Boston Scientific Q4 2022 Earnings Call Transcript

Presentation

[Operator]

Good morning, and welcome to the Boston Scientific Fourth Quarter 2022 Earnings Call. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Lauren Tengler, Vice President, Investor Relations. Please go ahead.

[Lauren Tengler, Vice President, Investor Relations at Boston Scientific]

Thank you, Drew. Welcome, everyone, and thanks for joining us today. With me on today's call are Mike Mahoney, Chairman and Chief Executive Officer; and Dan Brennan, Executive Vice President and Chief Financial Officer. We issued a press release earlier this morning announcing our Q4 and full year '22 results, which include 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 Financials and Filings.

The duration of this morning's call will be approximately one hour. Mike and Dan will provide comments on Q4 and full year performance as well as the outlook for our business including 2023 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, operational revenue growth excludes the impact of foreign currency fluctuations, and organic revenue growth further excludes acquisitions and divestitures, for which there are less than a full period of comparable net sales. Relevant acquisitions excluded for organic growth are Preventice, FARAPULSE and Lumenis Surgical, which closed in March, August and September of 2021 respectively as well as Baylis Medical, which closed on February 14, 2022.

Divestitures include the BTG Specialty Pharmaceuticals business, which closed on March 1, 2021. Guidance excludes the previously announced agreements to purchase a majority stake in M.I.Tech. and Acotec as well as the acquisition of Apollo Endosurgery, which are all expected to close in the first half of 2023. For more information, please refer to our financial and operating highlights deck, which may be found on our Investor Relations website. On this call, all references to sales and revenue unless otherwise specified are organic. This call contains forward-looking statements within the meanings of the federal securities laws, which may be identified by words like "anticipate," "expect," "may," "believe," "estimate" and other similar words. They include, among other things, statements about our growth and market share, new and anticipated products, approvals and launches, acquisitions, clinical trials, cost savings and growth opportunities, our cash flow and expected use, our financial performance including sales, margins and earnings as well as our tax rates, R&D spend and other expenses.

If our underlying assumptions turn out to be incorrect, or certain risks or uncertainties materialize, actual results could vary materially from the expectations and projections expressed or implied by our 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-Q 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.

[Michael F. Mahoney, Chairman and Chief Executive Officer at Boston Scientific]

Thanks, Lauren. Thank you to everyone for joining us today. 2022 represents a return to more durable and consistent procedural growth within the markets we serve, which provided a stronger base for our innovative portfolio. I'm very proud of the resiliency and winning spirit of our global team, delivering on our sales and EPS goals despite the ongoing macroeconomic and supply chain challenges. Importantly, we delivered strong performance across all geographic regions and believe that almost all of our business units gained or maintained market share throughout the year.

In fourth quarter '22, total company operational sales grew 9% and organic sales grew 7% versus fourth quarter '21, which was the low end of our guidance range. However, it's very important to note that these results include an unplanned sales reserve of $60 million, established for an Italian government payback provision, which resulted in a headwind of approximately 200 basis points for the quarter. The underlying fourth quarter performance was strong in both sales, operating margin increases and earnings per share. And without the impact of the Italian sales reserve, we would have achieved the high end of our organic sales guidance range of 7% to 9%.

Full year '22 operational sales grew 11% versus '21, while organic sales grew 9% in line with our guidance of approximately 9%. Fourth quarter adjusted EPS of $0.45 declined minus 2% versus '21, and full year adjusted EPS of $1.71 grew 5% versus '21, both achieved in the low end of the guidance range. Once again, without the impact of the Italian sales reserve, we would achieved the high end of the guidance range for both fourth quarter and full year of $1.71 to $1.74. We generated full year free cash flow of $950 million and adjusted free cash flow of $2.1 billion in line with our expectations.

Now for our outlook for 2023. We are guiding to organic growth of 6% to 8% for both first quarter of '23 and full year of '23, which excludes the acquisition of Apollo Endosurgery and the majority stake investments in M.I.Tech and Acotec, all of which are expected to close in the first half of 2023.

Our first quarter '23 adjusted EPS estimate is $0.42 to $0.44. And we expect our full year adjusted EPS to be $1.86 to $1.93. And despite the ongoing macroeconomic pressures and supply chain headwinds, we remain committed to our goal of plus 50 basis points of operating margin expansion and double-digit adjusted EPS growth in 2023.

Dan will provide more details on our '22 performance, the Italian sales reserve and our '23 outlook.

I'll now provide some additional highlights on '22 results, along with comments on our '23 outlook. Regionally, on an operational basis, the U.S. grew 10% versus fourth quarter '21. Full year '22 grew 11%, inclusive of a 300-basis-point tailwind from acquisitions. With particular strength in our WATCHMAN, Endo and Urology business units. Europe, Middle East and Africa grew 11% on an operational basis versus fourth quarter '21 and 12% on a full year basis. This above-market growth was supported by ongoing investments in emerging markets, new and ongoing product launches across the portfolio, pricing discipline and strong commercial execution. We're excited about the year ahead with ongoing momentum across the region, particularly with our innovative EP portfolio and further opportunity with Baylis and the Access Solutions franchise.

Asia Pacific grew 10% operationally versus fourth quarter '21 and 12% for the full year. On a full year basis, six out of the eight of business units grew double digits supported by ongoing innovation across the region. Full year Japan growth was driven by new products, including POLARx, which has approximately 50% share in open accounts.

We look forward to 2023 with ongoing momentum for both new products and excited about our recent approval and reimbursement received for AGENT DCB, which is a coronary drug-coated balloon for in-stent restenosis in small vessels.

