Boston Scientific Corporation
Q2 2013 Earnings Call Transcript

Published: 25 Jul 2013

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Boston Scientific Second Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn conference over to your host, Michael Campbell. Please go ahead.

[Michael Campbell:]

Thank you, Greg. Good morning, everyone, and thanks for joining us. With me on today's call are Mike Mahoney, President and Chief Executive Officer; and Jeff Capello, Executive Vice President and Chief Financial Officer. We issued a press release earlier this morning announcing our Q2 results for 2013, 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 Financial Information. The duration of this morning's call will be approximately 1 hour. Mike will begin our prepared remarks with an update on our business progress and his perspectives on the quarter and for the remainder of 2013. Jeff will then review our Q2 financial results and business performance as well as Q3 and full year 2013 guidance. We will then open the call up to questions. During today's Q&A session, Mike and Jeff will be joined by our Chief Medical Officers, Dr. Dawkins and Dr. Stein. Before we begin, I'd like to remind everyone that 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; procedural volumes and pricing; clinical trials; cost savings and growth opportunities; our cash flow and expected use; our financial performance, including sales, margins, earnings and other Q3 and full year 2013 guidance; as well as our tax rates, R&D spend and other expenses. Actual results may differ materially from those discussed in our forward-looking statements. Factors that may cause such differences include those described in the Risk Factors section of our most recent 10-K and subsequent 10-Qs and 8-Ks 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?

[Michael F. Mahoney:]

Thank you, Michael, and good morning, everyone. I'll begin today with some comments regarding our second quarter performance, and Jeff will review the financials in more detail later on the call. So overall, it was a strong quarter for Boston Scientific. Our team is beginning to build momentum, and we're executing against our global strategy. So key highlights for the second quarter include the following

[Jeffrey D. Capello:]

