Boston Scientific Corporation (NYSE:BSX)
Q1 2010 Earnings Call
April 27, 2010 8:00 am ET
Larry Neumann – Investor Relations
Ray Elliott - President and Chief Executive Officer
Jeff Capello - Chief Financial Officer
Sam Leno - Chief Operations Officer
Fred Colen - Chief Technology Officer
Hank Kucheman - Executive Vice President and Group President CRV
Mike Phalen - Senior Vice President and President of our Endoscopy
John Pedersen - Senior Vice President and President of our Urology and Women's Health
Joe Fitzgerald - Senior Vice President, and President of the Endovascular
Michael Onuscheck - Senior Vice President and President of our Neuromodulation
Dr. Ken Stein - Chief Medical Officer for CRM
Dr. Keith Dawkins - Chief Medical Officer for our CRV Group
(Operator Instructions) Welcome to the Q1 2010 Boston Scientific Earnings Conference Call. At this time I’d like to turn the conference over to Mr. Larry Neumann.
With me on the call today are Ray Elliott, President and Chief Executive Officer, and Jeff Capello, Chief Financial Officer.
We issued a press release yesterday afternoon announcing our first quarter results. Key financials are attached to the release and we have posted a copy of the press release as well as support schedules to our website. The agenda for this call will include a review of the first quarter financial results including second quarter and full year 2010 guidance from Jeff, an update on our business performance in the quarter from Ray, followed by his perspective on the quarter overall. We will then open it up to questions.
We will be joined during the question and answer session today by Sam Leno, Chief Operations Officer, Fred Colen, Chief Technology Officer, Hank Kucheman, Executive Vice President and Group President CRV, Mike Phalen, Senior Vice President and President of our Endoscopy business, John Pedersen, Senior Vice President and President of our Urology and Women's Health business, Joe Fitzgerald, Senior Vice President, and President of the Endovascular unit, Michael Onuscheck, Senior Vice President and President of our Neuromodulation business, Dr. Ken Stein, Chief Medical Officer for CRM, and Dr. Keith Dawkins, Chief Medical Officer for our CRV Group.
Before we begin I'd like to remind everyone of our Safe Harbor Statement. This call contains forward looking statements. The company wishes to caution the listeners that actual results may differ from those discussed in forward looking statements and may be affected by among other things, risks associated with our financial performance, our restructuring plans, our programs to increase shareholder value, new product development and launches, regulatory approvals, litigation, our tax position, our competitive position, and our growth strategy, the company's overall business strategy and other factors described in the company's filings with the Securities and Exchange Commission.
I would now like to turn it over to Jeff for a review of the financial results.
Before I discuss our results of operations I want to address the goodwill impairment charge that we announced in last night’s earnings press release. We test our goodwill balances during the second quarter of each year for impairment, or more frequently if indicators are present or changes in circumstances suggest that an impairment may exist.
As a result of the ship poles and product removal actions we took in the first quarter we performed an in term test of our goodwill balances. We updated all aspects of our long term discounted cash flow model associated with the US CRM business including our expectations, overall market growth as well as our share of that market, which we believe will be impacted by the ship hold and product removal actions.
The changes created a $1.8 billion write off of goodwill in the quarter. We continue to believe the worldwide CRM market to be growing in the 3% to 5% range. As a reminder, this is a non-cash charge and has no impact on either our continued results from operations, our levels of expected cash flows or our bank debt covenant ratios.
Now let’s turn to a more detailed review of the operating results for the quarter. Consolidated revenue for the first quarter was $1.960 billion versus our guidance range of $2 to $2.1 billion and represents a 3% reported decline from the first quarter of last year. Excluding the impact of a positive $63 million foreign currency contribution, first quarter revenue is down 6% constant currency.
Compared to the contribution assumed in our first quarter guidance range, foreign exchange contributed -$8 million to our first quarter sales results. The impact of the defibrillator, ship hold, and product removal actions in the quarter on our revenue growth was approximately $72 million or -400 basis points on a year over year basis.
Compared to the first quarter of last year, excluding divestitures, US revenue decreased 9% while international revenue increased 7% or down 1% in constant currency. Ray will provide a broader overview of our businesses by major product category, but I’ll address our sales results for all of our businesses at a high level here.
Worldwide, DS came in at $407 million within our guidance range of $385 to $425 million and down 9% from the first quarter 2009 which represents a decrease of 12% in constant currency. Our worldwide DS revenue includes $165 million for Taxus, $208 million for Promus, and $34 million for Promus element.
Our worldwide Taxus, Promus, Promus element split for the quarter was 41/51/8. We continue to sustain our worldwide DS leadership during the first quarter with an estimated global market share of 38% which we estimate to be about 13 percentage points higher than our nearest competitor and four percentage points lower than our share in Q1’09.
US DS revenue was $210 million at the high end of our guidance range of $195 to $215 million and 15% lower than the first quarter of last year. Excluding the favorable impact of a $14 million adjustment to the sales transition reserve included in Q1 2009 US DES sales were down 10% versus last year driven by Taxus share loss following the results of Compare trial, the impact of which is expect to anniversary by the end of Q3 2010. This includes $79 million of Taxus, $131 million of Promus revenue and represents a 38/62 mix of tax and Promus in the US, compared to a 54/46 mix in Q1 2009.
We estimate that our US DS share was 45% for the quarter with 17 share points of Taxus and 28 points Promus. Excluding the transition reserve recorded in 2009 our total share is down four points compared to the first quarter of last year. We continue to maintain drug eluting stent market leadership in a competitive US market with 17 more market share points than our nearest competitor.
Based on our estimate of the US market for the first quarter, we believe that Boston Scientifics market share was 45% and Am J Care was approximately 28% while J&J and Medtronic achieved 15% and 12% respectively.
International DES sales of $197 million were at the mid point of our guidance range of $190 to $210 million and represented a decrease from prior year of 1% on a reported basis and a decrease of 8% in constant currency. This includes $86 million in Taxus, $77 million of Promus sales, and $34 million in Promus element and represents a 44/39/17 mix of Taxus, Promus, and Promus element.
