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Boston Scientific Corporation (NYSE:BSX)

Q1 2014 Results Earnings Conference Call

April 29, 2014, 8:00 PM ET

Executives

Susan Lisa - Investor Relations

Michael F. Mahoney - President and Chief Executive Officer

Daniel J. Brennan - Executive Vice President and Chief Financial Officer

Keith D. Dawkins - Global Chief Medical Officer and Executive Vice President

Ken Stein - Senior Vice President and Associate Chief Medical Officer of Cardiac Rhythm Management

Analysts

Rick Wise - Stifel Nicolaus

Bob Hopkins - Bank of America

David Lewis - Morgan Stanley

Glenn Novarro - RBC Capital Markets

Mike Weinstein - JPMorgan

Josh Jennings - Cowen and Company

Bruce Nudell - Credit Suisse

Matthew Dodds - Citigroup

Brooks West - Piper Jaffray

Kristen Stewart - Deutsche Bank

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Boston Scientific Q1 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to turn the conference over to our host, Ms. Susie Lisa. Please go ahead.

Susan Lisa

Thank you, Linda. Good morning, everyone, and thanks for joining us. With me on today's call are Mike Mahoney, President and Chief Executive Officer; and Dan Brennan, Executive Vice President and Chief Financial Officer.

We issued a press release earlier this morning announcing our Q1 2014 results, which included reconciliations of the non-GAAP measures used in the release. We have posted a copy of that release as well as reconciliations of the non-GAAP measures used in today's call to the Investor Relations section of our website under the heading, Financial Information.

The duration of this morning's call will be approximately one hour. Mike will begin our prepared remarks with an update on our business progress and his perspectives on the quarter. Dan will then review our overall Q1 2014 financial results as well as guidance for full-year 2014 and the second quarter of 2014. During today's Q&A session, Mike and Dan 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; clinical trials; cost savings and growth opportunities; our cash flow and expected use; our financial performance, including sales, margins, earnings and other Q2 and full-year 2014 guidance; as well as our tax rates, R&D spend and other expenses.

Actual results may differ materially from those discussed in the forward-looking statements. Factors that may cause such differences include those described in the Risk Factors section of our most recent 10-K and subsequent 10-Qs 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, Susie, and good morning, everyone. I’ll begin today with some highlights regarding our first quarter performance and then provide some thoughts on our 2014 outlook. Dan will then review the financials and 2014 guidance and then we’ll take your questions. So please note that in my remarks, all references to growth are on a year-over-year basis constant currency unless otherwise specified.

So, overall we had a very good first quarter and we’re off to a strong start in 2014. Our plans for the year are to deliver full-year 2014 sales growth in the 3% to 5% range. Importantly, our sales growth will be leveraged to double-digit EPS growth. And we are increasing our full-year 2014 EPS guidance, for which Dan will provide further details.

I am pleased that we delivered continued revenue growth in first quarter, along with improved profitability. This represents the fourth straight quarter of operational revenue growth as we continue to build momentum and deliver on our commitments.

Our 4% operational revenue growth in first quarter and continued focus on margin improvement helped drive adjusted EPS of $0.20, which exceeded the high-end of our guidance and represents 21% growth. As we continue to execute on our strategic plan, I like to provide several key highlights from the first quarter and discuss key expectations for ‘14.

Starting with MedSurg, MedSurg had another excellent quarter. Our MedSurg businesses benefit from the continued high growth in Neuromodulation, as well as strong results in both Urology and Women’s Health and Endoscopy. Within our Cardiovascular group, we are encouraged by the return to operational revenue growth posted by our global Interventional Cardiology team. We look forward to accelerating our IC growth given our strong pipeline and global commercial reach.

Our Peripheral Interventions business delivered another quarter of above-market growth, driven by strong international performance. Our Rhythm Management group benefited from C.R. Bard's EP acquisition. Yet, our worldwide Cardiac Rhythm Management business slowed in first quarter. We aren’t satisfied with this performance and we believe results will improve given the momentum behind S-ICD globally, and the recent X4 CRT-D platform in Europe, as well as our recently approved ICD and CRT-D products in the U.S.

We also continue to execute on our strategic imperative driving global expansion. International sales were particularly strong, growing 8% as we continue to successfully broaden our portfolio and capabilities beyond the U.S.

To drill down a bit, we’re very encouraged by our pan-BSC European results in the quarter with 10% sales growth. In addition, we delivered 22% revenue growth in the emerging markets. Our emerging markets are steadily increasing in scale and now represent 9% of total company sales. And we are well on our way to our goal of 15% of total sales generated in the emerging markets.

I’ll now highlight the key drivers of our business unit performance for the first quarter and our ’14 outlook. So, starting with MedSurg, our three businesses continue to grow operational revenue faster than their respective markets. These businesses are expanding globally and investing in meaningful innovation, which in combination, help accelerate the diversification of the Boston Scientific portfolio.

Urology and Women’s Health posted a strong start to the year with high-single digit revenue growth, led by strong international sales. And our Urology growth has been fueled by investments we have made in physician training and expanded product registrations in urology. Endoscopy delivered solid performance in what has historically been our slowest quarter in Endoscopy. The division benefited from strong uptake of the endoscopic ultrasound slimline needle, continued demand for our hemostasis clips and biliary devices and strong emerging markets growth.

Regarding Alair, our bronchial thermoplasty platform for the treatment of patients with severe asthma, this continues to experience strong reorder rates and consistent case-by-case approvals by many large commercial insurers. However, Alair is not likely to contribute meaningfully to total company sales until we’re able to gain positive coverage policies from major U.S. payers. Reimbursement has taken longer than we anticipated, but we believe that a robust data portfolio combined with increased usage will ultimately prevail. In the first quarter, we completed our first BT cases in China and our regulatory submission in Japan is receiving an accelerated review.

Neuromodulation; this business had another terrific quarter. Our neuromod team continues to gain global share driven by the industry-leading Precision Spectra platform. Our Precision Spectra spinal cord stimulation system is designed to provide improved pain relief to a wide range of patients with chronic pain, and it’s also easier for physicians and patients to use.

We anticipate that our neuromod business will continue to grow faster than the market and gain share throughout 2014 globally. However, due to changes in reimbursement and challenging year-over-year growth comparisons as we anniversary Spectra’s launch, we anticipate that our growth rate in Neuromodulation will taper in the coming quarters.

Beyond spinal cord stimulation, we announced the launch of an important international clinical registry to evaluate both clinical outcomes and economic benefits of deep brain stimulation using our Vercise DBS System in Parkinson's disease patients.

So now let’s turn to Cardiovascular. We’re really pleased with our improved progress and a return to growth in the quarter. However, we have numerous opportunities to improve upon this performance. Our global IT performance was led by double-digit growth in Europe, which is encouraging given the recently expanded launch of our complex coronary care portfolio and our SYNERGY stent system. We believe we are well positioned to improve our global IC performance throughout the year due to a number of factors.

