Susan Lisa - Boston Scientific Corp. Michael F. Mahoney - Boston Scientific Corp. Daniel J. Brennan - Boston Scientific Corp. Kenneth Stein, M.D. - Boston Scientific Corp. Ian Meredith, M.D., Ph.D. - Boston Scientific Corp..

Michael Weinstein - JPMorgan Securities LLC David Ryan Lewis - Morgan Stanley & Co. LLC Joshua Jennings - Cowen & Co. LLC Joanne Karen Wuensch - BMO Capital Markets (United States) Larry Biegelsen - Wells Fargo Securities LLC Frederick Allen Wise - Stifel, Nicolaus & Co., Inc. Matthew Taylor - Barclays Capital, Inc.

Robert Hopkins - Bank of America Merrill Lynch Matt Miksic - UBS Securities LLC.

Ladies and gentlemen, thank you for standing by, and welcome to the Boston Scientific Q2 2017 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session; instructions will be given at that time. And as a reminder, this conference is being recorded.

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

Thank you, Tanya. 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 Q2 2017 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 our call will be approximately one hour. Mike will provide strategic and revenue highlights of Q2 2017.

Dan will review the financials for the quarter, and then Q3 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 and Symetis over the relevant prior-year period.

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

They include, among other things, statements about our growth and market share, new product approvals and launches, clinical trials, cost savings and growth opportunities, our cash flow and expected use, our financial performance, including sales, margins, earnings and other Q3 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..

Thank you, Susie, and good morning, everyone. Boston Scientific delivered strong results again in second quarter 2017, organic revenue growth up 6% and operational revenue growth up 7%. We're ahead of both expectations and underlying market growth rates.

It was an excellent quarter in light of a challenging 10% organic revenue growth comparison in second quarter of 2016. These results are also a reflection of our strong execution and success of our category leadership strategy.

We leveraged that 7% revenue growth to deliver 18% adjusted EPS growth, or $0.32 per share and $0.01 above Wall Street Consensus. If you exclude the $0.02 negative impact of foreign exchange, adjusted EPS grew 24% year-over-year.

Key to this very high level of EPS growth was a 260 basis point year-over-year improvement in adjusted operating margin to 26%, led by a strong 72.8% gross margin result, and a 40 basis point reduction year-over-year in SG&A spending to 35.5% of revenue.

Also, as detailed at our Investor Day last month, we aim to deliver this type of consistent revenue growth and double-digit adjusted EPS growth over the long term. We continue to enhance the growth profile of the company, with plans to enter into $13 billion in new high-growth markets across our businesses over the next few years.

Importantly, we believe Boston Scientific continues to be uniquely positioned to drive shareholder value and differentiated EPS growth due to our revenue growth profile, opportunity to improve operating margins, and a strengthening balance sheet.

We're also excited about the second half of 2017 and our plans to build upon our global momentum, and drive sustainable long-term growth in 2018 and beyond.

We're raising our full-year 2017 operational revenue growth guidance to an estimated 7% growth with a 6% to 8% range, which includes an approximate 120 basis point full-year contribution from the EndoChoice and Symetis acquisitions.

We're also raising our full-year adjusted EPS guidance by $0.01 from the previous range of $1.22 to $1.26, to a revised range of $1.23 to $1.27, representing 11% to 14% earnings growth. Importantly, this revised EPS guidance includes an expected $0.08 negative impact, or approximate 700 basis point headwind, from foreign exchange.

I'll now provide some highlights on Q2 2017 results and thoughts on our second-half 2017 outlook. In my remarks, all references to growth are on organic, year-over-year, constant-currency basis unless otherwise specified.

Our Q2 organic revenue growth of 6% continues to be broad based across our product lines, with most of our businesses growing faster than the underlying markets. MedSurg grew an impressive 10%, Cardiovascular 5%, and Rhythm Management 3%. We also delivered a strong balanced organic growth across geographies, led by 7% revenue growth in the U.S.

and EMEA, 14% in emerging markets, and 20% growth specifically in China. In Europe, our business was impacted from the LOTUS recall, yet they still delivered 2% growth in the quarter.

Turning to a few MedSurg highlights, the three MedSurg businesses delivered an impressive 10% organic revenue growth and 12% operational growth, including the recently acquired EndoChoice.

In Endoscopy, organic revenue grew 7% in the quarter, and 12% including acquisition, led by the strength of our franchises in hemostasis, pathology and endoluminal surgery. Of note, in hemostasis we're seeing faster-than-expected conversion to our new Resolution 360 Clip platform, which led to mid-teens growth for the franchise.

Regionally, Endo results were particularly strong in the U.S. and Latin America. Seven months after closing the EndoChoice acquisition, we have completed the sales integration, and revenue is slightly ahead of plan, contributing to 80 basis points of total growth in the quarter.

We continue to be pleased with the results from our expanding presence in pathology, infection control and prevention, and the Ambulatory Surgery Center market. Additionally, our recently signed agreement with Total Scope allows us to offer convenient scope repair services to this important customer base.

Our Uro and Pelvic Health businesses continue the strong performance that grew 10% in the quarter, led by our single-usage digital LithoVue Ureteroscope and products to treat men's health and pelvic floor conditions. This 10% growth is particularly impressive considering an 18% growth comparison in second quarter 2016.

So overall, the Uro health business grew double-digit in the U.S., EMEA, and Latin America. And the emerging markets sales were also very strong, led by our stone and men's health franchises.

LithoVue remains an important driver for our Urology business, providing single-use digital visualization and navigation capability to diagnose and treat stones and other conditions of the kidney, ureter, while avoiding the needs for repairs or sterilization that can be a very big challenge with reusable scopes.

LithoVue is now in more than 900 accounts worldwide, and we're seeing faster growth and pull-through of our core kidney stone business with customers that are using LithoVue. We continue to see important research studies that support the trend toward single-use systems, which bodes well for the longer term outlook.

