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

David Ryan Lewis - Morgan Stanley & Co. LLC Robert Hopkins - Bank of America Merrill Lynch Glenn John Novarro - RBC Capital Markets LLC Bruce M. Nudell - SunTrust Robinson Humphrey, Inc. Larry Biegelsen - Wells Fargo Securities LLC Danielle Antalffy - Leerink Partners LLC Joshua Jennings - Cowen & Co. LLC Rick Wise - Stifel, Nicolaus & Co., Inc..

Ladies and gentlemen, thank you for standing by. Welcome to the Boston Scientific First Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. As a reminder this conference is being recorded.

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

Thank you, Greg. 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 Q1 2018 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 the morning's call will be approximately one hour. Mike will provide strategic and revenue highlights of Q1 2018.

Dan will review the financials for the quarter and then give Q2 2018 and full year 2018 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 Symetis 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 Q2 and full year 2018 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 difference include those described in the risk factors section of our most recent 10-K and subsequent 10-Qs filed with the SEC.

These statements speak only as of today's date and we disclaim any intention or obligation to update them. At this point, I'll turn it over to Mike for his comments.

Mike?.

NxThera and nVision in Urology and Pelvic Health, EmCision in Endoscopy, Securus in EP, and Millipede in Structural Heart. These acquisitions will strengthen our faster growth core oriented business and enable over $16 billion in exciting new market expansion opportunities by 2021.

So before I discuss the business results, I'd like to review the changes we also announced earlier today in our reporting segments, which reflected better alignment in our geographic regions and businesses.

Geographically, we've now combined our Middle East and Africa organizations with Europe to create the EMEA region, which results in a standalone Asia-Pac region that no longer includes the Middle East and Africa.

Additionally, we've also realigned our global Neuromodulation business to now be included with our Rhythm Management reporting segments, which includes Cardiac Rhythm Management and EP.

We are renaming this segment Rhythm and Neuro, and we see benefits of bringing our active implantable devices closer together across both the cardiac and neuro markets, as this is better aligned with our shared manufacturing facilities and can drive further capabilities and best practices.

As a result of this move, our MedSurg segment now includes Endo and Uro/Pelvic Health and after 29 years at Boston Scientific, Mike Phalen has retired and we wish him the very best and thank him for his great contribution to BSC over these many years.

I'll now provide some highlights on first quarter results and thoughts on our full year 2018 outlook. In my remarks, all references to growth are organic, year over year, unless otherwise specified. So regionally in first quarter, we delivered strong and balanced growth with both EMEA and Asia-Pac growing 6%, U.S. 5%, and emerging markets gaining 17%.

Strength in the Asia-Pac region was broad based, and China once again delivered 23% growth. We also delivered balanced growth across all of our businesses. As to realigned, the MedSurg business grew 7%, Rhythm and Neuro grew 6%, and Cardiovascular was up 3%. So I'll now share some details on some of the drivers.

In Endo we posted 6% growth fueled by strong pathology and infection prevention performance as well as sales of our SpyGlass DS visualization platform, Axios Stent and continued the option of Resolution 360 hemostasis.

In addition, we're excited about the early launch of our endoluminal surgery portfolio, including the Orise platform which provides a novel means of diagnosing and treating cancers of the GI tract solely through natural orifice.

In early March, we also acquired EmCision, which offers an endoscopic bipolar RF device that coagulates tissue and relieves duct obstruction, which helps improve quality of life in patients who are living with pancreatic biliary cancers.

Our Uro and Pelvic Health business continued a strong performance trend, growing sales 9% in first quarter led by sales of LithoVue, our single-use digital ureteroscope, as well as products for Men's Health, core stone, and BPH.

Emerging market sales in Uro and Pelvic Health were strong, growing 30%, and our Greenlight therapy for BPH posted a solid growth, particularly internationally, as we continue to invest in training, while leveraging BSC's strong global infrastructure.

We also intend to strengthen and expand our leadership position in BPH with the recent acquisition of NxThera, and NxThera's developed the Rezūm system, which uses water vapor to remove excess prostate tissue, thereby alleviating obstruction to urine flow and reducing BPH-related systems (sic) [symptoms].

This is a very strong complementary offering to our existing Greenlight laser therapy. Minimally invasive therapies are expanding the market beyond pharmaceuticals for the estimated 110 million worldwide diagnosed with BPH.

And Rezūm's key advantages are that it's simple, in-office procedure provides differentiated relief from symptoms, and data to date indicate superior durability of results and thus limited need for re-intervention.

Also, last week's announcement of the acquisition of nVision Medical is really an important and potentially game changing opportunity for women at risk for ovarian cancer and for Boston Scientific.

nVision will become part of the Surg-Gyn business and we're hopeful that the nVision platform can change the landscape of ovarian cancer, which is the fifth most deadly cancer among women, given the lack of a reliable diagnostic and resulting late stage detection.

We're also hopeful that the platform may one day limit the estimated 300,000 preventative surgeries done each year in the U.S. to remove ovaries and fallopian tubes, 90% of which prove to be benign. Ovaries, I should say. Studies indicate that there are 400,000 women in the U.S.

who are high risk, who would be near term candidates to benefit from the nVision diagnostic procedure. We believe this diagnostic platform could ultimately result in a $500 million to $1 billion U.S. market opportunity.