First is the U.S. launch of the Promus PREMIER drug-eluting stent, which has recently captured the leading number one market share position in the U.S; the upcoming launch of Promus PREMIER in Japan; and the expanded European launch of our SYNERGY stent system; and the recent launch of the REBEL bare-metal stent in Europe.

I’ll also add that our Structural Heart franchise is really beginning to build momentum and strengthen internationally. It’s still early, but we’re seeing very positive momentum from our recent Lotus TAVR launch in Europe. The Lotus Valve is being well received by European physicians and we’re planning to expand our launch and training capabilities throughout the year.

90-day follow-up from our Lotus REPRISE II CE Mark trial was presented at the recent ACC Conference and demonstrated excellent results with 85.4% of patients demonstrating zero or trace para-valvular aortic regurgitation. We also look forward to the presentation of the six months REPRISE II follow-up data on Lotus at the upcoming EuroPCR next month, as well as initiating the REPRISE III U.S. IDE trial later this year.

Also within Structural Heart, WATCHMAN, our left atrial appendage closure device, continues to build momentum in Europe. And in the U.S., our goal for WATCHMAN approval is mid-2014 and we look forward to expanding patient access to this truly innovative stroke prevention treatment.

Peripheral Interventions delivered solid growth yet again and continues to expand its global capabilities. The consistent success of our PI business is driven by leadership positions in balloons, stents and interventional oncology. We’re excited about the upcoming launch of our drug-coated balloon in the second half of the year in certain European markets.

So, turning to resistant hypertension, we continue to receive positive feedback in the international markets on the unique benefits and differentiation of our second-generation multi-point platform. We continue to train physicians and sell Vessex to treat patients with resistant hypertension in those markets where Vessex is approved. However, we have seen a slowdown in the European resistant hypertension market post to SYMPLICITY HTN-3 publication.

In terms of our U.S. trial strategy, we’re carefully examining the available data post the ACC meeting and we’re working collaboratively with our scientific advisory boards and others to determine the best next steps for our clinical program. In addition, we are investing in the Vessex platform and other emerging opportunities, including atrial fibrillation and congestive heart failure.

So, finally I move to our Rhythm Management group, which includes our Cardiac Rhythm Management and EP divisions. So starting with EP, we’re continuing to enhance our portfolio and build capabilities to compete more effectively in this large and fast-growing market. The integration of the former Bard EP business is proceeding on track, and we completed the alignment of the global commercial teams.

We are excited about the potential of our IntellaTip MiFi therapeutic catheter platform, which features MicroFidelity sensors embedded at the tip of the catheters. The sensors provide high-resolution to assist physicians with better assessment of catheter tip location, tissue characteristics, and ablation feedback. MiFi XP recently launched in the U.S. and we expect to launch in Europe this quarter.

Another important expected product launch is our Rhythmia Mapping System where we continue to see high levels of customer interest. We anticipate first commercial sales of Rhythmia in Europe later in second quarter and in the U.S. in third quarter. We expect to see improved performance in EP in the second half of ’14, led by these new product launches and synergies from our broader rhythm management capabilities.

Turning to our Cardiac Rhythm Management business, it’s been a very positive quarter in terms of S-ICD uptake and new product approvals that we believe will benefit our CRM business for the long run. However, in first quarter, our global CRM sales pulled back and declined slightly. We believe that we continue to gain share in de novo ICDs, but these gains were offset in Q1 due to continued headwinds from our CRT-D and quad in the U.S., Japan and Australia markets.

The uptake of S-ICD in the first quarter was very positive. The launch is proceeding ahead of plan and the physician training events continue to be at full capacity. We continue to roll out the technology globally and for the full-year 2014, we are targeting an S-ICD revenue contribution north of $75 million.

In first quarter, a positive interim analysis from our EFFORTLESS S-ICD registry was published with 456 patients and a mean follow-up of 558 days. This long-term large patient dataset demonstrated results comparable to trans-venous ICDs in terms of inappropriate shock rates of6.4% and a 100% conversion of spontaneous ventricular tachyarrhythmias.

Finally, on S-ICD, from a reimbursement standpoint, we are pleased this quarter to receive the positive coverage decision from the multi-state commercial insurer, Health Net, and we expect others to follow shortly. In pacing, overall, our pacing franchise posted essentially flat sales in a market that we believe was down slightly.

Our global CRM team is executing on a number of very important product approvals that will further strengthen our rhythm management portfolio. During the quarter, we launched new MRI compatible products in Japan and Europe. In Europe, we launched two key CRM product lines; our quad line of X4 CRT-Ds and ACUITY X4 leads, as well as our next-gen pacemaker lead, INGEVITY, which is MRI conditionally safe.

In Japan, we launched our MRI-compatible INGENIO and FINELINE II system with promising early results. Importantly, we’re very excited about to have recently announced the approval of a new defib platform in the U.S. We’re launching a brand new product called the MINI ICD Platform, which now offers physicians and patients, the smallest and thinnest ICD available in the market. So, MINI has a total cam volume of just 26 CCs, which is 13% to 20% smaller than the best competitive devices.

We also received approval of our X4 quad pulse generator. This new CRT-D generator will be successfully coupled with competitive quad pole leads to offer patients and physicians new and unique CRT-D therapy benefits, including a thinner profile, more pacing vector options, and industry-leading battery longevity.

And, so in summary our team is delivering upon a comprehensive portfolio that offers EPs and their hospitals meaningful solutions for their patients at risk of sudden cardiac arrest. We look forward to discussing our rhythm management technology with you in more detail at the investor events we’re hosting at May 8 in San Francisco in connection with the Annual Heart Rhythm Society Meeting.

So, to wrap up the first quarter, overall we’re off to a very good start and we’re pleased with our first quarter performance. We’re competing in a challenging and dynamic marketplace, but we’re encouraged by our growth opportunities in front of us.

In addition, we believe there is ample room for improved operating performance across many of our businesses and regions. We’re expanding our global capabilities and further diversifying the business. And as highlighted by our recent CRM approvals, we are delivering meaningful innovation that provides both unique value and economic savings to the healthcare system.

We continue to expect to generate strong cash flow which we believe will support an allocation of capital that is aligned with our strategic priorities while enabling us to maintain sufficient flexibility. So, again to summarize, our plans are to deliver full-year 2014 sales growth in the 3% to 5% range. Importantly, our sales growth will be leveraged to deliver double-digit EPS growth and we are increasing our full-year 2014 EPS guidance. Finally, I’d like to thank our employees for their winning spirit and their commitment to Boston Scientific.

Now, let me turn our call over to Dan Brennan, our CFO, for a more detailed review of our financials and ‘14 guidance.