And the FDA has also recently determined that manufacturers of certain reusable medical devices now need to include validation data regarding cleaning, disinfection and sterilization. We remain very encouraged by the LithoVue opportunity. Turning to neuromod.

Revenue in neuromodulation grew 14% in the second quarter, driven by multiple new product launches, including the Montage MRI System and the Artisan full-body MRI paddle and spinal cord stimulation, as well as their Vercise Gevia MRI deep brain stimulation system in Europe.

Gevia features our Neural Navigator 2 with STIMVIEW Technology, which allows clinicians to visualize the stimulation field while customizing DBS stimulation programs for patients. We expect to launch into the U.S. DBS market by year-end 2017 or early 2018, followed by a traditional – followed by our directional lead in MRI conditioning label in 2018.

It's really an exciting time in spinal cord stimulation, as we recently published a Lumina 24-month data, and the PROCO randomized control trial data was presented at INS. The PROCO data showed that frequency is not a determining factor in spinal cord stimulation pain relief.

1 kilohertz therapy had equivalent results to 10 kilohertz, and Boston Scientific's Precision Spectra uses 1 kilohertz, and thus uses two-thirds less energy than high frequency systems with the equivalent outcomes for pain relief.

This reinforces the need and benefit for flexible technology platforms like Spectra that can enable physicians to customize therapy for the unique pain patients. Turning to our cardiovascular group, the cardiovascular group grew 5% in the second quarter of 2017 against a very tough 13% growth comparison in second quarter of 2016.

So starting off with our PI business, Peripheral Interventions in the quarter grew 7%, particularly strong performance in Asia and Europe, led by sales of our stent portfolio, our next-generation Innova Stent for the SFA, Drug-Eluting Eluvia Stent in Europe, and WALLSTENT.

We also saw strong growth from our Atherectomy Jetstream platform and a promising initial launch of our Opticross Intravascular Ultrasound platform for peripheral applications. Drug-Eluting technologies contributed nicely to European growth, and in the U.S., enrollment in the IDE trial for our Ranger DCB continues on pace.

We also await 12-month follow-up in the IMPERIAL trial for our Eluvia Drug-Eluting Stent. In Interventional Cardiology, that business grew second quarter organic revenue 4% and operational revenue of 5%, despite the impact of the LOTUS recall in Europe.

Our growth was led by strong sales of our WATCHMAN Left Atrial Appendage Closure device, mid-teens revenue growth in PCI guidance. mid single-digit growth in complex PCI, and early contributions from the Symetis ACURATE platform in Europe. The WATCHMAN platform had another excellent quarter and continues to build global momentum.

We're focused on market development activities such as deploying therapy awareness reps, increasing our medical education programs, social media outreach, and direct-to-patient awareness programs. We remain on track in 2017 with 350 to 375 U.S. centers.

We also achieved an important clinical milestone with WATCHMAN by completing enrollment in SALUTE trial. This trial is specifically designed to pursue regulatory approval in Japan. And we target mid-2019 Japan approval for WATCHMAN.

Global DS sales in the quarter were up 1% despite a challenging 9% growth comparison in second quarter 2016, led by our differentiated SYNERGY platform. Products for complex PCI procedures grew in the upper mid single-digits, led by strong Atherectomy and Cutting Balloon sales.

Our PCI Guidance business continues to build momentum with strong IVUS sales and the launch of our integrated fractional flow reserve platform. On LOTUS, LOTUS remediation work remains on track. We expect LOTUS to return to the EU market by year-end 2017, and a fourth quarter submission of our U.S. PMA for regulatory approval in the U.S.

We continue to estimate a mid-2018 launch in the U.S. Nine weeks post-closing, we're on track with our Symetis integration plans, including training of our Euro TAVR field reps on the ACURATE valve platform.

As highlighted at our recent Investor Day conference, we believe that our company will be uniquely and ideally positioned to address the needs of physicians and patients with our differentiated TAVR portfolio. There is no change to our clinical trial priorities, including pursuing ACURATE in the U.S. and Japan and a LOTUS intermediate risk indication.

We will aim to provide more details of our TAVR clinical plans in the coming months. We're also very well positioned in the faster (12:57) structural heart market with our strong momentum in LAAC and potential for share-taking in TAVR, via both ACURATE and LOTUS.

We're also raising our expected 2017 structural heart revenue guidance from $250 million to approximately $275 million to reflect the revenue impact from the Symetis acquisition, which closed in May. Shifting to Rhythm Management, global CRM sales grew 2%, which outpaced the challenging worldwide market growth of the industry.

Our focus on Rhythm Management profitability has really paid off, resulting in extremely strong adjusted operating margin of 20.9%, which is up 720 basis points year-over-year, which Dan will detail in a few minutes. As for product trends, Brady sales grew mid-single digits and we continue to gain share.

However, our growth did slow a bit from prior quarters due to the anniversary of our ACCOLADE MRI Brady platform, as well as a competitor's launch.

We also saw very strong growth globally in EMBLEM S-ICD, our Quad X4 CRT-P, and encouraging initial launch feedback of our new RESONATE platform in Europe, as well as a slight uptick in CRT-D replacement cycle sales consistent with our replacement curve models.

We have submitted clinical data from our navel MRI study to FDA, and continue to expect to launch our transvenous MRI-compatible high voltage system in the U.S. by year end. Turning to EP, we grew sales 13% in the quarter, led by improved uptake of our new Rhythmia HDx platform. We continue to roll out the HDx platform in Europe, and now in the U.S.

and Japan. We look forward to launching our IntellaNav MiFi Open-Irrigated Catheter, Therapeutic Catheter – wow – IntellaNav MiFi Open-Irrigated Therapeutic Catheter in the EU and U.S. in third quarter, as well as beginning a limited market evaluation of our DirectSense technology in the EU, as enabled by our new software upgrade for Rhythmia.

