Boston Scientific Q1 2023 Earnings Call Transcript

Presentation

[Operator]

Good morning, everyone, and welcome to the Boston Scientific First Quarter 2023 Earnings Call. [Operator Instructions] Please also note today's event is being recorded.

At this time, I'd like to turn the floor over to Lauren Tengler, Vice President, Investor Relations. Please go ahead.

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

Thank you, Jamie. 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 Q1 2023 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 Financials and Filings. The duration of this morning's call will be approximately one hour. Mike and Dan will provide comments on Q1 performance, as well as the outlook for our business, including Q2 and full year 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 Officer, 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 Baylis Medical, which closed on February 14, 2022, the majority stake investment in Acotec Scientific Holding Limited and Apollo Endosurgery, which closed in February and April this year, respectively.

Please note that we have elected to consolidate Acotec results of operations on a one quarter lag, thus having no impact to our Q1 reported or adjusted results. Guidance excludes the previously-announced agreement to purchase a majority stake in M.I.Tech which has not closed. 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 meaning 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 product 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 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.

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

Thanks, Lauren, and thank you everyone for joining us today. Our first quarter performance exceeded our expectations across all business units and regions, which is a testament to the winning spirit of our global team and their relentless focus on innovation and execution. We also launched more than 70 new products globally in 2022.

In the first quarter of 2023, total company operational sales grew 15% versus 2022, while organic sales grew 14%, exceeding the high-end of our guidance range of 6% to 8%. We believe that all business units grew faster than their respective markets with differentiated portfolios and a strong commercial execution, supported by healthy procedural demand. First quarter adjusted EPS of $0.47 grew 19% versus 2022, exceeding the high-end of the guidance range of $0.42 to $0.44. First quarter adjusted operating margin was 25.5%, which is in line with our expectations.

Now for our 2023 guidance. For second quarter '23, organic revenue we're guiding to growth of 7% to 9% and full year organic growth of 8% to 10%. Our second quarter '23 adjusted EPS estimate is $0.48 to $0.50, and we're guiding to a full year adjusted EPS range of $1.90 to $1.96.

I'll now provide additional highlights on first quarter, along with comments on our 2023 outlook, and Dan will provide more details on the financials. Regionally on an operational basis, the US grew 13% versus first quarter of '22, inclusive of a 140 basis point tailwind from the Baylis acquisition with notable strength -- with notable organic strength across all our business units. Europe, Middle East and Africa grew 20% on an operational basis versus first quarter '22, with nearly every market growing double digits in the quarter. The strong above-market growth is driven by our diverse portfolio, new launches and commercial execution with healthy underlying market demand. We remain excited about the year ahead and expect to continue to outpace our peers within the EMEA market.

Asia-Pac grew 15% operationally versus first quarter '22, with broad-based strength across all major markets and business units. Within the quarter, we're pleased to have received Health Sciences Authority approval for FARAPULSE in Singapore. Expanding access of this innovative new technology to more patients.

In Japan, first quarter growth was fueled by the launch of AGENT Drug-Coated Balloon, a differentiated coronary drug-coated balloon for in-stent restenosis and small vessels, with physicians pleased with ease-of-use and balloon deliverability. China also grew double digits in the first quarter, ahead of our expectations with solid procedural demand as hospitals worked through COVID delayed procedures. Our diverse portfolio in China, commercial execution and supply chain management within the country supported the strong performance in the quarter. In February, we also closed our majority stake investment in Acotec, further expanding our presence in the market and we continue to expect double-digit growth in China for the full year.

I'll now provide some comments on our business units. Urology sales grew 16% organically. All four franchises grew double digits in the quarter with strength in key products including LithoVue and Rezum. In the US, we received FDA clearance and initiated a limited market release for LithoVue Elite, which is a single-use flexible ureteroscope, which incorporates an innovative pressure sensing capability that will enable physicians to monitor intrarenal pressure during stone removal procedures

Endoscopy sales for the quarter grew 11% organically versus first quarter of '22, with broad-based strength across all regions and franchises. Our single-use imaging franchise grew double digits. So we're pleased to have recently launched our third-generation Exalt D, with improved ergonomic design updates to improve the physician experience.

In April, we closed the Apollo Endosurgery acquisition, which furthers -- furthers our category leadership strategy within the important area of endoluminal surgery. With differentiated technologies like OverStitch and X-Tack, along with an entry into the adjacent endobariatric market. Neuromodulation sales grew 14% organically versus first quarter '22. Our pain business grew high single digits in the quarter with strong SCS performance-driven by our innovative Alpha portfolio with fast therapy and our cognitive suite of digital tools supporting patient activation.

Our Brain franchise grew double digits in the quarter, driven by new product launches including Guide XT, which was developed in collaboration with Brainlab. This revolutionary software provides implanting and managing clinician -- the ability to model the effect of a patient stimulation ahead of actual programing, which will improve procedural efficiency.

In the quarter, peripheral interventions also grew 12% organically versus first quarter '22. Our arterial franchise grew double digits, led by our drug-eluting portfolio, establishing clear leadership in SFA drug elution, further supported by our differentiated ELUVIA long length DES. Our venous franchise growth was driven by ongoing above-market performance in Varithena. And within the quarter, we launched EKOS+ in the US, which provides more ultrasound power to resolve clot burden more quickly and completely.