Daniel J. Brennan

Thanks Mike. I’ll start with some overall perspective on the quarter before diving into the details. We generated adjusted EPS of $0.20, compared to $0.16 in Q1 of 2013, and ahead of our guidance range of $0.16 to $0.18. Similar to the Q4 results, the improved profitability in Q1 was driven by operational revenue growth and continued gross margin expansion, which was up 260 basis points year-over-year.

In addition, this quarter saw lower R&D spend, which was down 80 basis points year-over-year, due to the timing of some projects and a focus on R&D efficiency. These improvements were partially offset by SG&A spend on investments in our strategic growth initiatives and our core product launches. Overall, we posted an adjusted operating margin of 20%, which represents 220 basis points of improvement year-over-year and 140 basis points quarter-over-quarter.

We’re encouraged by this level of profitability in Q1 as we remain focused on delivering our goal of 25% adjusted operating margin by 2017, and view these results as a signal that our strategies and programs are working. We believe we remain on track to achieve our profitability goals.

Below the operating income line, a $7 million gain on investments and a slightly lower-than-expected effective tax rate, along with a 1% reduction in shares outstanding from a year ago, resulted in adjusted EPS of $0.20 or 21% year-over-year growth.

In addition, we generated adjusted free cash flow of $168 million in the quarter and operating cash flow of $198 million. We used $125 million or 63% of that operating cash flow to repurchase approximately 10 million shares in the quarter.

While we are pleased with the execution against these goals, particularly with respect to continued operational revenue growth, which we’ve now posted for four straight quarters, as well as improved profitability and a 20% adjusted operating margin, we believe we still have substantial future operating leverage and remain focused on delivering our 25% adjusted operating margin goal by 2017.

Now, I’ll provide a detailed review of our Q1 business performance and operating results. For the first quarter of 2014, consolidated revenue of $1,774 million, represented operational growth of 4%, compared to the prior-year period, which excludes the impact of foreign exchange and the divested Neurovascular business and 1% growth on an as-reported basis.

The acquisition of C.R. Bard’s Electrophysiology business contributed 140 basis points of growth in the quarter. The foreign exchange impact on sales was a $25 million headwind, compared to the prior-year period, and about a $5 million higher than the $20 million impact we assumed in our guidance range.

I would now look to provide more details on the revenue results for our seven divisions which roll up into our three business groups. I’ll start with MedSurg where the total group sales of $548 million, grew 9% year-over-year on a constant-currency basis. Each division within MedSurg grew faster than its respective markets and group operating income increased 280 basis points year-over-year to a Q1 2014 adjusted operating margin of 30.5%.

To dive into the details just a little bit, Urology and Women’s Health worldwide sales grew 8% on a constant-currency basis compared to the prior-year quarter. This represents the fastest quarterly growth rate for Urology and Women’s Health in over five years. This performance was driven by strong international sales with all regions up double digits due to our balanced product offering and physician training efforts.

Endoscopy sales grew 5% worldwide year-over-year on a constant-currency basis with six of our eight franchises in this division posting mid-single digit growth or better on a constant-currency basis. Emerging markets growth in Endo was a highlight, increasing more than 30% year-over-year on a constant-currency basis, driven by strong execution and an ongoing conversion to single-use products.

To close out the MedSurg highlights, we are pleased to report a third straight quarter of 20-plus percent year-over-year sales growth on a constant-currency basis in Neuromodulation with 23% worldwide growth in the first quarter. Significant changes to Medicare reimbursement for physician office trialing of spinal cord stimulation systems went into effect January 1 of this year, resulting in slower trialing volumes, which are typically a leading indicator of total SCS market growth. We continue to believe Precision Spectra’s ease of use and patient pain relief will help Boston Scientific gain share and drive market growth.

Turning now to the Cardiovascular Group, which consists of the Interventional Cardiology and Peripheral Interventions divisions, global sales for the group totaled $700 million and grew 2% year-over-year on a constant-currency basis, led by Peripheral Interventions growth of 5% and a return to growth in Interventional Cardiology. Cardiovascular group adjusted operating margins for the quarter of 24.3%, represented 140 basis point improvement year-over-year.

Within Cardiovascular, worldwide Interventional Cardiology sales of $497 million grew 1% year-over-year on a constant-currency basis on the strength of the Promus PREMIER DES launch, we believe we regained the DES leadership in the U.S. with $118 million in sales and an estimated mid-30s market share. Globally, DES sales declined 3% year-over-year on a constant-currency basis. U.S. DES sales grew 1%. Sales internationally were down 5% year-over-year on a constant-currency basis.

Europe was down just slightly as we continue to regain traction in terms of contracting and tenders in Germany after settling our patent litigation there in September of last year. Asia’s DES results lagged the other regions, down low-double digits year-over-year due to the weakness in Japan, but we believe we can regain share with the upcoming launch of Promus PREMIER in Japan. And for some perspective, the 3% decline in worldwide DES sales this quarter compares to a 10% year-over-year decline in Q4 of 2013.

So, to summarize our DES performance in Q1, we are pleased with the U.S. performance of the Promus PREMIER launch and strong European growth outside of Germany. This has been offset by continued weakness in Japan. Going forward, we are optimistic that Promus PREMIER can maintain market leadership in the U.S. and we look forward to establishing PREMIER as a global standard in all major markets.

Worldwide Other Interventional Cardiology grew 5% year-over-year on a constant-currency basis. We believe our strategy to surround the interventional cardiologists with the broadest portfolio of technology required to treat the most complex coronary cases that are starting to take hold as we’ve now enjoyed two quarters of our other IC or non-DES business growing faster than the market.

In Structural Heart, which includes our Lotus percutaneous valve and WATCHMAN left atrial appendage closure devices, our Lotus launch is off to a solid start and WATCHMAN of a small base grew revenue in the early 50% year-over-year on a constant-currency basis.

Peripheral Interventions continues to deliver highly-consistent above-market growth, posting a 5% gain in revenue over the prior-year period on a constant-currency basis. Our growth was broad-based driven by our leading portfolio and continued expansion into the international and emerging markets. U.S. growth was also broad-based driven by the Epic stent, a self extending Nitinol stent ideal for the iliac's that launched in 2012, the carotid wall stent and the direction micro catheter for the delivery of diagnostic or therapeutic material which was launched in Q4 2013 in our Interventional Oncology franchises.

Finally, I’ll discuss our Rhythm Management group, which consists of our Electrophysiology and Cardiac Rhythm Management divisions. Worldwide Rhythm Management sales in Q1 of $524 million, grew 3% year-over-year on a constant-currency basis. Rhythm Management adjusted operating margin for Q1 of 12.6%, represented a 140 basis point improvement year-over-year.

Within Electrophysiology, the quarter’s 68% year-over-year revenue growth on a constant-currency basis includes approximately $24.5 million of sales from the acquired Bard EP business. Excluding this contribution from the acquired EP business, global EP sales were down 4% year-over-year on a constant-currency basis.

The legacy EP franchise struggled with longer-than-expected sales cycles for certain products. Looking ahead, we’re excited about the potential of several new EP products, including the MiFi XP therapeutic catheter and our Rhythmia Mapping System.