Promus element contributed $34 million to our international DS sales including $27 million in EMEA, $7 million in the Americas and Asia/Pac combined. We estimate that Boston Scientifics DS market share in EMEA for the first quarter was 33% which is down three points compared to the first quarter 2009. Taxus market share was approximately 12% with revenue $32 million. Promus market share was approximately 10% with revenue $24 million and Promus element market share was approximately 11% with revenue of $27 million. Together this represents a Taxus, Promus, Promus element mix in EMEA of 38/29/33.
When you combine the impact of reaching the anniversary date of the impact of the Compare trial during the third quarter this year and the continued rollout of Promus element we expect to begin to take share on a year over year basis during the second half of this year.
Our DS share in Japan was 43% down 11% from the first quarter 2009 with revenues of $63 million driven by the introduction of additional competitive drug eluting stent platforms. We expanded our market share leadership to 17 points over our nearest competitor off a very strong Promus launch with revenues of $33 million.
Taxus market share was approximately 20% with revenue of $30 million and Promus market share was approximately 23% with revenue of $33 million. Together this represents a Taxus, Promus mix in Japan of 47/53. During the quarter we estimate Xiant share at 26%, Endeavor at 12%, and J&J at 19%. Subsequent to the normal trialing period with new drug eluting stent platforms and the completion of enrollment in the reset trial we expect to leverage our commercial strength and two drug platform to regain any lost market share by the end of the year.
We estimate our Asia/Pacific DS share remain steadily at about 18% during the first quarter, split 8% Taxus with $12 million revenue, 6% Promus with $10 million revenue, and 4% Promus element with $5 million revenue, or a Taxus, Promus, Promus element mix of 44/36/20. DS sales in our Americas international region were $24 million representing approximately 52% market share with 27% or $12 million in Taxus revenue, 22% or $10 million in Promus revenue, and 3% or $2 million in Promus element revenue. This represents a 52/42/6 mix of Taxus, Promus, and Promus element.
In summary, with global DES market share of 38% we maintained a 13 percentage point advantage over our nearest competitor. Our strong commercial team focused on the only two drug platform in the industry coupled with the roll out of the Promus element stent will allow us to increase our market share leadership going forward.
I would like to provide you a little bit more detail on the drug eluting stent market dynamics during the quarter. We estimate the worldwide DS market in Q1 at approximately $1.61 billion which is up 4% but flat in constant currency versus Q1 ’09. Excluding the impact of $14 million or 1% of revenue reported to replenish customer inventory as a result of the launch of Taxus Liberte.
Our estimated worldwide market revenue in the quarter includes a worldwide unit volume increase of approximately 10% driven by an increase in both PCI volume and penetration, offset by worldwide market decline in average selling prices of approximately 9% in constant currency or down 5% when you include the positive contribution from FX of 400 basis points.
Global penetration rates increased 2% versus a year ago. The USDS market is estimated to be about $467 million representing a decrease of approximately 2% from the first quarter last year, excluding the impact of sales transition reserve reversals in Q1 last year. This consists of a unit volume increase of approximately 7% which includes an increase in PCI volume and an increase in penetration. This unit volume increase was offset by approximately 9% decline in ASPs including a negative mix shift of DES platforms.
During the quarter we saw our USDS ASP reductions fare slightly better than the aggregate market decline with taxes down about 6% including the impact of pricing premiums on our Taxus Long and Taxus Atom and Promus down about 9% compared to the first quarter 2009. The US PCI volume in the quarter was approximately 260,000 procedures up 3% compared to the first quarter 2009.
We estimate that the USDS penetration was up three percentage points over the first quarter 2009. Combined with stented procedure rates and stents for procedure we estimate that the total unit market of US stents in Q1 was approximately 347,000 units including 271,000 units of DS.
The international DS market remains strong for the quarter with approximately 593,000 PCI procedures including 343,000 procedures in EMEA, 56,000 procedures in Japan, 130,000 procedures in Asia/Pacific and 64,000 procedures in the Americas.
Worldwide, Q1 CRM revenue at $538 million represents a reported decrease of 9% and a constant currency decrease of 11% versus the $589 million reported in the first quarter 2009. For the first quarter we have analyzed the impact of the issues we faced on our worldwide CRM revenue. We estimate that being off the market 13 selling days in the quarter as a result of the defib ship hold and product removal actions reduced our US CRM revenue by $72 million.
Of this $72 million all but $3 million was related to the US defib business. The actions we took with respect to certain sales personnel and the sub-pectoral product advisory resulted in less sales of approximately $16 million, $10 million of which impacted the US. In addition, we deferred approximately $5 million of revenue related to the launch of Latitude in Europe last year and had a sales return reversal of $8 million within the first quarter of this year related to the sub-pectoral product advisory in the fourth quarter last year.
US CRM revenue of $326 million represents an 18% decrease over the prior year for the quarter. International CRM sales of $212 million in the quarter represent reported increase of 10% from prior year and up 2% in constant currency, both our US and CRM revenues in the quarter were impacted by the items I discussed above.
Worldwide ICD sales of $390 million were below the low end of our guidance range of $440 to $470 million. This represents a reported decrease of 12% from Q1 2009 and a constant currency decrease of 14%. ICD sales in the US were $246 million below our guidance range of $300 to $320 million representing a 21% decrease from last year. International ICD sales of $144 million represent a 9% reported increase from last year up 1% in constant currency. With the exception of $3 million impact on our Pacer business from the ship hold actions in the quarter our defib revenues in the quarter were impacted by the items I discussed earlier.
Excluding sales from our five non-core divested businesses our DS and non-CRM worldwide revenues increased approximately 4% compared to the first quarter of last year to $1.13 billion and were up approximately 1% in constant currency. This includes constant currency increases of 9% Endoscopy, 6% Urology Women’s Health, 10% Neuromodulation, and 1% in each of our peripheral interventions and electrophysiology businesses.
For the quarter, our Neurovascular business was down 5% in constant currency as a result of continued pressures from competitive launches in our coil and stent businesses worldwide. In our non-stent interventional cardiology business we saw a constant currency decrease of approximately 4%. As we continue to develop our new product pipelines for the businesses we expect growth in these divisions. Ray will talk more about some of the new product launches in these businesses in a few minutes.