We plan to make nVision commercially available in the first half of 2019 and will continue to invest in clinical work to support the widest possible adoption of this platform. Rhythm and Neuro grew 6% in the quarter led by 17% growth in Neuro, 11% in EP, and 2% in CRM. Neuro revenue grew growth of 17% in the first quarter, was driven by U.S.

launches of our WaveWriter Spinal Cord Stim system and Vercise Deep Brain Stimulation platforms. In addition, our international investments in Neuro are starting to pay off as we delivered 30% plus growth outside the U.S.

We're also very encouraged by the initial physician and patient clinical experience with the WaveWriter SCS launch and its unique ability to offer combined waveform therapies both with paresthesia and sub-perception.

In DBS yesterday at the American Academy of Neurology annual meeting, we presented the one-year results from the landmark INTREPID study. This is the first and only multicenter, double-blind randomized sham-controlled study in the field of deep brain stimulation.

In this study, the use of Vercise DBS demonstrated a 49% improvement in motor systems in patients with advanced but responsive Parkinson's disease. This represents a greater benefit when compared to other DBS systems researched to date.

We look forward to ongoing strong growth in Neuromodulation and the launch of our next generation DBS platform with directional lead in the second half of 2018.

Global CRM sales grew above market at 2%, led by double-digit growth in defib sales, reflecting a very strong global launch of our Resonate platform which includes the HeartLogic heart failure alert as well as continued double-digit growth of Emblem S-ICD. The expected benefit from our device replacement cycle is also tracking to expectations.

We are now the number two global share player in the high-voltage market. Customer interest in HeartLogic is increasing as heart failure practitioners recognize the value of the only FDA approved heart failure alert which doesn't require maintenance data monitoring.

We also continue to enroll patients in the first stage of Manage AF (sic) [HF], which is a multicenter randomized trial designed to quantify the benefit of proactive heart failure management using HeartLogic.

S-ICD's strong global growth continues and we're pleased to announce that it is now included in Physician Society of Recommendations in both the U.S. and Europe, placing S-ICD on equal footing to transvenous ICDs for patients who don't need pacing or ATV therapy.

Brady pacing grew below market in first quarter as we faced a tough comp and lost some modest share due to competitive launches.

While we expect brady pacing sales could remain likely a headwind for the full year 2018, given the strong global momentum of our defib portfolio in both CRTD and ICD, we are confident that our worldwide CRM business will continue to grow above market in 2018.

EP sales grew 11% in the quarter led by good growth in our Rhythmia HDx mapping and nav platform. We also continue to strengthen our catheter portfolio with the upcoming European full launch of our DirectSense and IntellaNav MiFi ablation catheter.

We also announced a small EP acquisition in April, Securus Medical, which has developed a thermal monitoring system for continuous measurement of esophageal temperature to avoid thermal injury during left atrial ablation procedures. We expect a launch in mid-2019, post completion of manufacturing scale-up activities.

Also, please join us for an update and webcast on our Rhythm Management and WATCHMAN programs at HRS on Friday, May 11 at 12:15, and please note this is a scheduling change from Thursday to Friday. Our Cardiovascular group grew 3% in first quarter 2018. PI grew at 6% in the quarter, led by strong growth in both Europe and Asia.

Europe, in particular, is delivering a strong growth due to our innovative drug-eluting technologies with both the Ranger DCB and Eluvia DES, as well as our JetStream atherectomies platform. We're now targeting drug-eluting U.S. launches in first half 2019 for Eluvia DES and in 2020 for Ranger DCB.

Preliminary COMPARE-1 DCB data was presented in first quarter at the LINC Congress in Leipzig, Germany. This is the first randomized controlled head-to-head trial of DCBs, and the preliminary results suggested similar patency with our next generation lower drug dose Ranger DCB versus the higher dose IN.PACT DCB.

Our Interventional Cardiology business grew 1% in the quarter, led by strong sales in structural heart and complex PCI products, offset by an expected challenging quarter in drug-eluting stents.

Complex PCI grew double-digits for the second quarter in a row on continued momentum from multiple new launches in 2017 and we remain on track for a strong cadence in 2018 with the WOLVERINE Cutting Balloon and our next gen rotational atherectomy system, ROTAPRO.

Offsetting this growth, drug-eluting stent sales were down mid-single-digits in the quarter as declines in the U.S. and Japan due to tough comps and competitive trialing were offset by low-single-digit growth in Europe. Our structural heart programs continue to build momentum with increased capabilities and scale.

The strength of WATCHMAN and ACURATE position us well to deliver $400 million in structural heart revenue in 2018. WATCHMAN had another very strong quarter and continues to build global momentum, having now surpassed the 50,000 global implants milestone.

And during the quarter, positive results from the Japan SALUTE trial were presented and we remain on track to launch in Japan in the second half of 2019.

In the U.S., we expect to begin enrollment in the next gen WATCHMAN FLX IDE this quarter, and we continue to invest in multiple WATCHMAN market development initiatives focused on physician training, refer education, and patient awareness.

Our ACURATE TAVR valve platform continues to build momentum in Europe and hit sales of $21 million this quarter, up from $16 million in fourth quarter 2017.

We completed training of our European sales and clinical teams in fourth quarter and we look forward to continued momentum as well as the launch of the next gen ACURATE neo2 with an advanced seal in Europe in the second half of this year.