On a full year basis, China grew more than 20%, fueled by 13 [Phonetic] new product launches, ongoing portfolio diversification and the team's resiliency and execution. We continue to expand our presence in the China market with the recently announced acquisition of a majority stake in Acotec. We believe this investment can create strategic value for both companies with opportunities to collaborate in R&D, manufacturing and commercial strategies. We also continue to expect China to be a double-digit grower in '23, despite ongoing VBP pressure and potential impact to procedure volumes in Q1 from COVID.

In Latin America, the momentum continued with operational sales growth of 16% versus fourth quarter of '21 and full year growth of 28% with all business units growing double digits versus '21.

On the business units, starting with Urology. Urology sales grew 12% both operationally and organically versus fourth quarter of '21 and on a full year basis. They grew 15% operationally and 10% organically versus '21. Within the quarter, all franchises grew double digits fueled by new and ongoing product launches and continued global expansion. On a full year basis, global growth was driven by key products such as LithoVue, Rezum and SpaceOAR as well as the acquisition of Lumenis MOSES Laser Technology, further complementing the Urology portfolio.

Endoscopy sales grew 7% organically in the quarter and on a full year basis, grew 8% organically versus '21. In '22, we had global success with innovative products such as AXIOS and Single-Use Imaging both growing over 20% and supporting strong growth across the globe. In fourth quarter, we announced our intent to acquire Apollo Endosurgery, which will add a complementary and innovative endoluminal surgery portfolio. We look forward to closing this acquisition as well as our previously announced majority stake in M.I. Tech, which includes the [Indecipherable] in the first half of '23.

Neuromodulation sales grew 5% organically versus fourth quarter of '21, and on a full year basis grew 3% organically versus '21. Globally, our Spinal Cord Stimulation business grew 4% in fourth quarter with continued physician enthusiasm for WaveWriter Alpha and FAST. We continue to invest in clinical evidence to expand indications and presented three-month data from our non-surgical back study SOLIS at NANS earlier this year. The study comparing SCS to the conventional medical management met its primary endpoints, and we anticipate FDA approval for non-surgical back indication by the end of '23.

Our Brain franchise grew double digits in the quarter and low double digits on a full year basis. This strong performance was aided by continued momentum from new product launches in '22 as well as the recent launch of the Vercise 2-in-1 lead extension.

Peripheral Intervention sales grew 9% organically versus both fourth quarter of '21 and full year of '21. Within Arterial, we are pleased with the performance of our Drug-Eluting portfolio growing strong double digits for the full year and achieving the Number One global position -- I'm sorry, the Number One position within SFA in the U.S.

On a full year basis, our Venous franchise was flat versus prior year with the Varithena, our market-leading varicose vein offering growing over 20% in 2022. Our Interventional Oncology franchise performed well in '22, growing low double digits, led by our portfolio of innovative cancer therapies and suite of embolization tools.

We continue to invest in expanding the potential applications of TheraSphere and enrolled our first patient in our early feasibility study, FRONTIER, evaluating the image of -- the safety of image-guided intra-arterial delivery of TheraSphere GBM in patients with reoccurring glioblastoma.

Cardiology delivered another excellent quarter with operational sales growing 13% and organic sales growing 10% versus fourth quarter of '21. On a full year basis, sales grew up 14% operationally and 10% organically. Our newly aligned Cardiology Group delivered strong growth across its four businesses, as we continue to invest in the higher growth segments and differentiated offerings for our customers that address the areas of greatest cardiac need for patients.

Within Cardiology, Interventional Cardiology Therapy sales grew 5% organically in the fourth quarter and on a full year basis grew 8% organically versus '21. On a full year basis, the Coronary Therapies franchise, which includes both drug-eluting stents and Complex PCI grew 7%, driven by strong performance in our international regions and our Imaging franchise.

Our Structural Heart Valves franchise grew double digits on both fourth quarter and full year basis, outpacing the market in Europe with our ACURATE neo2 Aortic Valve. Ongoing clinical evidences supported growth throughout '22 and in the fourth quarter. Data from the ACURATE neo2 PMCF study was presented as a late breaker at PCR London Valves, demonstrating positive safety and 30-day outcomes with low PVL rates and best-in-class pacemaker implantation rates.

Additionally, we enrolled our first patient in the ACURATE Prime XL Nested Registry, assessing the safety and efficacy of the ACURATE Prime Aortic Valve XL to treat patients with severe aortic restenosis, who need a larger valve size for the TAVR procedure.

WATCHMAN sales grew 22% organically versus fourth quarter '21 and on a full year basis grew 24% organically versus '21. Q4 finished with record sales, strong utilization in the U.S., supported by the DAPT label expansion. Importantly, we completed the enrollment of our CHAMPION-AF trial way ahead of schedule. This head-to-head trial versus novel oral anticoagulation has the potential to more than triple the number of patients indicated for WATCHMAN FLX in 2027 and beyond. We remain excited about this outlook for this business and expect double-digit growth in 2023, fueled by innovation, ongoing clinical evidence and strong commercial execution. CRM sales grew 6%, both operationally and organically versus fourth quarter '21 and on a full year basis grew 8% operationally and 7% organically.

Our Diagnostics franchise had a strong year, growing double digits versus '21. In core CRM, on the full year basis, our high-voltage business grew low single digits, and our low voltage business grew mid-single digits, and we expect that all major markets were in line or slightly above the market.

Electrophysiology sales grew 76% operationally and 25% organically versus fourth quarter '21 and on a full year basis grew 69% operationally and 18% organically versus '21. Importantly, our international EP business continues to outpace the market, growing over 40% organically versus fourth quarter '21.

POLARx continues to perform well in both Europe and Japan [Indecipherable] to treat over 25,000 patients since launch. Momentum in FARAPULSE continues with another strong quarter of growth in Europe. And we continue to invest in clinical evidence and look forward to the readout of the randomized ADVENT U.S. IDE trial in the second half of '23 and are planning to initiate our ADVANTAGE AF trial [Indecipherable] FARAPULSE for patients with persistent Afib imminently.

