Boston Scientific Corporation
Q3 2017 Earnings Call Transcript

Published: 26 Oct 2017

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Boston Scientific Q3 2017 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Instructions will be given at that time. As a reminder, this conference is being recorded. I'd now like to turn the conference over to Susie Lisa. Please go ahead.

[Susan Lisa:]

Thank you, Stacy. 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 Q3 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 Investors/Filings/Quarterly Results and non-GAAP reconciliations. The duration of this morning's call will be approximately one hour. Mike will provide strategic and revenue highlights for Q3 2017; Dan will review the financials for the quarter, and then Q4 2017 and full year 2017 guidance; and then, we'll take your questions. During today's Q&A session, Mike and Dan will be joined by our Chief Medical Officers, Dr. Ian Meredith, and Dr. Ken Stein. Before we begin, I'd like to remind everyone that, on the call, operational revenue growth is defined as excluding the impact of foreign currency exchange rates. Organic revenue growth is defined as excluding the impact of changes in foreign currency exchange rates and sales from the acquisitions of EndoChoice and Symetis over the relevant prior year period. In Mike and Dan's remarks, all references to growth are on an organic year-over-year basis unless otherwise specified. Also of note, this call contains forward-looking statements within the meaning of federal securities laws, which may be identified by words like anticipate, expect, believe, estimate and other similar words. They include, among other things, statements about our growth and market share, new product approvals and launches, clinical trials, cost savings and growth opportunities, our cash flow and expected use, our financial performance, including sales, margins, earnings and other Q4 and full year 2017 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.

[Michael F. Mahoney:]

Well done, Susie. Good morning, everyone. Boston Scientific delivered strong results, again, in third quarter 2017 with both revenue and EPS coming in at the high end of our guidance range despite a 9% organic revenue growth comparison in Q3 2016. Operational revenue growth of 6% and organic revenue growth of 4% reflects strong execution by our global teams and the success of our category lead strategy. We leveraged the 6% operational revenue growth in the quarter to deliver a 16% adjusted EPS growth, or $0.31 per share, which is the high end of our guidance range. Also, if you exclude the $0.02 negative impact of foreign exchange, adjusted EPS grew 23% year-over-year. This EPS growth reflects an 80 basis point year-over-year improvement in adjusted operating margin to 25.1%, led by a solid 72.2% gross margin and the 100 basis point reduction to year-over-year in SG&A spending to 35.2% of revenue. We're also excited about our plans to close out 2017, build upon our global momentum and drive sustainable long-term growth in 2018 and beyond. We're also narrowing our full-year 2017 operational revenue growth guidance to an estimated 7% growth, which includes an approximate 120 basis point full-year impact from the EndoChoice and Symetis acquisitions. We're also narrowing our full-year adjusted EPS guidance to $1.24 to $1.27, which represents 11% to 14% earnings growth. This revised adjusted EPS guidance includes an expected $0.07 to $0.08 negative impact, or approximate 700 basis point headwind, from foreign exchange. I'll now provide some highlights on third quarter 2017 results and thoughts to finish out the year. We continue to grow faster than market in most all of our businesses and regions. We also delivered consistent organic revenue growth in every geography, led by 8% growth in AMEA, 5% in Europe, and 3% in the U.S. We also continued to outperform in the Emerging Markets with 18% growth in the quarter, including 23% in China. I'll start with MedSurg highlights. The three MedSurg businesses together delivered 8% organic revenue growth and 10% operational growth, including the EndoChoice acquisition, which continues to deliver above our deal plan. In Endo, organic revenue grew 5% in Q3 and 10% including the EndoChoice, led by strong performance from the Spy DS [SpyGlass DS] Visualization System, AXIOS platform, Res 360 Hemostasis Clip and EndoChoice ambulatory surgery center portfolio. We do expect Endo to return back to mid to high single-digit growth rates in the fourth quarter. We have now completed the integration of EndoChoice and revenue is ahead of plan, contributing 75 basis points to total growth in the quarter. We continue to be pleased with the results from our expanding presence in the ambulatory surgery center market, led by differentiated offerings in GI pathology and infection prevention. Our Urology and Pelvic Health businesses continued this streak of double-digit organic revenue growth, led by our Single-Use Digital LithoVue Ureteroscope and products to treat men's health and pelvic floor conditions. The overall 10% growth across Uro/PH is particularly notable in light of a 13% growth comparison in Q3 2016. Emerging market sales continue to accelerate, led by our stone and men's health franchises. In our men's health business, we look forward to future developmental launch of new products now that the FDA Warning Letter was lifted during the third quarter from our Minnetonka, Minnesota facility. In Neuromodulation, revenue grew 11% in Q3, driven by strength in spinal cord stimulation market, sales of our Montage MRI platform, as well as continued strong uptake of the Vercise MRI Deep Brain Stimulation System in Europe. The strength in the SCS market reinforces the need for flexible technology platforms, like Spectra, that can enable physicians to address the unique needs of patients suffering from pain. We are deep into preparations for our expected launch of Vercise into the U.S. deep brain stimulation market, which we expect by year-end 2017 or early 2018, followed by a Directional Lead and MRI conditional labeling expected in 2018. Now, I'll turn to Cardiovascular. This group grew 3% against a very difficult 12% growth comparison in Q3 2016. Peripheral Interventions was up 5% on strong growth in Asia and Latin America. We continue to see solid growth from across the portfolio, including drug-eluting technologies Eluvia Stent and Ranger Balloon in Europe, Jetstream Atherectomy and OptiCross intravascular ultrasound, now in the second quarter of launch for our Peripheral applications. In September, at the CIRSE European conference, we presented compelling data from both drug-eluting platforms, Eluvia DES and Ranger DCB, both with mid-80% ranges rates of freedom from TLR. While 2018 will be a quieter year for new product launches in PI, the globalization momentum continues and the pipeline is very strong for 2019 and 2020. Our Interventional Cardiology business grew operational revenue 4% and organic revenue 2%, in light of a 13% growth comp in Q3 2016. Our performance was led by strong sales of our WATCHMAN Left Atrial Appendage Closure device, our portfolio of complex PCI products and above-plan contribution from the Symetis ACURATE platform in Europe. The WATCHMAN platform had another excellent quarter and continues to build global momentum as our market development efforts continue. The U.S. continues to be our largest and most important market, and we're pleased to announce that, effective October 1, Medicare reimbursement rates for DRG 274, to which 93% of WATCHMAN implants map to, increased by an average of 10.6%. We also continue to drive multiple market development efforts for WATCHMAN to increase physician and patient awareness. We now expect to end 2017 with over 375 accounts implanting WATCHMAN, while continuing to see increased reorder rates in previously opened accounts. We're also making good progress on building the WATCHMAN franchise outside the U.S. China is off to a solid start and we hit a new monthly record for implants in September. At last month's Asia-Pac HRS, WATCHMAN was showcased by principle investigators from the Japan SALUTE Approval Trial, where we remain on track to launch in 2019. Also, at Asia-Pac HRS, investigators presented the WATCHMAN Asia-Pac Registry, which showed a 99% implant success rate and an 82% low risk ischemic stroke rate compared to expected outcomes at one year, while also avoiding the bleeding risk associated with long-term anticoagulation. We continue to make strong progress, both clinically and commercially, with WATCHMAN and view it as a significant long-term growth driver. Products for complex PCI procedures grew double-digits, led by strong Atherectomy and Cutting Balloon sales. Our PCI Guidance business grew single-digits and continues to build momentum with strong IVUS sales in the launch, our integrative fractional flow reserve platform. Global DES sales declined low single-digits in the quarter, reflecting a very challenging 14% growth comp in Q3 2016. Within DES, we will continue to invest in our market leading SYNERGY platform with multiple new portfolio enhancements in progress. Turning to TAVR, we continue to see very strong clinical and commercial performance with the ACURATE neo Valve across Europe, as integration activities remain on target. ACURATE demonstrated strong year-over-year growth, ahead of our expectations, and continues to take market share. Positive clinical data also continues to emerge with ACURATE, as seen just this week in a publication in JACC