Reported gross profit margin for the quarter was 66.2%. Adjusted gross profit margin for the quarter excluding restructuring related charges was 66.9% which is 340 basis points lower than the first quarter 2009. Excluding the impact of the ship hold and product removal actions taken at the end of the quarter, adjusted gross margin would have been 67.4% which is consistent with our guidance for the year of 67% to 68%.
The primary contributors to the 340 basis point reduction from last year include the shift in DS mix from Taxus to Promus during the quarter, lower DS share and pricing pressures in both US and Japan, partially offset by the increase in Promus element sales in Europe and the negative impact of settling FX contracts in cost of goods sold.
Our gross margin percent will continue to be pressured as a result of negative DS mix shifts from Taxus to Promus as well as lower overall market shares, and lost CRM market share resulting from our recent ship hold actions. While we now see the profit margin benefits of selling Promus element instead of Promus in Europe in 2010 the recent launch of Promus in Japan will create an adverse mix of Taxus and Promus compared to 2009.
Our reported SG&A expenses in the first quarter were $628 million. Adjusted SG&A expenses excluding restructuring related items were $627 million or 32% of sales compared to 32.2% in Q1 2009. You should note that the ship hold and product removal actions during the quarter did not have an impact on our total SG&A dollars but did put upper pressure on the SG&A as a percentage of sales as put plans in place to keep our sales reps compensation whole during the time we were off the market with our defib products.
Therefore, the negative drop relative to the lost sales and the impact to operating profit in the short term is a bit higher than normal. Offsetting the impact of the ship hold and product removal actions on SG&A was the favorable legal settlement and reductions in our annual bonus accruals. These items kept SG&A expenses as a percent of sales within the expected range.
Both reported and adjusted research and development expenses were $250 million for the quarter or 12.9% of sales. Our absolute dollar investment remained consistent with our plan to continue to invest approximately $1 billion in R&D on an annual basis. We continue to believe that this is an appropriate level of dollar investment going forward. Our R&D dollars will be more heavily directed into the higher growth portions of our businesses as we begin to implement the restructuring initiatives announced last quarter.
We reported a GAAP pre-tax operating loss of $1.575 billion for the quarter due to the results of our interim goodwill impairment test and associated impairment charge previously discussed. On an adjusted basis, excluding goodwill and intangible asset impairment charges, restructuring costs, acquisition related gains and amortization expense, adjusted operating income for the quarter was $380 million or 19.4% of sales down 370 basis points from Q1 2009. The reduction versus Q1 2009 is primarily related to the gross margin deterioration discussed earlier.
I’d now like to highlight the GAAP to adjusted operating profit reconciling items a little bit more detail for you. As previously mentioned, we performed an interim goodwill impairment test as of March 31, which resulted in an estimated $1.848 billion non-cash charge in the quarter related to the impairment of our US CRM goodwill associated with the acquisition of Guidant in 2006. The amount of this charge is subject to finalization during the second quarter 2010.
We recorded intangible asset impairment charges of $60 million pre-tax or $51 million after tax associated with the write down of certain intangible assets. We recorded acquisition related gains of $250 million pre-tax or $216 million after tax upon our receipt of a milestone payment from Abbott related to a Japan regulatory approval of the Xiant Promus drug eluting stent.
We recorded $80 million pre-tax or $56 million after tax of restructuring related charges in the quarter which are primarily related to severance and certain other costs in connection with our previously announced 2010 restructuring plan. These charges are slightly lower than previous estimates due to employee attrition during the quarter. Total amortization expense was $128 million pre-tax or $101 million after tax which is flat with the first quarter 2009. Going forward our quarterly amortization expense should remain at this level.
The cumulative effect of all these items was $1.866 billion pre-tax and $1.840 billion after tax.
Interest expense was $93 million in the quarter or $9 million lower than Q1 2009 primarily as a result of our $325 million in debt repayments during the last 12 months together with lower interest rates. On the same basis, our Q1 2010 average interest expense rate was 5.7% compared to 5.9% in Q1 2009. Other net was $4 million of income in the quarter compared to an expense of $6 million in Q1 2009.
For the first quarter 2010 we had $8 million of interest income primarily due to the collection of interest on past due receivables in Spain, offset by $4 million of other expense. A net expense of $6 million in the first quarter 2009 included $4 million of interest income and approximately $3 million of net gains related to the monetization of our non-strategic investments offset by $6 million of net FX hedging costs and $7 million of other miscellaneous expense.
Our reported GAAP tax rate for the first quarter was -0.9% and on an adjusted basis our tax rate was 14%. Our adjusted tax rate for the first quarter reflected a 730 basis point favorable impact or $21 million for discrete tax items as well as 370 basis points of favorable timing of events which may reverse in subsequent quarters.
The discrete items are primarily attributable to the release of tax reserves resulting from a favorable court decision in a third party case for which we have similar facts. Adjusting for both the discrete benefit and the favorable timing items we had an operational tax rate in the first quarter of approximately 25%.
We currently expect our full year operational tax rate to be approximately 21% inclusive of the US R&D tax credit or 1% lower than our previous guidance at 22%. Including the impact of both discrete benefit and the timing items that occurred during the first quarter our adjusted rate is estimated to be approximately 18% for the year. The decrease in the expected full year operational rate from our original guidance is due to revised expectations of our geographic mix of earnings and is reflected in our first quarter operational tax rate.
In addition, our operational tax rate for the first quarter excludes the US R&D tax credit as it had not yet been reenacted for 2010. As a result of our revised pre-tax profit projections the R&D tax credit equates to 400 basis points on our operational effective tax rate.
We reported GAAP EPS loss for the first quarter of $1.05 per share compared to a loss of $0.01 per share in the first quarter last year. GAAP results for the first quarter included the previously discussed charges related to goodwill and intangible asset impairments, amortization and acquisition and restructuring related net credits. Our adjusted EPS in the first quarter which excludes these items was $0.16 and was at the high end of our guidance range of $0.13 to $0.17 per share.