The expected Rhythmia launch and the Bard EP acquisition significantly expand our product portfolio and commercial capabilities and we anticipate improved results in this newly strengthened franchise in the second half of 2014 and beyond.

For the Cardiac Rhythm Management division, Q1 worldwide sales declined 2% on a constant-currency basis year-over-year. Overall CRM sales of Asia grew slightly. Europe was flat. And our U.S. business declined mid-single digits, driven by market price erosion, a difficult replacement cycle, and continued uptake in the market of Quadripole CRT-Ds. Partially offsetting this, worldwide S-ICD sales were ahead of our internal expectation as we continue to see very strong demand for the product in the quarter.

In addition, European sales of our AUTOGEN X4 quadripolar pulse generator and ACUITY X4 quadripolar lead enjoyed a solid launch. So while Q1 CRM sales were not what we had hoped, we do have several ongoing product launches that lead us to believe that we can be a net share gainer in worldwide CRM for the full year.

On a worldwide basis, defib sales of $339 million were down 3% year-over-year on a constant-currency basis. Again, S-ICD globally and the quad launch in Europe were strong, but this was offset by U.S. share losses driven by a lack of quadripolar offering in CRT-D and our continued headwinds in the replacement market.

Worldwide pacer sales were up 1% on a constant-currency basis year-over-year totaling $127 million. We continue to see strong adoption of our INGENIO family of pacemakers and believe we are gaining market share internationally.

Turning now to the P&L, adjusted gross profit margin for the first quarter was 69.9% or 260 basis points higher than Q1 2013. The increase was largely attributable to benefits from our value improvement programs and favorable product mix, partially offset by price erosion. Foreign exchange continued to have a fairly minimal impact upon gross profit margin as a result of our hedging program.

Adjusted SG&A expenses were $654 million or 36.9% of sales in Q1 2014. This represents a 140 basis point increase in SG&A spending as a percent of revenue, compared to Q1 2013, but a 140 basis point decline from the Q4 2013 rate.

Adjusted research and development expenses were $191 million in the first quarter or 10.8% of sales. As a percent of sales, this represents an 80 basis point decline in year-over-year spending due to some efficiency gains but primarily to the timing of some projects. We expect to return to a more normalized rate of R&D spend in Q2 and for the balance of the year.

Royalty expense was $40 million in the quarter or 2.3% of sales, flat year-over-year, but up 100 basis points sequentially as we reset to the higher tiers in some of our royalty agreements at the beginning of each year. On an adjusted basis, pre-tax operating income of $354 million in the quarter or 20% of sales, up 220 basis points from Q1 2013 despite continued investments in our strategic growth initiatives which were offset with targeted cost reduction initiatives, higher gross margins, and lower R&D spending.

GAAP operating income, which includes GAAP to adjusted items, was $196.5 million in Q1 2014. The primary GAAP to adjusted items included in operating income for the quarter were pre-tax restructuring charges of $19.8 million, pre-tax litigation gain of $7 million, pre-tax gain on the Neurovascular divestiture of $11.5 million, pre-tax intangible asset impairment charge of $55.2 million, pre-tax contingent consideration benefit of $22.4 million, and pre-tax amortization expense of $108.9 million.

The $55.2 million intangible asset impairment charge is the result of our interim impairment analysis. In conjunction with our ongoing analysis to determine next steps for our Vessex clinical program, we revised our expectations of the renal de-nervation market size and thus recorded this Q1 pre-tax impairment charge to in process R&D of $9.4 million and a core technology charge of $45.8 million related to Vessex.

Now, I’ll move on to other income and expense, which primarily consisted of interest expense. Net interest expense for the quarter was $53.1 million as compared to $63.6 million in Q1 last year, due primarily to the refinancing of our public debt in Q3 last year. Our average interest expense rate in Q1 2014 was 4.8% or approximately 90 basis points lower than Q1 2013.

Our tax rate for the first quarter was 8.9% on a reported basis and a 11.9% on an adjusted basis. The difference between our reported and adjusted tax rates for the quarter is attributable to charges excluded in determining our non-GAAP results.

Finally, adjusted EPS of $0.20 per share represents 21% year-over-year growth. As mentioned, included in the adjusted EPS calculation is an approximate $7 million gain on an investment, which coupled with a slightly lower-than-expected tax rate in aggregate added approximately $0.01 to adjusted EPS.

On a reported GAAP basis, Q1 2014 EPS was $0.10, and included an intangible asset impairment charge, acquisition and divestiture related net credits, litigation-related credits, restructuring- related charges, discrete tax items and amortization expense totaling $1 35 million after-tax. This $0.10 of GAAP EPS in Q1 this year compares to a GAAP loss per share of $0.26 in the prior-year period that was driven primarily by a goodwill impairment charge in Q1 2013.

Moving on to the balance sheet, DSO of 62 days decreased one day compared to March of last year, due primarily to strong collection in the U.S. and Europe. Days inventory on hand of 155 days was up 22 days compared to March of last year and up 6.5 days compared to December 2013 due to higher inventory in advance of launches, primarily S-ICD, Promus PREMIER and the European quad launch and lower cost of goods sold, driven primarily by standard cost improvements and a favorable product mix. Adjusted free cash flow for the quarter was $168 million, compared to $181 million in Q1 of last year. Capital expenditures of $59 million, compared to $53 million in Q1 last year.

Turning to share repurchases, we repurchased approximately 10 million shares for $125 million in the first quarter of 2014. Since July 2011, we’ve repurchased 248 million shares or approximately 16% of our outstanding shares. We currently have $535 million of capacity remaining under our share repurchase authorization. We value returning cash to shareholders, and as always continuation of our share repurchase program in 2014 is subject to business development opportunities, market conditions, our stock performance, regulatory trading windows, and other factors.

I’d like to conclude with guidance for Q2 and full-year 2014. For the full-year 2014, we continue to expect consolidated revenue to be in the range of $7.3 billion to $7.5 billion, which represents growth of 2% to 5% year-over-year on a reported basis and growth of 3% to 5% operationally.

We continue to expect foreign exchange to be a net neutral for the full-year 2014. Included in this revenue guidance is an estimated 100-plus basis point full-year contribution from our adjacencies, primarily driven by the WATCHMAN left atrial appendage closure device, the Lotus percutaneous valve and the Alair system for bronchial thermoplasty.

We now expect adjusted EPS for the full-year 2014 to be in a range of $0.77 to $0.82 and we encourage you to model for the midpoint of the range. On a GAAP basis, we expect EPS to be in a range of $0.36 to $0.41. Although it will be necessary to make trade outs within the P&L in any given time period, we remain focused on achieving our goal of at least 100 basis points of annual adjusted operating margin improvement and reaching an overall 25% operating margin by 2017. We believe that our strategies and programs to improve profitability are working and we remain on track to achieve this goal.