[Daniel J. Brennan:]

Thanks, Mike. Third quarter consolidated reported revenue of $2.222 billion represents 6% growth on a reported and operational basis, which excludes the impact of changes in foreign currency and is at the high end of our guidance range of 5% to 6%. Our reported revenue reflects a $3 million headwind from foreign exchange, which is $17 million or approximately 80 basis points less than the $20 million headwind expected at the time of guidance. Further, excluding the 140 basis point contribution from acquisitions, organic revenue was at the higher end of guidance with 4.3% growth. Although immaterial to the quarter overall, our revenue growth reflects a modest impact in the 10 basis point to 20 basis point range from the hurricanes in the quarter, which impacted procedures. Our thoughts are with those impacted by the hurricane and I'd like to reiterate Mike's thanks to our employees for their winning spirit, particularly on their ability to serve the needs of customers and patients throughout the many weather-related challenges this quarter. We delivered Q3 adjusted earnings per share of $0.31, also at the high end of our guidance range of $0.29 to $0.31, and representing 16% year-over-year growth. This double-digit adjusted earnings per share growth was driven primarily by the strong sales growth and P&L line item metrics that were in line with our guidance ranges. Adjusted gross margin for the third quarter was 72.2% compared to 72.5% in Q3 last year and, significantly, includes a year-over-year negative 120 basis point impact from foreign exchange, which is 40 basis points more than our guidance of 80 basis points. Revenue benefited from the euro strengthening, but since we are largely hedged for 2017, there is little corresponding benefit in gross profit, which negatively impacts the gross margin rate. Adjusted gross margin for the quarter represents a 30 basis point decrease over prior year, as manufacturing cost reductions and favorable product mix from continued strength in our WATCHMAN and men's health franchises were slightly offset by the gross margin phenomena I just mentioned, as well as onetime unfavorable variances in our Puerto Rico facility due to Hurricane Maria. Due to the great efforts by our team, our Puerto Rico plant is currently running at 90% capacity. While we do not expect any material ongoing impacts as a result of the storm, it remains a challenging situation and, after our number one priority of our employees and their well-being, our key business priorities are continuing to work to eliminate our current dependency upon generators for power, and validating the resiliency assurances we have from our raw materials and component suppliers. We expect our full year 2017 adjusted gross margin to be approximately 72% of sales, which now assumes a negative FX impact of 120 basis points for the year, a 20 basis point increase from the full year 2017 outlook we gave in July. Adjusted SG&A expenses were $783 million or 35.2% of sales in Q3, down 100 basis points year-over-year and at the low end of our guidance range of 35% to 36%. In any given quarter, you may see some variability and seasonality within SG&A, but we remain committed to SG&A optimization through initiatives like expansion of global shared services, end-to-end business process streamlining and automation, and global indirect sourcing leverage. We continue to expect our full year 2017 adjusted SG&A rate to be in a range of 35% to 36% of sales, which at the midpoint would represent a decrease of 60 basis points versus the full year last year. Adjusted research and development expenses were $247 million in the third quarter or 11.1% of sales, which is roughly flat year-over-year, and we continue to expect full year adjusted R&D to be in a range of 10% to 11%. Royalty expense was 0.7% of sales in Q3, which is 20 basis points lower than prior-year, due to a mix of certain product sales and their related royalty rates. But we expect our royalty rate to remain relatively consistent, just below 1% of sales for the full year 2017. As a result, Q3 2017 adjusted operating margin of 25.1% increased 80 basis points year-over-year and it was within our guidance range of 25% to 26%. The improvement over prior year was largely driven by strong operational improvements in our Rhythm Management and MedSurg segment results. The Rhythm Management team delivered an operating margin of 19.4% for Q3, an improvement of approximately 230 basis points over the prior year, as they continue to make great progress on gross margin and focus on expense control. We continue to expect the full year 2017 Rhythm Management operating margin to be approximately 19% to 20%. The MedSurg segment also realized significant year-over-year improvements in operating margin of approximately 170 basis points, delivering operating margin of 32.9% of sales, while continuing to invest in commercial capabilities for key upcoming launches. In the Cardiovascular segment, operating margin of 28.3% represents a decrease of approximately 180 basis points over the prior year due to commercial and development spend, primarily related to building our Structural Heart franchise. In any given quarter you may see some variation in segment operating margin, but Cardiovascular continues to be accretive to total company operating margin. Now, I'll move on to interest and other expense. Interest expense for