We've been very pleased with the performance of our Baylis acquisition and the innovative VersaCross platform, which grew 2 times faster than the market in '22. We launched our VersaCross Connect in '22, improving efficiencies in our WATCHMAN procedure.

Earlier this year, we shared our strategy consistent with years past. We continue to position ourselves to win in the markets we play through meaningful innovation by balancing our financial commitments. And in '22, we announced four acquisitions, invested 10% of our sales in internal R&D to fund sustainable growth and advance patient care.

We're extremely excited about the year ahead and remain focused on our people and sustaining a culture that is motivated to drive differentiated performance and achieve our long-term goals, continuing to grow sales faster than markets, continuing to expand operating margins and delivering double-digit adjusted EPS growth and strong adjusted free cash flow generation.

So before I turn it over to Dan, I want to share that with the retirement of Dr. Ian Meredith, Dr. Ken Stein will assume some of the global responsibilities that previously fell under Ian, including total company investor engagement in addition to the CRM, EP and WATCHMAN roles. Please join me in congratulating Ken and thanking Ian for his many contributions.

With that, I'll pass it off to Dan to provide more details on the financials.

[Daniel J. Brennan, Executive Vice President and Chief Financial Officer at Boston Scientific]

Thanks, Mike. Fourth quarter consolidated revenue of $3.242 billion represents a 3.7% reported revenue growth versus the fourth quarter 2021 and reflects a $158 million headwind from foreign exchange, slightly favorable to our expectations as the U.S. dollar weakened throughout the quarter. Excluding this 500-basis- point headwind from foreign exchange, operational revenue growth was 8.7% in the quarter. Sales from the acquisition of Baylis contributed 160 basis points resulting in 7.1% organic revenue growth at the low end of our guidance range of 7% to 9% growth versus 2021, including an approximate 200-basis-point impact associated with an unplanned sales reserve related to an Italian government payback provision, which was recorded in the fourth quarter of 2022. With the goal of recovering spending above the government's medical device budgets, this payback provision requires companies that have supplied medical devices to public hospitals in Italy to pay back a portion of these overrun amounts. While we and others in our industry have appealed and will continue to challenge the enforceability of the law through the Italian court system, we established a sales reserve of $60 million in the fourth quarter, representing our best estimates of amounts we could be required to pay back. Without the reserve, we would have achieved the high end of the organic revenue growth guidance range. Flow-through on the Italian sales reserve resulted in Q4 adjusted earnings per share of $0.45, at the low end of our range, representing a decline of 2% versus 2021. Without the reserve, we would have achieved the high end of our range for the quarter.

Full year 2022 consolidated revenue of $12.682 billion represents 6.7% reported revenue growth versus full year 2021 and reflects a $524 million headwind from foreign exchange. Excluding this 440-basis-point headwind from foreign exchange, operational revenue growth was 11.1% for the year. Sales from closed acquisitions contributed 240 basis points, resulting in 8.7% organic revenue growth, in line with expectations and inclusive of a 50-basis-point impact associated with the Italian sales reserve. Full year 2022 adjusted earnings per share of $1.71 represents 4.8% growth versus 2021, achieving the low end of our guidance range of $1.71 to $1.74. Without the unplanned Italian sales reserve, we would have been at the high end of our full year guidance range.

Adjusted gross margin for the fourth quarter was 70.5%, resulting in full year 2022 adjusted gross margin also of 70.5%, in line with our expectations. Full year adjusted gross margin improved versus 2021, driven by an FX tailwind of approximately 100 basis points related to our hedging contracts, partially offset by continued macroeconomic headwinds. These headwinds were approximately $375 million versus 2019 and are predominantly from increased freight costs and unfavorable manufacturing variances primarily related to direct material cost and availability.

Our 2023 guidance assumes macroeconomic and supply chain headwinds will be similar to 2022. Different from prior years, we expect first half 2023 gross margin to be higher than the second half, largely due to the timing of foreign exchange movements that occurred during 2022. Fourth quarter adjusted operating margin was 25.7% resulting in full year 2022 adjusted operating margin of 25.6%, improving 30 basis points versus 2021, inclusive of a 30-basis-point negative impact from the unplanned Italian sales reserve.

As we look to 2023, we continue to focus on our goal of annual operating margin expansion. And despite our expectation of continued macroeconomic headwinds, our goal is to achieve approximately 26.4% adjusted operating margin for the full year 2023, representing 80 basis points of improvement versus the 2022 adjusted operating margin of 25.6% and importantly, 50 basis points of expansion compared to the full year 2022 adjusted operating margin without the impact of the Italian sales reserve.

On a GAAP basis, the fourth quarter operating margin was 12.4%, including $131 million in litigation-related expenses, which I'll provide detail on in a moment. Moving to below the line, fourth quarter adjusted interest and other expense totaled $88 million, resulting in full year adjusted interest and other expense of $362 million, slightly higher than our expectations, driven in part by an FX loss from certain unhedged currencies.

On an adjusted basis, our tax rate for the fourth quarter was 11.9% and 12.7% for the full year 2022 including discrete tax items and the benefit from stock compensation accounting. Our operational tax rate was 12% for the fourth quarter and 13.5% for the full year, slightly favorable to our expectations of approximately 14%. Fully diluted weighted average shares outstanding ended at 1.442 billion in Q4 and 1.440 billion for the full year 2022. Adjusted free cash flow for the quarter was $776 million, and free cash flow was $597 million with $807 million from operating activities less $210 million of net capital expenditures. Full year 2022 adjusted free cash flow was $2.1 billion, in line with expectation, and free cash flow was $949 million with $1.5 billion from operating activities less $576 million of net capital expenditures.