There are a number of items that impacted our EPS in the quarter including a -$0.03 per share related to the ship hold and product actions, -$0.01 per share as a result of an increase in our operational tax rate directly related to these items in the quarter, a benefit of $0.03 per share as a result of several items including a favorable legal settlement and a reduction in our bonus accruals, and a benefit of $0.02 per share associated with the discrete tax item discussed.
Our adjusted EPS for the first quarter was down $0.03 versus our adjusted EPS of $0.19 in the first quarter 2009. As a reminder, the first quarter 2009 adjusted EPS excluded $0.15 per share of litigation related charges, $0.07 or amortization, $0.02 per share of restructuring related charges, and positive discrete tax items of $0.04 per share.
Stop comp was $56 million and all per share calculation were computed using 1.5 billion shares outstanding. DSO was 60 days a one day improvement from the first quarter 2009. The improvement was driven by strong collections in the US, EMEA and Asia/Pacific. Days inventory on hand was 123 days down three days from Q1 ’09 as we continue to work on reducing our inventory levels.
Operating cash flow in the quarter was a $284 million outflow compared to a $261 million inflow in Q1 ’09. The Q1 2010 included a $250 million milestone receipt from Abbott related to approval of Xiant DS in Japan, a $1 billion payment related to the settlement a certain patent disputes with J&J and a $33 million restructuring payment. Q1 ’09 included $36 million of legal settlement payments, and $24 million in restructuring payments.
Excluding these items, Q1 2010 adjusted operating cash flow was $499 million or $178 million higher than Q1 2009 primarily due to improved accounts receivable, inventory and accounts payable management and lower tax payments including a tax refund in the quarter of $163 million partially offset by lower adjusted operating profit. The $1 billion J&J payment was funded with $800 million of cash on hand and a $200 million revolving credit loan. We repaid this revolving credit loan during the first quarter with cash generated in the quarter. We expect to fund the remaining $725 million of the $1.725 billion settlement due January 2011 with our 2010 cash flow.
Capital expenditures were $70 million in the quarter and $10 million higher than Q1 2009. Reported free cash flow was a $354 million outflow in the quarter compared to a $202 million inflow in Q1 2009. We continue to have significant availability in liquidity of more than $1.8 billion including cash on hand and our credit facilities. In addition, for the year, we expect to generate strong cash flow of about $1.5 billion before special items.
In addition, our debt to EBITDA credit facility covenant ratio was 2.4 times which is well below the maximum permitted level of 3.5 times and provides us with $750 million of EBITDA safety margin. This covenant was unaffected by the recent J&J settlement as we are committed to exclude all litigation related accruals and up to approximately $1.3 billion of related payments from our bank EBITDA calculations.
At the end of the first quarter we had $519 million of cash on hand, $5.9 billion of total debt, and net debt of $5.4 billion which is comparable to Q1 2009. We expect to renew our revolving credit facility and refinance the majority of our 2011 debt maturities in mid year 2010.
All three rating agencies affirmed our long term corporate credit ratings in the first quarter. As we announced in February we have initiated a restructuring plan which we’ll spend the next 24 months. During the quarter we took the first steps in executing on many of our restructuring initiatives we are undertaking.
The execution of all these restructuring initiatives over the next 24 months will result in a gross reduction of our operating expenses by an estimated $200 to $250 million. We will then reinvest a portion of these savings into customer facing and development of related activities to help drive top line growth in the future. We are on schedule with our planned restructuring at this point.
Let me now turn to guidance for the second quarter as well as revised guidance for the year. While we have returned to market with Cognis and Teligen as of April 15th the combination of being off the US defib market for 11 selling days in Q2 and lower overall share in our CRM businesses will have an impact on both our Q2 revenues as well as our full year.
While we begin to ramp up our sales we estimate that our US year end revenues will be lower than our previous expectations by approximately $127 million in Q2, $55 million in Q3 and $50 million in Q4 this year. The total estimated impact of our US year end revenue for 2010 including the $72 million in the first quarter is approximately $300 million. This amount is in addition to the estimated $100 million of reduced revenue included in our original guidance for the year related to disciplinary actions we took with respect to certain sales personnel and the subpectoral product advisory.
From a US ICD share perspective we expect a bought amount during Q2 and then rebound exiting the year approximately 500 basis points lower than we existed 2009. Of the estimated 500 basis points of loss, 400 basis points relate directly to the ship hold and product removal actions and the 100 basis points relates to the actions we took in the fourth quarter with respect to certain sales personnel as well as subpectoral product advisory that happened in the beginning of this year.
Turning to our US pacer business, we estimate that we lost 200 basis points of market share in the first quarter, less than 100 basis points as a result of the impact of the ship hold actions on our quarter end bulking and 100 basis points as a result of the actions related to certain sales personnel. We are currently estimating that we lose another 100 basis points of share as a result of the ship hold and product removal pressure but we will gain that 100 basis points back by the time we exit the fourth quarter.
Since much of the additional revenue loss is related to our high margin, high city business this loss revenue will negatively impact our gross margins for the balance of the year. As a result, we are revising our estimated gross margin for the year to reflect the impacts of the ship hold and product removal actions. We now expect gross margin range for the year to be within 66.5% to 67.5%.
Finally, we have also taken steps to ensure that our sales personnel are not negatively impacted as a result of the ship hold and product removal actions. This result and a draw through to EPS is equal to the gross margin impact. As a result, we expect earnings per share for the year to be negatively impacted by $0.05 per share in Q2 and $0.03 per share each the third and fourth quarters. The full year impact of the ship hold and product removal actions including the -$0.03 per share in the first quarter will be -$0.14 per share.
Turning to sales guidance for the second quarter 2010, reported consolidated revenues are expected to be in the range of $1.825 to $1.925 billion which is down 12% to down 7% from the $2.074 billion recorded in the second quarter 2009. If current foreign exchange rates hold constant to the second quarter the benefit from FX should be approximately $25 million or approximately 1% relative to Q2 2009. On a constant currency basis Q2 consolidated sales should be in a range of down 13% to down 8%.
For DS we are charting a worldwide revenue to be in a range of $355 to $390 million with US revenue of $190 to $210 million and OUS revenue of $165 to $180 million. For our defibrillator business we expect revenue of $290 to $325 million worldwide with $160 to $180 million in the US and $130 to $145 million OUS.