Thanks, Mike. Let me begin by providing some overall perspective on the quarter before getting into the details. We generated adjusted earnings per share of $0.18, which was above the higher end of our guidance range of $0.14 to $0.17 and above consensus. This represents improved profitability from the prior year, which is primarily driven by continued gross margin expansion including a $0.01 benefit associated with an adjustment related to our PROMUS profit share agreement, lower operating expense and fewer shares outstanding. This was partially offset by increased investments in our strategic growth initiatives and a $0.01 impact from the medical device tax. In addition, we generated adjusted free cash flow of $388 million and used $100 million to repurchase of approximately 12.5 million more shares in the quarter. Now I'll move to the detailed review of our business performance and operating results in the quarter. For the second quarter 2013, consolidated revenue of $1,809,000,000 represents a decrease of 1% on a reported basis. And excluding the impact of foreign exchange and the divested Neurovascular business, we grew the business 2% this quarter. The actual headwind from foreign exchange on sales was approximately $40 million as compared to the prior year and was $10 million higher than what we had assumed in our second quarter guidance range. In Interventional Cardiology, worldwide revenue came in at $520 million in the second quarter, representing a constant currency decrease of 3% compared to the second quarter of 2012. Total international IC revenue grew by 4% with the Europe and Asia Pacific each growing 5%, including China and India growing by 75% and 41%, respectively, all on a constant currency basis. Worldwide DES revenue came in at $287 million in the second quarter, representing a constant currency decrease of 7% compared to the second quarter of last year. U.S. DES revenue was $117 million in the quarter, representing a decline of 16% compared to the second quarter of last year. This decrease was primarily due to lower share due to competitive products, softness in PCI volumes and lower ASPs. We estimate that our U.S. DES share was stable sequentially in the mid-30s for the second quarter. International DES sales of $170 million remained flat in constant currency compared to the second quarter of last year, driven by over 60% growth in the emerging markets of China and India, primarily offset by pricing declines in Europe. Worldwide non-stent Interventional Cardiology was up 3% in constant currency. With the recent launches of several new products along with the ongoing success of our BridgePoint Medical suite of CTO devices, we expect to see continued improvement in this business over the course of 2013. Now moving on to CRM. Worldwide revenue was $475 million in the second quarter, representing a constant currency decrease of 2% compared to the second quarter of last year. In the U.S., CRM revenue of $282 million was down 1% as compared to the second quarter of last year. International CRM sales of $193 million were down 3% in consent currency compared to the prior year quarter. On a worldwide basis, defib sales were $342 million in the second quarter, which was down 3% in constant currency from last year. In the U.S., defib sales were $213 million, this was down 3% compared to the second quarter of last year. International defib sales of $129 million represented a 3% decrease in constant currency from Q2 of last year. Worldwide pacer sales increased 1% on a constant currency basis as compared to Q2 2012, driven by continued strong performance from our INGENIO family of pacemakers and CRTP devices. In the U.S., pacer revenue of $69 million was up 7% compared to Q2 last year, while international revenue declined 4% in constant currency for the quarter. Additionally, our worldwide Electrophysiology business remained relatively flat on a constant currency basis compared to Q2 last year. Our Peripheral Interventions business delivered growth above the market with worldwide revenue up 5% in constant currency compared to Q2 2012. Global growth was driven by stents, balloons and renal denervation. Our Endoscopy business continue to grow faster than the market and had another solid quarter with worldwide sales up 8% in constant currency led by 11% revenue growth internationally. In constant currency, our worldwide Urology/Women's Health business had growth of 1% in the quarter. However, sales growth was particularly strong internationally at 7% compared to the second quarter of last year. Our Urology business maintained a leadership position with 3% worldwide constant currency growth in the quarter, driven by strong international revenue growth of 5%. Our Women's Health revenues declined 6% on a worldwide constant currency basis as compared to the prior year. However, our international business delivered 6% growth on a year-over-year basis. We continue to see pressure on elective procedures due to concerns around the use of surgical mesh for pelvic organ prolapse, specifically in the U.S. market. However, we expect this market to begin to stabilize as we move past the second anniversary of the July 2001 FDA safety notification. Our Neuromodulation business delivered a solid 21% worldwide sales growth, driven by strong market uptake of the Precision Spectra Spinal Cord Stimulation system and very strong commercial execution strategies. We expect to build on this momentum in the second half of 2013 when we expect Precision Spectra to be fully launched. Now moving on to sales. Adjusted gross profit margin for the second quarter was 70.8% or 230 basis points higher than the second quarter of last year. The increase was largely attributable to benefits from our value improvement programs and a onetime benefit of approximately 90 basis points associated with an adjustment related to our PROMUS profit share agreement. These benefits were partially offset by price erosion and product mix. Looking forward, we expect adjusted gross margins to be between 69% and 70% for the second half the year. Adjusted SG&A expense were $650 million or 35.9% of sales in the second quarter of 2013 compared to $641 million or 35.1% in the second quarter 2012. During Q2 2013, the impact of our cost-saving programs were offset by continued investments in our strategic growth initiatives and costs associated with expanding in emerging markets. In addition, SG&A expenses in Q2 2013 include the impact of approximately 100 basis points from the medical device tax under the U.S. Affordable Care Act. Currently, the accounting treatment for the medical device tax is not consistently applied across the industry. We expect to absorb the first full year impact of the medical device tax during 2013. Looking ahead, we expect adjusted SG&A as a percent of sales to be between 36.5% and 37.5% in the third quarter this year, as we expect to continue investing in our strategic growth initiatives in preparation for the commercialization of several new technology platforms and build our capabilities in emerging markets. Adjusted research and development expenses were $223 million for the second quarter or 12.3% of sales. This compares to $213 million in the second quarter of 2012. We expect R&D spending to be in the range of 12% to 13% of sales in the third quarter this year, as we continue to transform our R&D organization and refocus our spending to drive innovation and growth. Royalty expense was $47 million or 2.6% of sales compared to $48 million in the second quarter of last year. Consistent with the prior year, we expect royalty expense to step down in the second half, as we reach lower per unit royalty rate tiers on our annual volume-based arrangements. On adjusted basis, pretax operating income was $361 million or 20% of sales, up 70 basis points from the second quarter of last year. The increase in adjusted operating margins was primarily due to higher adjusted gross margins, partially offset by an increase in R&D expense and the impact of the medical device tax. It is important to note that the medical device tax negatively impacted our operating margins by 100 basis points this quarter. GAAP operating income, which includes GAAP to adjusted items that had a net negative effect of $141 million on a pretax basis, was $220 million in the second quarter of 2013. The primary GAAP to adjusted items in the quarter were

[Michael Campbell:]

Thanks, Jeff. Greg, let's open it up to questions for the next 20 minutes or so.

[Operator:]

[Operator Instructions] Your first question comes from the line of Glenn Novarro from RBC Capital Markets.