Our interventional oncology franchise grew double digits with strength across -- with strength across the entire portfolio. We look forward to initiating our limited market release in second quarter for Obsidio, the first conformable embolic indication for the peripheral vasculature. Cardiology delivered another excellent quarter with operational sales growing 17% and organic sales growing 15% versus first quarter '22. Within cardiology, interventional cardiology therapies sales grew 13%. Our coronary therapies franchise grew low double digits in the first quarter, led by strong performance within our imaging portfolio with particular strength in the US with the ongoing launch of AVVIGO Guidance System.

Our structural heart valves franchise continues to grow strong double digits and we're pleased to have completed enrollment on our ACURATE IDE trial and continue to expect to launch ACURATE neo2 within the US in the second half of 2024. WATCHMAN sales grew 29% organically versus first quarter '22. Demand remains very strong for WATCHMAN FLX, and we now have treated more than 300,000 patients globally since launch.

We are proud of our performance to date and we continue to invest for the future through product innovation solutions and clinical evidence. Last week, the Population Health Research Institute announced the ID approval of [Indecipherable] which is a collaborative research study with Boston Scientific, that will continue to expand our LAAC clinical evidence. This trial is expected to start in mid 2023. It will complement the existing CHAMPION-AF and OPTION trials.

Cardiac Rhythm Management sales grew 8% organically versus first quarter '22. Our diagnostics franchise grew strong double digits in the quarter with continued momentum across the portfolio. A core CRM, both our high voltage and low voltage businesses grew mid single digits, and we believe that all major markets were in line or slightly above market growth. We do expect our core CRM growth to taper closer to market growth for the remainder of '23, as replacement tailwinds neutralize.

Electrophysiology sales grew 54% operationally and 31% organically versus first quarter '22. Our international EP business grew 40% and importantly, the EMEA region grew our EP business 57%, driven by strong adoption of FARAPULSE and POLARx.

We continue to invest in the expansion of our portfolio and received approval in Japan, Canada and Europe for POLARx FIT, which is an expandable balloon catheter capable of creating 28 and 31 millimeter sizes, providing procedural adaptability and efficiency. And just last week, one year outcomes data from the MANIFEST PF registry represented as a late breaker at EHRA. This is the first large real-world dataset on a novel ablation technology, which demonstrated a real-world safety, efficacy and efficiency of the FARAPULSE PFA system. The data also reinforced the minimal learning curve and reproducibility of the FARAPULSE workflow and everyday commercial use.

We continue to advance our clinical evidence within this space and initiated enrollment in ADVANTAGE AF trial, which is studying the use of FARAPULSE for patients with persistent atrial fibrillation. We also look forward to the readout of our ADVENT US ID randomized controlled trial in the second half of this year and continue to expect the approval in the US in '24. We're also very pleased with the performance of our Access Solutions franchise, which grew strong double digits in first quarter, driven by further penetration into transseptal crossing procedures.

Last week, we released our '22 performance report, outlining our environmental, social and governance results. We are pleased with the progress our global teams have made to advance sustainable innovation, while contributing to a healthier planet, addressing inequities and supporting communities around the world. We have much more to do and our values based culture will serve us well as we continue to transform lives and hold ourselves accountable to our commitments.

We are confident the year ahead will bring many more exciting milestones across each of our business units and we remain committed to our financial goals of consistently growing faster than our underlying markets and our peer group, expanding operating margins and delivering double-digit adjusted EPS growth with strong free cash flow generation. We also look forward to hosting our hybrid Investor Day event on September 20th.

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. First quarter consolidated revenue of $3.389 billion represents 12% reported revenue growth versus first quarter 2022, and reflects an $88 million headwind from foreign exchange, slightly favorable to our expectations with continued volatility in foreign exchange rates throughout the quarter. Excluding this 290 basis point headwind from foreign exchange, operational revenue growth was 14.9% in the quarter. Sales from the acquisition of Baylis through mid February contributed 90 basis points, resulting in 14% organic revenue growth, nicely exceeding our guidance range of 6% to 8%.

Strong revenue performance resulted in Q1 adjusted earnings per share of $0.47, again exceeding the high-end of our guidance range of $0.42 to $0.44, and representing growth of 19.2% versus 2022. Adjusted gross margin for the quarter was 70.4%. We continue to expect full year 2023 gross margin to include a similar level of macroeconomic and supply chain headwinds as 2022, and expect a sequential improvement in Q2, resulting in a first half 2023 gross margin that is higher than the second half of 2023, largely due to the timing of foreign exchange movements in 2022.

First quarter adjusted operating margin was 25.5%. We continue to prioritize operating margin expansion and are maintaining our full year 2023 goal of approximately 26.4% adjusted operating margin, representing 80 basis points of improvement versus the full year of 2022. On a GAAP basis, the first-quarter operating margin was 16.3%.

Moving to below the line, first quarter adjusted interest and other expense totaled $78 million, slightly favorable to expectations due to gains on certain unhedged currencies. On an adjusted basis, our tax rate for the first quarter was 12.8%, including discrete tax items and the benefit from stock compensation accounting, slightly higher than expectations due to the timing of certain discrete tax items. Our operational tax rate was 13.8% for the first quarter, in line with our full year expectations of approximately 14%.

Fully diluted weighted-average shares outstanding ended at 1,446 million shares in Q1. Free cash flow for the quarter was $83 million, with $190 million from operating activities, less $180 [Phonetic] million net capital expenditures. Excluding payments related to acquisitions, restructuring and other special items, adjusted free cash flow was $229 million.