For the second quarter, adjusted EPS excluding charges related to acquisitions, divestitures, restructuring, and amortization expense, are expected to be in the range of $0.06 to $0.10 per share. This includes an operational effective tax rate for the quarter on adjusted earnings of approximately 25% reflecting the delayed approval of the R&D tax credit.
The company expects EPS on a GAAP basis in the second quarter 2010 to be in the range of a loss of $0.03 per share to $0.02 per share. Included in our GAAP EPS estimate is approximately $0.02 to $0.01 per share restructuring related costs and $0.07 per share of amortization expense.
As a result of the ship hold and product removal actions involved in the company’s ICD and CRTD in the first quarter the company is revising estimates for the full year as well. The company now estimates sales to be between $7.6 and $8 billion for the full year versus previous guidance of $8.1 to $8.5 billion. If current foreign exchange rates hold constant we expect FX impact to be minimal. Therefore, a revised guidance on both a reported and constant currency basis should be in a range of down 7% to down 2% for the year.
To help you in adjusting your models, in addition to our revised range for gross margin we expect SG&A to be in the range of 33% to 34% of sales, R&D in a range of 12.5% to 13% of sales, royalties of approximately 2.5% of sales, and interest expense of approximately $410 million including approximately $10 to $20 million of non-cash interest charges in the second quarter associated with our planned refinancing.
Adjusted EPS for the full year is now expected to be in the range of $0.50 to $0.60 per share versus our previous guidance of $0.62 to $0.72 per share. This reflects a -$0.14 per share related to ship hold and product removal actions, offset by the favorable impact of $0.02 per share related to the discrete tax items discussed above.
The company expects EPS on a GAAP basis for the full year to be in the range of a loss of $1.00 per share to a loss of $0.88 per share. Included in our GAAP EPS estimate for the year is $1.22 per share related to the Q1 goodwill impairment charges, $0.03 per share related to the Q1 intangible asset impairment, $0.14 benefit per share related to the acquisition related credits, $0.12 to $0.10 per share of restructuring related costs and $0.27 per share of amortization expense.
As discussed earlier, we now expect our adjusted operational tax rate for the full year 2010 to be approximately 21% excluding any discrete tax items that may rise during the remainder of the year, but including the R&D tax credit for the year. However, as a result of the discrete benefit and timing in the first quarter our full year adjusted tax rate is now expected to be closer to 18% for this year.
The R&D tax credit has not yet been extended for 2010 but we are assuming that will be approved in the fourth quarter 2010 as it has in many previous years. The full year benefit of the R&D tax credit is 40 basis points on our annual effective tax rate. As a result of this timing, we expect our operational effective tax rate for the second and third quarters to be approximately 25% and for the fourth quarter approximately 9%.
That’s it for guidance. Let me now turn it over to Ray for an overview of the businesses in the quarter as well as his overall thoughts.
Let me begin with a more qualitative review of our businesses and then as usual I’ll share some brief thoughts on likes, dislikes, and hot topics for the quarter overall.
In the first quarter we began the integration of our CRM and CV businesses into our newly formed Cardiology Rhythm and Vascular Group or CRV, in order to better address the needs of healthcare systems, physicians, and their patients. We know that realigning our resources will create a more agile organization that will be better prepared to address the needs of our customers and our rapidly changing healthcare environment.
Our continued investment in new technologies will allow us to build on our market leading positions across our existing cardiovascular service line, while accelerating investment in, for example, structural heart and hypertension. In addition, this integration positions us well to benefit from opportunities to implement our new cross care initiative.
Looking at CRM we estimate that our worldwide ICD market share was down five percentage points sequentially in the quarter, driven mainly by the defib ship hold and product removal actions we took in the US beginning March 15th. In the US we lost eight percentage points of ICD market share for the quarter as we were off the market for the last 13 business days.
As Jeff indicated, we are estimating a US defib share exiting the year that is 500 basis points lower than we exited the year in 2009, 400 of which relate directly to the ship hold and product removal. These actions had some spill over affect on our US pacer revenue, particularly generating pure bulk sales at the end of the quarter with customers who typically bought both defib and pacer products with us. I’ll talk more about the defib ship hold and product removal actions in a few minutes.
While the events in the quarter were clearly a distraction from our focus on planned product launches, we are committed to advancing our technologies to strengthen our CRM franchise. In the US we will launch the Acuity break away lead delivery system, building on our already strong lead portfolio. We also plan a phased US launch of our new Foresight header and defibrillation lead which is designed to be compatible with the upcoming IS4 standard.
This new lead system reduces the required implant area within the body, making Cognis and Teligen even smaller. The foresight system was broadly commercialized in Europe during the first quarter. The first DF4 compatible system to be commercialized there.
We plan to build on the success of our new products over the past 24 months with the launch of our next generation line of defibrillators. These devices will include new features designed to improve functionality, diagnostic capability and needs of use but also with a far greater emphasis on cost. In 2011 we expect to launch a new wireless pacemaker in the US and Europe built on the same platform as our existing high voltage devices.
Our international CRM performance was driven by continued robust growth in Japan following the launch of Cognis, Teligen, and Altrua late last year. We anticipate international defib performance to strengthen over time. Europe is poised for continued growth with the ongoing launches of our Latitude patient management system and our Foresight defibrillator system.
Early signs point to strong adoption of Foresight across 16 European countries including the addition of new customers and positive physician experiences.
On March 18th an FDA advisory panel unanimously recommended expanding the indication for Boston Scientific CRTDs. If approved, we would become the only company with an FDA indicated CRTD for high risk neuro heart association class one and two patients with left bundled branch block morphology. These patients accounted for 70% of admitted CRT trial population. We hope to receive an expanded indication from the FDA in the middle of this year which will potentially create additional opportunities for the market as a whole but certainly for Boston Scientific specifically.
Touching on our REP business, we launched our Blazer Prime Catheter in the US in November and have received very positive feedback from physicians. Blazer Prime is an improved version of the market leading Blazer Ablation Catheter and is designed to deliver enhanced performance, responsiveness and durability. We anticipate launching Blazer Prime in Europe in the next few months. The Blazer DX 20 stirable diagnostic catheter has achieved an estimated 20% market share in the US since its introduction last may.
