. One of the clinical trials, I think you mentioned obviously accelerating the update there.

I may have missed it, on WHISPER, can you just update us on the timing for WHISPER and when we could expect data?.

Yeah. So that one is on track. The detail is obviously in clinicaltrials.gov. We believe that we'll finish the enrollment of that trial by the year end 2017, so December 2017. And so we haven't provided any additional details on the readout of the data, but we hope to finish enrollment by the end of the year..

Could it be NANS 2018 or probably too early?.

Actually not sure. So, we'll finish the trial, then we'll go through the appropriate steps. Not sure if it will happen in NANS or not..

Okay. Thank you very much. Nice quarter..

Yeah. Thanks, David..

Next question comes from the line of Bob Hopkins of Bank of America. Please go ahead..

Hi. Thanks. Okay.

Can you hear me? Can you hear me okay?.

Can hear you fine, Bob..

Great. Good morning. So, I have two questions. The first one is on LOTUS. I just wonder if you guys, if you could just confirm that the device you expect to have approved in the US is indeed LOTUS Edge.

And then can you just give us a sense as to when we'll next see some longer term pacer rate data from the LOTUS Edge Australia or the patients that were enrolled in REPRISE Edge before the ship hold? Just curious as to when we'll see some more data there..

Thanks, Bob. Yes, we do expect to launch in the US with LOTUS Edge. We're optimistic that we'll have approval by year end of 2017 and I'll have Dr. Ian Meredith comment a bit more on some of the clinical information..

Thanks, Mike. So, to address the question of pace, longer term data with pacemakers, at the ACC meeting, you will see 30-day data presented on the first-in-human use of the LOTUS Edge platform. We presented that data as a seven-day discharge data at TCT last year. So you will see 30-day data at ACC.

And at EuroPCR, you will see longer term follow-up data on the LOTUS with Depth Guard, which will provide significant insight into the benefits of Depth Guard technology on LOTUS Edge..

Okay, great. Thanks for that. And then one follow up for Dan on the finance side. Two quick things, one can you just give us your updated views on the potential impact of tax rate reform? Just given your low tax rate, just any updated thoughts there would be great.

And then also maybe if you could just quickly comment on why the FX headwind is a little worse. You mentioned greater volatility in rates, but looks like rates have kind of gone in your favors since you last gave guidance. So just curious as to why the FX hit is a little worse than you talked about in December..

Sure. I'll hit the FX one first. Yeah, and it really is, it's the market basket of all the currencies that we track, right. So we hedge certain ones, largely the yen and the euro. But when you look at what's happened since we had kind of snapped the line on that, the overall trend does see $0.08 versus the $0.06 to $0.07 that we had.

And it's also a function of the hedges that we have, when we layer in the hedges and how those roll off. So the $0.08 is the most accurate number as we sit today. In terms of tax reform, just broadly, obviously a lot of proposals out there.

And where we support it, right, relative to making something we have competitive tax rates for the US companies versus global peers, and that provides us as US companies with much better access to our global cash flows.

There's a lot of uncertainty out there relative to what the timing would be and the details are pretty scarce relative to transition rules as well. So as you would imagine, we follow that very closely. Some of them are good for us.

Some of them are not as good for us and once the tea leaves are out and we see some final proposals, we'll let folks know what the impact is..

But could it put some upward pressure, though, on the guidance that you've given or?.

Well, it really depends on how they come out. Let me just give you an example, right. So the interest rate deductibility, right, the timing of when that will be put in and what could potentially be grandfathered.

Are you, is it from dollar one, are you grandfathered with the existing debt on your balance sheet today, is it only future debt? Those types of things could have big swings. And so it's tough to guess until we actually see what comes out as a final rule..

Thanks, guys, and congrats on the 10%..

Thanks, Bob..

Next we go to the line of Rick Wise with Stifel. Please go ahead..

Good morning everybody. Michael, actually I think I'll start with Daniel. Balance sheet again here, starting in 2018, just following up in your earlier comments, it looks like free cash flow is going to be relatively less encumbered as you move past some of these past challenges.

And when you think about it, assuming further growth and less encumbrance, I mean as I think about 2018, 2019, 2020, 2021, I mean you could be generating $4 billion, $5 billion, $6 billion in total cash during that period. That might be a bit optimistic, but even in a period where your cash was encumbered, you were able to be active on the M&A front.

Maybe just reflect on some of these topics and as you look out beyond 2017, how are you thinking about that cash opportunity? Will you be more aggressive on M&A portfolio? Are you going to be more aggressive on share repo, instate a dividend? Just help us reflect on those..

Sure. Thanks, Richard. In terms of looking out beyond 2017, I think you've hit on it and it kind of goes to the answer to the earlier question from David as well.

2017 and the first half of 2018 is really putting a lot of the liabilities and the things that we have today behind us and I'm excited for that time when we get to 2018, 2019 and beyond as you mentioned. So, our goal this year is $1.750 billion in cash flow. Safe to assume that grows.

We've talked recently about having $6 billion over the 2017, 2018, 2019 timeframe in terms of accessible cash and being able to put that to use in M&A and share repurchase have been historically and I think would continue to be our two most favorite uses.