We continue to aim for full year 2023 adjusted free cash flow in excess of $2.3 billion. As of March 31, 2023, we had cash on hand of $570 million, which in accordance with accounting standards for less than wholly-owned subsidiaries includes the cash balance from Acotec of approximately $140 million following the completion of our majority stake investments. As of March 31st, our leverage was 2.5 times, in line with our expectations.

I'll now walk-through guidance for Q2 and the full year 2023. We expect full year 2023 operational revenue growth to be in a range of 9% to 11%, which excludes an approximate 50 basis point headwind from foreign exchange. Excluding the impact of closed acquisitions and the recently closed divestiture of our pathology business which had approximately $24 million revenue in 2022, we expect full year 2023 organic revenue growth to be in a range of 8% to 10% versus 2022. We expect second quarter 2023 operational revenue growth to be in a range of 7.5% to 9.5% versus Q2 2022, excluding an approximate 100 basis point headwind from foreign exchange based on current rates.

Excluding the contribution from closed acquisitions and divestitures, we expect second quarter 2023 organic revenue growth to be in a range of 7% to 9%. We expect our full year 2023 adjusted below-the-line expenses to be approximately $340 million. We continue to expect our full year 2023 operational tax rate to be approximately 14% with an adjusted tax rate of approximately 13% under current legislation and forecasted geographic mix of sales.

We expect a fully diluted weighted-average share count of approximately 1,458 million shares for Q2 2023 and 1, 464 million shares for full year 2023, which includes the 23.98 million shares we expect to issue based on our current stock price on June 1, 2023 upon the conversion of our mandatory convertible preferred stock. We expect the impact to adjusted earnings per share to be neutral with the approximately $14 million quarterly preferred stock dividend ending at the time of conversion.

We expect full year adjusted earnings per share to be in a range of $1.90 to $1.96, representing a 11% to 15% growth versus 2022, which we believe delivers top tier financial performance. We continue to anticipate a neutral impact from FX on full year 2023 adjusted earnings per share. We expect second quarter adjusted earnings per share to be in a range of $0.48 to $0.50. For more information, please check our Investor Relations website for Q1 2023 financial and operational highlights, which outlines more details on Q1 results and 2023 guidance.

Before I turn the call over for a few upcoming events to note, we will be hosting our Annual Shareholder Meeting on May 4th at 8 AM Eastern and our Q2 2023 earnings call on Thursday, July 27th at 7:30 AM eastern.

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

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

Thanks Dan. Jamie, let's open it up to questions for the next 35 minutes or so. In order for us to take as many questions as possible, please try and limit yourself to one question. Jamie, please go ahead.

Questions and Answers

[Operator]

Ladies and gentlemen, at this time we will begin the question-and-answer session. [Operator Instructions] Our first question today comes from Robbie Marcus from J.P. Morgan. Please go ahead with your question.

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

Oh, great. Good morning, and congrats on a great quarter here.

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

Thanks, Robbie.

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

Thanks, Robbie.

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

Let me start with, and I'll just ask one two-part question here. Great, great performance in the first quarter, particularly on the topline. We all know this is probably the last easy comp from COVID trends in first quarter last year, but would love to get a sense of -- what are you seeing globally? How sustainable is this? You guided to a slight deceleration in second quarter, anything to note there other than conservatism?

And then second, there have been some news reports lately about M&A on behalf of Boston Scientific. Would love to just get a refresh on your M&A strategy. We've seen a lot more smaller tuck-in type deals historically. Is that still the goal and any thoughts there? Thanks a lot.

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

Sure, Robbie. Thanks for the question. The second one is easier for me, then I'll do the first one. Yeah, on the second one on M&A, as you know, we've been consistent over the years. As a matter of practice, we never comment on rumors or speculation in the marketplace. And the first question, really proud of the global performance really across the board. If you look at on the regional side, as I've mentioned in the script there, the US grew 13%. I think it's really important to note that Europe grew 20%. And Asia-Pac grew 15%. So it wasn't one region or one business. It really was across the board performance.

And it's encouraging in Europe, in particular, where we have an impressive product line and our EP portfolio and in our TAVI portfolio, that's not launched yet in the US, which I think is a good signal for the future as you'll hear about more in Investor Day, as well as in Japan where we have our POLARx product approved in Japan, but not approved in the US.

So the fact that the US put up a double-digit number, albeit, on some softer comps as you said given that the COVID impact. The European and Asia-Pac performance is really impressive and LatAm. And those products -- many of those products are not yet approved in the US. So overall really pleased. You saw almost every business unit grew double-digits, but I think more importantly, not all of our competitors have reported yet, but we'd be surprised if we didn't exceed the peer group across each one of our businesses. So the execution of the team is very -- quite strong and also I would say the -- clearly some underlying market improvement in the first quarter. You saw the public hospitals report good patient volume, particularly good outpatient volume, which is a good indicator for Boston Scientific, given our portfolio.

Nursing shortage is still a challenge, for sure, but it has improved and the hospitals being very efficient. So the underlying backdrop for procedure volume demand has improved and strong and our portfolio really meets the moment around the world. So we're really pleased with the overall performance.

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

And then specific to Q2, Robbie, just to double click a bit on that. As Mike said, relative to CRM, that grew 8% in the quarter. We had talked about at the beginning of the year that kind of growing at market lower-single digits. We have some replacement trends that start to get a little bit more challenging. So that 8% probably a bit outsized for what we're expecting there.

And then neuromod. As you look at that, that's a business that over the last many quarters has been kind of in that low-single digit range and to pop a 14%, that's great in the quarter, but I think a little early to call the ball on that market and say that it's fully recovered. So just the 7% to 9% I think is appropriately prudent for second quarter guidance.