the quarter was $57 million, roughly flat to Q3 of last year, and our average interest expense rate was 3.7% in Q3 this year compared to 3.9% in Q3 of 2016. Adjusted other expense was $11 million in the quarter, which is consistent sequentially and includes $6 million in equity method dilution from our portfolio of venture investments. As a reminder, our below the line expense is comprised of the dilution from our venture investment portfolio and interest expense as well as costs associated with our FX hedging program. For both full year 2017 and full year 2018, we expect below the line expenses, in aggregate, to be approximately $300 million. Our tax rate for the third quarter was 8.5% on a reported basis and 11.9% on an adjusted basis, below our guidance range of 13% to 14%, primarily due to timing of certain interim items. We now expect the full year adjusted tax rate to be in a range of 12% to 12.5%, which decreases the range by 50 basis points as a result of discretes recognized during the year. Finally, Q3 2017 adjusted earnings per share of $0.31 includes approximately $0.02 of unfavorable foreign exchange, as we expected, and represents 16% year-over-year growth, or 23% growth excluding the impact of foreign exchange. On a reported GAAP basis, which includes net charges and amortization expense totaling $149 million after tax, Q3 2017 earnings per share was $0.20, exceeding our guidance range of $0.16 to $0.18. During the quarter, we continued to make progress on settlement discussions and the claims processing related to our mesh litigation and, as of today, we've entered into or are in the final stages of entering master settlement agreements in principle with certain plaintiff's counsel to resolve approximately 44,000 claims, which represent over 90% of our approximately 48,500 known claims. We remain committed to reducing the risk on our balance sheet and continue to target a resolution of the majority of our remaining mesh claims in 2018. Our total legal reserve, of which mesh is included, was $1.69 billion as of September 30, 2017. Adjusted free cash flow for the quarter was $464 million, compared to $440 million in Q3 last year. And in the quarter, we used cash primarily to fund previously agreed upon legal settlements. As of September 30, 2017, we had cash on hand of $210 million. We continue to expect full year adjusted free cash flow to be $1.75 billion, representing 9% growth in the year, and expect the primary use of the cash generated in 2017 and into 2018 will be to fund mesh legal settlements. We continue to make progress in finalizing the IRS stipulation of settled issues, but now expect the payments for the settlement of approximately $500 million to be made in the first half of 2018 as we continue to work through the calculations and documentation necessary to finalize the agreement. Capital expenditures for the third quarter totaled $60 million. Given recent strategic investments, we now expect capital expenditures for the full year to be approximately $320 million versus our previous guidance of $300 million, but believe we can absorb the increased spend within our cash flow guidance. We ended Q3 with 1.394 billion fully diluted weighted average shares outstanding and we expect a fully diluted weighted average share count of approximately 1.395 million for Q4 2017 and 1.393 billion for the full year 2017. I'll now walk through guidance for Q4 and the full year 2017. For the full year, we now expect consolidated revenue to be in a range of $8.985 billion to $9.015 billion, or $9 billion at the midpoint, which represents year-over-year growth of approximately 7% operationally. Included in this guidance is an approximate 120 basis point contribution from the EndoChoice and Symetis acquisitions, which implies 6% organic revenue growth for the year. We now expect foreign exchange to be a tailwind of approximately $10 million for the full year 2017 and, as a result, we expect to achieve 7% to 8% revenue growth on a reported basis. We're tightening the full year 2017 adjusted earnings per share to be in a range of $1.24 to $1.27, representing 11% to 14% adjusted earnings growth, and now assume the full year negative impact of foreign exchange will be approximately $0.07 to $0.08. On a GAAP basis, we now expect earnings per share to be in a range of $0.71 to $0.75. Now, turning to Q4 2017, we expect consolidated revenue to be in a rage of $2.345 billion to $2.375 billion. This represents year-over-year growth in a range of 5% to 6% operationally and 4% to 5% organically, and it's a slight acceleration sequentially given the Q4 total company comparable that is 120 basis points higher than our Q3 comp. In Q4, we expect an approximate 130 basis point contribution from acquisitions and expect the foreign exchange impact on revenue to be a $40 million tailwind. For the fourth quarter, adjusted earnings per share is expected to be in a range of $0.32 to $0.35 per share, representing 7% to 17% adjusted earnings growth and includes $0.01 to $0.02 of negative FX impact. GAAP earnings per share for the fourth quarter is expected to be in a range of $0.19 to $0.23 per share. Please check our Investor Relations website for Q3 2017 financial and operational highlights, which outlines Q3 results as well as Q4 and full year 2017 guidance, including P&L line item guidance. So, with that, I'll turn it back to Susie, who will moderate the Q&A.