We're also expanding access to ACURATE in multiple markets and have begun the process for reimbursement in France, which is expected in 2020. Enrollment in the SCOPE I and SCOPE II studies is expected to be completed by the year end and we anticipate beginning enrollment in our U.S. IDE for ACURATE in the second half of the year.

Regarding our LOTUS Edge TAVR valve platform, there's no change to our commentary from earlier in the year. In that pending our ability to clear certain technical and regulatory hurdles, our goal remains to launch LOTUS Edge in the U.S. and European markets in 2019. So to close, I'd like to share again my enthusiasm for outlook in 2018 and beyond.

We really believe that Boston Scientific continues to be uniquely positioned to drive shareholder value due to our differentiated long-term growth profile, significant room to improve operating margins, our consistent track record of driving double-digit adjusted EPS growth, and our improving ability to deploy capital.

I really want to thank again our employees for their winning spirit and commitment to advancing science for life. And Dan will now provide a detailed review of our financials..

Thanks, Mike. First quarter consolidated revenue of $2,379 million represents 10.1% reported revenue growth and 6.2% growth on an operational basis, which excludes the impact of foreign currency fluctuations.

Our reported revenue reflects an $83 million tailwind from foreign exchange, which was slightly favorable to the $60 million to $70 million tailwind expected at the time of guidance.

Sales from the Symetis acquisition contributed approximately 100 basis points, which was slightly above our expectations at the time of guidance, resulting in 5.2% organic revenue growth for the quarter.

This strong top-line exceeded the high end of our guidance range of 4% to 5% due to outperformance across the majority of our businesses and regions.

We leveraged this strong sales performance and delivered Q1 adjusted earnings per share of $0.33, which represents 14% year-over-year growth and is above the high end of our guidance range of $0.30 to $0.32, driven by solid metrics throughout the entire P&L.

Our adjusted earnings per share includes approximately $0.01 of negative FX impact in the quarter, which was in line with what we expected at the time of guidance. Adjusted gross margin for the quarter was 72.3%, slightly above our guidance range of 71.5% to 72%, and represents a 170 basis point improvement over the prior year.

However, Q1 2017 adjusted gross margin included approximately 180 basis points of net charges associated with the voluntary recall of the LOTUS platform and the discontinuance of the FUSE business acquired from EndoChoice.

Excluding this charge, first quarter 2018 adjusted gross margin was roughly in line with prior year, but importantly, Q1 of 2018's result reflects our ability to offset a negative 190 basis point year-over-year impact from foreign exchange with operational improvements, manufacturing cost reductions, as well as favorable product mix, particularly in our CRM high voltage, WATCHMAN, and Men's Health franchises.

Adjusted SG&A expenses were $846 million, or 35.5% of sales in Q1 2018, down 60 basis points year-over-year and within our guidance range of 35% to 36%.

We remain committed to and continue to realize the benefit of our targeted initiatives focused on reducing SG&A, like end-to-end business process streamlining and automation, expansion of global shared services, and leveraging global sourcing.

Adjusted research and development expenses were $254 million in the quarter, or 10.7% of sales, which is relatively flat to Q1 of last year. Royalty expense was 0.7% of sales in Q1 this year, also roughly flat year-over-year.

As a result of the strong sales and solid performance throughout the P&L, Q1 2018 adjusted operating margin of 25.3% increased 230 basis points year-over-year and slightly exceeded our guidance range of 24.75% to 25.25%.

Normalizing for the one-time charges incurred in the first quarter of 2017, related to LOTUS and FUSE that I just mentioned, adjusted operating margin improved operationally by 40 basis points year over year.

There's no change to our full year adjusted operating margin guidance of 25.5% to 25.75%, as we continue to deliver against our goals, and remain on track for our adjusted operating margin goal of 28% in 2020, and 30% plus longer term.

The underlying year over year improvement in our Q1 2018 adjusted operating margin rate was driven by gains in all three of our segment operating results. The new Rhythm and Neuro segment delivered an operating margin of 20.8%, which, on a comparable basis, represents a 450 basis point increase over the prior year.

The addition of neuromodulation to what was the Rhythm Management standalone segment to create Rhythm and Neuro does not materially change the current profile or future outlook for these businesses.

The teams continue to leverage strong top line results in all three businesses and make strong progress on gross margin through favorable S-ICD and Resonate portfolio product mix in CRM, focus plant network optimization, as well as manufacturing efficiencies.

In addition, we are seeing results from the strong focus on expense controls and leveraging ongoing commercial synergies. The addition of Neuromodulation is slightly dilutive now to the segment, but over the next couple of years, margins are expected to be similar to where Rhythm Management margins were.

And as a result, the prior goal of increasing Rhythm Management operating margin by 300 to 400 basis points by 2020 is still a reasonable goal for this combined segment.

The MedSurg segment, now comprised Endoscopy and Urology/Pelvic Health also realized significant year over year operating margin improvements of 290 basis points in the quarter, delivering 36.4% on a comparable basis.

Even as we made investments in commercial capabilities for ongoing launches across both businesses, these were more than offset by leverage from strong topline performance and cost containment initiatives.

In the Cardiovascular segment, operating margin increased 380 basis points year over year, but when you consider the LOTUS charges in Q1 last year, it's actually down slightly, primarily due to the investment in our structural heart franchise. Now I'll move below the line to interest and other expense.

