Boston Scientific Corp (BSX) — Q4 2017 Earnings Call Transcript

Thank you, Greg. Good morning, everyone, and thanks for joining us. With me on today's call are Mike Mahoney, Chairman and Chief Executive Officer; and Dan Brennan, Executive Vice President and Chief Financial Officer. We issued a press release earlier this morning announcing our Q4 2017 results, which included reconciliations of the non-GAAP measures used in the release. We have posted a copy of that release as well as reconciliations of the non-GAAP measures used in today's call to the Investor Relations section of our website under the heading Filings. The duration of this morning's call will be just under one hour. Mike will provide strategic and revenue highlights for Q4 2017 and full year 2017; Dan will review the financials for the quarter, and then Q1 2018 and full year 2018 guidance; and then, we'll take your questions. During today's Q&A session, Mike and Dan will be joined by our Global Chief Medical Officer, Dr. Ian Meredith; and Chief Medical Officer for Rhythm Management and Global Health Policy, Dr. Ken Stein. Before we begin, I'd like to remind everyone that, on the call, operational revenue growth excludes the impact of changes in foreign currency exchange rates. And organic revenue growth is defined as excluding the impacts of changes in foreign currency exchange rates and sales from the acquisitions of EndoChoice and Symetis over the relevant prior year period. Also note, this call contains forward-looking statements within the meaning of federal securities laws, which may be identified by words like anticipate, expect, believe, estimate, goals and other similar words. They include, among other things, statements about our growth and market share, new product approvals and launches, clinical trials, cost savings and growth opportunities, our cash flow and expected use, our financial performance, including sales, margins, earnings and other Q1 and full year 2018 guidance, as well as our tax rates, R&D spend and other expenses. Actual results may differ materially from those discussed in the forward-looking statements. Factors that may cause such differences include those described in the Risk Factors section of our most recent 10-K and subsequent 10-Qs filed with the SEC. These statements speak only as of today's date and we disclaim any intention or obligation to update them. At this point, I'll turn it over to Mike for his comments. Mike?