Now turning specifically to Q2 2014, we expect consolidated revenues to be in a range of $1,840 million to $1,890 million. If current foreign exchange rates hold constant, the tailwind from FX should be approximately $5 million or 25 basis points relative to Q2 last year.

On an operational basis, we expect consolidated Q2 sales to grow year-over-year in a range of plus 3% to plus 5%. For the second quarter, adjusted EPS is expected to be in a range of $0.18 to $0.20 per share and reported GAAP EPS is expected to be in a range of $0.06 to $0.08 per share.

For the detailed Q2 P&L, our expectation is for gross margin in a range of 70% to 71%, SG&A spending in a range of 36.5% to 37.5%, R&D spending in a range of 11.5% to 12% and royalties in a range of 2% to 2.5% of sales, resulting in a targeted operating margin of 19% to 20%. Our tax rate expectation for Q2 is consistent with our full-year 2014 expected tax rate in the range of 13% to 15%.

So with that, I’ll turn it back to Susie who will moderate the Q&A.

Susan Lisa

Thanks, Dan. Linda, let’s open it up to questions for the next 30 minutes or so.

Question-and-Answer Session

Operator

(Operator Instructions) We have a question from the line of Rick Wise with Stifel. Please go ahead.

Rick Wise - Stifel Nicolaus

Let me start if I could with CRM. Obviously, Mike, you said not what you hoped. And, but during the quarter, since the quarter you continue to roll out all these new products. Do you have what you need in hand now to get this more on a positive growth track in the second half? And maybe, Dan, you could talk about do we return, does the business return to positive growth as we proceed through the year? How do we think about that?

Michael F. Mahoney

So, overall and if you look at CRM more broadly, we certainly like our full quarter trend that we’ve had in CRM and we’re really pleased how we’ve positioned ourselves from a portfolio perspective going forward and I’ll touch on that in a minute. We are disappointed in the Q1 results. It’s really driven in the U.S. because we had some excellent performance outside the U.S. where we likely gained share in defib outside the U.S. and also at minimum held share globally in pacer.

So our challenge really for the quarter only was in the U.S. and we think we were impacted likely. We don’t have a CRT-D device yet in the U.S. and so we’re likely impacted by headwinds in CRT-D and also ongoing replacement challenges that we have in the business, but offset by a de novo -- continued de novo share gain in the U.S.

So in the U.S., we particularly are excited about the new launches that we have. So as you saw in the press release and you read, we had a number of really big approvals that will help this business going forward for the long term. We have a new MINI platform which is 15% to -- or 13% to 20% smaller than our competitive devices. We have the approval of our new X4 quad can and we have really been out of the CRT-D game globally for a long time.

So, we will not only launch this device including the lead in Europe from now on, but also have the quad can available to launch with competitive lead devices in the U.S. So we think the combination of this in Europe and in the U.S. will clearly provide some enhanced revenue in CRT-D which has been the troubling segment within CRM.

So you combine that with our S-ICD device and now our longevity story as well as a device that provides the smallest profile, we think we do have a highly differentiated portfolio and we are positioned to improve our performance moving forward.

Daniel J. Brennan

And so Rick to follow up, as I said in my prepared comments, I do expect that we would be a net share gainer for the rest of the year based on the portfolio that Mike has just mentioned in terms of S-ICD, the quad system in Europe, the quad can in the U.S. and then MINI in the U.S. and Europe.

From a profitability perspective, the good news is that despite going backwards in sales, we still were able to add 140 basis points in operating margin year-over-year, and we’ve been very public about the fact that we have plans in place to do that within the Rhythm Management group without growth and that growth could be upside. So, we are looking forward to the rest of the year relative to sales and obviously very focused on profitability every quarter.

Rick Wise - Stifel Nicolaus

One quick follow-up on the S-ICD, our survey work suggests you have trained roughly half the docs in the U.S., I don't know if that is representative of the larger market. Do you hope to train everybody on the S-ICD this year? And maybe talk a little bit about reorder rates if it is not too soon. Thanks.

Michael F. Mahoney

Yes, in terms of the training, I’ll turn that question -- that comment over to Ken Stein, Dr. Ken Stein in a second. We did provide guidance in the call today for the first time in terms of revenue projections. We guided towards at minimum $75 million or exceeding $75 million in sales for the full year of S-ICD. So we want to provide that guidance. We’re not going to provide quarterly actual results, but we feel we’re certainly on track to deliver in excess of $75 million for the year. But, Dr. Stein, if you want to comment on the training?

Ken Stein

Your order of magnitude right in the rough proportion of cardiac implanting physicians who we’ve trained already. We, again as Mike said during his prepared remarks, we really continue to be fully subscribed in all the training courses that we offer and we are going to continue to train folks on this device through the end of this year and next year.

Operator

We have a question from the line of Bob Hopkins with Bank of America. Please go ahead.

Bob Hopkins - Bank of America

So also want to focus a little bit on U.S. ICDs. So if S-ICD was ahead of plan, I am just wondering what specifically in the quarter was worse than you expected on U.S. ICDs. And did pricing change relative to what it has been the last couple quarters? Do you think the market was a little soft? Just wondering if you could give a little bit more color. And as part of that, I am curious as to what percentage of your U.S. ICD sales are CRT-D and how that has been trending?

Michael F. Mahoney

Overall, again, I’ll answer your question specifically on ICD, we felt it was a very strong quarter comprehensively for BSC with our sales growth on track and also increasing the full-year guidance for the year and double-digit EPS with a broad portfolio. But specific to U.S., again, we are much stronger outside the U.S. in ICDs, but in the U.S. really the two categories continue to be the CRT-D, which we think is a segment and we haven’t broken out the exact percent, but we think it’s a segment that has been growing more quickly and we’ve also been had a headwind in our replacements.

And in particular, we offer a leading battery longevity platform. And we think that’s excellent for patients and physicians particularly moving forward in this new environment, but it also does provide us a headwind with our replacement cycle.

So, really those two factors have hampered us in the U.S., the CRT-D, which is a segment that is growing and also the headwind that we have with our battery longevity which we think will ultimately be a tailwind for us given the economics of the health care system.

Again, we think this will improve with the new launch that we have of our quad-enabled CRT-D device, which we think is very innovative and it will offer physicians and patients the choice. With the quad solution in the U.S., we think it’s clinically differentiated from St. Jude for the reasons discussed earlier.

On pricing, we didn’t see anything dramatically different in price, kind of consistent with our fourth quarter. And we also -- we can verify, but we also feel there may have been some larger competitive balking in the quarter, in the first quarter of 2014.

Bob Hopkins - Bank of America

Okay, that is interesting and helpful. I will let others follow up on that. I just want to ask Dan one other quick one. I know the EPS guidance went up by $0.02 relative to your previous guidance. You rattled off a bunch of other categories. Dan, did anything else change in terms of the moving parts of your guidance say on operating margin or tax rate or anything like that? Or is it all consistent with what you said previously?