For 2023, we expect adjusted free cash flow in excess of $2.3 billion. As of December 31, 2022, we had cash on hand of $928 million. We continue to expect to close the acquisition of Apollo Endosurgery and the majority stake investments in M.I.Tech and Acotec with cash on hand or available credit lines in the first half of 2023. Our top priority for capital allocation remains high-quality tuck-in M&A, and we'll continue to assess opportunities in conjunction with our financial goals. As of December 31st, our leverage was 2.57 times in line with our expectations, and we were pleased to be upgraded to BBB+ with a stable outlook at both Fitch and Standard & Poor's within the quarter.

Our legal reserve was $443 million as of December 31st, an increase of $139 million from the prior quarter, primarily related to our mesh litigation. While our U.S. case count has remained materially the same over the past three years, we've increased our reserve to account for our latest estimates of the time and cost to resolve these claims as well as remaining probable and estimable global claims.

I'll now walk through guidance for Q1 and the full year 2023. And as a reminder, guidance excludes any acquisitions that have not yet closed. We expect full year 2023 reported revenue growth to be in a range of 5% to 7% versus 2022. Excluding an approximate 100-basis-point headwind from foreign exchange, based on current rates, and a 20-basis-point contribution from closed acquisitions, we expect full year 2023 organic revenue growth to be in a range of 6% to 8% versus 2022. We expect first quarter 2023 reported revenue growth to be in a range of 3% to 5% versus Q1 2022. Excluding an approximate 350-basis-point headwind from foreign exchange based on current rates and a 70-basis-point contribution from closed acquisitions, we expect first quarter 2023 organic revenue growth to be in a range of 6% to 8%. We expect our full year 2023 adjusted below-the-line expenses to be approximately $340 million. Under current legislation and forecasted geographic mix of sales, we forecast a full year 2023 operational tax rate of approximately 14%, with an adjusted tax rate of approximately 13% including the benefit of the accounting for stock compensation, which we expect will largely be recognized in the first quarter, resulting in a Q1 2023 adjusted tax rate of approximately 12%.

We expect a fully diluted weighted average share count of approximately 1.447 billion shares for Q1 2023 and 1.464 billion shares for full year 2023, which includes the shares we expect to issue on June 1st this year related to our May 2020 Mandatory Convertible Preferred Stock offering. We expect the impact to adjusted earnings per share to be neutral with the preferred stock dividend ending at the time of conversion.

We expect full year adjusted earnings per share to be in a range of $1.86 to $1.93, representing 9% to 13% growth versus 2022. At current rates and existing hedging contracts, we anticipate a neutral impact from FX on full year 2023 adjusted earnings per share. We expect first quarter adjusted earnings per share to be in a range of $0.42 to $0.44. For more information, please check our Investor Relations website for Q4 2022 financial and operational highlights, which outlines more details on Q4 results and 2023 guidance.

In closing, I'm very proud of the results that our global team achieved in 2022 with top-tier revenue performance and differentiated operating margin expansion despite a challenging macroeconomic environment, and I'm looking forward to continued momentum during 2023.

With that, I'll turn it back to Lauren, who will moderate the Q&A.

[Lauren Tengler, Vice President, Investor Relations at Boston Scientific]

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

Questions and Answers

[Operator]

[Operator Instructions]. The first question comes from Rick Wise with Stifel. Please go ahead.

[Rick Wise, Analyst at Stifel Nicolaus]

Good morning everybody. Great to see another excellent year from Boston Scientific. I guess to focus on one question, I'll start with your 2023 guidance. Obviously, the 6% to 8% guide is right in line with your long-term philosophy. But you started in the same place in '22. You obviously, excluding the Italy issue, finished above 9% organically. Why again stick with the 6% to 8%? Is this conservatism, respect for lingering macro pressures or both? And maybe just as part of that, why model macro headwind similar to '22? The large-cap companies reporting to date, they're not Boston Scientific, but they're all in some way, shape or form highlighting the improving or less pressures from macro as they finish the year and start '23? Thank you very much.

[Michael F. Mahoney, Chairman and Chief Executive Officer at Boston Scientific]

Hey. Good morning, Rick. It's Mike. Thanks for the compliments. Just to summarize your points, I guess. We're really happy with fourth quarter, excluding that onetime Italy reserve, grew plus 9%, basically high end of sales, high end of EPS. And as Dan said, really pleased that delivered top-tier revenue growth and I think one of the few companies that actually improved margins as well in '22. So, we have a lot of momentum and we're excited, very bullish on '23 in the future here. On guidance, you don't win the day in February here. So we think the 6% to 8% guidance for full year is appropriate. For the full year, we're coming off a 9% growth comp in 2022. And we obviously plan to grow as fast as we possibly can while continuing to invest in the Company. There are a couple of things that will be in -- there are pluses and minus. We're very bullish on the EP business, our momentum with WATCHMAN with FARAPULSE. There's a couple of headwinds we do believe on the CRM side. We grew about 6% or 7% [Phonetic], I guess, last year, 7% in a market that's low single digits when you include Diagnostics. So, we expect a little bit of a headwind there based on comps. China performed terrific for us in '22, and we expect them to deliver again excellent double-digit growth but potentially not quite as fast as they did in '22. Also, the underlying markets we are competing at about 6%. So, we think coming off a 9% comp, 6% to 8% full year estimate. This time of year is the smart prudent guidance to give, and we're going to push [Indecipherable] to beat it.

[Daniel J. Brennan, Executive Vice President and Chief Financial Officer at Boston Scientific]

And then relative to the macroeconomic environment, Rick, the -- we kind of reiterated that 375 that we saw in 2022 as being a similar headwind in 2023. As you saw through 2022, we have a pretty high-performing global supply chain organization that has been on top of this all through it, and which is the reason that we've been giving the updates at the level of specificity that we have. So, as you would imagine, as we went through our annual operating plan process and guidance preparation process, they really dug in at a detailed level to try and understand what 2023 could bring. There are some elements that look better, right? Freight does work better. You see fuel prices and oil prices coming down. So, we're optimistic freight costs will be less. The supply of materials and the cost of materials is still a bit uncertain and choppy and that direct labor piece that we had that in 2022, you've got to annualize that in 2023. So, I think the prudent case right here, the prudent course for guidance in February is to assume that we don't get a lot of macroeconomic help in 2023. I'd love to be surprised as we go through the year that we get that help. But I think as we sit here in February, prudent to assume a similar headwind to what we saw last year.