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

Great, thanks for the thoughts.

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

You are welcome.

[Operator]

Our next question comes from Joanne Wuensch from Citi. Please go ahead with your question.

[Joanne Wuensch, Analyst at Citibank]

Good morning. And may I reiterate a repeat good quarter. One of the things in China to figure out this particular quarter is how much of what we're seeing is easy comps, pent-up demand or something else? And I know you can't particularly pick that apart on this kind of delivery. But if it is pent-up demand, is there any way to quantify how many quarters or what kind of tailwind that is?

And I'll throw my second question into -- FARAPULSE seems to be doing quite well outside the United States and we're getting a lot of questions on the timing of it in the United States and what that ramp may look like? If there's any color or sort of level-setting of expectations, that would be appreciated. Thank you.

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

Sure. One the first one, Joanne, wish we could give you a perfect Scientific response to your question on the overall market. I would say it's a healthy market for all the factors that you just indicated. There are some easier comps. Our comp for Q1 was 97 [Phonetic] but that was up based on COVID impacted 2021. So maybe the comps are a little bit easier, but clearly the procedure volume is stronger, as I mentioned with the hospitals that have reported. The outpatient momentum is quite strong, which fits our portfolio. And we've got a very strong portfolio cadence across the world right now.

So I think it's really all those things that contribute to a very strong first quarter and the increase in the guide that we gave for the full year. You know, we typically said previously that the markets that we serve grow kind of plus 6% in that range. Clearly, the market grew faster than that in the first quarter, but we're not quite ready to call this exceptionally strong market growth for the full year, we think that would be premature to do that and not responsible. So that's why we gave the guidance that we did of the 8% to 10% full year, because we do see strong underlying market demand, but it may not be quite as strong as we saw in first quarter, and we'll see as the year goes on.

On FARAPULSE, it was that EHR meeting in Europe just last week and the enthusiasm for FARAPULSE very unique I would say. The MANIFEST data was excellent, and Dr Stein is here. Can you remind us when the -- when do we expect the trial to readout.

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

Yes. So our US IDE trial, Joanne, is ADVENT. It's the most rigorous trial that anyone has done in this space. It's double-blind randomized trial against conventional thermal ablation. We continue to expect to present that data in second half of this year, submit to the FDA at the same time. So again, continue to anticipate US approval in '24.

[Joanne Wuensch, Analyst at Citibank]

Would you expect that to ramp similarly to what you're seeing outside the United States?

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

Sorry, I didn't hear the question.

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

She asked if it is ramped similar -- similar in US versus...

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

Well, for FARAPULSE.

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

Yeah.

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

Yeah. So FARAPULSE, we broke out the number for in Europe, which is -- which is 57%...

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

Organically all EP.

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

Yeah, and that includes POLARx which makes a very strong contribution and we expect approval for POLARx in the US in the second half of this year. We do expect POLARx to be a nice part of our portfolio globally for many-many years. So that's having a nice contribution and FARAPULSE is having an outweighed contribution despite some still limitations in supply. So customer demand is outpacing supply, I would say still at this moment. But clearly there's a lot of enthusiasm. You saw the MANIFEST trial data in terms of the safety, the efficacy and the -- the procedure, the productivity. It's clearly been differentiated. So we'll continue to report our progress in EP. But the momentum in Europe is quite strong and that's why we called that number out for you.

[Joanne Wuensch, Analyst at Citibank]

Thank you so much.

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

Your are welcome.

[Operator]

Our next question comes from Rick Wise from Stifel. Please go ahead with your question.

[Rick Wise, Analyst at Stifel Nicolaus]

Good morning to you both, and good morning to everybody. Mike, just looking ahead to the September 20th Analyst Day, Boston's CFO recently spoken in public I think March 1st at my friend Joanne event and said that he is excited for the next chapter for the company for '23 and then for '24, '25, '26. And I think he said Boston has the opportunity to have a special chapter for the company. I'm just wondering what do you think Dan meant? And what is the special chapter and does that possibly suggest more willingness, given that everything that's happening fundamentally, and with the product portfolio to commit to a sustained higher growth rate guidance for the next LRP[Phonetic]

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

Well, Dan is a smart guy and he wouldn't have said that unless you meant it, and so I certainly support that. We'll lay it out more at Investor Day. But just overall you see the strength of our businesses really across the board and the portfolio mix continues to help us. It's what we purposely designed and executed on for many-many quarters in a row. Our businesses in the slower growth markets continue to get smaller and smaller as a percent of our sales and we continue to layer on faster growth markets and better innovation that also help us with the pricing.

And you very aware of many of our key products that are launched outside the US are not in the US, that we can make very -- that we can make very nice gross margins and at high customer demand. So we look forward to bringing those to the US and we'll also tell you about some other products or capabilities that may lie outside our three-year LRP, but will share all that at Investor Day. But we're very excited about the future of the company.

[Rick Wise, Analyst at Stifel Nicolaus]

And will sneak in one quick follow-up on FARAPULSE. I know that you've been supply-constrained on FARAPULSE generator. Is that situation improving? Will it be resolved by the time you hopefully get US approval? Any update on that situation? Thank you.