Daniel J. Brennan

For which period, Bob?

Bob Hopkins - Bank of America

Sorry, for the full-year 2014.

Daniel J. Brennan

No, I think for the most part if you go back and look at the full-year guidance ranges for the P&L that we gave at our Q4 call and now they are relatively consistent.

Bob Hopkins - Bank of America

Okay. Anything change though at all?

Michael F. Mahoney

Nothing. Nothing of any materiality. If you look at the ranges we gave for gross margin and SG&A and R&D and tax rate, they are all very consistent.

Operator

We have a question from the line of David Lewis with Morgan Stanley. Please go ahead.

David Lewis - Morgan Stanley

Mike, I appreciate it's a lot of questions on CRM this morning. I guess we sort of looking at the math here in this quarter, your growth rate on a comp adjusted basis into this quarter decelerated virtually identically to your other competitor that has already reported. So I know we are talking about new dynamics in the quarter. Maybe you could sort of talk about in the -- that from a market perspective it does appear that two different providers are down materially fourth quarter to first quarter. So how much of this in your mind is simply market? And if there were sort of pull-through effects in the fourth quarter that we haven't seen here in the first quarter, do you have any sense of how those trends have looked here in the early part of the second quarter?

Michael F. Mahoney

Yes. We’ll see when Medtronic reports in a few months here, little bit more in the first quarter in terms of the market, but overall in the first quarter, we didn’t see a significant shift really from third quarter, fourth quarter of 2013.

Globally, we’re still calling the CRM market kind of flattish to slightly negative. We’ve talked about price being in the kind of negative 3% to negative 5% range globally and really almost essentially offset by volume. So we haven’t seen a significant market change in first quarter.

And I think in terms of our performance again, ex-U.S. defib, our business globally performed quite well and we had a number of promising launches and we discussed likeliness and competitive balking as well as some of the headwinds in CRT-D replacement. And some of the new launches that we have we believe will offset some of those trends as we move forward in ‘14. No big market shifts that we saw in the first quarter.

David Lewis - Morgan Stanley

And then, Dan, obviously across your segment reporting here in the first quarter, the biggest relative change obviously was in CRM, which I think those margins almost doubled here in the quarter. As you think about the balance of the year, Dan, and we think about MedSurg and Cardio versus CRM, can you just talk about how you think those general trends -- how much relative improvement can we see in CRM versus some of the other segments and should we assume the majority of the improvement here in 2014 is going to come out of the CRM division versus the other two lines?

Daniel J. Brennan

And I think just to be clear, you’re talking about a doubling from Q4?

David Lewis - Morgan Stanley

That’s correct.

Daniel J. Brennan

So looking at Q4 Rhythm Management to Q1, yes, that’s correct, and we had talked about it on our Q4 call some one-time items that were included in Q4. So very pleased with what we saw in Q1 from a Rhythm Management perspective. So just quickly as you go through the three segments, we expect to see the Rhythm Management segment produce more relative to the others because obviously there is more room for that segment to go.

But the other segments, both in MedSurg and in Cardiovascular should leverage the growth that’s anticipated in there, and as I mentioned earlier, Rhythm Management, we have plans in place to do that without growth and growth would be upside for that. So, all three will contribute, but I think to your point, Rhythm Management will contribute more overall since it’s coming from such a lower position than the other two.

Operator

We have a question from the line of Mike Weinstein with JPMorgan. Please go ahead. Your line is open Mr. Weinstein. Okay. I’m not hearing anyone. I believe we’ll go on to the next. We have a question from the line of Glenn Novarro with RBC Capital Markets. Please go ahead.

Glenn Novarro - RBC Capital Markets

I wanted to talk about the stent business which is back on track. In the U.S. you called out Promus PREMIER and it performed very well. I'm wondering if you can call outside the U.S., talk to us about how SYNERGY is launching? A lot of our channel checks suggest SYNERGY is a very differentiated stent and I know it is just getting launched in Europe. But can you give us some feedback in terms of how many countries have been launched, what the pricing dynamic, anything that you can give us that tells us that this differentiated product is going to be a share gainer for you in Europe this year?

Michael F. Mahoney

Absolutely, Glenn. Overall, we’re really pleased with our performance in Intervention Cardiology and we think we have a lot of room to grow in this one. It’s the first quarter that we’ve grown this segment of our business, which is critical for us given its high profitability in probably four to five years. And we have a lot of room to improve that.

Just breaking down on the IC performance quickly, we talk about our IC Other business as well, which is becoming quite meaningful for us in terms of its size from 5%. The DES business globally was down. We had a very strong performance in Europe and we’re challenged a bit more in Japan. And the good news in Japan we expect from a Promus PREMIER launch sometime over the next 90 days, which will really change our trajectory in Japan.

So as you look forward with the Japan approval of Promus PREMIER, the momentum that we have in Europe and the -- retaking the number one share position without dramatically changing pricing trends, we like our position. Specifically with SYNERGY in Europe, we continue to follow this kind of three segment strategy in Europe, because we want to establish SYNERGY which we have successfully as a premium product due to its clinical characteristics, and so at future meetings, we will provide more detail in terms of the specific mix of SYNERGY.

But we don’t sell it in all markets, we sell it in four to five countries in Europe that can justify a premium pricing. So in those markets, we have a much higher market share of SYNERGY -- much higher mix. In a market that can’t support premium pricing, we don’t even launch SYNERGY. So in those markets, we lead with our Promus PREMIER brand and then we also have a Promus for a low-end product.

So we feel like our portfolio is positioned extremely well combined with our complex coronary and imaging business. And those products will be launched in Japan, the PREMIER device as we get into the third quarter and eventually SYNERGY likely the fourth quarter of ‘15 in the U.S. So we think our DES portfolio is uniquely positioned to manage price effectively and to gain share responsibly and complemented with our complex coronary strategy.

Glenn Novarro - RBC Capital Markets

And just one quick follow-up. You mentioned Promus PREMIER Japan being launched in 90 days. It is a little bit sooner than we thought. Is that going to be launched also with reimbursement in place?

Michael F. Mahoney

Yes, we don’t see any issues with the reimbursement with Promus PREMIER in Japan. So the answer is yes.

Operator

And we do have a question from the line of Mike Weinstein with JPMorgan. Please go ahead, your line is open.

Mike Weinstein - JPMorgan

I apologize, we missed the last few minutes of the call, so if this was asked. But I wanted to ask on two end markets, Mike. One was peripheral vascular and that’s because your performance was so strong this quarter and you have had competitors who have made comments, Bard in particular, that the market has gotten worse, that there has been incremental pricing pressure in particular in Europe and that is where you guys felt the strength. So, could you talk a little bit about that market and your own success there? And then second, I don't know if this was covered in the last minute, but Neuromodulation where we've had this discussion about the impact of the reimbursement change and what that would mean to your business. You seem to suggest that while you expect it to continue to grow above market that the spread between you and the market would narrow over the balance of the year. So could you add a little bit more meat to the bone there? Thanks.