We began the initial launch of the Blazer DX 20 in Europe during the first quarter and feedback from physicians has been very similar to the positive responses we’ve received from US doctors. The Blazer open irrigated ablation catheter should be ready for European launch in the third quarter with US clinical trials beginning around the same time.
Turning now to cardiovascular worldwide DS revenue of $407 million was solidly within our guidance range and included $34 million in revenue of Promus element now available in 96 countries. In the highly competitive European market this product is rapidly gaining share. It has surpassed the Promus stent in market share and is outselling Xiant Prime. Promus element shifts us to self manufactured margins and improves our DS gross margin performance. Also, the Australian therapeutic goods administration approval in the first quarter opens several emerging market growth opportunities for both Promus element and Taxus element.
Our worldwide DS market share is down one percentage point from last year and down four points versus the first quarter 2009. As we anticipate, our mix continues to shift from Taxus to Promus, is driving significant reductions in our gross margin, as Jeff has already highlighted. Also contributing to these reductions is continued weakness in ASPs, offset by an increase in both PCIs and penetration rates compared to a year ago.
The launch of Promus in Xiant in Japan contributed to a penetration rate of 72% in the quarter an increase of 3% versus last quarter and up 6% from first quarter 2009. We expanded our market share leadership over the nearest competitor due to a strong Promus launch since its January approval. However, our 43% share was down 11 points from the first quarter 2009.
We should note that our Promus launch has actually been better than the numbers would indicate. We believe the reset trial sponsored by Abbott comparing Xiant to Cipher is inflating Abbott’s share. This trial locks a set of selling Promus to the trial centers until late July which is when we estimate enrollment will be completed. Once enrollment is complete we will launch Promus in these centers. We have consistently chosen not to do studies that re-validate known end points versus first generation products.
Being the only company with a two drug platform in Japan we fully expect to remain the Japanese market share leader. We continue to expect to launch Taxus element in late 2011 to early 2012 and Promus element in the middle of 2012.
At the ACC meeting in Atlanta last month the Perseus trial results were presented and they demonstrated positive safety and efficacy outcomes for Taxus element while highlighting the platform improvements enabled by our platinum chromium alloy. The unique stent architecture and proprietary platinum chromium alloy combined to offer reduced recoil, greater radio strength, increased flexibility, and improved radio pace, helping to create consistent lesion coverage and drug distribution while improving deliverability. Results from this trial support the PMA submission Taxus in the US and Taxus element CE mark approval is expected late this quarter.
Also at the ACC the results from the Horizon AMI trial assessing the impact of diabetes on clinical and angiographic outcomes and heart attack patients treated with Taxus express drug eluting stent or the express bare metal stent were released. Analysis of the high risk diabetic patient population demonstrates superior efficacy and comparable safety for the Taxus express stent when compared to bare metal stents in these patients. We have submitted an application to the FDA requesting expansion of indications for use of the Taxus express and Taxus liberte stents to include patients experiencing AMI.
We also completed enrollment in the small vessel and long legion trials of our platinum clinical program which compares Promus element to historical data from the Spirit trials. The platinum angiographic data will be presented at TCT in September and the platinum primary end point results at ACC in March 2012. We remain on track to launch Promus element in the US and Japan in mid 2012. We plan to launch Taxus element in the US in mid 2011.
We are uniquely able to offer customers choice between the two best DES stents that are on the market today. This is a point of differentiation between us and our competition and it represents one of the key reasons we continue to be the worldwide DES leader.
Turning to our other CV product lines, our worldwide non-stent IC core business was down 4% in constant currency from the first quarter of 2009. This decline is mostly attributed to PTCA balloon average selling price erosion. However, we maintained our US and worldwide PTCA balloon leadership positions with 55% and 41% share respectively.
Our first quarter rollout of the Apex Platinum PTCA in the US exceeded our expectations and we are planning to rollout internationally during the second quarter. We also look forward to launching the NC Quantum Apex Post tilitation balloon catheter during the third quarter in the US while we currently have limited market evaluations going on in Europe. We believe these products should result in year end balloon market share gains in the mid single digits.
In addition, we have begun a phased US launch of our Connetix Guide Wire and plan to expand to full product availability by next quarter. Connetix represents an exciting wave of new products in the space and most notably a first time highly competitive entry into the nearly $100 million work horse wire market. We continue to expect market share gain in the low double digits by the end of 2010.
In our peripheral intervention business we returned to modest growth over the prior year during the quarter. We experienced solid international growth of 5% constant currency but we’re still struggling in the US due to procedural softness. We continue to build on our strong global position with successful launches of our new technologies worldwide. We continued the momentum with the international efficacy vascular stent launch and continue to see expansion in new accounts and overall share growth.
In the corroded space the adapt corroded stent system launch in select international markets represents an important additional technology in Nitinol self expanding close self stent design. We received PMBA approval in Japan for our corroded roll stent system and this product will officially launch in the second quarter. Both the Adapt launch and Japan corroded roll stent launch should bolster our worldwide leadership position.
In late March we launched the Sterling SL Balloons in both the US and European markets, filling a gap in our portfolio in the long balloon segment. Additionally, we received US PMA approval for our Express LD Iliac stent system in early March. Results from March indicate good momentum with share gains in the US Iliac stent market.
We continue to be very excited about our number one worldwide market position in the peripheral and interventional space. We believe our growth projections for the business are solid as demonstrated by the multiple product approvals and launches in the quarter, as well as the additional six product launches planned in 2010. We will, however need to continue to monitor the procedural softness within the US market. Given the global nature of this market we believe that continued international momentum can offset some of the US shortfall.
Our cardiovascular business continues to be well positioned and we absolutely believe our overall cath lab leadership will be strong for years to come.
Our neurovascular business recorded very strong sales in nearly every franchise this quarter and maintained a global leadership in an increasingly competitive environment. Our guide wire business continues to do extremely well and was up 12% driven by excellent performance and our continued conversion of our customer base to our Syncro 2 guide wire which grew 29% worldwide.