So to wrap up, Boston Scientific's portfolio strategy, our globalization efforts, and execution of our global teams, continues to work, and we continue to deliver strong and differentiated results. We believe we are poised for an exciting second half of 2017, and that we are well positioned to continue our performance track record in 2018 and beyond.

I really want to thank our employees again for their winning spirit and strong commitment to the company, and Advancing Science for Life. Dan will now provide a detailed review of our financials..

Thanks, Mike. Second quarter consolidated reported revenue of $2.257 billion represents 6% growth on both a reported and organic basis, and 7% on an operational basis, which excludes the impact of changes in foreign currency.

This strong top line also reflects a $23 million headwind from foreign exchange, which is $12 million or approximately 55 basis points less compared to a $35 million headwind expected at the time of guidance.

The contribution from the recent acquisitions was approximately 120 basis points, which was higher than our guidance of 70 basis points as a result of the strong performance of the Pathology business acquired with the EndoChoice deal, and sales from the recently closed Symetis acquisition that was not included in guidance.

After adjusting for the performance of the acquisitions, we still exceeded our 5% to 6% operational guidance range on slightly stronger results from the core businesses. We delivered Q2 adjusted earnings per share of $0.32, representing 18% year-over-year growth and at the high end of our guidance range of $0.30 to $0.32.

I'll walk through the details of the results and guidance in a moment, but we're pleased to have exceeded the midpoint of our guidance range, and as a result are increasing our full-year adjusted earnings per share guidance to $1.23 to $1.27 range.

Adjusted gross margin for the second quarter was 72.8%, compared to 70.7% in Q2 of last year, and includes a year-over-year negative 50 basis point impact from foreign exchange.

Adjusted gross margin for the quarter represents a 210 basis point increase over prior year, and was at the high end of our guidance range due to favorable product mix in the quarter, particularly from the strength in WATCHMAN and men's health franchises.

We continue to expect our full-year gross margin to be in the range of 72% to 72.5%, which now assumes a negative FX impact of 100 basis points for the year, a slight increase from the full year 2017 outlook we gave in April.

Adjusted SG&A expenses were $801 million, or 35.5% of sales in Q2 2017, down 40 basis points year over year and at the midpoint of our guidance range of 35% to 36%.

We're delivering on our SG&A improvement initiatives outlined in detail at our recent Investor Day, such as the optimization and expansion of our global shared services, and global indirect sourcing leverage.

We continue to target full-year 2017 adjusted SG&A in a range of 35% to 36% of sales, which at the midpoint would represent a decrease of 60 basis points versus the full year 2016. Adjusted research and development expenses were $239 million in the second quarter, or 10.6% of sales, which is roughly flat year over year.

We continue to expect full-year adjusted R&D to be in a range of 10% to 11%, and continue to target a rate of less than 10% by 2020, driven by geographic mix, greater efficiencies and leverage. Royalty expense was 0.8% of sales in Q2, which is similar to prior year, and we expect our royalty rate to remain approximately 1% of sales for 2017.

As a result, Q2 2017 adjusted operating margin of 26% increased 260 basis points year over year, and was at the midpoint of our guidance range of 25.5% to 26.5%. The improvement over prior year was largely driven by strong operational improvements in our Rhythm Management segment operating margin results.

The Rhythm Management team delivered an adjusted operating margin of 20.9% for Q2, as the team continues to make strong progress on gross margin, focus on expense control, and leverage the improved top-line performance of the global business.

As you would expect, in any given quarter you may see some variation in adjusted segment operating margin, but we now expect the full year 2017 Rhythm Management adjusted operating margin to be approximately 19% to 20%, which is an increase over our prior expectations of 18% to 19%.

The Cardiovascular and MedSurg segments also realized year-over-year improvements in adjusted operating margin of 40 basis points and a 110 basis points respectively, all while continuing to invest in commercial capabilities for key upcoming launches. Now, I'll move on to interest and other expense.

Interest expense for the quarter was $58 million, roughly flat to Q2 of last year. Our average interest expense rate was 3.9% in Q2 this year compared to 4% in Q2 last year. Adjusted other expense was $14 million in the second quarter, and includes $6 million in equity method dilution from our portfolio of venture investments.

We believe this is representative of a go-forward run rate and annualizes to approximately $25 million per year.

We still expect the full-year below-the-line expense, which is comprised of interest expense, dilution from our venture investment portfolio, and costs associated with our FX hedging program, to be approximately $300 million in both 2017 and 2018.

Of note, this excludes an impairment of certain of our investments of $53 million recorded in the quarter. As we mentioned at our Investor Day, we've grown our portfolio of venture investments to over 30 companies, and as you'd expect, we may see impairments from time to time, but we continue to be very excited about the portfolio.

Our tax rate for the second quarter was negative 60.3% on a reported basis, and 13.9% on an adjusted basis, at the high end of our guidance range of 13% to 14%. We continue to expect full-year adjusted tax rate to be in a range of 12.5% to 13%.

Finally, Q2 2017 adjusted earnings per share of $0.32 includes approximately $0.02 of unfavorable foreign exchange, as we expected, and represents 18% year-over-year growth, or 24% growth excluding the impact of foreign exchange.

On a reported GAAP basis, which includes net charges and amortization expense totaling $298 million, after tax, Q2 2017 EPS was $0.11. This is below our guidance range of $0.18 to $0.21, primarily due to litigation-related charges of $205 million associated with our mesh litigation.

Our total legal reserve, of which mesh is included, was $1.779 billion as of June 30, 2017. During the quarter, as we continued working through settlement discussions and the related claims processing related to our mesh litigation, more of the potential settlement claims were verified than previously expected.

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

We have entered into or in the final stages of entering into master settlement agreements, in principle, with certain plaintiffs' counsel to resolve and an aggregate of approximately 38,000 of our approximately 48,000 known claims, which represents nearly 80% of those claims.

