Boston Scientific Corporation (NYSE:BSX) Boston Scientific Announces Recommended Offer to Acquire BTG PLC November 20, 2018 7:15 AM ET
Susan Lisa - Vice President of Investor Relations
Michael Mahoney - Chairman and Chief Executive Officer
Jeffrey Mirviss - Senior Vice President and President Peripheral Intervention
Daniel Brennan - Executive Vice President and Chief Financial Officer
Robert Hopkins - Bank of America
David Ryan Lewis - Morgan Stanley
Bruce Nudell - SunTrust Robinson Humphrey
Lawrence Biegelsen - Wells Fargo Securities
Robert Marcus - J.P. Morgan
Isaac Ro - Goldman Sachs
Ladies and gentlemen, thank you for standing by. Welcome to the Boston Scientific Acquisitions BTG 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, today's conference is being recorded.
And I would now like to turn the conference over to your host, Susan Lisa. Please go ahead.
Thank you, Brad, and good morning everyone and thanks for joining us on short notice. With me on today's calls are Mike Mahoney, Chairman and Chief Executive Officer; and Jeff Mirviss, Senior Vice President and President Peripheral Intervention.
We issued a press release earlier this morning announcing that we have reached an agreement on the terms of a recommended offer to acquire BTG for £0.480 per share which implies to today's exchange rate of total transaction value of approximately $4.2 billion in cash or 100% of the equity or approximately $4 billion enterprise value net of BTG's cash as of September 30th.
We have posted a copy of that release and a summary slide deck for that transaction with additional financial and operational highlights to the Investor Relations section of our website under the heading, Events and Presentation.
You can also find here a 2.7 announcement issued by BTG, Boston Scientific and Bravo Bidco Limited our wholly owned subsidiary form to affect the transaction which describes the proposed transaction in detail as required by the UK Laws City Code on takeovers and mergers.
And more fully described in these materials, we have received irrevocable undertaking from BTG's three largest shareholders covering approximately 33% of BTG's share to vote in favor of our offer as well as from all BTG's directors covering an additional 0.3% of BTG's shares evidencing strong support for the transaction.
I will now turn it over to Mike.
Good morning everyone. Today we are excited to announce another milestone in our Company's category leadership strategy, with our recommended offer to acquire BTG in all cash transaction values approximately $4.2 billion.
We believe this deal is both strategically and financially attractive to Boston Scientific and deliver significant value to patients, customers and our shareholders. And I know our team will deliver on it.
Slide 3 outlines the strong alignment that BTG and Boston Scientific have and bringing to market highly differentiated technologies, which improve patient lives through minimally invasive solutions to meet many of today's greatest clinical challenges.
We believe BTG's IM business is highly complementary with our Peripheral Interventions' business. And the combined businesses would bring great benefits to patients around the world as well as to our shareholders.
This transaction would also allow us to leverage our global presence and utilize our R&D and clinically evidence generation capabilities to increase patient access to BTG's differentiated therapies throughout Asia and Europe and Latin America.
Slide 4 highlights the clear strategic benefits of this combination. The BTG acquisition would enable to scale our capabilities in diagnosing and treating cancer. This is a critical patient need where BTG will bring unique platform technologies to Boston Scientific in liver, kidney and other cancers.
BTG's IM business is expected to accretive to top-line growth for Boston Scientific and our PI business. We also have to make that BTG's interventional medicine business would add more than $400 million of revenue to BSX's Peripheral Interventions divisions in calendar year 2019 further in our category leadership strategy and driving portfolio pull through in both interventional oncology as well as venous disease which Jeff will outline in few minutes.
The BTG business also has strong margins and cash flows through its unique acute care specialty pharma and licensees business. As a result of transaction, it will provide strong returns to our shareholders. We expected to be accretive to adjusted EPS by $0.02 to $0.03 in 2019.
We expect to realize approximately $175 million of combined synergies in the third year after completion of the transaction in 2021. And our return on invested capital is expected to be between 7% to 8% in the third year after completion in 9% to 10% in year five.
We also have a firm commitment to maintain our investment grade credit rating. We expect to generate very strong cash flow over the next several years after resolving the vast majority of our legal and tax disputes in 2018.