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

Yes, we do expect that to dramatically improve prior to having US approval, primarily because we will bring -- we have a really important strategic contractors that we have -- very long-term contracts in place with who are very much part of our solution. We're also in parallel have internal capabilities that we're ramping up. And so both those things will continue to happen for many-many years. But we do expect particularly in the second half of' 22 -- '23, I'm sorry, to have enhanced council supply to meet the demand. And we expect by the time the US approval that will have significantly more capabilities in this area. So I guess for that reason is the only reason why we were happy about the in the slightly in the US with the trial was to ramp-up production, but we expect to be able to meet that demand in the US when we get approval.

[Rick Wise, Analyst at Stifel Nicolaus]

Thank you so much.

[Operator]

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

[Larry Biegelsen, Analyst at Wells Fargo & Company]

Good morning, and congrats on a great start to the year here, guys. So, one for Dr. Stein, one for Mike. So Dr. Stein, FARAPULSE is a single-shot technology with PFA energy, but companies are developing large focal catheters and dual energy sources. How are you thinking about the evolution of FARAPULSE beyond its current geometry and energy source?

And Mike, we all completely understand you won't comment on rumors, but there are interesting assets in MedTech that would push it over 4.5 times leverage or require the use of equity through relatively large deals. Are those options on the table? And just remind us of how you think about ROIC? Thank you.

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

Yeah, thanks, Larry.

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

I'll take the second one. As a matter of practice, Larry, we don't comment on rumors or speculation. Yeah, I will comment on -- that we did comment on the closing of Apollo in the quarter, which is really going to be a nice asset for us in endoscopy, expand our endoluminal presence and a nice continued focus on category leadership. So we have our venture portfolio. We've signed the Acotec, or closed the Acotec deal this year. We had closed the Apollo deal. But like we always said, any future deals speculation as a matter of practice, we don't comment on.

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

And then, Larry on -- so the evolution of FARAPULSE. We certainly are looking at alternative catheter from factors. And as you mentioned, there are a lot of different things that you can do with Pulse Field Energy and with the FARA wave platform or FARAPULSE platform. I do think it's important, though, as you think through that to think through the different use cases. And so for atrial fibrillation, whether it's paroxysmal atrial fibrillation where really the goal of therapy is just pulmonary vein isolation or whether it's persistent atrial fibrillation where you may very well need to go beyond that, do pulmonary vein isolation plus posterior wall isolation, which we're investigating right now in our ADVANTAGE trial. And as Mike noted in his prepared remarks, we've already begun enrollment in that trial and really are, I'd say beyond pleased at the excitement, at the rate at which we're enrolling in that trial.

When you think about both of those use cases, all right, it's our belief and in fact the data that you've seeing from things like manifest supports that belief that the FARAWAVE catheter itself is uniquely well-suited among all the competing technologies for achieving those goals. So again, when you think about AF ablation. All right, we think that the FARAWAVE catheter is the best of the catheter form factors out there. And then when you couple that with the wave form that we deliver, when you couple that with the dosing protocol that we've optimized over the many years of preclinical and clinical research that FARAPULSE data and that we have continued since the acquisition, we are really satisfied with that as the catheter that's going to be preferred for atrial fibrillation. And then it's adding on some of these other form factors that you talk about as we think about some of the smaller use cases beyond the Afib market.

[Larry Biegelsen, Analyst at Wells Fargo & Company]

All right. Thank you very much.

[Operator]

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

[Travis Steed, Analyst at Bank of America]

Hey, thanks for taking the question. I guess, high-level, maybe you could just refresh us on your overall capital allocation priorities and start there, and then a quick question on the guidance. Revenue growth obviously moved up quite a bit, but earnings didn't move up quite as much. So just want to make sure I'm not missing something on the EPS side, given that margins are saying the same?

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

Sure, Travis. I think I can probably take both of those. Capital allocation priorities remain unchanged. It's been an equation that's worked well for us for many years relative to capital allocation. So first priority is high-quality tuck-in, adjacent high-growth M&A. And Mike just give you a couple examples of those that we've closed this year, and then we fill in on the back with any excess cash for share repurchase. And as you know, obviously don't pay a dividend this time. So I think that's clear.

With respect to the drop-through in the quarter. As I look at it, we kind of beat the midpoint of the range and the consensus by $200 million. You dropped that through at our overall margin percentage and you get to about $0.02 to $0.03 of additional adjusted EPS. You would have expected -- we delivered 3.5 [Phonetic] I think that's kind of in that range. We were at 25.5% adjusted operating margin, I think that puts us right in place to achieve that 26.4% for the year. So I think all is well relative to the margin profile. If the 26.4%, again it would be 80 basis points on top of of last year, which I think gives us a bit of differentiated expansion versus our peer set.

[Travis Steed, Analyst at Bank of America]

Okay, great. Thanks a lot.

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

Sure, Travis.

[Operator]

Our next question comes from Vijay Kumar from Evercore. Please go ahead with your question.

[Vijay Kumar, Analyst at Evercore ISI]

Hey guys, congrats on the print, and thanks for taking my question. I had a two-part one product and one capital allocation. On the product side PFA. Mike, did I hear you correctly on the prior question on FARAPULSE. Can you do point-by-point ablation at this point? I thought it was a single-shot catheter, but I would be curious if you have -- if it can't do point-by-point ablation and are you gaining share in the RF side as well in the current market?

And then on the capital allocation side, I know you're not going to comment on market speculation. So this is not related to market speculation, but can you just remind us, in current interest rate environment what kind of leverage levels would Boston be comfortable with? And if Boston [Indecipherable] strategic, would you be okay doing an earnings dilutive deal?