We remain committed to reducing the risk in our balance sheet and continue to target a resolution of the majority of our remaining mesh claims in 2018. Adjusted free cash flow for the quarter was $409 million, compared to $464 million in Q2 last year.

In the quarter, we used cash primarily to fund previously-agreed-upon legal settlements as well as the Symetis acquisition. As of June 30, 2017, we had cash on hand of $195 million.

We continue to expect full-year adjusted free cash flow to be $1.750 billion, representing 9% growth in the year, and expect the primary use of the cash generated in 2017 and into 2018 will be to fund mesh legal settlements and the IRS stipulation of settled issues, once finalized. Capital expenditures for the second quarter 2017 totaled $68 million.

We continue to expect capital expenditures for the full year to be approximately $300 million. We ended Q2 with 1.391 billion fully diluted weighted average shares outstanding, and we expect a fully diluted weighted average share count of approximately 1.394 billion for Q3 and 1.393 billion for the full year 2017.

Now I'll now walk through the guidance for Q3 and the full year 2017. For the full year, we now expect consolidated revenue to be in a range of $8.890 billion to $8.990 billion, which represents year-over-year growth of approximately 7% on an operational basis, within a range of 6% to 8% growth.

This guidance includes an approximate 120 basis point contribution from EndoChoice and Symetis, and represents 6% to 7% growth on a reported basis. We now expect foreign exchange to be a headwind of approximately $30 million for the full year 2017.

As I mentioned earlier, we now expect full-year 2017 adjusted earnings per share to be in a range of $1.23 to $1.27, representing 11% to 14% adjusted earnings per share growth, and continue to assume the full-year negative impact of FX will be approximately $0.08. On a GAAP basis, we expect EPS to be in a range of $0.70 to $0.74.

Now turning to Q3 2017, we expect consolidated revenue to be in the range of $2.180 billion to $2.210 billion. This represents year-over-year growth in a range of 5% to 6% operationally, including the approximate 140 basis point contribution from acquisitions. We expect the foreign exchange impact on Q3 revenue to be a $20 million headwind.

For the third quarter, adjusted earnings per share is expected to be in a range of $0.29 to $0.31 per share, representing 9% to 16% adjusted earnings growth. GAAP earnings per share for the third quarter is expected to be in a range of $0.16 to $0.18 per share.

Please check our Investor Relations website for Q2 2017 financial and operational highlights, which outlines Q2 results, as well as Q3 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, Dan. Tanya, 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. Tanya, please go ahead..

Thank you. And our first question we'll take will be from Mike Weinstein with JPMorgan. Please go ahead..

Thank you. And good morning, everybody. First off, congratulations on a, what was a very strong quarter on a tough comp. I did want to make sure I understood, Dan, the guidance for the year and your thoughts on the third quarter.

It looked like, with the guidance update, that you're widening the organic sales growth range for the year from what had been 5.3% to 6.3%, to 4.8% to 6.8%.

So, one, do we have that right, that actually the range on we would call organic growth, backing out EndoChoice and Symetis and currency, widened? And then second, how do you view the third quarter comp, relative to the comp you had this quarter? Because obviously we all thought this was a pretty tough comp quarter for you guys, and you put up a very strong performance.

Third quarter looks like another very tough comp for you guys. Just put it in some context, how you view the year-over-year comparison? Thanks..

Sure, Mike. I'll start, and Mike can add in any comments he wants as well. So, relative to the guidance, I wouldn't overthink the range relative to the full year. So if you look at the range we have, the way we look at it is, 7% is what we think is a likely outcome, and we increased the top end to 8%.

So as you look at it, we could have thrown a half in there and gone 6.5% to 7.5%. We chose to say 7% is the likely outcome, and just ranged it 100 basis points on either side. So I wouldn't overthink the ends of that range. Specific to comps for Q3, it's a 9% organic comp. It was 10% in Q2, and it's a 9% comp in Q3.

So feel like, again, off of what are pretty heady comps from last year, the revenue growth range of 5% to 6% for Q3 is still pretty strong..

Okay. And then can you spend a little more time on the men's health business? Because when you made that acquisition, we didn't view it as being a growth accretive acquisition; it's turned out to be one. It had a very strong quarter again this quarter and exceeded our expectations.

Can you just talk a little bit about what's going on there?.

Sure. Good morning, Mike. The Uro business is really performing at a very high level for many number of quarters in a row now, a 10% revenue growth again in second quarter. And it's really across the board. The stone business is doing extremely well, and the catalyst for the stone business is that LithoVue disposable scope.

That's very disruptive, and we see a lot of tailwinds, given some of the comments in the script regarding FDA requirements to putting on reusable scopes, as well as the healthcare economics that hospitals are starting to see in terms of the cost savings of using LithoVue. And LithoVue is enabling us to pull through greater stone share.

And then you move on to the other businesses, the men's health business is doing particularly well, really exceeding our expectations in the U.S. and globally, and that's a very strong gross margin product for us. The BPH business is doing okay. Another big catalyst for the Uro business is global expansion.

Our emerging market growth is extremely, extremely strong, and we're investing in physician training in men's health, as well as adding commercials reps. So essentially having that full portfolio together is driving larger synergies on the bottom line, as well as incremental revenue synergies..

Understood. Okay, thank you, Mike..

Thanks, Mike..

Thank you. Next we go to the line of David Lewis with Morgan Stanley. Please go ahead..

Good morning. Just – yeah, maybe a quick clarification and two quick product questions.

Just in terms of the back half of your guidance, is a good way to think about it, basically you're kind of saying back half is sort of stable on a momentum basis, there's no underlying changes in most of the business lines, just the comp is harder, business is pretty stable; is that a good way to think about the second half?.

I think that's fair, and then we're adding in Symetis, right? So we didn't have Symetis in guidance as of last quarter, so we're adding that in. We've obviously updated the structural heart guidance, but I think that's a fair way to look at it, yes, David..

Okay. Thank you. And then....

And then to add to that is...