We also expect to repay at least $1 billion of borrowings within 18 months following closing of the transaction. This will allow us to achieve 2.5X leverage by within two years while still maintaining the financial flexibility to invest in tuck-in and growth oriented M&A and share repurchase.
To support these goals, we expect to suspend our share repurchase program in the near-term while we prioritize debt repayment. I would also like to recognize the hard work of our BTG employees in creating the high-performing company with a great culture that we plan to build upon for the benefit of patients and customers around the world.
Slide 5, BTG's headquarter in London, but a high presence of this revenues approximately 90% are generated in United States. The company has over 1600 employees worldwide in three operating business segments.
The IN business is comprised of two franchises oncology and vascular. This business has been delivering strong double-digit growth. The specialty pharma business is highly profitable and consists of a portfolio of durable differentiated life-saving products for the acute care hospital setting.
The licensing portfolio is also highly profitable, benefitting from royalty payments for well known pharma agents such as ZYTIGA, a highly successful cancer treatment for prostate cancer. BTG shareholders receive £0.840 in cash per share for total purchase price of approximately $4.2 billion or 100% of the fully diluted equity and enterprise of value of $4 billion net of BTG's cash on hand based on yesterday's exchange rate.
The transaction also supported BTG's three largest shareholders as well as its directors and committed financings already in place. The combination of two companies will result in a strong cash flow and attractive 9% to 10% ROIC in 2023 as already mentioned. We expect the transaction to close in the first half of 2019 subject to receive a BTG's shareholders approvals, customary regulatory approvals and approval of the UK Court.
Slide 6 demonstrates the continued execution of our portfolio diversification journey to expand into continuous higher growth segments with differentiated solutions. The high growth interventional oncology and venous portfolio in particular of BTG further accelerates that strategy and strengthens our growth profile in PI and overall.
Slide 7 outlines areas we are purposely committed to increasing our presence in the field of cancer treatments and diagnostics. In addition, we already commercialized products across many of our businesses including Endo and Uro, NPI. We are strategically building a compelling future portfolio of growth platforms in cancer therapies.
We are focused on leading causes of cancers around the world as we believe in the promise of medical technology to the extend and improve the lives of patients suffering from cancer.
I will now turn it over to Jeff to talk about the specific opportunity for the combined PI business.
Okay. Thanks, Mike. Looking at Slide 8. This is just a quick reminder of the underlying opportunities of the Peripheral market due to demographic and clinical growth drivers as well as our own PI growth drivers.
Our PI category leadership strategy has enabled us to deliver above market growth of 9% year-to-date and the IM portfolio of BTG will help us accelerate our growth in 2019 and beyond by scaling our offerings in both interventional oncology and venous while we also launch exciting new products in our U.S. PAD portfolio with the novel Eluvia Drug-Eluting Stent, the Ranger DCB in 2020, and then the SAVAL DES-BTK in 2021.
Slide 9 lays out the compelling combination that these portfolios and organizations can create. BTG's unique interventional medicine products are a perfect complement to our current PI portfolio and provide entry into over $1 billion of new attractive peripheral segments in which BSX does not currently compete.
Within interventional oncology, the acquisition of BTG will enable us to add Y90 radio embolization and unique radiopaque beads as well as cryo and microwave ablation to our existing IO portfolio of coils, micro catheters and guidewires.
This transaction would transform our current interventional oncology franchise from one of primarily delivery tools and coils into a potential $500 million plus business with multiple new innovative therapeutic technologies that can better serve the interventional radiologist customer. So in short BSX would accelerate into a full-line cancer therapy provider.
And in venous we would add several adjacent products to advance the treatment of multiple venous disorders; the EKOS thrombolysis system has demonstrated positive outcomes in treating pulmonary embolism supported by strong evidence base.
Varithena is a novel treatment for varicose veins and has recently relaunched in the U.S. with a dedicated CPT code. And we would reenter the vena cava filter market with the world's first five convertible vena cava filter, which is called Sentry and is supported by excellent two year outcomes that was just presented earlier this month at the Aviva conference.
