Highlights From BSX's Q3 Conference Call: Climate Still Remains Challenging, Issues Mixed Guidance for FY

October 20, 2009 2:49 PM EDT

Boston Scientific Corporation (NYSE: BSX) reports Q3 adj-EPS of $0.19, 5 cents better than the analyst estimate of $0.14. Revenue for the quarter was $2.02 billion, which compares to the estimate of $2.04 billion.

Highlights From BSX's Q3 Conference Call:

• Sees Q4 adj-EPS of $0.17-$0.21, on sales of $2.025-$2.125 billion. The Street is currently looking for Q4 EPS and sales of $0.17. and $2.10 billion, respectively.
  
• (CFO) The global economy issues remain a challenge. Increased focus on healthcare systems here and abroad is resulting in greater price pressures on our businesses around the world. This coupled with
  gradual and general slowdown in the growth of some of our larger certain markets is putting pressure on our top-line growth opportunities as well as on our gross and operating profit margins.
  
• U.S. healthcare reform is still being intensely debated in the medical device innovation tax is passed together with the utilization tax that is proposed to be levied on our customers, changes in the way healthcare is developed and delivered will place added strains on healthcare providers, technology investments and advancements as well as suppliers.
  
• We're evaluating possible changes in several of our business models as a direct response to current market conditions and pending healthcare reform. Particularly in the U.S.
  
• Turning to the highlights of the quarter we delivered top-line growth on a constant currency basis excluding divestitures of 3%. With U.S. growth of 4% in and international growth of 3%.
  
• This results in year-to-date constant currency consolidated sales growth of 5%, which is at the midpoint of the 2009 full-year guidance.
  
• We delivered solid growth in our worldwide DES business as well as in endoscopy and neuromodlation businesses.
  
• Our gross profit margin declined sequentially as a result of pricing pressures in several of our key markets together with product mix.
  
• Consolidated revenue for Q3 was 2.25 billion. That's within our guidance range of 2 bln to $2.1 bln and represents a 2% reported increase in Q3 of last year. Included in our reports is 1% from divested businesses. Excluding the impact from the divested business and negative $111 million affect from foreign currency, Q3 revenue was up 3% in constant currency.
  
• Compared to Q3 of last year, excluding divestitures, U.S. revenue increased 4% while international revenue increased 2% or up 3% in constant currency.
  
• Worldwide drug stents came in at $411 million.
  
• Our worldwide DES revenue includes $245 million for taxes and $166 million for PROMUS and this represents a 60/40 split between TAXUS and PROMUS.
  
• We continue to sustain our worldwide leadership during the second quarter with an estimated global market share of 41% which continues to be about 20 percentage points higher than our nearest competitor.
  
• Geographically, U.S. DES revenue was $222 million and that was within our guidance of 220 to $240 million and 6% higher than the third quarter of last year. This includes $106 million of TAXUS and 116 million of PROMUS revenue and represents a 48/52 mix of TAXUS and PROMUS in the U.S. compared to a 47/53 mix in Q2 of this year.
  
• We estimate that our U.S. DES share was 49% for the quarter with 23 share points of TAXUS and 26 share points of PROMUS.
  
• Based on our estimate of the U.S. market for the third quarter, we believe that habit market share of 22% while JJ and neutronic achieved 212% each. International drug eluting stents sales were at the top end of our guidance range of 170 to $190 million and represents an increase in prior year of 1% on a reported basis and 2% in constant currency.
  
• BSX DES market share in EMEA is estimated to be 34%, which is up 1% sequentially than Q2 and up 2% compared to the third quarter of 2008. TAXUS market share was approximately 20% with revenue of $46 million and PROMUS market share was 14% with revenue of $32 million.
  
• Our drug eluting share-- stent share in Japan was 47% up 2 percentage points from Q3 of 2008 with revenue of $62 million. Despite the competitive launch of endeavor in May we continue to hold nearly half of the Japanese market.
  
• During the quarter, we estimate that Endeavor's share reached 19% in Japan while J&J reached 34%. While our sales in Japan today are 100% TAXUS, we anticipate approval of PROMUS Zion in the first quarter with the first quarter 2010 launch expected. We estimate that our Asia Pacific DES share remains steady at about 19% during the third quarter split 10% TAXUS and with $13 million in revenue and 9% PROMUS with $11 million in revenue, or TAXUS-PROMUS mix of 54/46.
  