The dividend probably in the short-term is probably not in the cards, but it's something that we continue to look at every year and would evaluate that as we go through those years as well..

Okay. A little follow-up on LOTUS. How optimistic are you that with the evolving implant technique for LOTUS that the pacer rate will stay down at more competitive levels? We had some encouraging conversations with European physicians.

And maybe talk about the process of – and how long it's going to take to retrain European docs, so that you can generate that better data on the higher implant position? Thanks..

Thanks, Rick. It's Ian Meredith here. I think I could take that question. I think there are four lines of evidence that support the notion that the pacemaker rate will be substantially lower. The first you have already mentioned is the depth of implantation, even with a classic LOTUS. And that's a widespread practice that is taking place now.

And you will see the emergence of more and more similar centers reporting their data with a classic LOTUS device showing lower pacemaker rate. And I think we'll see several more of those abstracts actually appear. So that's the first line of evidence. The second is classic LOTUS with Depth Guard.

You will see presentations at CRT coming up in a week or two on RESPOND Extend which will, of course, only be seven-day data. Meaningful data will be presented at EuroPCR, so that's LOTUS with Depth Guard. That will be an important line of evidence.

Then we'll have the trials of the extension of the data that we already have from the first-in-human study that you know of from TCT last year, will be presented at ACC. And then finally the REPRISE EDGE trial which will be the full complement of patients at EuroPCR. So there are four streams of evidence that seem to be moving in the right direction.

The technique for implantation I think has been widely adopted already. And that sets a very strong foundation for people's ability to use Depth Guard when they move to LOTUS Edge..

Thank you..

Next we'll go to the line of Brooks West with Piper Jaffray. Please go ahead..

Good morning.

Can you hear me?.

Yes, Brooks..

We hear you fine, Brooks..

Thanks. Good morning, guys. I wanted to ask a question on the cardiovascular franchise. You've got a monster comp that you're looking at for next year and wanted to understand some of the growth drivers in that franchise that might offset. So, would love thoughts on SYNERGY.

Are you at peak mix? Is there further penetration of market share to be had? I don't know if there is anything you can give us on structural heart and expectations there. And then also, I wanted to hit your thoughts on the ATTRACT trial that we're going to see at SIR in March and how that might impact Jeff's venous business. Thanks..

Sure. Yeah. We've earned a tough comp in IC and we're proud of it. And I think the most important thing to think is our IC business is very broad. We used to be a DES company and now we're clearly DES, but all the structural heart initiatives, our complex PCI. We'll continue to roll out a new FFR platform.

So the diversity of the IC portfolio is quite strong. Certainly, we do have some challenging comps, but we're comfortable that we're going to grow above market. And I think if you just look at the momentum that we have in the structural heart business, that will be a growth driver overall for IC. We have a nice new launch coming with SYNERGY in China.

And we'll continue to expand our SYNERGY market share. We do think we'll likely won't give a number. We do believe there is more mix improvement we can have with SYNERGY given its acceptance of that platform globally. And we also have a number of new launches.

I would call them incremental, but they all help, cutting balloons and so forth in complex PCI. So I think given the diversification and geographies, the breadth of that portfolio, the exciting growth in structural heart and our complex CTO bag as well as improved mix of SYNERGY opportunity in China will help grow that business well in 2017.

On ATTRACT, I think that's potentially great upside for the company. I believe that study gets read out in March and we're well-positioned for that business with our ZelanteDVT catheter, our commercial base globally and also just the capabilities we have in venous broadly.

So, we'll see how it happens in March, but that could provide some additional upside for that franchise obviously in 2017 and well beyond, especially if that study is positive..

Thanks. And then just one follow-up. Have you said or can you remind us, Mike, what's the most recent timeline for LOTUS Edge back on the market in Europe? Thanks..

We've quoted early third quarter is our aim for LOTUS Edge back in Europe. So we want that to happen, but it's important to note that our current LOTUS platform is doing extremely well in Europe.

And you talk to many physicians and they certainly want LOTUS Edge, but they're very happy with LOTUS and its current capabilities, its ability to position the device, low PBL rate. So, we want to launch LOTUS Edge, but we're more than pleased with the growth of our current LOTUS platform..

Perfect. Thanks, guys..

Next question comes from Larry Biegelsen with Wells Fargo. Please go ahead..

Good morning. Thanks for taking the questions and congratulations on a great year, guys. Let me start with the 2017 guidance. Just to ask a different way, the mid-single-digit growth in 2017. It's obviously the deceleration is driven by tough year-over-year comps.

Dan, can you help us think through the different puts and takes for the businesses as it relates to 2017? In other words, what slows this year versus 2016? Is it across the board? Are there certain areas that are more pronounced? And I had one follow-up. Thanks..

Yeah. So, we're obviously pleased with our performance in 2017 and momentum – I'm sorry in 2016 and momentum going into 2017 and beyond here. You hit the first one. We're coming up against a 10% organic comp. And the good news for the company, it's broad-based. As I said, five of the seven divisions grew double-digits in Q4.