Interest expense for the quarter was $61 million, compared to $57 million in Q1 of last year. Our average interest expense rate was 4.1% in Q1 this year, slightly higher than the 4.0% in Q1 of last year, as a result of our recent public offering of $1 billion aggregate principal amount, 4% senior notes due March 1, 2028.

With the proceeds of this offering in the quarter, we repaid certain short-term commercial paper balances and $600 million of 2.65% notes that were coming due in October of 2018.

Adjusted other expense was $18 million in the first quarter, and primarily included dilution from our equity method investment, adjustments to our available for sale investments, as well as foreign exchange losses related to our hedging program.

Our tax rate for the first quarter was 8% on a reported basis and 13.2% on an adjusted basis, which was at the low end of our guidance range of 13% to 14%.

As expected, our underlying operational tax rate was approximately 16%, and we realized a net benefit from stock compensation accounting of approximately 260 basis points in the quarter and still expect the full year benefit from stock comp to be approximately 100 basis points.

Finally, Q1 2018 adjusted earnings per share of $0.33 includes approximately $0.01 of unfavorable FX and represents 14% year over year growth, or 19% growth, excluding the impact of foreign exchange. On a reported GAAP basis, which includes net charges and amortization expenses totaling $157 million after tax, Q1 2018 earnings per share was $0.21.

We ended with 1,397 million fully diluted weighted average shares outstanding. Adjusted free cash flow for the quarter was $283 million, compared to $167 million in Q1 2017. In the quarter, we used cash primarily to fund previously agreed upon legal settlements, as well as business development activities, namely the investment in Millipede.

We continue to expect 2018 adjusted free cash flow to be approximately $1.9 billion. We continue to make good progress on our mesh litigation and still expect to make cash payments of approximately $800 million to fund the settlement of the remaining legal reserves related to the mesh litigation.

We have now reached conditional, final or near final settlement on approximately 95% of all known claims, as we continue to reduce the risk on our balance sheet and target a resolution of the majority of our mesh claims in 2018. Our total legal reserve, of which mesh is included, was $1,511 million as of March 31, 2018.

As a reminder, this liability is released from our balance sheet as payments are made out of the qualified settlement fund, into which we've already made payments in prior quarters.

In addition, finalizing the IRS stipulation of settled issues for the 2001 to 2010 tax years remains on track, and we currently believe that it will be finalized during Q2, 2018.

We still expect to make net cash payments of approximately $600 million around mid-year, and we will also adjust our balance sheet to reflect the final settlement in the quarter in which that occurs.

If our timeline holds, we would expect to record a tax benefit in Q2, for both GAAP and adjusted earnings consistent with the manner in which the tax reserves were originally booked.

However, to the extent that we have a tax benefit for adjusted earnings, we are exploring strategies to reinvest that tax benefit into our tax structure, with the goal of reducing our overall operational tax rate in 2019 and beyond, below our previously announced goal of 15%.

As a result, we do not expect that any tax benefit resulting from finalizing the IRS settlement will cause a modification to our full year adjusted EPS guidance.

This $800 million estimated payment for mesh settlements combined with our expected $600 million payment as a result of finalizing our disputes with the Internal Revenue Service requires approximately $1.4 billion of cash flow for the year to settle our remaining significant existing contingencies.

Capital expenditures for the first quarter 2018 were $60 million. We continue to expect capital expenditures of approximately $325 million for the year, as we build capacity, integrate acquisitions and drive growth. I'll now walk through guidance for Q2 and full year 2018.

For the full year we expect consolidated 2018 revenue to be in the range of $9,750 million to $9,900 million, which represents year over year growth of 5% to 7% on an organic basis, with an additional 40 basis point contribution from the Symetis acquisition.

We expect foreign exchange to be a tailwind of approximately $200 million to $225 million for the full year 2018. We continue to expect our adjusted gross margin for the year as a percentage of sales to be approximately 72% for the full year, which now assumes a negative FX impact of 120 basis points or 10 basis points greater than prior guidance.

We have also considered the recent proposed tariffs between the U.S. and China in our adjusted gross margin guidance. We do not manufacture in China, but we do purchase a small percentage of component inventory from China, so there may be slight pressure on our cost of goods sold, if U.S. tariffs are applied to Chinese manufactured goods.

However, we also may have the ability to substitute some of those products and we expect we can manage the impact. For goods imported to China, it appears there will not be an impact from the China 301 list because there are no devices currently on that list.

We will continue to monitor developments, but as of today, we do not expect a significant impact to our business.

We continue to expect full year adjusted SG&A to be in the range of 34.5% to 35% of sales as we're seeing the benefits of operating expense control programs currently underway and there's also no change to expectations for full year adjusted R&D spend in a range of 10% to 11% and full year royalty rate to remain at slightly less than 1% of sales for 2018.

This implies a full year 2018 adjusted operating margin in a range of 25.5% to 25.75%, which remains consistent with the improvement goals we outlined at an investor conference on January 9 and sets us up well to deliver on our long-term goal of 28% adjusted operating margin in 2020.

We continue to expect our 2018 operational tax rate to be between 14% and 15% and our adjusted rate to reflect an additional approximately 100 basis points of benefit from the accounting standard for stock compensation, of which the majority was recognized in our Q1 tax rate.

We expect below the line expenses, which include interest payments, dilution from our venture capital portfolio, and costs associated with our hedging program to be approximately $300 million for the year and a fully-diluted weighted average share count of approximately 1,398 million shares for Q2 and 1,401 million shares for full year 2018.