Michael F. Mahoney

Sure. Thank you. The first one on our peripheral business globally, we grew that 5% ahead of market for a number of quarters in a row. And it’s really not one particular product, we have a very well-balanced portfolio there, very strong commercial team and a nice pipeline. In terms of the market, we haven’t seen a dramatic reduction in pricing in our peripheral business. So there are some pricing challenges there, but we didn’t see a hiccup or a catalyst of price declines in the quarter.

And so we continue to see very low single-digit price declines in peripheral, offset by volume, gets us to about 5% growth globally. So, overall, we think it’s a relatively healthy market and that will still pay for innovation. So we like our cover progress in PI globally and we will be launching our drug-eluting balloon in Europe in the future here.

Regarding Neuromodulation, this has really been a gem with - or it is a gem with Boston Scientific and we did guide towards slower growth the remaining three quarters. We are confident we’ll continue to gain share. That business has a lot of momentum, a very differentiated platform, but the headwinds you called out one, the reimbursement changes in the outpatient settings and also the anniversary of a launch and very strong comps, plus 20% growth comps that will be entering the second quarter.

So we didn’t provide guidance as to what our growth would be in the second, third and fourth quarter, but it will be slower, it will taper from what it has been the last four quarters, really driven by both of those factors, but we still believe it will be a healthy contributor to the top line and faster to market.

Mike Weinstein - JPMorgan

One last follow-up. Dan, on the 140 basis points of margin expansion in the CRM business this quarter which you (indiscernible) what you guys thought. How much of that came from R&D reduction versus gross margin expansion or SG&A reduction, do you have that?

Daniel J. Brennan

Yes. I think the majority of it would -- more of it would come from gross margin than would come specifically from R&D. But the point is, it’s really - it’s all throughout the P&L. It won’t be just one area of the P&L that will drive the improvements that we’re going to make in that segment. All will contribute, but the gross margin should be the largest contributor of the line items.

Mike Weinstein - JPMorgan

And overall the R&D, you saw this quarter for the company as a whole, do you expect that to balance out over the balance of the year to be less of a driver of the earnings growth?

Daniel J. Brennan

Yes. That’s fair Mike. So I think we were sub-11% for the quarter in R&D as a percentage of sales in Q1 and we’ve guided for a 11.5% to 12% for Q2. So there is a little bit of timing. We still expect probably to be driving some efficiencies in R&D but there is some timing in Q1 that will come back in Qs two, three and four exactly.

Operator

We have a question from the line of Josh Jennings with Cowen and Company. Please go ahead.

Josh Jennings - Cowen and Company

Just first I wanted to go back to the drug-eluting stent franchise in the U.S. and returning to growth mid-30s share. Can you just talk about the sustainability there, is there upside in terms of share gains from here versus some of the potential trialing that your competitors have called out?

Michael F. Mahoney

Yes. So one is, we’re pleased that we’ve kind of recaptured the number one share position. We’re also very sensitive to the pricing in this marketplace. So this is not a hold a number one share position at all cost position. We think we have a stronger portfolio and we can maintain price discipline and increase our market share with our portfolio.

So if you look at the, one, we’ve got a very strong commercial team. We have capabilities with our chronic total occlusion and imaging business that physicians are interested in that helped complement our DES portfolio. And we think, as you look for the future here, with our Promus PREMIER launch, which really is in full launch mode now and call it 18 months from now, potential launch of SYNERGY in fourth quarter ‘15 that we really are well positioned to have a - we’re planning on a increasing gap in terms of our leadership in the U.S. with our portfolio.

Josh Jennings - Cowen and Company

Great, and just one follow-up on the CRM side. Just with -- in terms of your high-voltage lead strategies with the recent announcement of U.S. ID for 7-French lines 4-FRONT, how are you thinking about building out that portfolio and any timelines in terms of when that lead could be approved?

Michael F. Mahoney

So, this question regarding the new lead in the U.S.?

Josh Jennings - Cowen and Company

Yes.

Michael F. Mahoney

So specifically around the new ICD, that’s an 8-French lead, not 7. And that is being investigated as part of our NAVIGATE clinical trial, which is enrolling patients both to investigate our family of quad pole CRT-D leads, the ACUITY X-4 leads as well as the 4-FRONT device and that trial launched a little bit earlier this quarter and expect to complete enrolment in that trial around the end of next year.

Operator

We have a question from the line of Bruce Nudell with Credit Suisse. Please go ahead.

Bruce Nudell - Credit Suisse

Mike, just looking at the dynamics around the S-ICD. In one sense it’s very positive in that you are expecting over 1% worldwide market share on a revenue basis. But just looking more granularly at the US, it looks like the MRG data says you are about 2 points under-represented in can share in the CRT-D segment relative to the overall share, but 5 points over-represented in the single chamber share. And so, is one of the moderating influences regarding the impact of S-ICD on overall share that people will just keep your single chamber share about the same but give you more representation in S-ICD, with a revenue uptick of course. But that’s like kind of this share allocation strategy that these hospitals may have, if you could just comment on that?

Michael F. Mahoney

Well, I think physicians and patients ultimately like to think we will choose the best product for the best patient. And we think that’s what’s driving our de novo share gains, which really is the hallmark of which platforms are most innovative. I think the new implants are being selected and we are being selected at an increasing rate because of our S-ICD capability.

And we think we have a lot of momentum. We believe we’ll gain a lot of momentum with this new MINI platform, which provides the thinnest device. So the notion of a physician rewarding us for that and then maybe hurting us or de-tracking us in CRT-D as a result of that gain, I don’t think that’s a big play.

I think the fact we’ve had some portfolio gaps, we haven’t had a CRT-D device, which is the premium priced product in the segment, we haven’t had one and now we have it in Europe and we’re able to provide a solution now in the U.S. and although it’s not a solution, we’re are offering the quad pole lead as well, we believe a number of physicians will mix and leverage our X4 can capability in CRT-D procedures. So there is a lot of service components embedded within the CRM business but we think ultimately a leading that’s innovative will win and we are building that over time.

Bruce Nudell - Credit Suisse

And on a strategic basis, one of the things that’s really kind of surprised me is the strength of TAVI results generally where it’s proving superior to surgery in elderly, higher-risk patients. And that has connotations for its ultimate market size. And I think the skeptics of the market were pegging it more in the $2 billion range, the optimists were $3 billion. But it looks like there could be even upside to that. Have these results made you sit back a little bit and really think about the level of investment that Boston should be appropriating towards structural heart generally, especially given success -- early success at least in the mitral front?

Michael F. Mahoney

Yes. Well, I’ll turn that over to Dr. Keith Dawkins.