And so, we do have tougher comps really across the board, but that's really offset by strong momentum that we have really across each business. So the comps are tougher, but we have strong momentum and I don't think I have time to go through each division.

Each division has continued on product launches that we can expand globally, a number of new launches. Just take CRM for example. In a tough market we're growing above market and we're really excited about this new RESONATE platform that will launch right now in Europe and likely third quarter in the US.

One that we don't talk about, we have some momentum building we believe in our EP business with our new HDx platform. That's just in rhythm management. I talked about IC a little bit ago with Brooks. And also PI, MedSurg continues to do well. Endo is moving into new markets based on our EndoChoice acquisition, the AXIOS Stent.

Neuromodulation continues to do well. So we have a extension of our product launches that we have. We'll continue to grow globally. The business has momentum, which is difficult to build for a company, and we're going to continue to press on that.

And what's most important for us is, while we deliver a strong 2017, all these new platforms that we're investing in now that give us the higher R&D spend begin to generate even more fruit we think in 2018 and beyond..

That's very helpful, Mike. One for Dr. Meredith on LOTUS. Dr. Meredith, in the past you've talked, you've said publicly you expect the REPRISE III data to be similar to the head-to-head study you published in JACC in 2015.

Is that still the case? And can you comment, I know we've talked about this before, and I just can't remember what the response was, but there did seem to be a little bit of a higher stroke rate for LOTUS in that study compared to CoreValve. Can you remind me why that isn't a concern for you? Thank you very much for taking the questions..

Larry, it's a great question. I think the best comparison we still have for the REPRISE III data, until the data is known, is the study that you actually mentioned. That of course was not a randomized trial. It was a consecutive comparison and propensity matched patients. So one would assume that the pacemaker rate would be somewhere in that vicinity.

Having said that, we have seen the uptake of a higher implant technique across the world and that will influence the practices in the US. So it's hard to predict exactly what the pacemaker rate might be. But I think it would be safe to assume that it would be similar to something that is published in the JACC manuscript that you mentioned.

The second question with the stroke rate, I don't believe that there is an appreciable difference in disabling stroke.

The difference, and as was identified in that manuscript, was that there was a pre-specified neurological assessment before and after valve deployment, which means that there was a lower threshold to detection in the LOTUS arm of that study than what we had for the CoreValve arm.

So, I suspect that the rate of disabling stroke, which is troublesome for all valves, will be comparable between the two groups..

Thanks for taking the questions, guys..

You're welcome..

We also have a question from the line of Matt Taylor with Barclays. Please go ahead..

Hi. Thanks for taking the question. So, the first question I had was, Dan, when you are talking about this operating margin expansion, I thought maybe it was worth revisiting the sources of that for 2017. I mean, certainly you gave us an overview a while back for the long range plan.

But can you talk about the specific components of the operating margin expansion for 2017? And just kind of give us an update on how some of those initiatives have gone, and what's left to go in the tank as you move toward the high 20s?.

Sure. The good news is, Matt, it's across the entire P&L and you can see that when you look at our ranges for 2016 versus 2017. It's expansion in each of the key areas. So when you look at gross margin, we were at 72% for 2016. The range is 72% to 73% and that includes offsetting a 50 basis point headwind from FX.

That's continuing to launch accretive products. It's optimizing our plant network and it's really being maniacally focused on reducing standard product cost in a year over year comparison. So, that's really where we get the majority of the benefit in gross margin.

SG&A, we have a companywide initiative, as you've heard about over the last couple years, to really drive that down. You saw the benefit this year in terms of the reduction in our SG&A rate as a percentage of sales. You see it again next year in terms of what we've given for guidance.

And then, Mike (sic) [Matt], the commentary around R&D, R&D is really not the hunt in the current configuration to generate additional operating margin. It's more in the SG&A and gross margin lines. But the two of those are what get us to that 25.5% midpoint for 2017.

And then as you look out getting to that 2020, there's probably a little bit less on the gross margin side and more on the SG&A and R&D side to get us to that 28% by 2020..

Okay, great. And then I just had a follow-up on tax. I mean understanding nobody has the answer to this, I wanted to know if you could help us understand what your exposure could be to a border tax.

And then are you doing anything differently as a management team to prepare for these potential changes, whatever composition we might see?.

No. As I mentioned to the answer to the earlier question, we obviously are very close and plugged into the entire process relative to the border tax, where I would call as a slight net importer. So the border tax would probably be a net negative for us overall.

But again, it depends on how that comes in terms of a configuration, what's the rate, what's included, what's excluded and then there are other parts of tax reform that are beneficial around the cash access and others. So, we really need to see the different elements of how the final proposals come out, put that through and see what the impact is.

In terms of whether we're doing anything differently, other than monitoring it and really staying close to that, no, we haven't changed our strategy as a team. Mike mentioned earlier category leadership and driving that. And so, we're monitoring tax reform, but not changing anything we're doing..

Okay. That's helpful. Thanks a lot..

All right. David, with that, we'd like to conclude the call. Thanks for joining us today. We appreciate your interest in Boston Scientific. And before you disconnect, David will give you all the pertinent details for the replay. Thank you again..

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