Good morning. Thank you, Susie. Thanks for dialling in. Boston Scientific delivered excellent financial results in the fourth quarter of 2017 with 8% operational revenue growth, 7% organic revenue growth, 190 basis point improvement in profitability and 14% adjusted EPS growth to $0.34. These fourth-quarter results closed out a very strong 2017. For the full year, we delivered 8% operational revenue growth, 7% organic, against the 10% comp in 2016, which represents a 90 basis point improvement in profitability and 13% adjusted EPS growth to $1.16. Similarly, 2017 closed out a very strong three-year period for BSC, with an average operational revenue growth of 9%, organic growth of 7%, combined with a 480 basis point improvement in adjusted operating margin, which leveraged that growth two times to an average 14.5% growth in adjusted EPS over the three-year period. So our strategy of category leadership in key markets and diversification in the high-growth adjacencies continues to deliver. Our goal is to continue to execute against our strategic planned goals, and execute similarly strong sales and EPS growth results over the next three years. It is the combination of long-term consistent above-market revenue growth, margin expansion and targeted double-digit EPS growth, now coupled with an improved ability to deploy strong free cash flow, that we believe uniquely positions Boston Scientific to deliver shareholder value. Accordingly, we are excited about our plans to build upon our global momentum in 2018 and beyond. We're targeting full-year 2018 organic revenue growth of 5% to 6%. We're guiding to adjusted EPS of $1.35 to $1.39, which represents 7% to 10% earnings growth. Importantly, this EPS growth includes an expected $0.02 to $0.03 negative impact from foreign exchange, which we'll seek to offset and deliver another year of double-digit adjusted EPS growth. I'll now provide some highlights in fourth-quarter and 2017 results along with thoughts on our 2018 outlook. All growth figures highlighted are on an organic basis over the prior year unless otherwise noted. Our fourth-quarter organic revenue growth of 7% continues to be broad-based across businesses and regions, led by our strong and diversified portfolio, continued global expansion and execution of our category leadership strategy. The ongoing diversification of our portfolio has helped drive excellent results with sales growth of 11% in MedSurg, 5% in cardiovascular and 3% in Rhythm Management. Four of the seven businesses grew revenue double digits, and we believe five of our seven businesses grew faster than the market. We also delivered another quarter of balanced global growth, led by 8% revenue in both the US and EMEA, and 4% growth in Europe. Emerging markets revenue grew 13%, led by 19% in China. The MedSurg business has continued to deliver. MedSurg grew 13% operationally and 11% organically in the fourth quarter and now represents 39% of the revenue mix in the quarter. In Endo, we posted 10% organic and 13% operational growth in Q4 fueled by biliary, hemostasis and continued strong growth in the EndoChoice acquisition, which has now been part of the BSC team for over a year now and is fully integrated. Endo delivered 8% organic and 12% operational growth in full-year 2017 sales, and we expect continued strength in our global Endo business in 2018. Uro and Pelvic Health also continued its excellent performance, growing sales 11% in the fourth quarter, which is the eighth straight quarter of double-digit sales growth and 12% for the full year of 2017. Our single-use digital ureteroscope, LithoVue helped drive double-digit growth in our core stone franchise. Prostate health also grew double-digits, while Men's Health grew single-digits. And also, the Minnetonka plant warning letter now has been lifted. And we anticipate a stronger new product cadence in our Men's Health business going forward. Boston Scientific continues to build the single-use market for ureteroscopy, while LithoVue now had over 700 accounts in the US and over 1,300 worldwide. Neuromodulation revenue grew 15% in the fourth quarter. We're excited about the future for this business in 2018 and beyond, with fast-growing markets and new innovative product launches in both the spinal-cord stimulation and deep-brain stimulation franchises. Our WaveWriter SCS System is currently launching, and is the first and only platform approved by the FDA to simultaneously provide a paresthesia-based and sub-perception therapy for patients suffering from chronic pain. We're also launching in the US our Vercise DBS platforms to treat Parkinson's disease. Vercise is a rechargeable platform with multiple independent controls to offer more adaptable delivery of stimulation. Our Cardiovascular group grew 7% operationally in the fourth quarter and 5% organically in both the fourth quarter and full year. Our PI business Peripheral Interventions grew 7%, both in the quarter and for the full year. From a product sales standpoint, drug-eluting technology has led the way, but many franchises grew double digits, including stents, atherectomy, IVUS, and