[Glenn J. Novarro:]

Two questions on the stent side. By our modeling, it looks like stent share both U.S. and globally has finally stabilized, and I'm wondering what this is a function of. Is it a function of just Resolute Integrity of the trial ending there? Is it Promus PREMIER? I'm kind of wondering if it's all the new products that you're launching into the cath lab like CTO that's just driving overall momentum. So if you could give us some additional color? And on a separate note, what would the impact of Germany be going forward?

[Michael F. Mahoney:]

Mike Mahoney here. Thanks for the question. I think in terms of the overall worldwide DES market, we see the kind of market in the low single digits in terms of our performance, and again, choose the market, we see the price volume in the kind of 7% to 8% range and price impact for the overall market in the low single -- mid-single digits. In terms of our performance with the DES market, we're very encouraged by our European performance. So in Europe, we're launching our new platforms. So we have SYNERGY, and we also have Promus PREMIER. And we actually had growth both in Europe and in the Asia-Pac markets for the first time in a number of years. That's an encouraging trend as we grow share in Europe, and also, those products will be coming to the U.S. And they also reflect the broader portfolio strategy that we have in our other IC businesses with our CTO devices that you mentioned and also the additional platforms that we're launching in IVUS. So we're encouraged by the momentum we're seeing outside the U.S. where we're launching our first products. And in the U.S., we've essentially stabilized our share, and we are benefiting from the annualization of the comparables of the launches that you mentioned earlier.

[Glenn J. Novarro:]

And then just...

[Jeffrey D. Capello:]

Glenn, just let me just jump in for a minute to add to what Mike had said. I think the other dynamic that's really starting to benefit is the emerging markets. We've talked about investing aggressively in areas like India and China and some of the other areas. And those areas are growing very well. So if you look at kind of Asia Pacific as a whole, we are probably up mid-single digits plus within DES. So we continue to believe, depending on kind of what happens from a pricing perspective, that the unit growth kind of the emerging markets, subject to kind of pricing results is really going to help the market and us disproportionately as we start to get more of our fair share of the market share in those areas.

[Glenn J. Novarro:]

Is this what's helping offset the loss of sales in Germany in the second half of the year?

[Jeffrey D. Capello:]

Well, I guess a couple of comments on the German side. So the German market, we had made some conscious decisions based on pricing and based on our portfolio, which we think is differentiated, not to place heavily in Germany this year, and a lot of that's price driven. As a result, our inability to sell in Germany hasn't impacted as much as people may have thought. And in a previous exchange, somebody had asked me how big could Germany be, and I think we kind of landed that it's less than $40 million for the full year. So we're able to grow through that. And of course, we think that our intellectual property position is well positioned, and we intend to vigorously defend ourselves and try to get that appealed in reverse. So despite the impact on Germany, which is not really that significant, the business is performing pretty well.

[Glenn J. Novarro:]

And can I just ask one question to Dr. Dawkins on SYNERGY? I get a lot of pushback on SYNERGY relative to Absorb with investors asking is SYNERGY just kind of an incremental gain overcurrent DES and why would a doc put in SYNERGY when you could put in Absorb that'll fully disappear. So SYNERGY is in Europe, and I'm wondering if Dr. Dawkins can give us some feedback on how the doctors are viewing SYNERGY. Is it a slight incremental benefit or gain from a technology standpoint over current DES? Or are they viewing this as a major leap forward?

[Keith D. Dawkins:]

I think the majority of physicians still put acute performance top of their list of metrics when they judge the stent. And obviously, with the modified Element platform, the key performance of SYNERGY, we're very -- we like a lot as do the physicians. They also like the concept of the polymer and the drug disappearing at the 3 months time point. And that obviously is not the case for the BBS as you brought up, where the stent struts and therefore, the polymer is still visible in many patients for 2 to 3 years. So that allows us to explore formally short DAPT. And we know that the overall cost of a DES procedure relates more to the medication than the stent itself. And we -- there is no study currently that is sufficiently par to formally explore short DAPT and the impact of stent thrombosis, bleeding and the financial consequences. And we're going to explore that formally. We have more than 14,000 patients planned for enrollments in registries and randomized trials looking at SYNERGY in a variety of complex patient subsets, and this clinical portfolio will support the SYNERGY launch in a wide variety of patients. So we think doctors like a acute key performance. They like the drug and polymer disappearing early. And we will confirm that in a number of important clinical trials.