Keith Dawkins

Bruce, I think we remain very bullish about the segment, particularly after the favorable superior ACC results recently presented. As you know, Lotus is a differentiated second-generation product and as you also know peri valve elite drives both early and late mortality and morbidity.

We think the leak results from REPRISE II the CE Mark trial best-in-class and the six-month data from the REPRISE II will be presented next month at EuroPCR. So this is an area where we are investing heavily. The additional third valve size, the 25 millimeter valve, will be launched shortly and will be available for the REPRISE III U.S. pivotal IDE trial. So in answer to your question, we appreciate the increasing potential size of the market and are investing appropriately in this space.

Operator

And we have a question from the line of Matthew Dodds with Citigroup. Please go ahead.

Matthew Dodds - Citigroup

For BP, it looks like the Bard business, I know you talked about the legacy business declining, but I think the Bard business declined 10% as well, is that right and is that integration issues?

Michael F. Mahoney

We have to get that exact number to you. The standalone Bard business declining 10% doesn’t appear correct to me. So we will to verify with the group here. So our information was saying that the Bard integration has gone well, that the revenue gains are consistent with our financial model and more in the flattish range year-over- very.

Quite frankly, the challenge has been more in the legacy EP business within Boston Scientific, which ex-Bard, was down slightly for the quarter. So I would tell the Bard business more flat and the legacy BSC business is low single digits.

So I think overall that integration has gone well. As I mentioned the commercial teams have pulled together and we’re really still in the very important time where we are pulling the key pieces there together. We’ve talked about our IntellaTip MiFi therapeutic catheter, we’ll gain an impact as we move towards the second half of the year. And we will have our first implementations of our Rhythmia navigation system. So that business will strengthen particularly in the second half of 2014 and be a more meaningful contributor in ‘15.

Matthew Dodds - Citigroup

Just a quick one on emerging markets, if that’s all right. You did better than peers this quarter. It sounds like in the commentary, Endoscopy, Urology, Other Interventional Cardiology were the big strengths, is that - are those the majority of it, or is there something I missed that also did really well?

Michael F. Mahoney

We are putting increased emphasis on the diversification of our portfolio in the business you just mentioned in those emerging markets. There is less pricing pressure, there is excellent opportunity to train more physicians and to increase access and the three that you mentioned there are growing quite nicely. And so it’s helping diversify our cardiovascular mix in those markets.

Operator

We have a question from the line of Brooks West with Piper Jaffray. Please go ahead.

Brooks West - Piper Jaffray

Mike, I wanted to push you a little bit on the strategy with your quad generator in the United States, just to make sure I'm thinking about expectations correctly. Do you see that -- is there an opportunity to call on competitive accounts in your mind with that generator and actually try to take some share based on the differentiated features? Or is it primarily a protector for Boston Scientific labs against potential -- you know, you've got St. Jude and you've got Medtronic coming to the market in the near future.

Michael F. Mahoney

I think it’s both. We haven’t offered, there hasn’t been a competitive quad offering in the U.S. And physicians like -- in most hospitals like choices. So I think it will be - we’ll target that customers who are users of BSC products broadly and customers who may not be users of BSC products, so I think it’s great for the market to have a second offering.

And this strategy has been really well proven out. There has been a number of cases in the past where even recently that we’ve seen some competitive companies have some lead issues and you see companies or physicians that will mix and match say our leads with competitive devices or our device with competitive leads.

So that is not a new phenomena within this business and it’s been approved through rigorous testing and clinical performance by the FDA and I think the market will embrace a second choice in the quad offering and we will take it immediately to competitive accounts and to our current users.

Brooks West - Piper Jaffray

Okay. And then just a quick follow-up on other Interventional Cardiology, can you call out, is that mainly your imaging products and then remind us again your pipeline there? Don't you also have an FFR product coming to market soon?

Michael F. Mahoney

Sure. The key drivers of our IC Other business would be our imaging business, our IVUS imaging business for sure and we’ll be expanding into FFRs. I think -- I believe the first quarter of 2015 is the timing for our FFR launch, so that’s a nice catalyst.

The second one is our chronic total occlusion, which is the acquisition we did at BridgePoint a number of years ago, a couple of years ago and also we had a positive ruling legally and we’ll be able to re-launch our Guidezilla guide catheter as we enter our second quarter here. So that should provide some additional tailwind to the Other Cardio business.

Susan Lisa

Linda, we have time to take one more question please.

Operator

Okay, thank you. We have a question from the line of Kristen Stewart with Deutsche Bank. Please go ahead.

Kristen Stewart - Deutsche Bank

Just wanted to double check I guess your guidance for the full year including about 100 basis points plus from adjacencies, just in terms of whether or not -- I know that is what you said from last quarter as well but your confidence around that given what seems to be still a very slow progress on Alair and then the change in assumptions with Vessex. Then I have a follow-up after that.

Daniel J. Brennan

Christian, it’s Dan. Yes, I think as we called out in the prepared comments, the three biggest contributors to that 100 basis point, 100-plus basis points of growth will be Lotus, WATCHMAN and Alair, and that’s still the plan and still that’s included in our $7.3 billion to $7.5 billion guidance for the year.

Kristen Stewart - Deutsche Bank

And then just on the margin front, you guys have commented that you still feel very confident in getting to the 25% operating margin goal in 2017. This quarter you saw a lower tax rate. It sounds like you didn't really change the tax rate guidance for the full year. But can you give us some level of appreciation in terms of the longer term if you can get to the 25% operating margin goal in 2017? What does the tax rate look like in that year?

Daniel J. Brennan

So I think we’ve gone out both this year and next year with 13% to 15%. I’m very comfortable with that in terms of tax rate and actually we don’t really give much guidance for ‘15, but we feel like the tax rate is an important one to give for that next year. Still feel good about the 25% operating income in 2017 and that would include whatever tax rate we’re at at that point as well.

Kristen Stewart - Deutsche Bank

What’s the risk I guess that that nice improvement in operating margin over the next several years is really offset by a significantly higher tax rate?

Daniel J. Brennan

I think if you look at the -- our comfort with the 25%, again, I wouldn’t give anything beyond 2015 relative to any parts of the P&L, but still feel that the 25% is our goal for 2017 with all areas of the P&L contributing.

Susan Lisa

Okay. With that, we’d like to conclude the call. Thanks for joining us today. We appreciate your interest in Boston Scientific. And before you disconnect, Linda will give you all the pertinent details for the replay. Thanks again.

Operator

Thank you. Ladies and gentlemen, this conference will be available for replay after 10:30 AM Eastern time today until May 13th at midnight. You may access the AT&T Executive Playback Service at any time by dialing 1-800-475-6701 and entering the access code 322688. International participants may dial 1- 320-365-3844. Again those numbers are 1-800-475-6701 or 1- 320-365-3844 and the access code 322688.

That does conclude our conference for today. Thank you for your participation and using AT&T Executive Teleconference Service. You may now disconnect.

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