our CeloNova microspheres for interventional oncology procedures. We're seeing expanded use of drug-eluting technologies in peripheral in Europe, and we continue to be the only manufacturer offering both the highly effective drug-eluting stents and a drug-coated balloon. Both of our drug-eluting technologies are on track for U.S launches in 2019 for Eluvia, our drug-eluting stent, and in 2020 for Ranger, our drug-coated balloon. We expect data from the Eluvia pivotal trial IMPERIAL to be presented in the second half of 2018. And earlier this week, we're encouraged by early COMPARE I trial data that was presented at the LEERINK conference in Leipzig, Germany. This is the first comparative data in the PI DCB space, looking at our Ranger DCB in a prospective multicenter randomized trial against Medtronic's IN.PACT Admiral DCB. Ranger will be differentiated as the lowest profile of any DCB, utilizing the minimum effective dose of paclitaxel and builds upon our market-leading 0.018 Sterling platform balloon. We also expect to bring Ranger to the U.S. and Japan as the first DCB with the longest lengths available on the market. Intervention Cardiology continues its above-market growth trend, delivering a 4% organic and 7% operational revenue in the quarter, and for the full year 4% organic and 6% operational. IC growth was led worldwide by continued strength of WATCHMAN, 10% growth in our complex PCI portfolio and mid-single-digit growth in PCI guidance. We also launched four new complex PCI products in the second half of 2017, as we continue to extend our lead in terms of depth and breadth of our complex PCI portfolio. We're targeting continued momentum in 2018 with new launches like the WOLVERINE cutting balloon and our next-generation rotational atherectomy platform called ROTAPRO. We also recently received FDA approval for a high-definition IVUS system and expect to begin a limited market release this quarter while we continue to rollout our new Comet FFR platform. As we disclosed earlier this month, 2017 structural heart revenue exceeded our guidance of $275 million, and WATCHMAN sales delivered $250 million. WATCHMAN has now treated over 3,000 patients globally, and we continue to drive growth via increasing utilization with existing customers, opening new centers and expanding the therapy geographically. Clinically, our efforts include indication expansion with the ASAP-TOO study in patients with absolute contraindication to oral anticoagulants. And we reported positive real-world results and EWOLUTION WASP registries this year as well as the five-year PROTECT AF PREVAIL meta-analysis. On the product development front, we target beginning enrollment in Q2 for the next generation of WATCHMAN FLX in the PINNACLE FLX IDE trial and launching in Japan in 2019. WATCHMAN also received a 10.6% increase in its primary DRG reimbursement in the U.S. starting last October, as well as reimbursement in Australia. We remain committed to educating patients and their caregivers about WATCHMAN as an alternative to oral anticoagulants to help reduce the risk of bleeding and stroke. Our ACURATE TAVR program continues to build momentum in Europe, and we recently completed training of our European sales and clinical teams. We look forward to continued momentum as well as the launch of the next-generation ACURATE neo2 that incorporates an advanced seal in Europe in the second half of this year. We are also on track to begin enrolling patients in our U.S. IDE for ACURATE in the second half of this year, and we'll confirm the trial details in the coming months. Regarding our LOTUS Edge TAVR valve platform, there's no change to our commentary from earlier this year in that pending our ability to clear certain technical and regulatory hurdles, our goal is to launch LOTUS Edge in the U.S. and European markets in 2019. Finally, in structural heart, last week, we announced an exciting investment and acquisition agreement with Millipede, a company that's developing a transcatheter mitral valve and annuloplasty repair device to treat patients with severe mitral regurgitation. This is a large and currently underserved patient population that we estimate could represent a $1 billion market opportunity by 2021. The Millipede IRIS Annuloplasty Ring delivered via transfemoral, transseptal delivery system follows the surgical standard of care to repair and ultimately reduce the size of a dilated mitral annulus. This unique design is a complete ring designed to be used as a standalone device or in combination with other technologies. It's also designed to be highly customizable to a specific patient's anatomy and disease state. We're pleased with the results of Millipede's first-in-human study, and a second first-in-human study will focus on improving the efficiency of the procedure. With WATCHMAN, ACURATE, LOTUS, and now IRIS, we're excited about our structural heart capabilities and the long-term growth prospects of our structural heart business. For 2018, we expect revenue from our WATCHMAN and ACURATE TAVR franchise to deliver approximately $400 million in revenue.