[Operator:]

Your next question comes from the line of Rick Wise from Stifel.

[Frederick A. Wise:]

Jeff, can you talk a little bit more about gross margin? It was especially strong, above 70%. I appreciate there are a lot of moving pieces, but can you give us -- help us understand a little more carefully the 90-basis-point positive adjustment for PROMUS agreement? A couple of things, is that a onetime thing? Is that going to be with us in some way in the future? And can you sustain gross margin at the 70%-plus level? Are we at a new high level sustainably going forward? How do we think about it?

[Jeffrey D. Capello:]

Yes, thanks, Rick. So let me take you through kind of a bridge, and as part of that, I'll pick up your question on the Abbott true-up. So I would say the midpoint of our guidance range for gross margins for the quarter was about 68.5%. We guided from 68% to 69%, so 60.5% -- 68.5%. So we're a couple of hundred basis points higher than we guided to. Clearly, one impact is the true-up of the Abbott supply arrangement. So as, I think, most people know, we were procuring PROMUS from Abbott, and we estimated our price from them, the cost of the device, and we had an arrangement, where on a retrospective basis, they looked at their actual cost base, we true it up, kind of our estimate to the actual. So we've now done, in this quarter, the final true-up. In that final true-up, we had a benefit of roughly 90 basis points flow through our gross margin. That's a onetime benefit. It would not recur going forward. So there's a 90-basis-point benefit in the gross margins for the second quarter we do not expect to recur. So that explains a little bit of why the margins were a little bit stronger. However, the other hundred basis points plus was pretty good news for the business, and this really comes into us in 3 different areas

[Frederick A. Wise:]

That's very helpful. And turning -- second question on the subcu. Mike, you talked about the subcutaneous ICD, and your supply constraints went by a little fast for me. I want to make sure I understood. By the late third quarter, you'll be fully supplied. And did I hear you correctly? Fourth quarter GEN 1.5 launches. But just, in general, can you help us understand when will the subcutaneous ICD be fully rolled out and available to whoever wants it? And it sounds like that 4Q GEN 1.5 is a little faster, if I understood you, than we thought before?

[Michael F. Mahoney:]

Sure. In third quarter, we'll be reentering the U.S. with S-ICD, primarily with our IDE sites, so we'll begin shipment again of S-ICD, call, late third quarter. And by fourth quarter, we'll be able to ramp up more significantly and also expand our commercial presence in the U.S. and globally beyond our trial centers. So if this ramp up in the third quarter, in the fourth quarter we'll be able to drive significant more supply than the marketplace. And also in fourth quarter, we'll launch our 1.5 release, which would further enable greater capabilities for supply going into 2014 and improve the cost profile of the platform.

[Frederick A. Wise:]

So full rollout, Mike, again, you think is going to take another 6 or 12 months beyond that? Or how do we think about that?

[Michael F. Mahoney:]

Well, we won't be supply constrained as we head into the fourth quarter. So in third quarter, we'll begin launching S-ICD again. We will not be supply constrained as we move into the fourth quarter and into 2014.

[Operator:]

Your next question comes from the line of David Lewis from Morgan Stanley.

[David R. Lewis:]

Jeff, maybe a quick question for you and then a follow-up for Mike. But one of the interesting things is the segment margins this quarter. I think if you adjust for PROMUS, it looks like the standout this quarter was MedSurg operating margin expansion. Maybe help us understand what's the continued strength in MedSurg margins now I think up over 30%. And then the interesting thing is CRM margin's obviously a focus for investors. CRM did a lot better this quarter guiding to improving in the back half. What are sort of the catalysts for CRM margin improvement? And what's that balance between top line's getting better, but you're still investing in that business?

[Jeffrey D. Capello:]