[Rick Wise, Analyst at Stifel Nicolaus]

Thank you so much.

[Daniel J. Brennan, Executive Vice President and Chief Financial Officer at Boston Scientific]

Thanks, Rick.

[Operator]

The next question comes from Robbie Marcus with J.P. Morgan. Please go ahead.

[Robbie Marcus, Analyst at J.P. Morgan]

Great. Thanks for taking the questions and congrats on a nice quarter. Maybe to start, Mike, at our conference last month, you were really bullish on FARAPULSE, and we saw EP have a nice beat in the quarter, particularly outside the U.S., where you have FARAPULSE and POLARx going now. Maybe you could talk about your expectations, what you saw in the quarter for FARAPULSE specifically and your expectations for it in 2023, especially after we get the data later in the back half of the year, assuming it looks good.

[Michael F. Mahoney, Chairman and Chief Executive Officer at Boston Scientific]

Sure. Yeah, our EP business in the quarter grew 25% and it grew 40% or 50%, I think...

[Lauren Tengler, Vice President, Investor Relations at Boston Scientific]

40% internationally.

[Michael F. Mahoney, Chairman and Chief Executive Officer at Boston Scientific]

40% internationally and poorly in the U.S. because we don't have these products approved in the U.S. So that really drove the growth down to 25%. But I really look at the -- outside the U.S. growth as the key barometer for us. And we're continuing to see great pickup with both our cryo platform and FARAPULSE. Cryo is a platform that is competing against a product that hasn't changed in a decade. And so, physicians like the ease of use and the features of the cryo platform that we have in Japan and in Europe. That's doing quite well, and we're hopeful to have approval for that second half of '23 in the U.S. here. And then FARAPULSE is doing extremely well for both cryo users who have adopted FARAPULSE and point to point RF users, Dr. Stein is on the phone, so he can make some comments. But the utilization enthusiasm for FARAPULSE is extremely high, and we're very bullish as we look at 2023 in terms of our EP performance and outlook, especially in Europe and Japan. And if we can get some -- the approval of the cryo platform in the second half, the U.S. will perform quite well as well. And then we expect to see a big impact from FARAPULSE in '24. So, the future of our EP business is very bright. We know it's a competitive field. We believe we have unique platforms in both FARAPULSE and cryo that are differentiated and showing that clinically where they're launched and we have an excellent commercial team ready to bring these to the U.S. So, we don't give specific guidance for EP, but it's clearly a critical growth driver for us in '23 and well beyond that. Dr. Stein, if you have any other comments?

[Ken Stein, Executive Vice President and Global Chief Medical Officer at Boston Scientific]

Yeah, absolutely. Thanks, Mike. Thanks, Robbie. Again, just we do believe that FARAPULSE is differentiated relative to other PFA technologies out there. I think it's important to reiterate that all PFA is not created equal and because it's a field effect, the results that you're going to see with any of the technologies are highly dependent on the way -- actual catheter design and FARAPULSE is the only system in evaluation right now that was designed from the ground up to deliver PFA dependent on the waveform that's delivered and dependent on the dosing strategy.

And as you said, we are really looking forward to presenting the results of our randomized FARAPULSE trial, ADVENT in the second half of this year as well as to initiate our persistent AF trial, ADVANTAGE, imminently.

The only thing I'd add to what Mike said is I also think as you think about EP, I think it's really important also to consider the really extraordinary momentum that we've got with our Transseptal Access Solutions from Baylis and continue to see above-market growth with that and continue to see increased use of the Baylis Transseptal Access Solutions, the energy needle and VersaCross Access, both in ablation procedures and in WATCHMAN and other structural heart procedures.

[Robbie Marcus, Analyst at J.P. Morgan]

Great. Thanks for the color. And maybe just a quick follow-up. China has been an important growth driver for Boston Scientific, grew 22% in the year even with the difficult operating environment. So how should we be thinking about China coming out of the reopening here into first quarter? And what's your expectation for the year going forward? Thanks.

[Michael F. Mahoney, Chairman and Chief Executive Officer at Boston Scientific]

Thank you, that team had a terrific '22 despite all the challenges with COVID and all the different pricing tenders that occur over there. So, for China, in '23, we are very bullish again -- we do expect double-digit growth out of the China team for the full year. There'll likely be some pressure in first quarter given the challenges that they've had in China with COVID. So, we expect potentially some sales growth challenges in Q1, but we do expect strong double digit for the full year, likely not at the same level as the 22% that we delivered in '22, but strong double digits nonetheless.

[Robbie Marcus, Analyst at J.P. Morgan]

Thanks a lot.

[Operator]

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

[Larry Biegelsen, Analyst at Wells Fargo & Company]

Good morning. Thanks for taking the question. Congratulations on a strong end to the year here. I wanted to ask a two-part question also on FARAPULSE. So maybe for Dr. Stein, you talked about your excitement for the ADVENT trial later this year. Can you help put the MANIFEST-PF data into context? How did that compare to prior RF and cryo studies? And what would be a win for you in ADVENT for FARAPULSE? And we're going to see -- the second part is we're going to see the Medtronic PulseSelect data at ACC, the J&J inspIRE data at Boston AF, I guess, this weekend. You talked about how FARAPULSE is differentiated. What should we be looking for in those studies that would support your comments earlier? Thanks for taking the questions.