In Slide 10, I will just go a little bit deeper on a few of the key differentiated technologies. The growing trend in liver, kidney and other cancers is to treat as much as possible locally, seeking to improve outcomes for patients and reduce the unwanted side effects of systemic chemotherapy.
BTG’s TheraSphere radioactive glass microspheres deliver a high dose of localized radiation directly right into the tumor enabling a more personalized medicine approach, it has a very high concentration of radioactivity per sphere, which we believe confers competitive advantage.
there is also a strong body of existing clinical evidence plus an ongoing series of clinical trials which we believe position it to be category leading technology; and similarly both Galil cryoablation and the microwave ablation system that is in development have a unique opportunity to not only be a part of palliative care, but also curative for patients who are suffering from cancer.
Slide 11 shows that these technologies serve as differentiated platforms that we plan to explore expanding into other cancers and we have highlighted just a few of them on the slide here.
Clinical studies and both product development are in process to expand TheraSphere and cryoablation for lung cancer which is the leading cause of cancer death and there are also programs underway to expand indications into breast cancer and into bone metastases.
On Slide 12, let me just switch now to the venous portfolio with a focus on pulmonary embolism and the impressive progress that BTG’s ecosystem has achieved in the space gaining the first indication for a minimally invasive product for PE.
The EKOS thrombolysis system speeds time that clot dissolution and has shown quality clinical outcomes in several clinical trials. Together with the Sentry vena cava filter which is the world’s first bio convertible filter, these technologies help treat and prevent one of the leading causes of in hospital preventable deaths.
In fact, PE is the third most common cause of death from cardiovascular disease just after heart attack and stroke. However, with prompt diagnosis and treatment, survival rates can significantly improve.
On slide 13 an additional growth opportunity of this transaction shows that we can provide more patients around the world with access to the BTG’s innovative technologies by leveraging our global commercial engine.
For example, we know that there are far more cancer patients in international markets than in the U.S.. However, 90% of current BTG sales are generated in the United States. So upon completion of this deal, we look forward to bringing the breakthrough technologies of BTG to new geographic markets via our existing commercial teams.
On slide 14, we provide an overview of BTG’s acute care specialty pharma and licensing portfolios. BTG’s specialty pharma business is a self contained business unit with a long history of life saving products. It comprises a durable and highly specialized collection of anecdotes led by CroFab, which is an anti-venom for snakebites. DigiFab, an anecdote for digoxin toxicity and Voraxaze anecdote for methotrexate overdose.
And CroFab has been used in over 50,000 patients since 2001, and is the only FDA approved product derived exclusively from U.S. snakes and approved to treat all North American pit viper envenomation in adult and pediatric patients. And while we recognize that CroFab faces some newly launched competitive product, its long-established safety and efficacy profile should enable it to remain a durable leader in this segment.
In BTG’s licensing business consist of receiving royalty streams, it requires very little support and infrastructure and is quite profitable. The key primary revenue stream is derived from a market leading cancer drug called Zytiga.
So to conclude on Slide 15, we believe this transaction will enhance our growth profile and create significant value for shareholders. We will add a high growth $400 million interventional business to accelerate our category leadership strategy in interventional oncology and Venus.
We expect to realize revenue and cost synergies of at least 175 million in year three, which is 2021 after closing. There is a potential for meaningful revenue synergies from pull-through with BTG product lines in our market leading global PI commercial engine.
On the car side, there is a significant opportunity to be more efficient, where there is redundancy and functions and to bring the BTG portfolio where appropriate into the Boston Scientific manufacturing footprint. And with those two drivers, we anticipate the transaction will be approximately $0.02 to $0.03 accretive to adjusted earnings per share in 2019, and then increasingly creative thereafter.
So in summary, the combination of the two companies is expected to be immediately accretive result in strong cash flow generation and a strong ROIC, which again we expect to be between 7% and 8% in year three, and between 9% and 10% in year five.
We look forward to taking the steps necessary to complete this transaction and to having the opportunity to engage productively with the BTG team to transform patient care.