Okay, David, thank you. So yes, as you look -- dig into the press release, our MedSurg margins went 27.6% up to 32% so pretty impressive performance within a quarter. One thing to recognize in the MedSurg business is you've got some larger businesses like Endoscopy that are fairly profitable that we're doing very well that can continue to increase the profitability. But Neuromodulation is a business that, as it grows pretty quickly, has significant leverage from a bottom line perspective because not currently at our average operating margins, but it's coming up pretty quickly. So I think what should continue to happen here in this year and into the future is as Neuromodulation continues to grow and we feel very good about the trajectory within the SCS the Spinal Cord Stimulation and the DBS side, that will grow and operating profit will grow much more quickly. So that'll help the margins, as well Endoscopy and certainly, Urology/Women's Health is opportunity to expand the margins as well. So there's certainly opportunity to push up the margins of the MedSurg, feel pretty good about that. On the CRM side, the margins were down year-over-year, same story as kind of the first quarter. Really, what you see there is investment. Investment in areas like Rhythmia and Cameron are weighing a little bit on the margins as our investments in the EP business, which is lumped in at Rhythm Management. What we do expect though is, over the next 5 years, that 600 basis points that we keep talking about a margin expansion for the whole company, CRM will disproportionately benefit from that because they've got a number of investment programs. What you're seeing so far is all the OpEx. You're not seeing a lot of sales. And as we get back in the market with CRM, as we now have FDA approval for Rhythmia and we have CE Mark, 2014 should be the inflection point from a growth perspective in terms of picking up a lot of sales at pretty good profit margins. And so now you'll have the sales growth with a little bit less OpEx. That's a pretty good equation for us. The other dynamic is we have restructuring programs that we've been running that we updated people on at the end of last year, and certainly, CRM will benefit from those as well.

[David R. Lewis:]

Okay, very helpful and very clear, Jeff. And then, Mike, in terms of the AF opportunity, we didn't get much time about this at the Analyst Day because that business has really come together in the last several months. So as it sits today, including the recently acquired asset, how do you see the addressable market for AF? And can you give us any sense about when is it appropriate to think about what's the market growth rate and whether Boston should be growing above or below that rate and by when?

[Michael F. Mahoney:]

Well, it's an area we've invested quite heavily in over the last 2 years, and we've done it because we like the size of the market. It's $2.5 billion. It's growing essentially double digits, and there's a tremendous amount of synergy with our CRM business. So we like the market, and we like the synergies with our expanded CRM business, as well as the customer. In terms of the portfolio, we'll have a much more meaningful business as we look at closing the Bard transaction, which hopefully will be fourth quarter. So we'll be approaching the $250 million EP business with much more global scale in terms of our commercial efforts in U.S., Europe and Asia Pac. And a really much -- a well-rounded portfolio with a mapping system, the recording devices, the diagnostic catheters and the therapeutic catheters, we're continuing to develop internally here. So our portfolio really will be highly competitive post the Bard close, one of the much stronger commercial footprint. So we respect there are some very difficult and challenging competitors in that market, but we believe the portfolio we pull together in the team is very innovative and very focused and a lot of synergies to work within our CRM business, so we anticipate ourselves will be improving the drug profile of that business.

[Operator:]

Your next question comes from the line of Mike Weinstein from JPMorgan.

[Michael N. Weinstein:]

Let me just follow up quickly, if I could, on the gross margin piece. And, Jeff, could you just walk us through? So you said 90 basis points was the PROMUS catch-up, which we understood. The other, if we looked at last year, so 220 basis points. Could you just break that down maybe how much of that was from as well like FX hedges and how much was from Neurovascular running off? And anything else you can give us, that'd be great.

[Jeffrey D. Capello:]

So if you look from a year-over-year perspective, we're up a couple of hundred basis points from 68.5% to 70.8%. If you look at kind of the impact of -- I'm going to net pricing together with kind of VIP improvements, cost improvements. That was a net benefit of roughly 70 basis points, which is good news for us. That's kind of what we want to see happen, is less pricing pressure and more ability to kind of manage the cost side. It was 100 basis points of -- 90 basis points improvement from the Abbott true-up and about 50 basis points improvement from the Neurovascular divestiture.

[Michael N. Weinstein:]

And FX impact on gross margin?

[Jeffrey D. Capello:]

FX wasn't that significant. We were -- unlike some of our -- some other people in the sector, we hedged, so the foreign exchange rates don't move us around as much.

[Michael N. Weinstein:]

Okay. And then the guidance for the full year, how does FX in the Neurovascular impact the full year? Just trying to find an organic basis here.

[Jeffrey D. Capello:]

Yes, so from an FX perspective, we don't expect it to have a big impact in the back half of the year. And then I believe the Neurovascular divestiture, there's a little bit of benefit in the third quarter, and then that's gone.