Sorry..

That is the right – a good summary. And particularly in Q3, we got very tough DES comp, so we have a 10% comp overall for the company, and our highest DES comp is in the third quarter – from 2016 – which is 14%..

Okay. Very helpful, Dan, and Mike. So two quick product questions. The first is just the EP business was the other business, other than urology, that looked like it got better on a momentum basis.

Could you just talk about the trends in EP? And then just the early Symetis feedback, obviously taking the smaller business on your broader distribution channel, is some sense of how that's trending here? Even though I know it's early days? Thank you..

Yeah. So, we are committed to this EP business, and we continue to – I hate to use the word "slowly," but we are improving the platform and the product portfolio globally each quarter.

And this new launch of this Rhythmia HDx platform has gone extremely well in Europe, and we're starting to roll that out a bit more now in Japan and the U.S., so it's giving physicians more confidence in the differentiation of Rhythmia.

And we'll be embarking on a nice cadence of therapeutic catheter launches, ideally in the second half in Europe with our IntellaNav MiFi OI launch, and that will be followed in 2018 with that same catheter, therapeutic catheter launch in the U.S. So you'll start to see more impactful therapeutic catheter launch cadence coming. Dr.

Stein is here as well, any comment you'd like to make on that?.

Yeah.

The only thing I'd add, Dave, is that the IntellaNav's MiFi OI catheter, in combination with Rhythmia HDx, then becomes the foundational platform for our DirectSense technology, which we really do see as being revolutionary in enabling physicians to better assess tissue contact and type of tissue the catheter's in contact with, and that also becomes the foundation for our Force-Sensing technology as well..

And – thanks, Ken, and – Dr. Stein. On the Symetis, we're really pleased, it's early days, we're just under two months. The integration's gone – going extremely well. The leadership team is in place and solidified there.

We're focused on expanding supply, of the capability by ramping up manufacturing, and importantly, we're training all of our TAVR commercial team, clinical and commercial, on the ACURATE platform.

And so the great news is, when our LOTUS platform gets back in the market by year end, we'll have a clinical team and a sales force that can sell both platforms. So we're pleased with that, we upped our structural heart guidance a bit to $275 million, to reflect the impact of Symetis..

Great. Thanks so much..

Thank you..

Next we go to the line of Josh Jennings with Cowen. Please go ahead..

Hi, good morning. Thanks for taking the questions. I was hoping to just start off with a question back from the Investor Day just on the TAVR franchise and intermediate and low risk timelines.

So the strategy behind waiting until 2019, I was just hoping you could just recap that and help us think about the start of those trials and the kind of strategy behind waiting till 2019?.

Thanks, Josh, this is Ian Meredith here. So, pleased to take your question. Obviously, the first and the highest priority is to have LOTUS Edge approved in the U.S. for extreme and high-risk patients, and we'll follow that with establishing a LOTUS Edge bicuspid valve registry.

And then the immediate priority thereafter is high and extreme risk ACURATE approval in the U.S. and Japan. And of course our priorities hot on the tail of those immediate priorities would be intermediate and low-risk approval in U.S., Japan, for both ACURATE Symetis – the ACURATE neo/IS platform, and indeed LOTUS Edge.

So with those priorities structured that way, the highest priority obviously is to establish extreme and high risk approval for both valves as expeditiously and timely as can be achieved, and then the low-risk of course will be to follow the intermediate risk, as one would expect, it's likely to those trials would have to randomized..

Thanks, Ian. And just on the follow up, the Endoscopy business, you made some comments, Mike, in your prepared remarks, but I was just hoping if there's anything else, your sequential growth for that business was phenomenal.

It was one of the line items that we were little bit concerned about heading them into the quarter, but 6%, 7% sequential growth – were there any one-timers there, or is just still pure strength on SpyGlass adoption, utilization, and how sustainable is that type of sequential growth trend? Thanks a lot..

That business performs for us each quarter, 12% operational, 7% organic, when you back out the acquisition that we made. And I think what's unique about this business is, there are core products continue to grow nicely, and they are expanding into new categories.

The SpyGlass digital platform has really been a breakthrough for the company, and they continue to focus on additional enhancements to kind of extend the lead there. That pulls through some of the core portfolio.

The EndoChoice acquisition has moved us into some new spaces where there's a lot of synergies, in the pathology market, and so – and then lastly it's a very global company, this business for us. Over half the sales are outside the U.S., and there's very strong growth there in emerging markets.

So, we expect that Endo business to continue to put up strong above-market growth..

Thank you, Josh..

Thank you. Next we go to the line of Joanne Wuensch with BMO Capital Markets. Please go ahead..

Good morning, and thank you for taking my question. Can we pause for a minute on your third quarter guidance? By our calculation, it looks like it's up 3.5% to 4.5%, 3.6% to 4.6% organic. Is that the right way to look at it, and if so, that's somewhat in the lower side than I would have expected.

Am I looking at this right?.

Joanne, this is Dan. No, that the way I would look at it is, the guidance for Q3 is 5% to 6% operational growth. The contribution from the acquisitions of EndoChoice and Symetis is 140 basis points. So if you take that off, you get to an organic growth rate that – again, in the range of what you're saying.

Some of the challenges there, in terms of the sequential growth from Q2 to Q3, you look at CRM; we anniversary some of the MRI-safe Brady technologies in the U.S. We love the growth we've had in urology, but at 18% and 10% and some very high comps there, with anniversarying some share gains from a competitor exit.

And then Mike mentioned the DES comps that we have. So the organic piece is a little bit lower than Q2, but still at that 5% to 6% of that 9% comp from last year, and then another 10% comp in Q4, feel like that still stacks up pretty well compared to our peers..

Yeah. I'd just add, a bit of a cheerleader here, but I think 6% to 8% full-year guidance, midpoint of 7%, pretty nicely above the peer group, against 9% or 10% organic growth comp for the year. So I think if we can grow the company faster than the peer group, facing that type of comparison, that's pretty strong.