[Susan Lisa:]

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

[Operator:]

And we'll go to Mike Weinstein from JPMorgan. Please go ahead. [Technical Difficulty] (28

[Operator:]

Pardon me. We'll go to David Lewis with Morgan Stanley. Please go ahead.

[David Ryan Lewis:]

Can you hear me?

[Susan Lisa:]

Yes. (30

[David Ryan Lewis:]

I am the lucky winner. Okay. So, let me kick it off here with a couple questions. Maybe I'll just keep asking, because I'm the only one who can talk. But just two questions, one for Dan and one for Mike. So, Dan, a couple things. You did bring up momentum improving in the fourth quarter. I just wonder if you could highlight what gets better. And you also shared with us at Analyst Day some specific commentary for 2018

[Daniel J. Brennan:]

Sure. I'll start with the second one. No update to that. We obviously have not issued guidance yet for 2018; would expect to do that in early 2018. So those numbers that we had given as goals at Investor Day are still good. Relative to Q4, we've guided to Q4 organic revenue growth of 4% to 5%, so the midpoint is 4.5%. So yes, there is, I would say, a slight acceleration if you take the midpoint of our range at that 4.5% versus the 4.3% we posted in Q3. But really, the key point to note is the comp, as we mentioned. The growth comp for Q3 was 9% and it's a little bit over 10% in Q4, so I think that gets at the acceleration portion for Q4. Broadly, the biggest driver from Q3 to Q4 is CRM. We don't expect to be down 1% in CRM in the fourth quarter, especially with the momentum of the RESONATE launch and our MRI safe defibrillator portfolio in the U.S. So, I'd say that's probably the biggest driver of the momentum from Q3 to Q4.

[David Ryan Lewis:]

Okay. Very helpful. And then, Mike, just want to clarify some things on LOTUS. So, the slight delay into the first quarter, you talked about platform enhancements. So, how much of this is – is it new platform enhancements, additional required documentation or is it simply a longer than expected standard process for Europe? And just U.S. PMA timing, is approval mid-2018 still a decent estimate? Thanks so much.

[Michael F. Mahoney:]

Yes, I'll start with the second one. Yes, we haven't changed our timelines for U.S. approval to be mid-2018. So, we stay on track for that. There's a potential that the actual submission may slip into January, but we're comfortable with our timeline for approval mid-2018 and launching and starting to see a nice impact in the U.S. second half of 2018. No. In Europe, it really comes down to very small minimal impact to our overall business in Structural Heart franchise. And so what we want to do is ensure as robust a possible manufacturing and quality control process, given the importance of the platform, and we're just continuing to take a long-term view of this. And depending on the review time needed by the European regulators, we expect to launch LOTUS Edge in Europe in first quarter 2018. So, the bulk of it really is ensuring sound manufacturing and quality control, and we estimate a first quarter 2018 launch.