Our catheter business, excluding Flow directed and guide catheters grew 5%. Our I Cat or Inter-cranial arthroscopatic disease business posted strong results with a 13% growth overall. The launch of the wing span stent and gateway balloon system in some of our key countries including Brazil, Korea, and Australia in the past two quarters boosted those results while China recorded another strong quarter with growth of 49%.
The NIH sponsored wing span stent and gateway balloon system Sampras trial is ahead of schedule and continues to aggressively enroll patients before a third of the patients completed 16 months into the trial.
Our adjunctive stemming business grew 1% this quarter despite increased pressure from competitive offerings. The upcoming launch in the second quarter of our Neuroform ez stent with its improved delivery system will no doubt reinforce our number on position in that segment.
Under significant pressure from competitive coil and adjunctive stent launches our detachable culling business was down 13% versus prior year. In spite of those softer results we’ve maintained an almost 40% worldwide market share.
From a country perspective the strong sales growth this quarter in China up 26%, Australia up 11%, and Korea up 10%, and Brazil up 7% were notable. These are emerging market countries that have received increased focus from our announced international structural changes.
The endoscopy division continues its strong performance recording another solid quarter posting 12% worldwide growth, 9% constant currency, and 8% in the US. The launch of the fully covered wall flex esophageal stent was executed in late January. The performance of the completed line of wall flex stents; Esophaegy, Duodenal, and Colonic was a key driver for the division in the first quarter.
Worldwide growth was approximately 22%. Enrollment in the benign stricture study of the wall flex Biliary RX stent continues to be on track. The trail will evaluate the removal of stents from patients with benign bowel duct strictures as well as the effectiveness of temporary stenting for long term benign biliary stricture resolution. Growth in the biliary interventional space remains strong, supported by our diverse product portfolio. Worldwide constant currency growth was 9%.
The homeostasis business continued its strong performance led again by the resolution clip, worldwide growth was 12%. Two additional product launches were executed in the quarter, the Twister Pall Petrigal devise which is utilizing colonoscopy procedures to facilitate Pall capture for pathology and feeding tube are both tracking well following initial release.
In the second quarter we will continue to execute key product development milestones in support of the 2010 new product launches.
Urology and women’s health delivered solid results for the quarter growing at 6% on a constant currency basis with double digit growth in our women’s health business. The growth in women’s health in fueled by recent new product launches using the treatment of incontinence and pelvic floor pro-lapse. Our Urology business maintained its leadership position and grew 3% on a constant currency basis despite declines in our BPH and biopsy businesses. Urology growth excluding these two franchises was very strong at 8%.
During the quarter we launched our next generation genesis HTA system for the treatment of excessive uterine bleeding in the European market. We believe that the significantly enhanced user interface and the east of use of the genesis system will enable the business to grow its share of the $400 million worldwide excessive uterine bleeding market. Looking forward we will continue to execute on our women’s health growth strategy as we prepare for the launch of the genesis HTA system in the US market.
Last week we announced an exclusive agreement with the Bladder Health Network to market their female uro-dynamic testing solutions for urinary incontinence. The agreement will allow to introduce healthcare providers to a female continence care platform that offers professional testing and results interpretation. It is another example of our continuing commitment to the women’s health community.
Our worldwide neuromodulation business constant currency sales growth was 10% but the US also growing at 10%. We experienced some softening of our procedure volumes primarily related to inclement weather in the East and ongoing softness in the economy with respect to elective procedures. In the second and third quarter of 2010 we will launch four new lead products which will allow us to offer additional alternatives to physicians and patients. These new product launches combined with the inherent technological advantages offered by our spinal cord stimulation system look to provide us with continued growth throughout 2010.
Let me wrap up with some thoughts on what we liked about the quarter, what we didn’t like and then finish with one hot topic. I’ll start with what we liked.
Number one, we liked very much the fact that 40% of our sales for the quarter came from new products. It shows our pipeline is producing products that physicians believe are making a difference for the
patients and it’s an indication that our R&D investment strategy is on target and paying off.
Number two, our drug eluting stent business made progress on several front starting with the ongoing success of Promus element launch in Europe. Since approval last October we have increased our share of the Olumus market nearly seven percentage points and we plan to build on that momentum following our recent receipt of reimbursement approval and launch for Promus element in France. Feedback from physicians on the performance of this new platinum chromium stent has been very encouraging. A recent survey of UK physicians, 81% rated the Promus element stent better in deliverability compared to their current work horse stent, 93% rated it better in visibility and 100% rated it better in acute results.
During the quarter we also announced positive 12 month data from the Perseus data clinical trial which will support our FDA submission for the Taxus element stent. In addition, we are pleased to see the approval to launch the Promus stent in Japan making Boston Scientific the only company to offer physicians the choice of two different drugs on separated DES platforms in all major markets worldwide.
Thirdly, we liked the unanimous recommendation of an FDA advisory panel the agency expand the indication for our CRTD devices including Cognis. The panel recommended the expansion include the majority of the study population of the landmark CRT trial. Approval and expand indication by the FDA could lead to a dramatic increase in the number of patients eligible for this therapy. If the indications expanded our CRT devices would be the only ones approved by the FDA for patients in all New York Heart association classes of heart failure.
Fourthly, we again like the good performances achieved by our endospy, urology and women’s health and neuromodulation businesses. Recent product approvals have expanded our family of wall flex stents, fueling first quarter growth of 9% in endoscopy. The entire wall flex stent family including biliary, endo, and esophageal are now available in the US, Europe and other key markets. Our urology and women’s health business grew 6% driven by continued double digit growth in our pelvic floor franchise and 13% overall growth in international including 25% overall growth in Japan.
Finally, one of the things we like best about the quarter was our very strong operating cash flow. As Jeff said, our first quarter operating cash flow was nearly $500 million excluding special items and we ended the quarter with more than $500 million of cash on hand. In addition, we expect to renew our revolving credit facility and refinance the majority of our 2011 debt maturities by the middle of this year.
We have a lot of room in our debt covenants with ample safety margins so overall we have significant liquidity as well as financial strength and flexibility. We are substantially stronger financially then most of the written reports would lead readers to believe.
Dislikes; let’s look at what we didn’t like.