And then we look forward to 2018, and then as we detailed at Investor Day, the comps will be slightly easier in 2018 than there were this year. And then we're, as I've mentioned before, really excited about this $13 billion of new markets that we'll entering into. When you look at that Investor Day presentation, 2018 through to 2020.

So I think it's a pretty strong performance for the team, delivering above market against a 10% comp..

Sounds good to me. As a follow-up question, WATCHMAN is really doing quite well. You raised your structural heart guidance. How do we think about the momentum in that franchise, and can you remind us about the timing of next generation products, how they start coming into the market to help you out? Thank you..

Sure. WATCHMAN is doing great. We – I think the most important thing is just the clinical success that that platform is seeing, the actual real implant success rates actually exceeding the safety rate seen in some of the clinical trials.

So the performance, most importantly in the safety and efficacy, as detailed at HRS and EuroPCR clinical trials, at Dr. Stein can highlight a bit more if you're interested, are very good. So you're building physician confidence with the platform.

We obviously took up our structural heart revenue guidance to $275 million, which is – a big part of that is WATCHMAN, obviously, given the LOTUS recall. And a big part of our efforts beyond the safety and great outcomes is on market development.

So we are building quite a few different swim lanes of digital capabilities, therapeutic reps to drive increased awareness, leveraging the broader commercial teams of our CRM, EP and IC teams to drive awareness and to assist the WATCHMAN sales team.

And then we're looking at expanding globally, we're enhancing our contribution of WATCHMAN in China, and we're excited about bringing WATCHMAN to the Japanese market in mid-2019. On the next generation WATCHMAN product, likely to have EU approval in mid 2018 for the WATCHMAN and FLEX platform. Now, Dr.

Stein, any other comments on WATCHMAN, in general?.

Again, just to say, pleased as you say with the momentum, see it continuing as we can continue to train, bring new operators, new centers online. In terms of the clinical trial, cadence, as Mike said, expecting the enhanced FLEX to get CE mark in mid-2018 and to begin enrolling in our U.S.

approval trial at that point, which would put us on track to get estimated U.S. approval roughly the same time as our competitors get approval on their first generation devices. Likewise, just to reiterate, as Mike said, completed enrollment in Japan of SALUTE, which is the trial that will get us approval in Japan.

And although we're in the early stages, pleased at this point with the cadence of our ASAP-TOO trial, which is an indication expansion trial that will get us a FDA labeling for the oral anti-coagulation contraindicated population..

Terrific. Thanks for a great quarter..

Thanks, Joanne..

Thanks. Next, we go to the line of Larry Biegelsen with Wells Fargo. Please go ahead..

Hey, guys. Good morning. Thanks for taking the question. Two product-related questions, starting with drug-eluting stents. I think I heard you say, Mike, there was about 1% growth on a global basis in Q2. And SYNERGY's been a great product for you guys, but that lapping. So I'm curious your thoughts, and Dr.

Meredith's thoughts, on kind of what's next, how we should think about growth going forward? And we didn't hear a lot about your internal bioabsorbable program at the Analyst Day. But Dr. Meredith, I'm curious to hear how you're thinking about the future of this franchise from a technology standpoint? And I have one follow-up. Thanks..

Sure. I'll make a few comments, then Dr. Meredith can add. Our DES business really pays a lot of the bills for our investments in structural heart. So, the fact that we can continue to grow that business despite a double-digit comp is nice accomplishment by the global team there.

So we do anticipate that SYNERGY will continue to be the market-leading stent, that it will grow slightly above market, and it will drive the contribution that we need it to so we can fuel all our WATCHMAN, TAVR, and eventual mitral programs. So that's a really important part of our portfolio.

And we don't see a, really a – over our LRP program, we don't see a new stent offering from a competitor that will threaten the safety and clinical efficacy of SYNERGY. So I think we're in a good position strategically.

In terms of next generation, the bulk of our investment, as Kevin talked about at the Investor Day meeting, is in complex coronary as well as structural heart. So, that's the primary investment area with our cardiology business. And maybe Dr.

Meredith can make some comments on fully resorbable space, if you like?.

Thanks, Mike. I think we're all aware of the burden of data that is now being published to show the less-than-stellar performance of the first generation bioabsorbable stents, and these scaffolds have all been associated with a higher risk of stent thrombosis at one year that led to a warning note in Europe, of course.

This has meant that there's some skepticism towards this technology currently, and it certainly means that we don't need to focus primarily on this at this point in time.

Obviously the RENUVIA platform has been a strut and is more of fracture resistant, but given the sort of global move away from BRS technologies at the moment, it's doesn't make sense to have that as a primary focus..

Okay. That's very helpful. And then, back to WATCHMAN, one of the comments you made at the Investor Day that I thought was interesting was that you expect over 30,000 implants over the next 14 to 18 months, which is roughly the number of implants since launch. And by our met, that implies about $420 million in revenue, assuming about a $14,000 ASP.

Is that the right way to think about it? And do you feel that you can get them closer to 14 months at this point, or you're still keeping that range of 14 to 18 months? Thanks for taking the questions..

Yeah. I think on the heels of what we had said at Investor Day, we'd stick with that, and I think the commentary from Dr. Stein and Mike is appropriate, that we're really excited about WATCHMAN and the technology and what it has done, and what it can do in the future, but we'd stick with that timing over that timeframe..

Thanks, guys..

All right..

And next we'll go to the line of Rick Wise with Stifel. Please go ahead..

Good morning, everybody.

Some more TAVR first, can you give us any more color on where you are with the LOTUS fix? Last we heard, I think at PCR your input – you were implementing manufacturing changes, and is that all done? And maybe some color on the regulatory process as well? Among Symetis, it's an easy valve to learn, you're training everybody; maybe you could talk to us about when the training's going to be done, and your thoughts about with this easy to learn valve, could we see a fairly rapid Symetis uptake in new European centers?.