[David Ryan Lewis:]

And Mike, were there any changes to the device inter-quarter that necessitated this move?

[Michael F. Mahoney:]

No, we haven't made any technical changes beyond the pin pull fix that we've discussed. It's more scalability of our operations and supply chain and quality capabilities.

[David Ryan Lewis:]

Great. Thank you very much.

[Operator:]

Thank you, and we'll go to the line of Mike Weinstein with JPMorgan. Please go ahead.

[Michael Weinstein:]

Perfect, can you hear me okay?

[Susan Lisa:]

We can.

[Michael Weinstein:]

Mike, just to follow up with that and flesh that out if you can, what are you referring to in scalability of the operations on LOTUS?

[Michael F. Mahoney:]

Simply, as we look at the – we talked about the end of the line QC testing that we've put in place that's automated, as well as testing along the lines of it in different increments, as well as ensuring we have the sufficient design builds for the number of devices needed for the PMA submission. So, it's design builds as well as enhancements to the quality control and scalability of the line. And so, with that, as said, we don't see a delay in our U.S. approval and we see potentially a 90-day delay in terms of our European launch.

[Michael Weinstein:]

Okay. And so, the people just want to know what's the risk of another delay here happening. Do you just want to characterize that?

[Michael F. Mahoney:]

We feel comfortable with it. So, we haven't projected a delay to the U.S., which is the biggest market. We've exceeded our Structural Heart guidance, we estimate, for the year. The only impact, which we think is quite minor, is in Europe, which is potentially a 90-day delay. And so, we debated forever whether we should just say January or first quarter; we landed on the first quarter. So, we feel like a 90-day delay in Europe is an accurate date and we haven't delayed our U.S. launch. And in the meantime, we exceeded expectations with WATCHMAN as well as ACURATE.

[Michael Weinstein:]

Okay. Let me – Dan, just one question on 2018. I heard your answer to David that – the dollar has moved since the June analyst meeting. You haven't gotten any benefit of that on the bottom line in 2017. Does that help you at all relative to that $0.05 headwind you called out for 2018?

[Daniel J. Brennan:]

Yes. Mike, I think that's a good point. As the rates have moved in 2017 and we're largely hedged in 2017, obviously, as we head into that year, we haven't seen a benefit. And actually, from a gross margin rate perspective, we've actually seen it go the other way on us. I think it's fair to assume our hope is that if rates were to stay where they are that we might see a little improvement against that $0.05 that we gave you of negative FX at Investor Day.

[Michael Weinstein:]

Okay. Thanks. I'll let some others jump in.

[Michael F. Mahoney:]

Thanks, Mike.

[Operator:]

Thank you. And we'll go to Bob Hopkins with Bank of America. Please go ahead.

[Robert Hopkins:]

Great. Thanks for taking the question. So just to – sorry to beat the dead horse here on LOTUS, but it's obviously such a key pipeline for you. So, I'm just curious to see what exactly changed from your kind of previous guidance, like what exactly is causing this? Is it something that you guys have decided to do or is it something that's been sort of mandated by regulators that you have to do?

[Ian Meredith, M.D., Ph.D.:]

Perhaps, I can take that actually, Bob. This is Ian Meredith here. So, as you know, we are well out of the starting gate with the regulatory approval processes, both Europe and indeed for the PMA. We have the PMA submission in the U.S. We have two of the three modules already submitted, including the clinical module, and the clinical module is one that might be the normal stumbling block. That's out there. And the technical data, as Mike said, will be submitted by year-end or possibly in January, and we're just trying to meet the number of design builds to provide that technical information. In Europe, we're working very closely with our notified body to ensure LOTUS Edge notification of change reflects the regulator's requirements in advance of the new medical device regulation framework that will come into place 2019 to 2020. So, I think the timeline is in our hands and I think the processes Mike outlined before really characterize the minor delay.

[Robert Hopkins:]

Okay. Great. Thank you for that. And then, Mike, one bigger-picture question for you on a couple of issues that have been swirling around the last month or two. I'd love to get your view on the outlook for growth in your business in China, given some of the changes that have been going on in China, or proposed changes from a kind of a national pricing perspective. What's your outlook for China in light of those potential changes? And any update, also, on kind of the national coverage decision determination that'll be made in late November on ICDs? Thank you.