Thanks, Mike. In the fourth quarter, we achieved consolidated revenue of $2,408 million, marking a 10% increase in reported revenue and an 8% increase on an operational basis, which excludes foreign currency impacts. This impressive performance surpassed our expectations, exceeding the operational guidance range of 5% to 6% owing to strong performance across most of our businesses and regions, as Mike mentioned. Our reported revenue included a $37 million benefit from foreign exchange, which aligns closely with the anticipated $40 million benefit at the time of guidance. Contributions from the EndoChoice and Symetis acquisitions added about 130 basis points, consistent with our earlier expectations, leading to 7% organic revenue growth for the quarter. We posted adjusted earnings per share for the fourth quarter at $0.34, reflecting a 14% increase year-over-year and falling at the high end of our guidance range of $0.32 to $0.35, primarily driven by this robust revenue growth. This figure includes a $0.02 adverse impact from foreign exchange, which fell at the higher end of our expected range of $0.01 to $0.02. For the full year 2017, our consolidated revenue reached $9,048 million, showing an 8% operational increase and a 7% organic increase. The adjusted earnings per share for the year was $1.26, indicating 13% growth, marking our fifth consecutive year of double-digit adjusted earnings per share growth, which excludes the $0.08 foreign exchange headwind that we successfully mitigated through operational savings and initiatives. In comparison to 2016, adjusted earnings per share grew by 20%. Our adjusted gross margin for the fourth quarter was 72.6%, unchanged from the previous year, indicating our capacity to offset a negative 200 basis point year-over-year impact from foreign exchange, coupled with pricing aligned with previous years, through operational improvements and cost reductions in manufacturing. We also achieved a favorable product mix due to the strengths in our WATCHMAN and Men's Health segments. For the entire year of 2017, our adjusted gross margin was 72.1%, consistent with the 72% margin from 2016, effectively offsetting a negative 130 basis point impact from foreign exchange, LOTUS inventory charges from Q1, and the adverse variances from our Puerto Rico facility following Hurricane Maria in Q3. Adjusted SG&A expenses amounted to $859 million, or 35.7% of sales in Q4 2017, down 80 basis points from the prior year and within our guidance range of 35% to 36%. We are dedicated to our targeted initiatives aimed at reducing SG&A, such as streamlining end-to-end business processes and expanding global shared services and indirect sourcing. Consequently, our full-year 2017 adjusted SG&A rate of 35.6% is reduced by 50 basis points compared to 2016. Adjusted research and development expenses for the fourth quarter were $256 million, making up 10.6% of sales, down 90 basis points from Q4 2016. For the full year 2017, adjusted R&D expenses totaled $974 million, or 10.8% of sales, slightly down from 10.9% in 2016. Royalty expenses were 0.7% of sales in Q4 and 0.8% for the full year 2017, remaining roughly flat year-over-year. Consequently, the adjusted operating margin for Q4 2017 was 25.6%, an increase of 190 basis points year-over-year, and was in line with our guidance range of 25.5% to 26.5%. Our full-year 2017 adjusted operating margin of 25% represents an improvement of 90 basis points over 2016, aligning with the objectives we set during our 2013 Investor Day, demonstrating our commitment to high performance and meeting or surpassing long-term goals. The year-over-year increase in our 2017 adjusted operating margin was primarily driven by improvements in our Rhythm Management and MedSurg segment results. The Rhythm Management team reported an operating margin of 21.6% for Q4 and 19.7% for the full year 2017, reflecting significant increases of 620 basis points for Q4 and 470 basis points for the full year. The team has made considerable strides in gross margin via a favorable product portfolio mix and manufacturing efficiencies while also maintaining tight expense control and leveraging the improved performance of both global CRM and EP businesses. This improvement also accounts for additional spending related to the acquisition of Apama Medical and its pulmonary vein isolation technology. The MedSurg segment saw substantial year-over-year enhancements of 290 basis points in Q4, achieving an operating margin of 34.3%. The full-year margin rate of 32.3% marked a 100 basis point increase over 2016. Investments made in our commercial capabilities for the ongoing launches in MedSurg were offset by strong performances in Endoscopy and Urology Pelvic Health, as well as improvements in Neuromodulation margins from recent launches and moderated development expenses. We reported a net litigation-related charge of $89 million this quarter, mainly concerning our mesh litigation. We are nearing final settlement for approximately 44,000 out of about 49,000 claims. As in previous quarters, we assess known claims, estimate resolution costs for each, project future claims, and evaluate defense costs to calculate necessary reserves and make any adjustments. With agreements from roughly 90% of all known claims settled or in principle, we are reducing balance sheet risk and aim to resolve most mesh claims in 2018. Our total legal reserve, including mesh, stood at $1,612 million as of December 31, 2017. For 2018, we plan to make approximately $800 million in cash payments to settle remaining legal reserves associated with mesh litigation, which will help minimize this liability on our balance sheet, along with previously made cash payments into qualified settlement funds. In addition, we expect to pay around $600 million to settle disputes with the IRS this year, totaling about $1.4 billion in cash flow required to settle significant existing contingencies. Thus, we anticipate around $500 million in cash flow for other strategic uses in 2018. I'll provide more cash flow guidance shortly. Moving to below-the-line interests and other expenses, our interest expense for the quarter was $56 million, roughly flat compared to Q4 of 2016. Our average interest rate was 3.8% in Q4 of 2017, compared to 4% in Q4 of 2016. Adjusted other expenses for the fourth quarter were $31 million, primarily comprising a $19 million impairment on specific available-for-sale investments and foreign exchange losses tied to our hedging program. For the full year, interest and adjusted other expenses were $229 million and $57 million, respectively, slightly under our expected $300 million total for the year. Our tax rate for the fourth quarter was reported at 