As a result of the improved revenue growth outlook and Q1 outperformance, we are raising full year 2018 adjusted earnings per share from a range of $1.35 to $1.39 now to a range of $1.37 to $1.41, representing 9% to 12% adjusted earnings growth. On a GAAP basis, we expect EPS to be in a range of $0.90 to $0.94.

Now turning to Q2 2018, we expect consolidated revenue to be in a range of $2,450 million to $2,500 million. This represents year-over-year organic growth in a range of 5% to 7% with an additional 70 basis point operational growth contribution from Symetis, which we will anniversary at the end of May.

We expect the foreign exchange impact on Q2 revenue will be a $60 million to $70 million tailwind. For the second quarter, adjusted earnings per share is expected to be in a range of $0.33 to $0.35 per share, representing 3% to 10% growth, and GAAP EPS is expected to be in a range of $0.21 to $0.23 per share.

Please check Our Investor Relations website for Q1 2018 financial and operational highlights, which outlines Q1 results as well as Q2 and full-year 2018 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. Greg, let's open it up to questions for the next 30 minutes or so. In order to enable us to take as many as possible, please limit yourself to one question and one related follow-up. Greg, please go ahead..

Thank you. Your first question comes from the line of David Lewis from Morgan Stanley. Please go ahead..

Good morning. Maybe one for Dan on guidance and then maybe one for Mike on some segments. Dan, just beyond the quarter it does look like getting back to 6% organic growth across the next several quarters does look, frankly, very achievable by our model.

So, how do you see the rest of the year playing out across the quarters? And what could drive the low end of the 5% to 7% guidance for the second quarter as the comps get easier? And then a quick follow-up for Mike..

Yeah, I would say the momentum coming out of the first quarter is solid, as we said, across the majority of the businesses and regions, which is the biggest reason that led us to take the increase up to 5% to 7% for the second quarter and 5% to 7% for the year. So we're very comfortable with that range as we look at the quarter and the full year.

As Mike outlined, some of the areas that we see pressure in DES and in pacer, those are probably some of the things that could put you towards that low end of the range, if those didn't go our way, but that's not what we're anticipating based on the ranges that we have and the momentum that we have in the global diversified business that is Boston Scientific..

Okay. Very clear. And, Mike, if there are two segments that stuck out to us this quarter from a momentum perspective, they obviously were Neuro, which is very good, and IC, which is a little less so. But you gave some great detail on Neuro, so I guess I'll focus on Interventional Cardiology.

If there was one area of apprehension to the year, it was obviously in IC. So can you discuss the pressures you're seeing in stents, if any? And then relative to ACURATE, that's the other kind of tale of a different city.

ACURATE's sequential performance was very strong and the guidance implies, I think, another meaningful step up, frankly, into the second quarter. So if you could talk about what you're seeing in stents and what you think is driving this pretty rapid change in momentum for ACURATE. Thanks so much..

Yeah. So overall, I would say we're quite pleased with our first quarter IC performance. It was really in line with what we expected. Just a couple broader points. Kevin and the team continue to rapidly diversify that business globally.

Our complex coronary business will likely be equal to the size of our DES business, probably end of 2019, and then you have a rapid growing structural heart business on top of that. So, that business continues to diversify significantly beyond DES over the years here.

You know, within DES itself, continues to be a key cash driver for the company to enable us to invest in structural heart and other initiatives. I think the good news there is you're seeing growth in Europe. So, after all the trialing of lots of competitive different offerings, you've seen low-single-digit growth in Europe.

We anticipated softness in the U.S. in first quarter and through the full year due to some tougher comps in DES, but also competitive trialing, but we like our long-term prospects in DES of new products coming plus the growth over in Europe.

I think the stars that are getting larger and larger, which continue to kind of reshape the composite mix of IC, are complex coronary and structural heart. WATCHMAN continues to do extremely well. We're on track to deliver the $400 million of structural heart guidance.

The utilization of WATCHMAN continues to increase, and we also are enrolling in our next gen WATCHMAN device in Europe and we'll start that in the second quarter here in the U.S. ACURATE, really pleased with that. Sometimes you do acquisitions and this integration's been like five stars across the board. Our supply chain team has tripled production.

We have next generation ACURATE. We'll launch in the second half with an advanced seal. We'll enroll that at the full clinical trial, SCOPE I and SCOPE II. And we'll launch the U.S. IDE shortly here. So that team really is delivering. And that's against in some markets where we're not approved yet. We're not approved for reimbursement yet in France.

So, we're very bullish on ACURATE and WATCHMAN, complex coronary and we feel like we'll manage the near-term headwinds in DES. And if Europe's an indicator, that will get back to growth. But that's all been contemplated in the guidance..

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

Oh, thanks and good morning and congrats on a great start to the year. I wanted to start with a product question, if okay. Because one thing that stuck out to me was on the defibrillator, or ICD side, very impressive results despite a tough comp.

So I guess my question on the ICD side is, is the market getting better at all? Or is this all your replacement cycle kicking in and that share gains from things like HeartLogic and just the new platforms?.

U.S., Europe, and Asia-Pac. And we have some additional enhancements to further simplify that product coming and some additional clinical data. So, that's ICD. For some reason, it floats a bit under the radar. But that's a terrific driver for us, as well as a mix driver.