[Michael F. Mahoney:]

Yes. So, we continue to see very strong growth in China. We're up 18% in the Emerging Markets and over 20% growth in China, again. And really, our business in China is really being diversified beyond just drug-eluting stents. So, some of the pricing, tendering and so forth you see in drug-eluting stents potentially could have an impact on our price, which we've already baked in to lots of our guidance that we gave at Investor Day. But also, that's offset by volume as we continue to increase our commercial distribution reach, and now we're playing in tenders and provinces that we never had in the past. So, we think our volume and distribution reach will offset any potential price declines in DES in China. And then, we continue to register new products in complex coronary. But more importantly, we just continue to diversify beyond DES in China. WATCHMAN's doing quite well for us at nice ASPs. Our whole MedSurg business was very underweight there a few years ago. Now, Endo/Uro/Neuromod are gaining traction, as well as our PI business. So, we really don't see in our projections a change of our kind of 15% growth commitment coming out of the Emerging Markets over the next couple of years.

[Robert Hopkins:]

Great. That's very helpful. Thank you.

[Operator:]

And we'll go to...

[Susan Lisa:]

Sorry, Stacy. One second. On the NCD, Ken?

[Kenneth Stein, M.D.:]

Yes, Bob. It's Ken. Just quickly on the NCD, we're looking forward to the revised national coverage decision. As you know, the existing NCD is quite old at this point and really sort of just hasn't kept up with professional society guidelines and appropriate use criteria. We have urged CMS reserve coverage for the currently covered patient populations, but also just to clarify reimbursement around some of the edge cases that got caught up in the DOJ investigation a few years back. And we're optimistic that the results are going to enable physicians to use the devices where appropriate and where indicated under current professional guidelines.

[Operator:]

And we'll go to Rick Wise with Stifel, Nicolaus. Please go ahead.

[Frederick Wise:]

Hi. Good morning, everybody.

[Michael F. Mahoney:]

Rick.

[Frederick Wise:]

Mike, maybe start off with some (41

[Michael F. Mahoney:]

Yes. Candidly, Symetis has outperformed our expectations, and its potential impact, globally, we're much more bullish on as part of our TEVR strategy, quite frankly, than versus we first acquired it. So today we're primarily in Germany and some of the Nordic countries, and we're expanding. We're getting out of some distribution arrangements that were previously set. We're working through that this year and early part of next. And we're enhancing our direct sales force with the Symetis platform. So, we'll seek to provide potentially more specific guidance on Structural Heart at the next earnings call. We'll detail out what our plans are for 2018. But essentially, we've been able to deploy the bulk of our Structural Heart commercial organization and clinical over to Symetis while we're enhancing the LOTUS valve and bringing that back to Europe in first quarter 2018, and Europe and U.S. approval by second half – second quarter next year. So, the valve is doing very well. And I think to speak to that, there was just an interesting article written yesterday in JACC Magazine, JACC, that maybe Ian can highlight a bit.

[Ian Meredith, M.D., Ph.D.:]

Yes. Thanks, Mike. Rick, we continue to be very excited about the progress of the ACURATE platform in Europe. And as you know, the SCOPE I trial, which is a randomized, multi-center, head-to-head trial comparing S3 versus ACURATE, is going extremely well in the countries that it's in. And indeed, it's on target to complete its enrollment by the middle of next year. The SCOPE II trial, which is a randomized, head-to-head trial against the Evolut R or PRO platform is also doing well, and we expect that to complete enrollment in the middle of the year. As well as that, Mike just mentioned there was a nice publication in JACC

[Frederick Wise:]

Now, that's real helpful. Just one follow-up on pacers. The 4% decline sort of stands out this quarter. Maybe I missed it, but remind us the issues here. Is it competitive dynamics, product approval timing, and just where are we there in terms of getting that back on track? Thank you.

[Michael F. Mahoney:]

Yes. So, Pacer for the quarter, we really anniversary – quite frankly, it's more of a comp issue. We've anniversaried some tough comps with the pacer growth that we had last year, and so we expect that to improve. But really, it was a comp issue for the quarter and it was offset by our strong growth in ICD, which is up 1% for the quarter, really being fueled by S-ICD. And the quarter really didn't reflect any Resonate benefit beyond what we saw in Europe – sorry, European's CRM business grew nicely on the heels of Resonate, which we will launch in – with earnest throughout 2018.

[Frederick Wise:]

Thank you.

[Operator:]

And we'll go to Glenn Novarro with RBC Capital Markets. Please go ahead.

[Glenn John Novarro:]

Hi. Good morning, guys. Can you hear me, okay?

[Michael F. Mahoney:]

Hi, Glenn.

[Daniel J. Brennan:]

Good morning, Glenn.

[Glenn John Novarro:]

Great. Thanks. I want to focus on the ICD franchise. So, congratulations, you got MRI safe approved sooner than expected; at least, sooner than we thought. And if I go back to the impact of MRI pacing on your business – over a year ago, the business prior – your pacing business prior to MRI approval was declining, and then it started growing double-digits. So, wonder if you can help us think about how your ICD franchise should grow going forward now that you have MRI safe in the marketplace. And then, as a follow-up, at your analyst meeting back in June you talked about a replacement headwind for the U.S. ICD business for next year. Is that still on track, and can you remind us the impact for 2018? Thanks.