[Ken Stein, Executive Vice President and Global Chief Medical Officer at Boston Scientific]

Yeah. Thanks, Larry. And let me just sort of begin by reiterating what I said to Robbie here. As we look at the data, everyone just needs to bear in mind that every PFA technology really needs to be evaluated on its own. It's very much unlike RF ablation. When you're doing RF ablation, if you've got the same size RF catheter tip and you've got the same back patch and the same power that you're putting through, you get the same lesion. PFA is very different. Again, because it's an electric field effect, what happens is just intimately related to actually the catheter design that tells you the shape of the field that you're generating; the waveform, which tells you very much what kind of impact you're going to have from that field and then your dosing strategy, how many applications of energy do you put in and where do you put them in. We're very confident that FARAPULSE is the industry leader in this, again based on having a catheter that was designed from the ground up to deliver PFA, based on a decade of preclinical and then really high-quality clinical data, validating the waveform and validating a dosing strategy with remap study that creates durable isolation. And I say, the proof of the pudding is in the eating, and we're really excited and looking forward to seeing the results of our randomized ADVENT trial. I'm glad that you mentioned MANIFEST; again, it gives us a high degree of confidence in where we're going, right? So, MANIFEST is a registry study of the earliest commercial cases following our CE mark approval in Europe. So, this is people's first experience climbing the learning curve and [Indecipherable] reported out, published initially on the first 1,700 cases and then some limited follow-up in about 1,400 of those patients. And really what those data show really proves the advantages of using a system like FARAPULSE. Certainly, in 1,700 patients, the safety promise of FARAPULSE was realized. No cases of esophageal injury, no cases of persistent phrenic nerve injury, no cases of pulmonary vein stenosis, so certainly being able to avoid most feared complications of AF ablation. Seeing efficacy results that for paroxysmal AFib are at least as good as what's reported in high-quality trials with conventional thermal ablation and seeing remarkable procedure efficiency, now -- in commercial clinical use, now sort of routinely seeing these cases being done on the order of 30 minutes. And that kind of procedural efficiency is, it's good for the system as a whole, right? There are a lot of patients who need to be treated dealing with staffing issues, etc., etc. Anything we can do to increase the throughput is good. It's good for patients, though, too. The less time you're undergoing a procedure, the less number of things that can go wrong, honestly, and so basically, to some, right, the MANIFEST data validates what we see as all the differentiated advantages of FARAPULSE, a safer procedure avoiding the worst complications. A procedure that is at least as effective as what you see with thermal ablation and a really efficient procedure, which benefits physicians, hospitals and patients.

[Larry Biegelsen, Analyst at Wells Fargo & Company]

Thank you.

[Operator]

The next question comes from Joanne Wuensch with Citibank. Please go ahead.

[Joanne Wuensch, Analyst at Citibank]

Thank you very much for taking the question. And good morning. I want to spend just a minute or two on the Urology and Pelvic Health business. I mean, that was up another 12% this quarter, 12.7% organically last quarter. What is driving that? And should we think of this more as a solid double-digit grower as we look forward? And my follow-up question, I'm going to just put it out there now, 50 basis points of operating margin expansion or at least 50 basis points this year, where is that coming from? Thank you.

[Michael F. Mahoney, Chairman and Chief Executive Officer at Boston Scientific]

Great, Mike here. Thanks for asking the endo, uro. You didn't ask about endo, but I'll throw it in there because they continue just to really outperform and are getting quite sizable within our portfolio and both accretive nicely to margins and growth rate. The urology results, I mentioned in the prepared words, it's really a -- it's a strong global performance around the world. This business has been predominantly a U.S.-oriented business that grows faster in the U.S. accretive to Boston Scientific. Outside the U.S. has been very underpenetrated. But now with all the investments that we've made, commercial and through R&D and through acquisitions, it is strengthening our outside the U.S. business in urology extensively. And the combination of that global performance and I would say, a highly differentiated portfolio, we talked about category leadership within a service line, and we really have that with urology and with endoscopy. So they have a very differentiated portfolio that's very comprehensive versus our competitive set and contracting capabilities with customers who want to work with us. And so urology continues to do quite well, and we expect similar results over the next few years here. And the integration of Lumenis has done well. So that's a terrific business. And I would say, along the same lines, most of the same words with endoscopy as well. In terms of margin improvement, Dan, if you want to hit that one?

[Daniel J. Brennan, Executive Vice President and Chief Financial Officer at Boston Scientific]

I can do that. Yeah, so the commentary again was 50 basis points on top of the 2022 results, excluding the Italian sales reserves. So that would be more like 25.6% was the actual, and then there was a 30-basis-point impact. So then add 50 basis points to that is where you get the 26.4% [Phonetic] just to give you the math there. And where does it come from? The short answer is, we believe all lines of the P&L. So gross margin will have a slight headwind from FX this year, again, we said neutral to the EPS line, neutral to adjusted EPS for the year. But at the gross margin line, we're largely hedged for the year 2023. And with what we see with where rates are today, we think we'll have a slight headwind from FX in gross margin. But we still think gross margin itself can go north through a lot of the good activities that we have from our global supply chain team in terms of reducing cost and other volume improvement programs. And then tightly managing our discretionary spend within SG&A to ensure it's helping us achieve our strategic plan. And as we've always talked about, just really focused on R&D efficiencies and leverage, it all starts with a healthy top line. We think that 6% to 8% guidance versus that 9% comp last year is a good, solid, healthy top line, and that gives us leverage opportunities throughout the whole P&L. And we think each line of the P&L has the opportunity to contribute towards the goal in 2023.

[Joanne Wuensch, Analyst at Citibank]

Thank you.

[Operator]

The next question comes from Vijay Kumar with Evercore ISI. Please go ahead.