371.1% and adjusted at 9.5%. The favorable adjusted tax rate was due to a better-than-expected geographic profit mix and specific discrete tax items. The reported tax rate includes an estimated one-time net income charge of $861 million from the Tax Cuts and Jobs Act. This includes approximately a $1 billion charge related to the deemed repatriation of unremitted earnings of our foreign subsidiaries, offset by a $100 million benefit from the remeasurement of deferred taxes following the lower U.S. corporate tax rate. The net result of these items is the approximate $861 million one-time charge. We anticipate utilizing certain tax benefits, such as NOL and R&D credits, expecting the cash impact of these charges to be around $450 million, which is manageable as it will be paid over eight years. Our full-year tax rate was 88.8% on a reported basis and 11.2% adjusted. To summarize, Q4 2017 adjusted earnings per share of $0.34 includes about $0.02 from unfavorable foreign exchange, highlighting a 14% year-over-year growth, or 23% growth excluding foreign exchange effects. On a reported GAAP basis, which factors in the one-time net income tax charge and various net charges totaling $1,095 million after tax, Q4 2017 reflected a loss per share of $0.45. For the full year 2017, the adjusted earnings per share of $1.26 stood at the upper end of our guidance, despite absorbing the $0.08 adverse foreign exchange impact. The adjusted earnings per share for 2017 rose 13% over the previous year and jumped 20% excluding foreign exchange effects. The reported GAAP EPS for 2017 was $0.08, down from a full-year 2016 GAAP income per share of $0.25. We concluded Q4 with 1,393 million fully diluted weighted average shares outstanding. The adjusted free cash flow for the quarter was $685 million compared to $472 million in Q4 2016. In this quarter, we primarily used cash for previously agreed legal settlements and business development activities, including the Apama Medical acquisition. By December 31, 2017, we had $188 million in cash on hand. Our full-year 2017 adjusted free cash flow reached $1,729 million, reflecting 7% year-over-year growth, though it fell short of our $1,750 million cash flow guidance due to working capital factors. We continue to anticipate 2018 adjusted cash flow of around $1.9 billion. Our capital expenditures for 2017 totaled $319 million, aligned with our $320 million target, inclusive of strategic investments aimed at enhancing capacity and driving growth, and we expect capital expenditures to remain at similar levels in 2018. Now, I’ll outline guidance for Q1 and the full year 2018. For the full year 2018, we anticipate consolidated revenue between $9,650 million and $9,800 million, reflecting year-over-year growth of 5% to 6% on an organic basis, plus an additional 30 basis point contribution from the Symetis acquisition. We expect foreign exchange to provide a tailwind of around $150 million to $175 million for the full year 2018. However, as I will explain next, due to our hedging program, we do not foresee similar benefits in our adjusted gross margin or earnings per share. We project our adjusted gross margin for the year, as a percentage of sales, to hover around 72%, which considers a negative foreign exchange impact of 110 basis points. Remember, we lock in our foreign currency hedges for up to 3 to 5 years ahead, depending on the currency, so recent currency fluctuations do not benefit us. Consequently, the upside in reported sales, mainly from the euro's strength, does not associate with gross profit benefits and thereby negatively affects our gross margin rate. We expect some offset from favorable mix, standard cost reduction programs, and the introduction of new accretive products. Looking towards 2019 and 2020, if currency rates remain stable, we anticipate a neutral to slightly positive impact from foreign exchange on results in those years. We foresee full-year adjusted SG&A ranging from 34.5% to 35% of sales as we continue to benefit from ongoing programs. In 2018, we intend to reinvest fully in the expansion of the medical device excise tax alongside strong investments in structural heart and other durable growth platforms. We project full-year adjusted research and development expenses to be between 10% and 11%. We also expect our royalty rate to stay slightly below 1% of sales for 2018. This suggests a full-year 2018 adjusted operating margin between 25.5% and 25.75%, consistent with our improvement goals stated earlier, positioning us well to achieve our long-term adjusted operating margin goal of 28% by 2020. We forecast our full-year 2018 adjusted tax rate to land between 13% and 14%, assuming an operational tax rate of about 14% to 15%, slightly lower than the 16% initially anticipated due to further analysis and clarity regarding the Tax Cuts and Jobs Act. Additionally, we expect an approximate 100 basis point advantage to the operational tax rate from stock compensation accounting standards, less than the 200 basis point benefit we experienced in 2017 from the reduction in the U.S. tax rate from 35% to 21%. For 2019 and beyond, we project a long-term effective tax rate of 14% to 15%, ensuring full access to our global cash. We expect below-the-line expenses, inclusive of interest payments, dilution from our venture capital portfolio, and costs associated with our hedging program, to reach around $300 million for the year, along with a fully diluted weighted average share count of approximately 1,399 million shares in the first quarter and 1,402 million for the full year. Consequently, we anticipate full-year 2018 adjusted EPS to range from $1.35 to $1.39, signaling 7% to 10% adjusted earnings growth despite facing headwinds from a full-year adverse foreign exchange impact of around $0.02 to $0.03. For GAAP, we expect EPS between $0.93 and $0.98. Now, concerning Q1 2018, we project consolidated revenue between $2,320 million and $2,350 million, indicating year-over-year organic growth of 4% to 5% against a 9% growth comparison in Q1 2017, including an additional 80 basis point operational growth contribution from Symetis. We foresee the foreign exchange impact on Q1 revenue to be a tailwind of $60 million to $70 million. For the first quarter, anticipated adjusted earnings per share should be between $0.30 and $0.32, representing growth of 5% to 12%, while GAAP earnings per share are projected between $0.19 and $0.22. Please refer to our Investor Relations website for Q4 2017 financial and operational highlights, which provide details on Q4 and full-year results as well as Q1 and full-year 2018 guidance, including line item specifics. Now, I’ll turn it back to Susie to moderate the Q&A session.