[Michael N. Weinstein:]

Okay. Could you just talk about the sustainability of 2 businesses, which were very, very strong this quarter? One, Neuromodulation, which we understand with the Precision Spectra launch. And then the other, I look at the Interventional Cardiology business x coronary stents, the business grew 3% reported this quarter. I assume that's like 5% constant currency. And that sort of business, I think, was down 10% in the first quarter, was down 12% last year. So how does it go from down 12%, down 10% to up 5%?

[Jeffrey D. Capello:]

Yes. So let me start with your last question first. So as you might recall, we kind of targeted investing in the other Interventional Cardiology area a couple of years ago, and it started with kind of looking at our balloons, guidewires, and then the IVUS franchise had been kind of a net share loser for us. And so those are some dynamics that we had that kind of weighed on that side. So what we've done over the past couple of years is we revitalized pretty significantly that segment. We've come up with new balloons, new guidewires, and the other thing we've done is from an IVUS perspective, we come up with our, really our first new catheter in over 10 years and a new software platform, which we really think is going to allow us to reposition that business. And that business was up mid-single digits, and it's a good-sized business for us. So we think we're going to build momentum. And as we talked on the Investor Day, we talked about having FFR capability sometime in '14. So we see that as a good opportunity for us to kind of get back some of the share we have lost. The other dynamic is BridgePoint, the CTO acquisition. That was something we were pretty bullish on that we've been talking about at every public point. We think that really positions us very well to be the provider of choice to treat difficult-to-treat lesions. And we think that's starting to play out, and we think we're going to get more momentum going forward. So credit to the management team and the various individuals running those businesses, this quarter was a strong quarter. We think we can build on that based on all the factors I just listed. The other dynamic I should point out as well is the emerging markets because the emerging markets and this other IC area is a great opportunity for us to kind of continue to grow our share as well.

[Operator:]

Your next question comes from the line of Bruce Nudell from Crédit Suisse.

[Bruce M. Nudell:]

Now that the stocks have kind of revalued to more acceptable levels, I think people are looking at some of the longer-term growth drivers that may be somewhat under the radar. So when we -- specifically, with regards to the S-ICD, like what percent of the patients do you feel, who get ICDs today, would have an equivalent shock burden with the S-ICD? And might that make this a 10% to 20% category rather than a 5% to 10% category? And secondly, with regards to Left Atrial Appendage, given the strong superiority result in PROTECT-AF, you guys have pegged the market at around $500 million. Might there be upside to that? And secondly, are you going to need a panel given the compendium of evidence?

[Michael F. Mahoney:]

Bruce, Ken Stein or Dr. Stein here on the phone.

[Ken Stein:]

Yes, I am. Thanks, Mike. Yes, Bruce, I guess, let me deal first with the S-ICD question, and then we can -- Mike, I don't know if you want me or if you want to take the Left Atrial Appendage question. So yes, in terms of the S-ICD, particularly if you're asking about where it fits long term, right, first of all, let's understand this is going to be used for de novo. It's obviously only going to be used in selected cases for patients who reach need for replacement. And within de novo, right, it clearly is not indicated for patients who need CRT, clearly not indicated for patients with a defined brady pacing indication. But we do believe that it over a long term, particularly as we continue technical iterations to the device that this can become the device of choice for remaining patients who really have no defined need to have a lead within the heart. There's accumulating data, data that we presented from MADIT-RIT, data we presented as a late-breaking trial at HRS this year from our ALTITUDE study, really showing that there's no reason on earth to think that in patients without an indication for pacing that there's any long-term outcome benefit to having a lead in the heart, and there are obviously a lot of advantages to not have a lead in the heart. And as we kind of went through our even our early experience with the first launch of the S-ICD, we were frankly taken aback at how quickly that began to get expanded use within just a general primary prevention population and really, how robust the demand was for us. And obviously, the product is only going to continue to improve as we start to iterate next-generation devices. Left Atrial Appendage, Mike, do you want me to take that?

[Michael F. Mahoney:]

Yes, why don't you just comment on the clinical results that were presented and your thoughts on the approval timelines.

[Ken Stein:]

Yes. So we were -- really couldn't be happier with the long-term 4-year results PROTECT-AF study of the WATCHMAN Device. And I think being able to show for the first time that this is now not only equivalent in outcomes to use of warfarin, but actually is superior to warfarin, both in terms of preventing strokes and also, obviously, at least as important, in improving all-cause mortality, as well as cardiovascular mortality. And we do believe that, that should have an impact on both the pace at which technology will be adopted, where it's proved today and assuming that it does get U.S. approval, as well as I think the role that implanting physicians or referring physicians are going to see for this as an alternative to drug therapy. In terms of timelines, as we've said, we've already submitted to the FDA. It's always hard to predict where FDA is going to be. We're looking towards approval in the first half next year and obviously waiting to hear whether FDA is going to make this go to another panel or not.