• We estimate the worldwide DES mark net Q3 at approximately $1 billion. That's down about 3% versus third quarter 2008 including a negative contribution from foreign currency of about 1%.
  
• The international drug eluting stent market remains strong for the quarter with approximately 494,000 PCI procedures including 282,000 procedures in EMEA, 53,000 procedures in Japan, 93,000 procedures in Asia PAC and 65,000 procedures in the Americas.
  
• Worldwide Q3 CRM revenue $608 million represents reported increase of 6% and constant currency increase of 8% over the $572 million reported in Q3 of 2008.
  
• Worldwide ICB sales of $445 million were at the low end of our guidance range of 445 to $475 million. This represents a reported increase of 5% over Q3 of last year and a constant currency increase of 7%.
  
• We estimate the recall temporarily took away 1% of our PI growth, which should be re-established in Q4. Our neurovascular business was down 2% versus last year as expected as a result of competitive launches and our softening coil business.
  
• The launch of project Phoenix, our new coil and neuroform EZ, our new stent delivery system, will be launched in the U.S. and Europe by the end of the first quarter 2010. In our nonaccident interventional cardiology business or electrophysiology business we saw constant currency decreases of 8% and 3% respectively.
  
• Reported gross profit margin for the quarter was 68.9% and adjusted gross profit margin for the quarter excluding restructuring related charges was 69.6%, which is 60 basis points lower than last quarter and 250 basis points higher than the third quarter of 2008.
  
• Our reported SG&A expenses in the third quarter were $665 million, adjusted SG&A expenses excluding restructuring related items were $660 million which were 1% lower than last quarter and 9% higher than Q3 of 2008.
  
• We're also continuing to pursue strategic acquisition opportunities. Operating expenses in total continue to reflect the targeted investments and customer-facing field force in R&D programs to drive profitable revenue growth.
  
• Based upon our results through September combined with our internal forecast for Q4 of this year, we expect to spend approximately $3.650 billion in combination of SG&A and R&D expenses for the full year 2009.
  
• Our Q3 2009 average interest expense rate was 5.5% compared to 5.9% in Q3 of 2008 and 5.5% in Q2 of 2009.
  
• Total debt is $744 million lower than Q3 of 2008 as a result of our debt pre-payments within the last 12 months including a $225 million pre-payment in the third quarter of this year. Net debt is approximately $391 million lower than the third quarter of 2008 reflecting positive net cash flow. In early October, this quarter, we pre-paid an additional $250 million of debt reducing total debt to $5.8 billion.
  
• We have, indeed, added these reps in the U.S., Europe and Japan and most have completed training but their effectiveness in the field will take longer than we had originally envisioned. We're very pleased and still are with our total U.S. DES market share position that we're able to carry into 2009 from 2008. Our market share has been stable throughout the year and we have a higher mix of PROMUS versus TAXUS than we had expected.
  
• On a constant currency basis, Q4 consolidated sales growth should be in a range of down 2% to up 2%. For DES, we're targeting worldwide revenue to be in a range of 400 to $440 million with U.S. revenue of 205 to $225 mlt and OUS revenue of 195 to $215 million. For our defibulator business, we expect revenue of $445 to $475 million worldwide. With $310 to $330 million in the U.S. and $135 to $145 million OUS.
  
• For Q4 adjusted earnings per share excluding charges related to acquisitions, divestitures, restructuring and amortization expense are expected to be in a range of 17 to 21 cents per share.
  
• With our actual results through Q3 and current guidance for Q4 we renow expecting full-year 2009 revenues to be in the range of $8.134 billion to $8.234 billion. (Consensus is $8.20B)
  
• We're also now expecting to achieve adjusted earnings per share for the full year of 75 to 79 cents excluding litigation related credits, credit related to payments from avid acquisitions, divestitures, major litigation and restructuring charges as well as amortization expense and large discreet tax. Included in this estimate is adjusted effective tax rate of approximately 17.3% for the full year including all discreet tax items previously mentioned. The company now expects full-year 2009 GAAP earnings per share between 43 and 48 cents. (Consensus is $0.56)
  
• (CEO) Turning to clinical updates, final results from the landmark COT trial were published in the "New England Journal of Medicine" and presented at the European society of cardiology and the heart failure society of America meetings. The results provide the first indisputable clinical evidence that cardiac resynchronization therapy significantly slows heart failure progression in class 1 and 2 patients further delaying the onset of severe and life-limiting conditions. We believe the strong results will allow us to work with the FDA to expand Boston Scientific's CRTD indications creating additional opportunities for the market as a whole and for Boston Scientific specifically. Our more immediate goal is to complete our FDA filing by the end of the year.
  