Yeah. So, on Symetis, really, it will never be done, because we're going to train our reps around the world as the cadence of Symetis moves from Europe to U.S., Japan, and over Asia. So it's really part of our ongoing platform now.

The good news is that all the training programs are in place, and we're building up additional staff and training capabilities to fully train the existing BSE team, and the BSE team in the U.S. that's being established to launch LOTUS. So that infrastructure is moving along quite well.

Xavier and the team in the Europe are doing nice job in building that out. And we are seeing, I would say slightly above our deal model, early days, in terms of Symetis uptake.

And some of the comments that were made at the Investor Day, it's a high-performing valve that's very, very easy to use, and has very impressive kind of clinical studies that are in play, that will be reported out in the SCOPE trials.

So Symetis is going well, we're very excited about that, and we're pleased that we doubled down in that market, given the size and the differentiation between LOTUS and Symetis. On LOTUS itself, it's really nothing new to report since the Investor Day meeting. We anticipate EU launch by year end and U.S.

PMA approval in the fourth quarter, so we can launch that product ideally end of second quarter in the U.S. And the R&D teams and ops teams, supply chain teams doing a really nice job. And we want to lock that down, so we can mass produce LOTUS to serve the markets.

And essentially, we feel like the fix was identified months ago, and the root cause, and all the additional validation.

And also the engagement with the regulatory bodies in Europe is a bit fluid, and that's where we're working through, but we feel like the timelines that we've laid out give us the proper amount of flexibility to manage any minimal clinical requirements or any regulatory discussions..

Thanks, Mike. And just on the S-ICD adoption. You highlighted the strong worldwide EMBLEM growth, which is encouraging.

Just where are we in the penetration goals that you dreamt of, and do we need the MRI – I'm sorry, the leafless pace (50:29) approval to really further accelerate the growth, or is there a lot more to go even before you get there? Thanks so much..

Yeah. Hey, Rick. I'll take that. It's Ken. We're in even probably a little better than where we thought we would be when we did the deal to acquire camera on the S-ICD.

In terms of where do we go with penetration, right, the key is at this point, how deeply can we get penetrated into the traditional primary prevention indicated market? And that's why I thought the data that we presented at HRS earlier this year, and we highlighted at the Investor's Day from our post approval study in the U.S., we now see that two-thirds of the implants of the device in the U.S.

are in that traditional primary prevention population. And I think, even ahead of getting our modular CRM device that is the leadless pacemaker that communicates with the S-ICD, even ahead of getting that, we see that we can continue to grow that penetration into primary prevention.

And then I think the two opportunities to further accelerate that are, first of all, getting modular CRM into clinical trials and eventually into the market, so that there is an opportunity to provide anti-tachycardia pacing while staying leadless for those patients who need it.

And then also our mated S-ICD trial, which is an indication expansion trial that would potentially bring in a completely new population of primary prevention patients, and that's those patients with mid-range ejection fractions, primarily myocardial infarction and diabetes.

And again, that's a population, that's roughly equivalent in size to the current primary prevention market to begin with, and a population that we feel is uniquely served by the S-ICD..

Thanks, Ken..

And next we will go to the line of Bob Hopkins with Bank of America. Oh! One moment..

We lost Bob..

I apologize. Just one moment, please. Next we'll go to the line of Matt Taylor from Barclays. Please go ahead..

Can you hear me, okay?.

Hi, Matt. We can hear you fine, Matt. Yeah, go ahead..

Okay. Great. So, I wanted to ask a question just on balancing cash flow. You're getting some more visibility on working through some of the settlements, and presumably that'll give you some more confidence and flexibility.

Can you talk about, a, when that can happen, and how you might think about doing things differently when you have some more confidence in kind of that cash flow outlook?.

Yeah. Thanks, Matt. Yeah, and I think we hit this pretty well at Investor Day as well, that as we start to work through this year – this year is a big year for retiring the historical liabilities, in terms of mesh in the IRS settlement.

So, put a lot of that behind us in 2017, still have to tail that into 2018, but once you get into certainly the second half of 2018 and absolutely into 2019 and 2020, you would see a significant increase in the amount of our free cash flow that will be able to put to more strategic uses like returning cash to shareholders and M&A.

So I don't think there is any change relative to the philosophy of how we would view that over that timeframe, but we're looking forward to it relative to being able to put more of that cash to use.

But the underlying philosophy and the financial discipline and the category leadership strategy that we've had, I think, is alive and well and would serve us as well as we move through that timeframe..

Thanks. And just to follow up on kind of a prior question, I appreciate Dr. Stein's comments on opportunities for S-ICD.

I was wondering if you could comment on any thoughts you have now, with a little bit of time since the announcement of the re-opening of the NCD for ICDs and/or the comment period on MRI, if you think either of those things could have an impact on the market?.

Yeah. Sure, Matt. We fully supported CMS' decision to reopen the NCD for ICDs and let me deal with that before the MRI. And what we gave in terms of our feedback to CMS was the recommendation they preserve coverage for the currently covered populations, and to revise the NCD so it doesn't limit device choice.

And most important, I think, to liberalize some of the current restrictions so that it can be consistent with the current guidelines and appropriate use criteria as developed by the societies, ACC, HRS, et cetera.

I think with MRI, again, the question in terms of what's going to happen with their NCD really is going to be whether they're going to remove some of restrictions on performing MRI for patients with legacy devices based on the results of trials like the MagnaSafe Registry.

Whether or not they do that, I don't see as having really any substantial impact on the market for devices that are being implanted currently..

Okay. Thanks very much for the comments, guys..

Thank you. Next we go to the line of Bob Hopkins with Bank of America. Please go ahead..

Good, thanks.

Can you hear me okay?.

We can hear you fine, Bob..

Great. Sorry about that last one. So, Mike, just to start out, I've heard lots of questions here on (56:41) you provided.