[Vijay Kumar, Analyst at Evercore ISI]

Hey, guys. Thanks for taking my question. Just some cleanup questions here on the guidance assumptions. Mike, the 6% to 8% organic, it is what it is, but can you just remind us what are the incremental tailwinds -- positive tailwinds here in '23 and any incremental headwinds versus '22? Some things I can think of, FARAPULSE becomes organic, maybe China has a little bit of a headwind, but can you just go through some of those drivers? And again, on share count up 20 million, that seems [Indecipherable] given how we've seen share count progress throughout the year. Curious why -- what's behind the share count assumption for the year?

[Daniel J. Brennan, Executive Vice President and Chief Financial Officer at Boston Scientific]

Yeah, sure. On the share count, just to take that cleanup quickly and then Mike can take your revenue question. It's just a simple math of the converts that we have in -- during the year. So the increase is from the share count that will increase when we convert the mandatory preferreds. Recall, we then lose the preferred dividend. So it's neutral to EPS, but the share count increases as those preferred holders will get common shares. That makes sense, Vijay?

[Vijay Kumar, Analyst at Evercore ISI]

That's helpful. Yes.

[Daniel J. Brennan, Executive Vice President and Chief Financial Officer at Boston Scientific]

Yeah. So, I mean the takeaway should be neutral EPS impact from share count related to the mandatory preferred conversion this year.

[Michael F. Mahoney, Chairman and Chief Executive Officer at Boston Scientific]

Sure. And Vijay, headwinds and tailwinds, maybe just some of the headwinds, we like the fact we did 9% growth in '22, but that's a bit of a tougher comp than normal. So that's one. I had mentioned China would be -- expect double-digit growth, but likely not the same growth as '22. And then also CRM coming off of a really exceeding market growth quite a bit in '22, likely to grow more in line with the market in '23. So there's a couple of the headwinds, clearly a bunch of tailwinds. The Company performed -- continues to perform extremely well across the globe, Europe, LatAm, Asia-Pac and U.S. You saw really impressive growth across the Company. WATCHMAN growing 24% for the year, Cardiology as a whole grouping grow 10%, PI grew 9%, Endo 8%, Euro 10%. So we have just very strong momentum across the businesses, which is obviously a bit of a tailwind given the momentum we have commercially and we have incrementally to that [Phonetic] some of the questions today on EP, we expect to have a very strong year in EP in -- outside in Europe and in Japan. Potential tailwind would be depending on when cryo gets approved in the U.S. So I'm sure how much of an impact that will have in the U.S. depends on the approval date there. Other products like WATCHMAN continue to do extremely well. We're really proud. We actually think we gained share in fourth quarter with WATCHMAN and ended the year just over 90% market share. So that business continues to do really well. And the one that gets very little discussion by analysts, but lots internally and by physicians is ACURATE neo2. We now have a large size. That business is doing extremely well in Europe, actually building momentum each quarter. And we're anxious to finish that U.S. trial shortly.

[Vijay Kumar, Analyst at Evercore ISI]

That's extremely helpful. Thanks, guys.

[Daniel J. Brennan, Executive Vice President and Chief Financial Officer at Boston Scientific]

Thank you, Vijay.

[Operator]

The next question comes from Travis Steed with Bank of America. Please go ahead.

[Travis Steed, Analyst at Bank of America]

Hi, good morning, everybody. And thanks for taking my question. I guess I'll ask a question on the Italy impact. Just curious why we're only hearing about this from Boston. I don't know if maybe it's -- you're taking a more conservative approach in taking a reserve. And it seems like a big number. I know it seems like Italy wouldn't be that big of a country, so maybe just calculated on more than a year of sales. And I just want to confirm no impact on 2023? And then I'll ask my follow-up now as well, which is on op margins. I think you mentioned gross margin first half higher, lower in the second half on currency. And I just want to make sure there's any puts and takes to consider on the op margin side first half versus second half? Thank you.

[Daniel J. Brennan, Executive Vice President and Chief Financial Officer at Boston Scientific]

Sure, Travis. I'll take the Italy one first. I can't speak for other companies. I can speak for on behalf of Boston Scientific. It's been an evolving situation, particularly over the last few weeks here, because what you have is the Italian government passed a provision back in 2015 with regard to what I mentioned to trying to claw back some excess spending over the allocated budgets within the public hospitals in Italy. But for the last seven plus years, there's really been -- it's been dormant. There's been limited implementation guidance, there's really been literally no activity around that. That changed, again, over the last few weeks, with some events that put a little more teeth into their desire to collect those monies. And so we booked that incremental reserve. We had a reserve on the books, we booked an incremental reserve to cover what we believe will be the amounts that we'll owe as part of that. We're obviously challenging it vehemently through the Italian court system as our other industry participants, we disagree with it. But that outcome will be uncertain, but we picked a reserve that we think is a reasonable reserve given the timeframe.

[Michael F. Mahoney, Chairman and Chief Executive Officer at Boston Scientific]

He also mentioned, do you see an issue in '23 with more reserves?

[Daniel J. Brennan, Executive Vice President and Chief Financial Officer at Boston Scientific]

The '23 amounts are included in guidance. So the amount of the reserve relates to prior periods, 2015 to 2022, anything that's 2023 and beyond is included in guidance. With respect to op margin, actually, I'm glad you asked that question because it's a bit of a juxtaposition with gross margin. So I mentioned that gross margin will be higher in the first half and lower in the second half, which is a bit of a buck [Phonetic] the trend we normally have, which I wanted to make sure I got that point out there. Relative to operating margin, though, I think you'll see a similar trend where it builds throughout the year. So the gross margin higher in the first half, lower in the second half, but through the rest of the P&L and netting down to operating margin, I would expect you'd see a very similar trend starting in Q1 and building to higher amounts as you go first half, second half. So hopefully, that's clear, Travis.

[Travis Steed, Analyst at Bank of America]

Yeah. Thank you.