Thanks, Dan. Greg, let's open it up to questions for the next 20 minutes or so. In order to enable us to take as many as possible, please limit yourself to one question and one related follow-up. Greg, please go ahead.

Good morning, guys. And thanks for taking the questions. Let me start, we got a chance to talk a little bit about the quarter in San Francisco. And obviously, this is an extremely strong quarter on the tough comp for you. There are some discussions already on the Street about kind of what the first quarter ends up looking like. I think we get a sense of how you're thinking about it with your guidance here. But with you guys showing such a strong fourth quarter, the industry in general having a strong fourth quarter, do you have a feel for how you're thinking about the first quarter? And should it be conservative just relative to what we saw here in Q4?

Sure, good morning, Mike. Yeah, we're very comfortable with our 5% to 6% full-year growth. We gave visibility to first quarter with 4% to 5%. As you said, we do have good momentum coming out of the company across the businesses with MedSurg delivering very well, WATCHMAN, PI, really across the board. We do have some headwinds in 2018 that we'll be facing. We do have some tough difficult pacer comps. We have some more DES competition with some new entrants that we expect some trialing. We expect to maintain our share over the term, but we expect some trialing early on. We also see some one-time price cuts in Australia and Japan that have a bit more impact in 2018 and that will be neutralized in 2019. So overall, the business is performing very well. There are a few headwinds and we're comfortable with the 5% to 6%. And gave you good line of sights and they are 4% to 5% for the quarter.

Okay. Let me ask you just a couple of other items. One, first off, thanks for giving the detailed number on WATCHMAN. That was obviously appreciated. WATCHMAN has a ton of momentum. It sounds like the fourth quarter in particular was very strong for WATCHMAN. Can you just give us a little bit more color on what you're seeing amongst interventional cardiologists and electrophysiologists, and who seems to be really getting on board with WATCHMAN usage and who's driving it? And then, second, could you spend just a minute on the Millipede transaction? I thought the structure of the deal was obviously very interesting. Effectively, you will be acquiring the company, but it keeps it off your P&L for the next two years. Why was that the right technology? And why was this the right asset to buy in mitral? Thanks.