And then Resonate, the new platform there, that was years in the development, probably seven years of development with our HeartLogic diagnostic tool. And that's providing very unique competitive differentiation. So, that and then the replacement cycle, we talked about that contributing maybe a point of growth and that's in line.

So, I think it's very strong portfolio and execution by our global CRM team..

Great. Thank you for that. That's very helpful. One other thing I wanted to ask about, obviously one of the things that happened over the course of the last three to four months is that you guys have executed on a number of smaller but important transactions.

So, I just wanted to ask, relating to those three or four deals, just when do you think we could start to see real revenue contribution from those deals? Is that 2020 or will it take a little longer? And then from a financial perspective, how do these deals impact the margin goals that you guys have laid out? In other words, how much dilution are you offsetting? So, just on the deals, when is the revenue growth contribution coming? And just maybe talk about the impact of those deals on margins..

Sure. So, Dan can touch on the margins. So, these are five deals, two that are more to further strengthen our core. And these two are quite small; the EmCision deal in Endo and Securus and you'll see a little bit of revenue from those. You'll see revenue from those, I should say, in 2019.

And then three maybe more strategic and larger opportunities are all in either adjacent markets that are high growth, or new white space. And Millipede, clearly a larger investment where we have the option to acquire that. Both parties do, actually. That would be a longer-term play, given the mitral repair market and the clinical requirements there.

So you're not going to see any revenue in 2019 and 2020 from Millipede. But NxThera and nVision, two really exciting opportunities in, call it either adjacent markets or white space. You'll see some revenue with NxThera in 2018, and we expect some strong momentum out of NxThera in 2019, and similarly in nVision.

There will be a little bit of revenue in 2018 and stronger contribution in 2019..

And in terms of the margin, Bob, simply put, all of that's contemplated in the 25.5% to 25.75% for the year and also, the 28% in 2020. To the extent that we do a deal that has any dilution in it, we make the appropriate tradeoffs to still deliver on the commitments and then obviously everything becomes accretive in the longer term.

So, all contemplated within our goals that we establish..

Your next question comes from the line of Glenn Novarro from RBC Capital Markets. Please go ahead..

Hi, good morning, guys. Mike, can you give us a little bit more color on WATCHMAN? And the reason I'm asking is ACURATE is doing very well. But you didn't change your $400 million structural heart guidance. So I just want to make sure that you're pleased with WATCHMAN here in the first quarter, given no change to the $400 million guide.

And then as my second question, can you just remind us of the trial design for ACURATE in the U.S. IDE trial? Thanks..

Sure. Couldn't be more pleased with the progress that WATCHMAN's making globally. We didn't take our number up. We do think there potentially could be some upside. So we'll see what happens later in the year with that number. But it's doing extremely well. The bulk of the growth is in the U.S., but we're also expanding into China.

And we're also excited about the clinical trial completion in Japan, which will be a very big market that will launch in the second half of next year. So for us, what's the most important metric is utilization rate. So we open up new centers, but the new center openings slow down over time given the presence that we already have.

So it's really about the safety profile, great outcomes, and utilization. And we continue to see an increase in utilization rates across our base of existing centers..

And then just some color on the U.S. trial for ACURATE, which I believe is going to start sometime in the second half..

Hi, Glenn, it's Ian Meredith. Thank you for the question. So the U.S. ACURATE IDE trial will be a randomized trial of extreme high and immediate risk patients. Approximately 500 patients. And it will be a comparison against any commercially available valve, which will be either the Edwards SAPIEN 3 valve or indeed the Medtronic Evolut R or PRO platforms.

So 500 patients, randomized to either of those two, and we will leverage the SCOPE 1 and SCOPE 2 data sets to put together a larger package as a consequence of that..

Your next question comes from the line of Bruce Nudell from SunTrust. Please go ahead..

Good morning. Thanks for taking my question. Mike, very nice quarter and I've really been impressed by the balance of the company. One of the things that was really exciting to me at the investor conference was the opportunity you're exploring in endoluminal surgery.

BSX made an investment this quarter and I was wondering whether you or Ian could comment on that particular technology that you purchased and the likely trajectory, the broader opportunity. And I have a follow-up up on TAVR..

Great. Thank you. So I think this is very consistent across all of our businesses is growing our core markets, our traditional ones in biliary and others, for example, in hemostasis and Endo, but then branching off into faster growth and new innovative markets.

And the acquisitions that we tick through really support that in new adjacencies and new white space, so we can deliver significantly above peer growth for the long term. Specifically to endoscopy, endoluminal surgery is a investment that we've been making for multiple years under Dave Pierce's leadership and now Art Butcher.

We see a large opportunity to, over time, move more general surgery procedures over to less invasive interventional approaches. The team, for lack of a better word, has pulled together a toolkit of internal organic R&D efforts as well as maybe two or three small tuck-in deals to do that.

And so, this Orise product allows us to get after esophageal cancer and other cancer interventional techniques to hopefully avoid general surgery. And so, we think we're leading the way in terms of physician training in Japan. That's actually quite a bit more mature in this market and we'll do a lot of physician training in the U.S.

I think over time here our goal is just to slowly help convert more general surgery procedures to less invasive interventional techniques. And we're pulling together the capabilities and the training to do that.

So that'll continue to be another branch of growth for Endo beyond our pathology and infection prevention which are also recent new markets that they've moved into..