Thank you, Jeff and Brad, we will take questions for about the next 15 minutes. So before we begin that I’m neglected to say that the outset of the call to remind everyone that the usual Safe Harbors apply is set forth on Slide 2 and this call contains forward-looking statements within the meanings of Federal Securities laws which are identified by words like anticipate, expect, believe, estimate and other similar words.
Actual results may differ materially from those discussed in the forward-looking statements and risk factors maybe 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. So apologies for that.
And now onto Q&A where both Mike and Jeff are available for your questions and they will be joined by Dan Brennan our Executive Vice President and Chief Financial Officer.
Brad please go ahead.
Of course. [Operator Instructions] Our first question today comes from the line of Bob Hopkins with Bank of America. Please go ahead.
Hi thanks and good morning. I will be quick as I know there is a lot going on. So just two quick things. One, can you guys give us a sense as to what you view the sustainable revenue growth outlook of this asset is and then probably more importantly give us a sense as to what the operating margin profile is both with and without the royalty and how long the royalty lasts, so just to start a couple of financial questions?
Good morning Bob. In terms of the revenue growth recently reported, their calendar ends March 2019, but for their first half results March through September they grew their oncology and vascular business 14%, their total IM business was 12%, pharmaceutical was 7% and licensees was 18%.
They provided an outlook for 2018 for the full calendar year, which ends in March 19th with strong double-digit 15% to 17% growth in IO and vascular and low single-digit growth in pharmaceutical sales. So we see a very strong accretive growth business with our interventional medicine business and a slower grower in the pharma business.
In terms of the gross margin of the company, overall BTG we would say is essentially in-line with the Boston Scientific average and when we look forward would be significant both cost synergies and revenue synergies as well as our ability on the COGS line with some manufacturing capabilities.
We see significant cost synergies and margin improvement, which would make this deal accretive overtime over the three-year period to both the BSC average as well as the PI average.
I guess the one follow-up I would add is just on how much does the royalty contribute to margins and how long do you think those royalties are likely to last? Just curious as to how ongoing that is?
Yes. So the public statement from BTG talks about Zytiga and potential entry to some litigation there that goes through I think September of 2022 and so that will continue to play out; the margins on that business are quite strong and so what we have there are two assets with the pharma business and the licensing business with strong profitability as well as the interventional medicine business which has significant upside in terms of profitability with significant R&D and potential synergies with that.
Great. Thank you very much.
And we do have a question from the line of David Lewis with Morgan Stanley. Please go ahead.
David Ryan Lewis
Good morning. Just a few quick ones for me. I will start strategically with Mike. So Mike on the surface just looks like a large transaction and so that the largest giving your tenure as CEO of the company. So there is really a core business inside of about $400 million but can you just really quickly reinstate your confidence and the core growth rate that investors were buying into for next year and the recent acquisitions you have hired. Does this transaction anyway suggest that you are not committed to acceleration in the core which is what everyone believe as a sort of we could go. So talk about your confidence in the core here number one. And number two, strategically, there is a pharmaceutical business here that doesn't seem very core, what is the opportunity frankly to engage in an asset sale. And then I have a real quick follow-up for Jeff.
Yes. So we have high confidence in the commitment we have already provided which is the 7% to 10% growth rate in 2019 and 2020. So we are very confident with that. We continue to execute against our plans. We continue to beat our strategic plans, our pipeline is very impressive.
So we think this is just further accelerator of our growth and specifically with our IM business and the markets that are growing faster than BSX's with accretive gross margins, accretive operating income margins and accretive growth. And a company that we are highly confident in our ability to integrate it.
The PI team and BFC overall has done a great job in integration. So it's much like the AMS deal five years ago for our urology business. This will transform our PI team and we are very comfortable with the synergies there.
And the pharma business, spec pharma is a solid business. So they has attractive profitability as I mentioned before, acute care products. It's also delivered 7% growth in the first half of 2018 and its slightly flattish to down in the second half.
And we will continue to evaluate this business overtime. So it's the best position BSE for growth and profitability. And we will continue to look at this portfolio in the context of BSX's overall portfolio when we look at portfolio management opportunities.