[Michael F. Mahoney:]

Sure. So, we're very bullish on our position, particularly in Defib, as we close out 2017 and enter in 2018. As we articulated, that Resonate platform not only offers that MRI capability, but we believe that HeartLogic, that Ken can probably detail out a bit more, is a highly differentiated diagnostic tool for heart failure physicians that we'll be doing a number of clinical studies on. Then, you combine it with a longevity benefit. So, I think we're really well positioned with Resonate and S-ICD to take share in Q4 as well as throughout 2018 in Defib, which is clearly – is the highest profit margin business within CRM versus Pacer. So, we don't expect this to have the same level of growth rates that we saw when we had the Pacer MRI, because we had this MRI compatibility strategy with our current ICD and CRT-Ds. But nonetheless, we do expect to grow faster than market in Defib and expect faster growth in fourth quarter and in 2018 than we saw in 2017 in that business. And that'll also be combined with some benefits of a – more of a tailwind in replacements, which we talked about being about 100 basis points to CRM. So, we think we're very well positioned in the high margin Defib business with S-ICD and Resonate, as well as the tailwind, and also our strength in the EP business, which is up 18% in the quarter.

[Glenn John Novarro:]

Great. Thanks for taking my question.

[Michael F. Mahoney:]

Yes.

[Operator:]

And we'll go to Larry Biegelsen with Wells Fargo. Please go ahead.

[Lawrence Biegelsen:]

Hey, good morning, guys. Thanks for taking the question. So, two for me. I wanted to start with – what struck me in the quarter was all of the regions except the U.S. accelerated on an organic basis. So, the U.S., I think, went from 7% to 2.8%. And I know you said weather was a pretty minor impact, but the amount of the impact, I think, was lower than some other companies have called out. And I guess my question is why the deceleration in the U.S.? And do you expect a benefit from Medtronic's issues in any business in the fourth quarter? And I had one follow-up.

[Michael F. Mahoney:]

Yes. We didn't really want to overplay the weather card. We thought it was kind of 10 basis points to 20 basis points in the quarter, so had some impact and – but our teams did a really nice job. It had some impact on procedures, clearly, in Houston and in Florida. But overall, I think it just shows the balance and strength of the company, that diversified growth across Europe and Asia-Pac, and also, particularly with Europe's growth, which was a 9% operational growth with a benefit of a number of our new platforms, with the Eluvia, the DES, and the DCB, with the Resonate platform launching more quickly in Europe, as well as the impact of Symetis, as well as the growth of EP; it was significant in Europe. And again, all those platforms are coming to the U.S. So it gives us a lot of optimism for the U.S. growth as we head into 2018, 2019 and 2020 on the heels of these platforms that are performing very well in Europe. So, will there be upside from Medtronic's challenges? I think all companies have had challenges with Puerto Rico, and I think our team's done a really good job of limiting supply outages and having terrific contingency plans and backup resiliency plans in order to minimize those impacts that you're maybe seeing more strongly from other companies.

[Lawrence Biegelsen:]

Thanks. And then, Ian, I wanted to ask you one question. When you were asked this a couple quarters ago about LOTUS versus Symetis and the share, I think you said you expect them to be roughly 50/50 and it might have taken some people by surprise. I'm just wondering, at this point, do you still expect it to be 50/50 or is Symetis maybe picking up more, in your view? Thanks for taking the questions.

[Ian Meredith, M.D., Ph.D.:]

Thanks, Larry. Probably, it's hard for me to comment fairly on market share. Obviously, you can see that ACURATE is doing very, very well in Europe. It's a very popular platform. I think it'll play out over time what the market share will be.

[Lawrence Biegelsen:]

Fair enough.

[Michael F. Mahoney:]

Yes. I guess it just speaks to why we acquired Symetis in the first place. And we've talked about it for a while. We think the data for Symetis is very compelling, and Ian articulated that in terms of its performance against the best valves that Edwards and Medtronic has. We'll have a trial that will report that out. So, we have a lot of confidence in the clinical capabilities of Symetis and we have tremendous confidence in the unique abilities of LOTUS. And so, combined in a $5 billion market, which is a very small number for us today, we think it gives us the most unique growth profile in Structural Heart combined with WATCHMAN. And we're in the – I think we're not even – we're probably in the top of the first inning, still, in terms of our LOTUS opportunity as well as Symetis.

[Lawrence Biegelsen:]

All right. Thanks for taking the questions.

[Operator:]

And we'll go to Joanne Wuensch with BMO Capital Markets. Please go ahead.

[Joanne Karen Wuensch:]

Can you hear me okay?

[Michael F. Mahoney:]

Yes. Good morning.

[Joanne Karen Wuensch:]

Wonderful. Good morning. I have two questions for you. The first one has to do with gross margins. The commentary at the Analyst Day would imply a 50 basis point improvement next year, but this year you're absorbing 120 basis points from the FX headwind. And with FX shifting, walk me through, please, why this wouldn't be better next year?