Thanks. And my question with regard to TAVR is we were struck by Edwards' commentary regarding the step down and the ex-U.S. market growth from lower 20s in the fourth quarter to low teens this quarter with a broader backdrop of price sensitivity in Europe. We realize there can be dramatic quarter-to-quarter variation, both the U.S. and ex-U.S.

market growth for no real fundamental reason. But we just wanted to check with you or Ian as to whether you perceive the secular shift in ex-U.S. payer perspective as to their willingness to pay for TAVR amongst largely an elderly population, which is historically not treated, or to convert surgery, which tends to be cheaper ex-U.S., to TAVR.

Any change that you've really seen or is this just one of those quarters?.

I'll make that first comment maybe on just the market and then Ian can make some other comments. Clearly, we see more price sensitivity in Europe than we do in the U.S. There's more competitors in Europe than there are in the U.S. And we see more price variation by country. We're really on offense here. We're launching into new markets.

We haven't been approved or reimbursed in some markets yet. So this is all new growth for us. And we have a terrific platform with ACURATE, with the next gen seal coming at very nice gross margin rate. And then we're optimistic on the progress with LOTUS as well.

But Ian, do you have any other comments?.

No. I'd only add, Bruce, that I don't think that there's really any evidence that there's a slowing of the uptake of transcatheter aortic valve for severe aortic stenosis in the elderly patients.

I think the evidence is growing stronger all the time and there's widespread understanding of the value of this technology in reducing morbidity and mortality. So I see no reason to think that this would slow..

Your next question comes from the line of Larry Biegelsen from Wells Fargo. Please go ahead..

Good morning. Thanks for taking the question. So one on EP, one on TAVR. Let me start with EP for Dr. Stein. So, next month at HRS, Dr. Stein, we're going to see the long awaited CABANA trial results.

What are your thoughts on that? Do you think that if it misses the primary endpoint, it could hurt the afib ablation market? And if it makes the primary endpoint, do you think this market could even grow faster? Just any thoughts on that study, given its importance. And I had one follow-up on TAVR. Thanks.

Yeah, Larry, I think we're all holding our breath to see what CABANA shows when it's released as a late breaker at HRS. I think it's always tough to speculate ahead of the data.

My feel on the trial, it took so long for them to enroll and used such a variety of different technologies for mapping and for ablation, that my own view is if it turns out to be positive, I think it would be an accelerator for the market. I think if it's negative, it depends on how it's negative.

But if it's a neutral result, just given the age of the trial and the early generation of technologies and variety of different approaches that were used, I don't think it would have too much of an impact..

That's helpful. And then on – let me just ask on LOTUS. Mike, I did hear your comment a minute ago that you're optimistic on the progress of LOTUS, but my question is really around once you resolve, if you resolve the technical issues, you've stated that there are regulatory steps that you need to take.

So, the question is really if you resolve the technical issues, what steps do you need to take to launch LOTUS in the U.S. and Europe? I think last year at TCT you indicated that you planned to conduct additional implants on Edge, I think before launching. Is that still the case? And I just want to throw it out there.

In Europe, it seems you do have the upper hand on Edwards right now in the litigation. So, I know it's sensitive to comment on litigation, but what's stopping from you enjoining them there to kind of force a global settlement? Thanks for taking the questions, guys..

Sure. On LOTUS, there really is no change there. It's our intention and our goal is to bring LOTUS back to market in Europe and the U.S. in 2019. We made the commitment that we wouldn't comment on that until we passed the technical and testing hurdles that we require of ourselves internally. So, we'll keep you posted on that.

And really, I wouldn't comment any further on clinical requirements in Europe or U.S. until we get through the quality and testing that needs to be done. On Edwards litigation, really no further comments there. We're pleased with the really strong outcomes that we've seen in Europe on the litigation front. But I wouldn't comment any further..

Your next question comes from the line of Danielle Antalffy from Leerink. Please go ahead. Danielle, your line is open. Please check your mute button..

Oh. Hello. Good morning, guys. Thanks so much for taking the question..

Our pleasure, Danielle..

Okay. Can you hear me okay? Sorry about that..

Yes, we can hear you fine..

Okay. Great. Thanks so much. I just had a question on – can you give a little bit more color about the combination of the CRM and Neuromod businesses and what this can ultimately do? I know you said Neuromod was dilutive to the operating margins.

But does this make you feel incrementally better about improving margins in the CRM business as well? And what is the new sort of bar set for that business from an operating margin perspective?.

Yeah, Danielle, this is Dan. I had a little bit of this in the prepared remarks around the overall goal. So what we used to talk about was kind of a 23% for the old Rhythm Management segment, and that's kind of still – 23% plus is still where we would see the Rhythm and Neuro segment going. It was a little over 20% here in Q1.

So there are some good synergies and advantages to bringing the active implantables together, as Mike had mentioned, to bring the Rhythm and Neuro segments together. But at the margin level, I think we're on track for where we said this year and on track for the 28% for 2020..

Okay. And then just a quick follow-up question. I mean obviously in 2019, you'll be entering that year with a lot more flexibility on the balance sheet and I was just wondering if you could give any color at a high level on how you're thinking about potentially deploying that capital going forward. Thanks so much..

Yeah, it definitely is an inflection point for us. We'll have much better ability to deploy our capital than we would have over the last really five, six, seven years as we get into 2019 and 2020. But I don't think we change the playbook at that point. It's still about category leadership.