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

Yeah. Vijay, it's Ken. Let me start with a question about FARAPULSE and FARAWAVE and let me answer in two parts, right? So the first part -- so the current catheter that we have approved in CE marked countries and as Mike said in Singapore, and that we're evaluating the US in the ADVENT trial is a "single-shot catheter". So it's not a point-by-point ablation catheter. And as I said to Larry, if a catheter form factor that really is uniquely well-suited for pulmonary vein isolation and for posterior wall isolation. And again, we firmly believe that this is the best form factor out there than for tackling the vast majority of patients that are undergoing atrial fibrillation ablation.

Now having said that, and I think sort of the proof behind that is when you look at our commercial release in Europe, we are taking share both from centers that were " single-shot centers". So the cryo users, but also taking share from folks who were very well-known in the field for their point-by-point RF ablation. I'd say we've really been impressed and pleased at the way we're converting folks who were point-by-point users into PSA and that's based on the safety, based on the efficacy and also frankly based on the efficiency of ablation with FARAWAVE.

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

And then relative to your specific question on leverage. I'd say it's been a focused an intentional journey for us to get back to BBB-plus with all three rating agencies that rate us and very comfortable there. Obviously, committed to investment-grade and comfortable that that BBB-plus rating.

[Vijay Kumar, Analyst at Evercore ISI]

Sorry, on earnings dilution, Dan, would you be concerned earnings dilutive deal if Boston being sort of strategic?

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

I wouldn't comment on specific dilution and the thematic. From our perspective relative to the M&A environment, we're committed to looking at deals that are high growth and tuck-in acquisitions as we've done.

[Vijay Kumar, Analyst at Evercore ISI]

Understood. Thanks guys.

[Operator]

And our next question comes from Danielle Antalffy from UBS. Please go ahead with your question.

[Danielle Antalffy, Analyst at UBS Group]

Thanks so much. Good morning, everyone, and congrats on a really strong quarter. Just a question on FARAPULSE. Sorry, there's so much focus on just one product on the call, but I'm curious about how you guys are thinking about the evolution of the market, probably. I mean, this has been a market -- the AF ablation market that's been a double-digit grower for the last decade plus. But is it right to think about FARAPULSE and just the advent of Pulse Field Ablation overall potentially accelerating market growth in a meaningfully and sustainable way because of the safety profile of the device or how are you thinking about and what are you seeing, I guess in Europe about market growth overall for this device? And I have one follow-up on WATCHMAN.

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

Yes, sure, Danielle. I guess -- I guess, I'll take that first one and we'll see on the follow-up. I mean, the easy answer to what your question was is yes. We do see FARAPULSE accelerating adoption of AF ablation. AF is the most common sustained arrhythmia that's seen globally, in fact. Ablation today for current indications is still very much underpenetrated. It's underpenetrated for a couple of reasons, right? And one is safety concerns around the procedure. One is just the skill level and the relative inefficiency of AF ablations today using thermal energy

So I think first of all with the FARAPULSE with FARAWAVE. and again the safety, the efficacy and the procedural efficiency, I think it's going to pull more people who are currently indicated. And then also believe that there is a real opportunity to drive further use of this with patients with persistent atrial fibrillation. We are frankly conventional thermal ablation results are marginal at best. It's one of the reasons we're so excited about the ADVANTAGE trial that we recently began enrollment in the United States, which is aimed at getting approval in indication for FARAWAVE for persistent atrial fibrillation as well as paroxysmal atrial fibrillation.

[Danielle Antalffy, Analyst at UBS Group]

Okay, thanks for that. And then my question on WATCHMAN is just really around is similar -- on the similar vein sort of what we're seeing from a market growth perspective there because really strong number, it's hard to parse out what backlog, what's underlying growth, but it's been growing quite healthily for a while with a competitor launching in the US. Just curious what you're seeing from a market growth acceleration perspective on WATCHMAN? Thanks so much.

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

Sure. I would say, we call the market 25 percentage growth. So very-very strong as it continues to get more and more scale. I think it's important to note that we believe our share is maintained at least flat, if not actually increased over the past six months. So our teams in the US have done a very-very excellent job commercially with the WATCHMAN FLX product. So we we continue to see this being a plus 20% -- 25% market grower for a number of years here. And then we have these very groundbreaking trials with Option, with Champion. And we just highlighted [Indecipherable] that which will follow. So we're very committed to the market development of this category and expanding the indication over-time to these clinical trials assuming they they are positive. And I think just as importantly, we'd look to continue that momentum with our product cadence. We have a differentiated steerable sheath that'll be approved in the coming nine months. And then our third-generation WATCHMAN product, which should be launching kind of around this time next year -- our first quarter next year. So we've got the the portfolio and the -- and the clinical work to continue to expand the market and the team is doing an excellent job globally.

[Danielle Antalffy, Analyst at UBS Group]

Thank you.

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

Yeah.

[Operator]

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

[Cecilia Furlong, Analyst at Morgan Stanley]

Hey, good morning, and thanks for taking the question and also echoing my congrats on the quarter. I wanted to ask specifically just your comments on pain in SCS. Clearly, what you saw in the quarter, especially as it pertains to recent headwinds playing out? And then just your outlook in terms of underlying market growth, do we see some recapture in 1Q? Is that part of the strength and how you're thinking about underlying market growth going forward?

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

Sure. In the first quarter we did see improvement out of our global business. The overall business grew 14%, led by our deep brain stimulation business. It had a terrific quarter. And spinal cord stim decline about 9%. So in the quarter there definitely was some improvement in the staffing, which likely helped the entire market and the Neuromod business. And as we said, there are some slightly favorable comps as well in the quarter, comparing to the '21 COVID year. But overall we expect that business and the pain size to grow above market. And the brain side, DBS significantly above market. And we're very excited about this new stim view capability.