• Turning now to cardiovascular, we report another solid quarter of DS results. Up 5% constant currency and with 41% worldwide market share. TAXUS drove 24% of the market share with PROMUS at 17%. In the U.S., we saw stable market in the third quarter with U.S. PCI growth up approximately 1% and penetration holding steady at 75% for the third consecutive quarter and up 5 percentage points from the third quarter of 2008.
  
• We believe in the U.S., science had a 27% share for the quarter while cipher and endeavor were at 12% each and therefore, maintaining our 22-point share lead over our nearest competitor with Boston Scientific at 49% share.
  
• You're rolling gynecology continued its leadership in the cornerstone management business with above market growth of 7%.
  
• Third quarter results were led by a 25% increase in endoco-and I stent franchise.
  
• Finally, our worldwide neuromodlation team delivered constant currency sales growth of 21% in the third quarter with the U.S. also growing 21%.
  
• We have to like our continued strong free cash flow of $493 million in Q3 which allowed to us prepay all of our 20120 debt and make an early dent in our 2011 debt.
  
• (Q&A) I think about with guidance of the fourth quarter which is minus 2% to plus 2% plus the currency top line, anything you could see that would drive that closer to your 5 to 7% in the top line that you had talked about earlier in the year for 2010, 2011? (A) I think there's a number of things on the downside that could directionally move it that way F we were able to get some tremendous, new productivity from the CR reps, the new reps would be an example because it's a real, pangs of the force. The outcomes of the TCP battles. So there's big, chunky things there, Mike that could move it directionally favorable. The problem is we don't know which of those and what's going to happen with them.
  
• Follow-up, the 30% operating margin target that you put out there for 2012, end of 2012, how do you want us to think about that? Should we still consider that a valid target, or it is too early to say? (A)Well, I think-- it's too early to say in some ways but aspirationally, Mike, that's where we want to be. So we will make every effort to structure the business and format it in such a way to get there, but obviously, you know, Sam just commented. We've got a good handle on where the business is at now. We're just finishing up strategic planned redo, if you will, over the next month or so, and then we've got operating plans of the board. I think we'd like to come back but aspirationally, I would just point out and some of the issues are still unfolding. I don't think anybody knows truly the effect that healthcare reform will have either in the form of the tax. I don't think anybody knows truly what the effect of the economy will bring in terms of job loss and from are a number of things that will affect our competitors and they're not knowable right now. Everybody has their own guesses, and we have ours, but we really can't go into a definitive forecast.
  
• I wanted to focus in on your commentary around gross margins and pricing broadly speaking. Sow know, first of all, I was wondering a few comments spes specifically on pricing pressure that you are seeing in cardiac rhythm management? Is that different from what you have seen historically? And related to the same sort of subject. Your gross margin in the quarter seemed to be affected by a one-time item related to recalls. If you had that back, you seem to be around 70% which is in line with where your guidance was and I guess my question is was the gross margin pressure that you're referring to, does that impact your ability to get above 70%? I'm just trying to clarify how that falls out. (A)On the first one without getting into specifics at this point, we did see a little worse pricing. CRM has been pretty constant over several prior years, and we did see that worsen a little bit. You're correct on Rhett call comments. I won't, unless Sam wants to expand on that, and on pricing, you're right. It does get you back close to 70, but I think it's what we foresee in a tougher pricing environment as we look at things like contract renewals and where it's trending that gives us some pause. Sam, did you want to add?(A)Bob, on the recall comment, I mentioned it had a penny effect on gross profit, about $20 million worth of gross profit, but it had an $18 million effect on sales, a combine combination of lost sales by not having products available to sell as well as returns this we had to record and take product back that we had previously sold. If you back both of those out, it doesn't really move the needle on gross profit margin for the third quarter.

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