It's still about being as deep in each of the verticals that we have and supporting that. You've seen an example of that, as Mike ticked through the deals we have done here and either closed or announced in Q1. And just because there's more cash available, relative to 2019 and 2020, I think the strategy remains the same..

Your next question comes from the line of Josh Jennings from Cowen. Please go ahead..

Hi. Good morning. Thanks a lot for taking the question. Let's start on TAVR and just follow up, Mike, on your territories where you have not received reimbursement. To start, I was hoping to just hear any type of cadence you can help us with. You mentioned France I think in 2020.

What are the other key regions where you're seeking reimbursement approval? And then maybe [Technical Difficulty] (53:41) that.

And then also just with the Symetis sequential improvement, can you just help us understand where you're having the greatest success? Is that with going deeper into historic LOTUS accounts or is it a combination of that and new customer capture?.

Sure. I'll comment on the first one. There's really not much to say. On the first one, there's really not much to comment on other than the France reimbursement comment I made in 2020.

Really in Europe, beyond the French reimbursement, it's been a matter of us scaling up production, which we continue to do successfully, training our clinical team and commercial team on ACURATE. And we continue to make a lot of progress there and build momentum. And we're confident we'll continue to see strong growth out of ACURATE.

But we'll be selling into most major markets in Europe, with the exception of France, without reimbursement. And then we'll be hopefully enrolling, as part of the U.S. trial, Japan as well, in the future for ACURATE. So that's probably the only comment I can make on it.

We just continue to invest in the platform on the portfolio side, on the clinical capabilities. And we are seeing growth, not only in existing customers who are using it more often, but also in new customer accounts as well. We've had particular success in the UK and the Nordics and we're continuing to build up our capabilities in Germany..

Thanks for that. And then just a question for Dan on the margin guidance. Stronger than expected performance in Q1, increase in the top line guide.

I know you laid some of this out already in your prepared remarks, but I was hoping it might be helpful to help us walk through I think it's why you can't see even stronger [Technical Difficulty] (55:35) 2018 guidance range. Thanks for taking the questions..

Yeah, Josh, you were breaking up a little bit at the end, but I think it's on 2018 guidance and why can't it be a little bit higher. At the 25.5% to 25.75%, feel like that's appropriate guidance. Gross margin was a little hot in Q1 at 72.3%. You'll see from the guide we have that at a 71.75% for Q2.

There's a little bit more sequential pressure relative to FX on gross margin. So we still think 72% is the right number there. So there's not, I don't think, a ton of upside on that front. We did give the EPS upside from the additional sales for the year of raising the range up to 7%. There's a piece of that in the EPS guide up to $1.37 to $1.41.

So, feel like the 25.5% to 25.75% at this point in the year is an appropriate guide, given the top line raise and the bottom line raise..

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

Good morning, everybody. Maybe I'll focus on some CRM questions at this point. Mike, you highlighted S-ICD as maybe being underappreciated. And yeah, we're four or five years in, you're still growing solid double-digits, the evolution of technology, more favorable guidelines.

How sustainable is this kind of growth? What's next? Maybe just update us on your thoughts about – some of the early days the thought was S-ICDs would only be useful in maybe 10%, 15% of patients.

Do you see it as a larger opportunity? And is it pulling through ICD business? Is that helping that part of the business as well, just that double offering?.

I can answer, but Dr. Stein's probably more qualified to answer..

Thanks a lot, Mike. I'm not sure about that. Yeah, Rick. I think the biggest opportunity for continued growth with S-ICD is continuing to penetrate into the traditional primary prevention market for single-chambered defibrillators. And again, you're right. The primary prevention market is the single largest market for ICDs in the U.S. and globally.

And there are a number of upcoming data releases that are going to help us push that forward, as well as product releases. And so I'd highlight for everyone a late-breaking trial that's going to be presented at HRS in Boston that shows the impact of the new detection algorithm we have in a device on inappropriate shock rates.

Then we're going to have eventually the release of the PRAETORIAN head-to-head trial of S-ICD versus transvenous ICD, as well as the results of our UNTOUCHED trial, specifically in primary prevention patients.

And then beginning in 2019, we'll be starting clinical trials of our modular CRM offering; leadless pacemaker that's capable to communicate with the S-ICD, that in our view reduces a lot of the barriers among physicians who haven't yet adopted the device for primary prevention..

Yeah. It's great. And then just last for me on defibrillated, given again, the strong ICDs, great products, S-ICD, I'm not sure I fully understand why brady was weak and why it remains weak for the rest of the year. I know you had a tough comp in the first quarter.

What are you doing, Mike, to make it better and do we have to wait until 2019 for better results there? Thanks..

Yeah. So on brady, it's been in line with what we expected. We do have some tough comps. We had very tough comps in the first quarter. We had tough comps again second quarter and they get a bit easier in the second half of the year. So, there's a lot of efforts there. We have a couple product gaps that we're trying to fill on CRTP with MRI.

That's in process that we're confident we'll move forward with. We are seeing a little bit of impact on leadless pacemaking in some markets. So there's a few product gaps that we're working to fill and some difficult comps. But we really feel like when we give guidance, we give guidance to execute upon it. We've had a really good track record on that.

And a bit softer pacemaker result is anticipated in that guidance and well offset by the defib performance..

Thanks..

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

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