Firstly, we didn’t like our flat year over year sales growth. Even with the impact of the ship hold and the product removal actions was figured in, sales were still flat. While we anticipate a loss in revenue associated with actions related to our CRM business we obviously don’t have to like it. We expect to address this trend as we continue to implement the restructuring plans we announced in February. The actions we are taking will provide renewed focus on sales and marketing, R&D portfolio prioritization and selected merger and acquisition activities. All of these actions will strengthen our top line opportunities and with continued focus on expenses allow us to grow our bottom line.
Second things we didn’t like is we remain concerned with the continued pricing pressures we’re seeing globally and their impact on our revenue growth and margins. Pricing pressures remain high in our DES business worldwide and we are seeing an acceleration of these pressures as a result of one competitor’s behavior in Japan as we now have all four major competitors in the market.
The trend we identified which was confirmed by our competitors last quarter relative to CR and pricing has continued. We believe that these pressures are directly related to slower growth market, greater economic buyer’s sophistication, increased price transparency, and government actions around the world limiting therapy and/or reducing reimbursement.
Last but not least we didn’t like that we had to say goodbye to a lot of good people recently as part of our restructuring plan. These decisions are never easy, however, the job cuts were an essential part of our plan and over the long run we’ll be stronger and better positioned having executed this plan.
I’m going to close with what would either be a dislike or a hot topic, and that’s the US defib ship hold and product removal actions. I’ll do a brief recap of what has transpired thus far and then I’ll tell you about our return to market efforts.
As you know, on April 15th we received an FDA clearance for the two validated manufacturing changes to our ICDs and CRTDs and we immediately resumed distribution of our Cognis CRTDs and Teligen ICDs. These two products represent virtually all of our defibrillator implant volume in the United States. We were fully positioned to meet customer demand for Cognis and Teligen within 24 hours and in fact the first impact occurred within two hours of our announcement that we were back on the market.
Throughout this process there was no indication the two filing omissions posed any risk to patient safety. They were also not related to product quality or effectiveness. We are committed to doing the right thing every time and we acted voluntarily, swiftly, and appropriately to ensure compliance with all regulatory requirements.
In addition to our ship hold and product removal actions, solely on our own initiative, we conducted an internal review of manufacturing and other changes for the products affected by these actions as well as the associated regulatory submissions. The review found a few additional instances where we did not submit the appropriate documentation for validated manufacturing changes in Convient, Livian, Prism renewal and vitality.
We have now submitted this documentation and are working closely with the FDA to secure the necessary clearances to allow us to return these products, the earlier generations of the company’s CRTDs and ICDs to market as soon as possible in the United States. These products may continue to be implanted in geographies outside the United States.
In addition to the internal review we conducted, we have made changes to ensure tighter controls overall aspects of our change order and regulatory filing systems. We’ve implemented more robust processes with even more checks and balances for the preparation and review of all change orders and associated regulatory submissions. Our multi function CRM regulatory review board will ensure that all change orders are properly processed, reviewed, and submitted. These changes were requested by us, designed by us, and executed solely by us.
We continue to unfold a comprehensive return to market plan that engages our sales force, sales management and senior management with physicians. Our work streams related to the CRV cardiovascular service line include the new CRV branding; new customer engagement programs, new pricing contracting approaches, new collaborations between sales and marketing, new sales force enablers, and a new communication program. A portion of these efforts will be visible at HRS.
We’ve been pleased with the initial feedback which has generally been understanding and supportive. I’m not suggesting that everyone has been understanding and supportive, we have certainly encountered our share of skepticism but overall we’ve been encouraged. We’ve been reaching out extensively to physicians, principally through a series of calls and visits. We are having a lot of one on one conversations so physicians are hearing from us and we’re hearing from them.
Our conversations with physicians are going to continue at the Heart Rhythm society annual meeting which opens two weeks from tomorrow in Denver. We’ll be there in force and we have a full schedule of meetings. I would not want our competitive neighbors in Minnesota to think that we’re going to lay down and die, that won’t happen.
We’ve also been reaching out to our sales force. We’re keenly aware of the challenges they’ve been facing and we’re doing everything we can to support them. We’re also aware of the importance of retaining them and we’ve taken a number of steps toward that end including keeping them whole while we were off the market and while we’re ramping back up.
I want to acknowledge the great job they have done helping us get through the situation. They are energized and hard at work, they’ve been terrific as has been our entire commercial team. We’ve made substantial progress since April 15th and we continue to make progress every day.
Looking ahead, we feel confident about our ability to restore trust to regain market share. That confidence is based upon more than just return to market plan. Boston Scientific is committed to continue to invest in innovative new technologies that improve the health of patients. We have a broad range of products and a promising pipeline. We plan to continue to invest approximately $1 billion a year in R&D. We have the financial strength required to make these investments and continued delivering these technologies to physicians and patients.
As I mentioned earlier, the establishment of our new CRV group has created the most comprehensive cardiovascular service line in the world and will help us improve our ability to deliver new products, leading clinical science and exceptional service. Our bread in the cardiovascular space is unique amongst our competitors and will put us in a position to affinitively lead in this space and to partner physicians over the long term. In short, several competitors have good individual product segment offerings but once powered up no one else has anything like our CRV.
Contrary to popular opinion we were not told to do the right thing every day by anyone. We chose to do the right thing every day and that strategy for patients, for physicians and for us will pay off. As one EP physician said to me, “I love your products and your service and I believe you made the right decision. I just wish you’d stay out of the newspapers.”
Lastly, there is considerable speculation on our acquisition and divestiture plans. I have never historically commented on M&A activity and have no intention of changing that approach. That said, virtually everyone is connecting the wrong dots. There is no connection or correlation between divestitures, liquidity, and the financial consequences of the ship hold and product removal actions. Any divestitures we may do are strictly a function of our portfolio strategy and capital creation for reinvestment and debt reduction.
With that I’ll turn it back over to Larry who will moderate the Q&A.
In a minute I’d like to open it up for questions. In an effort to enable us to field as many questions as possible I would request that you limit yourself to one question and a related follow up. Again, I remind you that Ray will be joined during the Q&A session by Sam and several of the businesses presidents as well as Dr. Dawkins and Dr. Stein.
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