[Daniel J. Brennan:]

Well, obviously, we haven't given guidance yet, Joanne, relative to 2018. You're correct, it's 120 basis point headwind for the full year this year, and I think what's nice is that we basically will have offset that with operational improvements this year relative to the total number. So specific to next year, it's one of the numbers that'll add down to what we give for total guidance for operating margin and earnings per share and such for 2018. But the focus of the team relative to the operational improvements and the value improvement programs that we drive is alive and well. So, we'll need to sort that out relative to what FX will be next year. Again, the hope – as I mentioned to Mike Weinstein's question earlier, the hope is that with the rates where they are, we might see a little bit less of a headwind next year relative to the FX at the bottom line. But we'll give specific line item guidance when we give guidance in 2018.

[Joanne Karen Wuensch:]

Thank you. My follow-up question has to do with – sorry, another LOTUS question – LOTUS in the United States. Assuming the third module goes in at the end of this year or the beginning of next, what are the steps that you need to then take to get a timely mid-year approval for LOTUS in the United States? Thank you.

[Ian Meredith, M.D., Ph.D.:]

Well, once the PMA submission is completed, it will be just a case of answering any questions that are required to complete that submission. And it's just simply a process of dialogue with the FDA. We have frequent and very productive communication with the FDA. So, it's simply a process of meeting their expectations. There's obviously a timeline to the FDA approval process, and in that time we may be required to answer questions.

[Joanne Karen Wuensch:]

But taking it a step further, what about manufacturing, ramp, productivity, sales force training? All that will be set in advance, I assume.

[Michael F. Mahoney:]

Yes. Unfortunately, with the delays, we've had – we have commercial capability ready to go in the U.S. for LOTUS. They've been deployed elsewhere within our Cardiovascular team since they can't, obviously, sell LOTUS at this point. So, we have resources already established and we'll continue to strengthen and build upon that team. So, it won't be a commercial concern for us. And by the time we launch LOTUS in the U.S. at greater scale in the third quarter, we'll have been ramping up manufacturing significantly in the first half. So commercial capabilities and manufacturing should not be a concern for us when we launch in the U.S.

[Joanne Karen Wuensch:]

Terrific. Thank you very much. Have a good day.

[Michael F. Mahoney:]

Thanks.

[Operator:]

We'll go to Matt Taylor with Barclays. Please go ahead.

[Matthew Taylor:]

Hi. Thanks for taking the question. I wanted to ask one about the balance sheet and use of cash, given you gave us an update on the settlement today. Can you talk us through a little bit how you're thinking about using your cash flow going forward as you're now going to be kind of out from under this overhang?

[Daniel J. Brennan:]

Yes, Matt. I think we've been pretty public about that in the past, and I don't think that really the timing of the payment for the IRS settlement really changes that. It's M&A and returning cash to shareholders are our two most favored uses of cash. I think we've balanced that well over the last four or five years, while at the same time settling a lot of legacy litigation liabilities and such. So, as we look forward to 2018, 2019, 2020, think back to Investor Day, we had talked about 90-plus percent of our cash over the next three years being able to go towards M&A and share repurchase over that timeframe, where it's been kind of the reverse of that over the last three or four years. So, I would look for M&A and share repurchase over that timeframe. And from an M&A perspective, there's plenty of opportunities out there to support our overall strategy of category leadership. I think you've seen that this year with a couple of the more notable ones we've done with Symetis and Apama, and I'd look for more of the same.

[Matthew Taylor:]

Thanks. And one follow-up, I just wanted to ask about your mitral program and how you're thinking about mitral options in repair and replacement? It's been a little bit of time since we've gotten an update there. Can you talk about what you have and if you need to add anything to the portfolio to be competitive?

[Michael F. Mahoney:]

Sure. So, our focus clearly has been on the TAVR platforms, as you know, with LOTUS as well as ACURATE, as well as our WATCHMAN. And we think the size of the TAVR market is well over $5 billion, likely. And the WATCHMAN market, every point of penetration is $250 million; and, we continue to press on clinical and portfolio advantages there. So, we've been investing in the mitral area more with our VC investments, some of which have not been disclosed. So, we're interested in repair as well as replace. And we've really done more work on that through VC investments that we've made as well as a few internal, organic R&D opportunities. So, more to come on that. It's an area that we're interested in. We do think it'll be a significant market. We do think it'll play out longer than TAVR, given that it's more fragmented. So, expect us to continue to enhance our capabilities in that area, but it's not as much of a priority versus our atrial appendage and TAVR programs.

[Matthew Taylor:]

Okay. Thank you, guys.

[Susan Lisa:]

All right. Stacy, with that, we'll conclude the call. Thank you very much, everyone, for listening in today. Apologies for the technical issues and, Stacy, if you could please give the replay information.

[Operator:]

Sure. Ladies and gentlemen, this conference will be available for replay after 10