The one challenge with that deep brain stimulation, it's an excellent procedure, but it's -- it takes quite a bit of time and a lot of coordination between neurologists, implanting physicians, the patient, and we believe this software enhancement will continue to improve their productivity and cycle time for patients. So overall I think it's too early to call what we think the market will be for spinal cord stim for the full year, and we still would say maybe mid single-digits, kind of 5%, 6% is where we would land if you forced us to give you a number now.

[Cecilia Furlong, Analyst at Morgan Stanley]

Great. And if I could just quickly follow-up on China, some of your comment, what you saw in the quarter coming in ahead of expectations. How should we think about, really just the rest of the '23 in terms of pent-up demand, backlog procedures, and then also what you've seen to date with WATCHMAN in the region? And thanks for taking the questions.

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

Yeah, China catches up to everything quickly. So there was an impact early in the quarter with COVID procedures and they clawed that back very quickly the second half of the quarter. So we do expect double-digit growth in China despite some of the pricing pressure consistent with previous years. Really based on the strength of the overall portfolio there and continue to expand our capabilities. We're excited about this Acotec agreements where we own 60% of Acotec, which is a local China company that's the leader in drug-coated balloons in the region as well as many other peripheral and potentially cardiology procedures. We think that strategic alliance will also help us and help them. And. w continue to expect double-digit growth in China.

And WATCHMAN, I have the exact numbers, do we find in China and we can provide more details in the future, but that flex is approved. I believe.

[Cecilia Furlong, Analyst at Morgan Stanley]

Thanks for taking the questions.

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

Your are welcome.

[Operator]

Our next question comes from Matt Taylor from Jefferies. Please go ahead with your question.

[Matthew Taylor, Analyst at Jefferies Financial Group]

Hey, good morning. Thanks, for taking the question. So a great result. I guess, what I'm struggling to understand is. Obviously, we saw strong demand in the quarter and I think we're seeing a lot of macro things improving, like like staffing, etc. I mean, could it actually theoretically get better sequentially or why are we thinking so conservatively? Do you think that the direction of travel could be positive, negative or neutral on what are some of the background thoughts that you would base that on?

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

Well. I would say, again, we are super proud of the quarter. We exceeded, we believe the peer group and did well across every region, we cut through everyone. We do think there are, despite it being a. 9.7 [Phonetic] comp, again it's off of a lighter '21. So we do think there is some comp benefit there despite shown a 9.7, if you look at the number. But that doesn't take away from the excellent performance in the quarter overall, as you compare to our peers.

So. I just think it would be not prudent for us to assume the same market growth for the remainder of the year, when traditionally this has been a, call it 6.5% markets that we serve in. And over-time you're going to see that sort of market growth continue to expand like we have every -- every couple of years based on our portfolio. So to say that the market has kind of jumped from 6% to 10% over the last six months probably isn't feasible. So we think the markets are healthy. We still think the market's growth kind of 6% to 7% where we serve, and those will hopefully increase over time as our strategy continues to play out. But it's too soon to call the first quarter performance for the market. They are lapping -- lapping every quarter.

[Matthew Taylor, Analyst at Jefferies Financial Group]

And then Mike, just a follow-up on that. I mean, thinking ahead to 2024, if we do have some, let's call it super normal growth this year, some catch-up or whatever, do you still think that you can grow in kind of the LRP range in 2024 over what could be a tough comp in 2023 if things play out well?

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

I would attend our Investor Day. We'll give you a sense then of what we think the LRP is for '24, '25, '26. We'll see how the year plays out over the next few quarters, but I would imagine as we have at prior Investor Day, we'll give you a good sense there about what we think the next three years look like.

[Matthew Taylor, Analyst at Jefferies Financial Group]

Okay, I'll be there. Thanks again.

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

All right. Thanks, Matt.

[Operator]

And our next question comes from Matt Miksic from Barclays. Please go ahead with your question.

[Matt Miksic, Analyst at Barclays]

Great. Thanks so much. So a question for Dan. And then just a couple of follow-up on some of the product lines here we haven't yet talked about so much in the call. So, for Dan, free cash flow conversion. Could you talk maybe a little bit about where you're -- where you're at now, where you want to be, and what's some of the challenges that are currently -- supply chain or whatever else has been more challenging and how you're kind of tackling those? And as I mentioned. Just have one other follow-up.

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

Sure. I think I would say I'm not where I want to be yet on free cash flow conversion. It's a key focus item for us. Some things are structural and some are probably a bit more transient and focused on working capital. The foundational ones are, as an acquisitive company and we're going to continue obviously overtime to to to be acquiring company. We're gonna have integration costs. So that's the cost that -- that kind of gets in the way of free cash flow conversion. We have had in the past, we've had litigation challenges. I think those are waning over-time here. That's a good thing. So that's one last thing that will get in the way of that. We have restructuring as well. So restructuring charges I think are good good hygiene of the company to continue to drive out -- continuous improvement and drive out unnecessary cost. So I think those are still going to be there. So from a foundational perspective, those are a bit challenging relative to the difference between operating cash flow and adjusted cash flow.

On the working capital side, the things that we really focus on there are relative to receivables and payables, inventory, have a real maniacal focus inside the company to continue to make those -- continue to be in our favor. So some things are structural relative to how the differences between operational and adjusted free cash flow, others have our focus. But the takeaway is we are probably not where I want to be, but focused on improving that overtime.