Thanks, Mike. I'll talk to a little bit about WATCHMAN and then I'll have - then we'll also talk about Millipede. And so, on the WATCHMAN the teams are doing a terrific job. We continue to open up centers, on track. But more importantly, we're improving utilization of the product and the therapies. We're increasing awareness amongst the referring physicians. We're training more physicians. And we're also expanding globally into China, and we will launch into Japan in 2019. So I think the overall momentum is just excellent clinical outcomes, more physicians, training in the product as well as just increasing awareness. And our focus is on improving utilization rates at these large centers each quarter. So we're very, very bullish on the platform. Maybe Dr. Stein can make a comment on the clinical work with WATCHMAN, and then we'll touch on Millipede.

Yeah, thanks, Mike. And, Mike, I think the key behind the momentum has been the great results that we've seen, both in the clinical trials, really pleased with the results that were presented at TCT, the final five-year results, combined meta-analysis, protecting from fail, leaving really no reasonable doubt, but that this is at least as effective as warfarin for stroke prevention. And I think you've seen that translate into the market as well as really the extraordinarily good safety results that we've seen as a result of our training program and disciplined approach to bringing new sites online. We see balanced interest between IC and EP implanters. And I think both sides have the skill that's required to do the implant and the results show that both sides are doing it well and doing it effectively.

Regarding the Millipede transaction, we appreciate the structure we have created. I believe you explained it well. Our goal is to acquire this company once they finish their second-generation family, likely by the end of this year. Ian, perhaps you can provide some insight into the reasoning behind the Millipede acquisition.

Yeah, thanks, Mike. And thank you, Mike, good question. The rationale behind Millipede, it's based on very sound physics principles and logically correct for pathophysiology of functional mitral regurgitation. As you know, it follows the surgical predicate in that you have a complete annuloplasty ring. And it's a small footprint device, transfemoral, transapical catheter repair, so not using the apex, which is a huge impasse on patients with significant left ventricle impairment to start with. And it provides some line of sight to tricuspid valve repair and obviously mitral valve replacement in the future. More importantly, it doesn't limit or preclude the use of any other therapies and that is particularly important because mitral valve repair is often a multifaceted approach leaflet and chord repair can still be done in this context. So we thought that there were eight criteria that we would want for a transcatheter mitral valve repair foundational device and this meets all of those eight foundational criteria.

Good morning. One quick question on structural heart for me and then I have a quick follow-up. Mike, I'm just thinking about the structural heart guidance you gave for 2018, which I thought was pretty interesting. I mean, the $400 million number, I wonder if you can provide some context around that. Because given the strong WATCHMAN number in 2017, as you're probably aware, WATCHMAN virtually slowed very marginally in 2017 versus 2016, very aggressive growth. To do $400 million in 2018, if I just take your NeoTract annualization off the fourth quarter and very substantial deceleration in WATCHMAN, you get above $400 million. So help us frame up that $400 million number because it sort of implies a lot of WATCHMAN deceleration or frankly is a very conservative way to think about the year to start the year.

We've definitely taken the NeoTract numbers out of our numbers. Just kidding you there. But on the WATCHMAN, I think overall, we aim to deliver against our commitments and we continue to do so. So we feel very bullish on the platform. We don't have as many new centers opening in the U.S. We penetrated that quite a bit. We saw a few new centers. And we have some major launches coming more so in 2019 in terms of U.S. - really, Japan. But we feel comfortable with that guidance number. And hopefully, we continue to do well, whether we'll be able to have the opportunity to increase it as the year goes on.

Sorry for the Freudian slip there, Mike. We'll move on.

The only thing I'll comment on is on Symetis, as part of that. This - that business continues to increase. We've trained our clinical and our sales teams on it. So we expect some acceleration of Symetis in 2018. And the approval - that second-generation platform, early third quarter will really be critical because it already has a very low pacemaker rate, very, very quick to implant, and this will even reduce the PVL rate further and we have those two large clinical trials that we'll also report on. So I think you'll see strong momentum out of WATCHMAN and Symetis this year in 2018.