[Daniel J. Brennan, Executive Vice President and Chief Financial Officer at Boston Scientific]

Yeah.

[Operator]

The next question comes from Cecilia Furlong with Morgan Stanley. Please go ahead.

[Cecilia Furlong, Analyst at Morgan Stanley]

Good morning. And thank you for taking the question. I wanted to ask on WATCHMAN, specifically what's underlying the double-digit growth outlook that you called out for '23, how you're thinking about market growth as well as Japan and China contributions. And then just a quick follow-up on ACURATE neo2 with the Prime XL registry. How are you thinking about approval time lines at this point in the U.S.?

[Michael F. Mahoney, Chairman and Chief Executive Officer at Boston Scientific]

Sure. On WATCHMAN, we had a terrific year in '22. As I said, maintaining, call it, 90% share, potentially slightly above that, grew 24% for the full year. It's a very healthy market, so call it, 25% growth we expect in '23, two companies in the marketplace today. Similar to previous comments, the success of WATCHMAN is really many-fold. The safety, consistency and proven effectiveness through clinical trial and everyday practice of [Phonetic] WATCHMAN, physicians are extremely comfortable in using the device. They're very comfortable with the support team they have from Boston in the lab with them and the referring physician community is seeing such strong benefits from the [Indecipherable] procedure that is helping to drive that market growth. So it's an excellent market. It's also a product that's -- a procedure that's profitable for hospitals. And the procedure time today continues to improve, which is really important for hospitals. So the overall market context is very good. We have the leading platform, and we have a new product, new steerable sheath coming this year and the next-gen WATCHMAN platform coming about a year from now. So we have a differentiated pipeline as well. Neo2 is doing extremely well in Europe. We just launched -- or just having some implementation of our XL valves. That's part of the U.S. trial. There was, I think, some -- a bit of inaccurate reporting on that one. We do not expect that XL to slow down the approval process for the U.S. So that does not have an impact on U.S. approval. And that XL valve is important because it's -- about a third of the procedures are using that size valve in Europe. So we're doing quite well, growing faster than market in Europe without that, and eventually, we'll be adding that to approval. So we're excited about that. ACURATE neo2, we expect it to be approved in 2024 in the U.S.

[Cecilia Furlong, Analyst at Morgan Stanley]

Great. Thank you for taking the questions.

[Operator]

And the next question currently I have is Josh Jennings with Cowen. Please go ahead.

[Josh Jennings, Analyst at Cowen]

Hi, good morning. Thanks for taking the questions. I was hoping to start off with just your Apollo acquisition and get you into the diabetes -- sorry, not diabetes, the obesity segment. And I just wanted to hear about your outlook for that portfolio but also just device-based intervention opportunities in obesity from a higher level and whether this portfolio could become a long-term growth driver for the endoscopy franchise? And then the follow-up is just on your neuromodulation business. Congratulations on SOLIS trial results. And I think three of the big competitors in the space have a peripheral diabetic neuropathy indication now with different levels of evidence. But I was hoping you could just review Boston's plan to generate clinical evidence for that indication going forward? Thanks a lot.

[Michael F. Mahoney, Chairman and Chief Executive Officer at Boston Scientific]

Yes. So on Apollo Endosurgery overall, it's really consistent with our overall strategy of category leadership, which is driving above-market growth and continuing to advance new therapies where we can be the leader. When we look at endoluminal surgery, we think that is really the next frontier for our endo business. And you see a terrific uptake of endoluminal surgery, I would say, outside the U.S., particularly in Japan, a bit more so in Europe and less so in U.S. And so we think endoluminal surgery will really continue to build momentum over the next coming years and Apollo is a platform that's most used by physicians [Indecipherable] outside the U.S. to perform these procedures with a product called OverStitch and X-Tack [Phonetic]. So we think the addition of Apollo into our current platform will obviously make us the number one strongest endoluminal surgery portfolio, but also put us in a position, as Dr. Duncan would say, to help train the field because these are procedures that require significant physician training to get great outcomes, and we'll be able to do that with the Apollo platform.

[Lauren Tengler, Vice President, Investor Relations at Boston Scientific]

[Indecipherable] asked about SOLIS.

[Michael F. Mahoney, Chairman and Chief Executive Officer at Boston Scientific]

On SOLIS with SCS, again, we did see some improvement in that overall SCS business in the fourth quarter, growing 4% in the quarter. SOLIS, we're pleased with the three-month results that we expected. We expect indication and approval for nonsurgical back by the year-end of 2023.

[Lauren Tengler, Vice President, Investor Relations at Boston Scientific]

And we're in early clinical work for PDN right now and haven't announced any timelines, but we'll look to continue to invest in that space.

[Josh Jennings, Analyst at Cowen]

Thank you.

[Lauren Tengler, Vice President, Investor Relations at Boston Scientific]

And that concludes our call for today. So thank you for joining us. We appreciate your interest in Boston Scientific. If we were unable to get to your question or if you have any follow-ups, please don't hesitate to reach out to the Investor Relations team. Before you disconnect, Drew will give you all of the pertinent details for the replay. Drew?

[Operator]

[Operator Closing Remarks].

Participants

Corporate Executives

• Lauren Tengler, Vice President, Investor Relations
• Michael F. Mahoney, Chairman and Chief Executive Officer
• Daniel J. Brennan, Executive Vice President and Chief Financial Officer
• Ken Stein, Executive Vice President and Global Chief Medical Officer

Analysts

• Rick Wise, Stifel Nicolaus
• Robbie Marcus, J.P. Morgan
• Larry Biegelsen, Wells Fargo & Company
• Joanne Wuensch, Citibank
• Vijay Kumar, Evercore ISI
• Travis Steed, Bank of America Co.
• Cecilia Furlong, Morgan Stanley
• Josh Jennings, Cowen Inc