[Matt Miksic, Analyst at Barclays]

Great, thanks. And then maybe just follow-up for Mike. So Interventional Oncology that we talk to clinicians, that business just seems to be growing at very healthy kind of rate in these centers. So just any quick color comment on what Obsidio could mean to that business? And then similarly, stone management, very strong. Maybe if you could talk a little bit about how the Luminous acquisition is kind of dovetailing there and what the impact of this -- this new single-use scope could be [Indecipherable] Thanks.

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

Yeah, Matt, thank you first of all for bringing up these other businesses that are over $2 billion and growing very fast and accretive to our margin profile overall. FARAPULSE, we love, but it's sometimes it rounds out everything else we're doing as a company. Interventional Oncology is so pleased with overall that BTG acquisition after we -- it's been integrated very well, Jeff Mirviss, Peter Patts and the team do a really nice job with that.

We continue to take core share with Y90. The cryo product that we have has been a surprise for us, does extremely well globally. And this Obsidio should be again another differentiated product to round out that portfolio even further. It just speaks to the category leadership focus that we have as a company.

So we're very well-positioned from a portfolio standpoint. The team has also pushing for new clinical indications. It's very early. They won't be impacted in the LRP. But we think Y90 and other therapies can be used outside their current indications, and we hope to prove that through our clinical science over the coming five years. So we want to invest long-term there. So we see a bright future overall for Interventional Oncology and we're positioned well.

And the same goes for the similar words, although be it different products for urology. We are the clear global leader here. The team has taken LithoVue, the single-use scope and pioneered that and really want to continue to pioneer that industry and tie-in our our pressure sensor, other AI algorithms and fluid management to create a smarter more efficient system that's more productive for the doctor and the staff and have better outcomes for patients. So we call that stone smart and that's a multi year journey that the team continues to execute well on. So I think that differentiated product as well as the other key components of that urology business make Boston really a preferred partner for most customers. And we have to earn that every day with our clinical people and our smart contracting, but we have a very robust portfolio to serve that core point. Thanks for that.

[Operator]

And our final question today comes from Chris Pasquale from Nephron. Please go ahead with your question.

[Chris Pasquale, Analyst at Nephron]

Thanks for fitting me in. And sorry, Mike, but I'm going to go back to FARAPULSE real quickly to finish up. Dr Stein, I want to ask you a couple of follow-ups on the MANIFEST study. First, do you think 80% efficacy in paroxysmal patients is a realistic goal for ADVENT or should we keep in mind any important differences and endpoints or trial design?

And then second, I was struck by the relatively low use of mapping in Europe today. How important do you think arrythmia integration is to the long-term outlook of FARAPULSE? And how you're thinking about the regulatory pathway and timing to achieve that?

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

Yeah, Chris, I'll take MANIFEST and then say a few words about where we think we need to be in terms of mapping. And so, I mean as you said in the question, there are some very important differences in trial design between our ADVENT study and what you saw in MANIFEST, and some towards the positive, some towards the negative. There are differences actual definition of endpoints. So in MANIFEST that 80% number that you cite allowed for patients to still be on previously ineffective antiarrhythmic drug over the course of the year that would not count as the success in ADVENT. And the actual, just the monitoring strategy and evidence of lot more intensive that it was a registry like MANIFEST.

On the other hand of that is that MANIFEST is the first broad rollout in real-world commercial experience as opposed to just going to some highly selected clinical trial sites. I think what I urge on ADVENT really importance is the comparison in the randomized trial against thermal ablation techniques. The trial rate is designed as a non-inferiority trial. We would have had to design a much larger trial to be able to use superiority as a primary endpoint. Although if we hit non-inferiority were allowed to test for the superiority. But really the goal in ADVENT is again to get regulatory approval based on non-inferiority versus thermal techniques and then let's look in real-world use. Let's see if we can duplicate results like MANIFEST results in the United States.

On mapping, I think we anticipate in the United States, we'll see more use of mapping than we see Europe for the obvious economic reasons. Having said that, right, for paroxysmal AF where you're just doing pulmonary vein isolation, it's pretty clear that you don't have to map to have a successful procedure with FARAPULSE, and the MANIFEST results speak for themselves in that regard, and I would expect things to split out pretty much the same way they do with cryoablation.

When you go beyond that though, I think there will be more of a tenancy to want to map those cases. And so we will have a second-generation FARAWAVE catheter that will be integrated with arrhythmia system, but we're never going to force people to use arrhythmia. We're always going to maintain it an open system, you can map with whatever system you want. Although we believe with somebody enhancements we're going to bring out, it's going to drive a lot of folks to want to use arrhythmia when they want to map FARAWAVE case.

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

Thank you, Dr Stein, and thank you for -- thank you for joining us today. We appreciate your interest in Boston Scientific. If we are 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, Jamie will give you all the pertinent details for the replay.

[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
• Kenneth Stein, Executive Vice President and Global Chief Medical Officer

Analysts

• Robert Marcus, J.P. Morgan
• Joanne Wuensch, Citibank
• Rick Wise, Stifel Nicolaus
• Larry Biegelsen, Wells Fargo & Company
• Travis Steed, Bank of America Co.
• Vijay Kumar, Evercore ISI
• Danielle Antalffy, UBS Group AG
• Cecilia Furlong, Morgan Stanley
• Matthew Taylor, Jefferies Financial Group Inc.
• Matt Miksic, Barclays PLC
• Chris Pasquale, Nephron