Good morning, everybody. Maybe just starting with the balance sheet, again, Dan. Maybe talk about your cash flow priorities, or Mike maybe you want to talk about it as well as we think about 2018 unfolding and into 2019 and 2020. From here, is it going to be continued M&A? Is that the number one priority? Or help us think about share buyback as well.

Yeah. That's the sequence that you laid out is the priority. One is, we had to finish the mesh pay down and tax, which we're doing this year. And then, we'll really have much more freedom as you look at the second half of 2018 and then going forward once those are retired. We do have a pretty active M&A appetite. We have a venture portfolio that's pretty healthy, that we have some preferred rights to buy a number of those companies. So I think you'll see us be active with tuck-in acquisitions to strengthen our category leadership strategy. But to the extent that we don't find strategic deals that meet our financial criteria, then we would look at share repurchase, more likely share repurchase, more likely in 2019 than 2018.

Hi, good morning. Thanks for taking the question.

Good morning, Josh.

I wanted to follow up on the operating margin trajectory out through to 2020 and how we should be thinking about the cadence of operating margin expansion in 2019 and 2020? Is there anything, Dan, that we should be thinking about in 2019, potentially Lotus launch or FX headwinds getting lighter on the gross margin line, in terms of that 240 basis points-ish of operating margin expansion left to that - for that 28% target?

Yeah, so I think you're kind of using the midpoint of this year and saying there's 240 left at the end of this year to get to that 28 by 2020, which I think is fair. Certainly, leveraging our Lotus launch, as Mike said, that's goal in 2019 in the US. Leveraging that would be helpful because we have a certain amount of commercial infrastructure that's in place, ready to go there. So leveraging that would be helpful. But then, the rest of the P&L and just the - if you look at the ranges for revenue, we talk about 5 to 6 this year. We've talked about 5 to 8 for 2019 and 2020 as we have a good launch year this year in 2018. But we are set up for 2019 and 2020 to be even better product launch year. So I think there is a natural opportunity for a topline leverage in 2019 and 2020, plus the continued focus that we have on SG&A, and then the FX relents a little bit in 2019 and 2020. You should see better gross margin and less of a drag from an EPS perspective. So I think, if you look at the 50 to 75 this year and then, say, we need 240 to get to that 28 by 2020, I think the pieces are in place to get there.

Thanks very much. And perhaps I can take that question. I think we do have internal programs as well. And as you know, repairing the mitral valve is often the multi-factorial approach and you need more than one solution to repair the mitral valve. But the primary foundation of mitral valve repair, particularly, functional mitral regurgitation, is the annuloplasty, and that can serve to treat functional mitral regurgitation in a large proportion of patients. So we see this as the foundational move in them, and their critical first step in building a mitral program but it's certainly the lion's share of that program. Obviously, this does provide us the line of sight down the track to a mitral valve replacement option and indeed tricuspid valve repair as well. It's not the immediate aim, and the immediate aim is to get through the clinical trials and launch a transcatheter mitral valve repair device from a transeptal approach, which I think everybody is yearning for.

Hey, guys. Thanks for taking my question, so maybe one on WATCHMAN. Really strong performance in 2017. Maybe, Mike, can you comment on what portion of the drill came from the new center adds versus same center volume growth? I think that would be helpful.

Yeah, we don't break that out for you. But as you might expect, early on, a few years ago it was new centers that were opening up. But now, call it 80/20 practically, just roughly.

And that's helpful, that's helpful.

Yeah, I think it's not a below-the-line impact. The cost associated with the hedging program are shown below the line, but the actual settlement of the contract - the hedging contract are shown in gross margin, which is why we've had that headwind in gross margin in the last two to three years from an FX perspective. So to be clear, this year we expect 110 basis points of headwind in FX, related to gross margin. When you get to 2019 and 2020, if the rates were to hold where they are today, it becomes a much better story, where it's neutral to slightly favorable for us, both at the gross margin line and then at the FX line as well. So 2019 and 2020 is a much better FX story than it has been for the last three-plus years.

Okay. With that, we'd like to conclude the call. Thanks for joining us today. We appreciate your interest, especially at this early hour, in Boston Scientific. And before you disconnect, Greg will give you all the pertinent details for the replay.