[Bruce M. Nudell:]

I guess, Mike, just as a follow-up. I mean, is there upside to that $500 million that you've kind of roughly scaled the market at?

[Michael F. Mahoney:]

We believe so. We've taken the market view on S-ICD up to about $750 million. So we'll be back in the market in full in the fourth quarter, and we do see upside longer term in S-ICD. But also just let me just expand more broadly on your question on the growth profile. Think of 3 major buckets, and Jeff outlined our performance in our MedSurg, Cross, Neuromodulation, PI and Endoscopy. We're growing plus 7%, and we have a number of new product launches, and you see the momentum there in the second half. The second piece is the improving performance of our IC and CRM businesses. And you touched on S-ICD and WATCHMAN. And then these adjacencies, we received, quite frankly, better-than-expected clinical results with TAVR, hypertension, S-ICD in the second quarter. And then the expanding impact of our emerging markets. So those 4 elements really deliver a lot of muscle to the long-term strategic plan that we outlined at Investor Day and give us great confidence in that, as well as the operational -- operating margin improvement opportunities that Jeff outlined.

[Michael Campbell:]

Greg, we're coming close to the hour, so we have time for one more question.

[Operator:]

Okay. That question comes from the line of Larry Biegelsen from Wells Fargo.

[Lawrence Biegelsen:]

Just 2 questions for me. First, mike, it would be helpful to hear from you your M&A focus at this point. You did a lot of technology deals over the past few years, and the Bard deal was bit of a departure for you. And then I had one follow-up question for Dr. Dawkins.

[Michael F. Mahoney:]

Sure. Our M&A strategy, we're always looking for the right opportunities, and as you mentioned, we've done a number of earlier-stage deals in 2012. And those were pointed at faster-growing markets. We're also in markets, the synergies with our existing Boston Scientific business that we can leverage and ultimately, deliver a faster growth profile for the company. And we're really in the middle of the investment phase of those acquisitions and we believe they'll have a growing impact on our revenue and ROI towards the back half of '13 and in '14. So the EP deal, we want to clearly balance our acquisitions. They all want to be in fast-growing markets where we drive synergies. But we'll continue to look for properties like C.R. Bard EP business, where we have quite a bit of leverage with our existing EP business in Rhythm Management area. It complements our businesses, and it would be accretive in 2014. So we'll continue to look for that right balance but ideally seek revenue-seeking opportunities that are accretive to the company.

[Lawrence Biegelsen:]

And Dr. Dawkins, this year, you talked about the controlled rollout of SYNERGY in Europe; next year, the full launch. You've talked about developing some clinical data to show the need for less or shorter dual anti-platelet therapy. Could you give us an update on where you are generating that data, when we might see that and when we might see that data?

[Keith D. Dawkins:]

Thanks, Larry. We've got a number of clinical trials, some that have already started. Some registries, some comparing SYNERGY with other platforms. And obviously, as you well know for the clinical outcomes with clinical endpoints, you usually need to wait 9 to 12 months following the completion of the trial. But we have also invested in some OCT studies where we'll get an earlier endpoint in terms of strut coverage of SYNERGY about the low [ph] and in comparison with other DES. We're encouraged also with the fast recruitments in EVOLVE II. That's the IDE trial, as you know, comparing SYNERGY with PROMUS Element. And we anticipate,, as Mike said, the completion of EVOLVE II in the third quarter this year ahead of schedule. So I think unlike some of the other platforms that we've discussed earlier, we have randomized trial data, and we have large randomized trial, and of course, that on the background of the EVOLVE versus PROMUS trial with just under 30 -- just under 300 patients randomized. So we're building steadily a data set to support SYNERGY, both at the experimental level, at preclinical level and obviously, the clinical level. And so within the next 6 to 12 months, we'll have increasing amounts of data to support SYNERGY worldwide.

[Michael Campbell:]

Okay. With that, we would like to conclude the call. Thanks for joining us today. We appreciate your interest in Boston Scientific. Before you disconnect, Greg will give you all the pertinent details for the replay. Have a great day.

[Operator:]

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