So maybe just to be clear, is there any change to any of the timelines that you mentioned at the Analyst Day, or any change whatsoever to your confidence in the revenue growth outlook that you discussed at the Analyst Day?.

No. I did screw up earlier in the call, I mentioned that LOTUS was going to be approved in the U.S. in fourth quarter this year, that a miss. I meant to say the PMA filing for U.S. will happen in fourth quarter 2017. So I did a nice job in messing that answer up, but other than that one, our outlook financially is unchanged from our Investor Day..

Okay..

I even took our sales guidance up for the year, our sales guidance is up for the year, up around by a point..

And just on that, so that U.S.

timelines are the same as you talked about at the Analyst Day?.

Yeah. Timelines for all TAVR, essentially timelines for everything, haven't changed over the last 45 days..

Perfect. Just wanted to clarify. And then Dan, just one quick one for you on currency. I was wondering if you could just talk about the impact of currency on this year and next.

Maybe just help us understand, from where rates are right now, what the impact of hedging is versus just the impact of FX translation? Just sort of get a little bit of – of a better sense of the moving pieces and what's in your guidance?.

Sure. Let me start with revenue on that, Bob. So as we've gone through the year, the amount of headwind from FX on the top line has dissipated, right? We started off thinking about 125, it was gone to 85, now for our most recent guidance it's 30.

And actually in Q4, it could flip to a tailwind for us, right? So – and that's obviously the market basket of rates that have changed over that timeframe. Primarily, the euro strengthening against the dollar, the pound a little bit the same, and then most other currencies seeing dollar strength, and the yen being somewhat flat during that timeframe.

So pretty clear on that. We haven't given revenue impact guidance for 2018, we'll obviously do that as the time draws nearer to giving that guidance. In terms of gross margin, it's actually been a little bit of a different story. It was kind of 50 basis points full-year in the February guidance, went to 90, and now is at 100.

So roughly unchanged from the April guidance, and that's just simply a reflection of the hedging contracts we have, when they were entered into, and then the expiration of those. So – and which currencies are moving.

So, you don't – the reason that the top line has gotten better through the year, but we still have seen – will still see $0.08 at the bottom line is, we're largely hedged for the year.

I mean, the majority of that top line benefit has been from the Euro, and we're largely hedged against the Euro for 2017, so we don't get a lot of the drop through, which is the benefit of a hedging program, you don't want the significant swings.

So that's kind of the relationship in 2017 of top line and bottom line, and we were pretty clear I think at Investors Day that we see about a nickel, $0.05, of negative FX with rates where they are today in 2018..

Great. Thank you very much..

Thanks, Bob..

Thank you. Next we go to the line of Matt Miksic with UBS. Please go ahead..

Hi. Thanks for taking our questions. Just a couple of follow-ups on some of the topics that you've covered. One on the CRM share recapture, the growth in that business. Any color you could provide just on the drivers of that? Obviously MRI saved and pacers and some of the new leads you've launched, say a year or so ago, and high power.

But any other competitive drivers you see or advantages you're enjoying would be helpful, and I have one follow up on WATCHMAN..

Yeah. So overall, really pleased, not only – particularly pleased with the margin improvement that Joe Fitzgerald's team delivered, impressive in a market that's challenging in terms of its overall growth profile. What's important for us in CRM is, we're continuing to grow above market.

Our Brady results were nicely above market despite anniversarying our launch and a competitor's recent launch. So we expect some challenges there with some of the comps, but we continue to growth above market, which is kind of the trend for the company.

And then in defib, which is really important, I think an encouraging trend there, despite kind of flat overall growth, was the growth outside the U.S., where we've launched the RESONATE platform. So, in Europe in particular, we're seeing some lightness in volume, but the team has done a nice job of growing that business off the RESONATE launch.

And that will be the launch that will happen in the U.S. more fully once we have MRI approved by year-end. So in 2018, we look forward to having global defib RESONATE platform with the multipoint pacing, as well as MRI capability and HeartLogic, as well as the longevity benefit. So we think we have lot of differentiation with that. And then as Dr.

Stein commented, our SIC platform really differentiates Boston Scientific. It comes at nice gross margins, and we continue to see improved utilization of that platform. So, I think the product positioning is quite strong, and we hope to see some of the benefits of the replacement cycle.

That being said, of all of our markets this is likely the most challenged in terms of its overall growth rate, kind of in a low single-digit growth rate range..

Sure. That's very helpful color. And then on maybe one of your more rapidly expanding markets, on WATCHMAN.

If you could talk a little bit about the way you're seeing sort of new centers coming up to speed in the U.S., the pace of that growth? Maybe also that degree to which other product lines are getting pulled into these conversations with your customers, either AFib or CRM or otherwise, that kind of color would be very helpful?.

Yeah, probably – thank you, Matt. WATCHMAN, as you said, we're very pleased with its uptake, but definitely not satisfied because we want – we expect a lot more. Every point of utilization as we highlighted at Investor Day, is another $250 million market opportunity.

So our focus, besides getting strong clinical results and training, is increasing utilization. And that's where most of our efforts are on; we have a large implanter base of approximately 350, 375.

We're focused on training more doctors, more physicians at those sites, and really trying to find any friction points in those sites to improve utilization. And that's what the teams are working through, and you see a wide, quite frankly a wide range of utilization across sites and centers. And our focus is on improving that scale across the board.

And we have a nice head start competitively, as you know. I won't comment too much more on pull-through. Obviously when you have a nice platform like that, as well as a leading drug-eluting stent, I've commented on the RESONATE platform for CRM.

Our overall portfolio in PI – which actually hasn't been discussed today – our overall portfolio in PI, Interventional Cardiology and Rhythm, is quite strong.

And then, with our structural heart emphasis, there is some – occasionally some bundling that goes across, but I would say a lot less bundling than what's discussed with analysts, quite frankly..

Okay. That's helpful. Thank you, Mike..

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