David Ryan Lewis
Okay, thanks Mike. And then Jeff, just two quick ones for me for you. So two things. This is really a $400 million business in Peripheral and IO. So our sense is does this gives you the scale to be a major player in those two businesses and maybe build that business to a $1 billion overtime. So are you confident this gives you everything you need in those business to be successful number one. And number two, I think it will make this deal work, is the significant mixed dynamics in U.S. and OUS. I think the total cooperation is 90-10 U.S., ex-U.S., but I think that $400 million is also a very skewed U.S. So what is the incremental growth opportunity of just taking that 90/10 mix from the $400 million to something more Boston Scientific like which is 50/50 or 60/40? Thanks so much.
Yes. Thanks for the question David. I think on the first point, yes, so we would add potentially $400 million in revenue and really scale up on both Interventional Oncology and venous. And we have built a very broad and deep scale business in arterial and so when you look across our Peripheral, we would sort of match that in the three big franchises.
So we are confident in the strong double-digits that they put up regularly in this business and adding it to our portfolio with our commercial engines makes a ton of sense and so we will be really a skilled player across all three franchises.
And then I think you hit on the one of the key attractive parts of this acquisition for Peripheral, which is the geographic expansion opportunities. And you are right in that 90% plus of their revenue comes from the United States.
We operate in many, many countries outside the United States internationally and so what a great opportunity to bring our capabilities to bear from a commercial standpoint and drive significant revenue upside and growth as a result of just entering countries that they are not in today.
And so that in addition to some of the clinical trial data that is coming out is a nice driver and then they have a pipeline. So we have excellent opportunities to launch some of the products, that they are just getting after today, as well as products we know that are coming down the pike. So, I think this really accelerates our category leadership strategy immensely.
And David, this is Dan. I would just add as well and Mike mentioned this. When we do the AMS deal in 2015, summer of 2015, a very similar profile to this 90/10 mostly revenue in the U.S. and the team here has fundamentally transformed the international opportunity for that business. And helped to transform the overall urology business into a global leader. So we would look for the same play to be run here relative to Jeff and the PI team that what the urology team is run with the AMS acquisition.
David Ryan Lewis
Thanks so much.
And we do have a question from the line of Bruce Nudell with SunTrust. Please go ahead.
Good morning. Thanks for taking the question. Just a few financial questions. One with regard to the 175 million in revenue cost synergies. Can I presume that almost all of that is interventional medicine? The second question pertains to the operating margin of the interventional medicine business. Is that in the 25% range? And just thirdly, I guess is should we look at - sorry, to your revenue stream as basically disappearing overtime. And I’m presuming those buyers for the pharmaceutical side. But I was just wondering about the revenue stream on Zytiga?
Yes. So to clarify, and you can refer back to the BTG’s earnings call. We recognize potential for U.S. generics in Zytiga before 2022, but there is ongoing litigation in that area. On the specialty pharmas, I mentioned before, we will continue to look at that asset as we would any business with in Boston Scientific given us growth and profitability, we will make the right portfolio management opportunities overtime.
In terms of the operating margins, as we mentioned, we are very excited, we believe that the operating margin is essentially in line with BSE today and with those synergy we will be able to grow both gross margin and operating margin accretive to PI and to Boston Scientific.
And in terms of the synergy question we are not going to give you a lot of detail here. Clearly there is overlap and the company, obviously more significantly more overlap in the Interventional Medicine business given that we are not in the pharam and licensee business.
The licensee business is they really a financial asset, it’s a standalone, it requires no integration and some resources to manage that, but that is a very independent as the specialty pharma business from Interventional. So there is clearly some opportunities for synergies whether it be in the manufacturing area to leverage our footprint, as well as if you go down the P&L.
But more importantly or as importantly as Jeff outlined, I think the revenue synergies in this are really significant. The portfolio match with our interventional medicine business is significant, this is slide that lays what they add to our business combined with a pipeline that Jeff mentioned as well as international expansion.
This is a company that we have been tracking for over two years and Luis and the team have done an amazing job of pulling together a powerful interventional medicine business that is hand in glove with Boston Scientific and so this is not a new target for us, we have been looking at it for a while, we thought the timing was right and we have a high degree of confidence in our ability to integrate this.
So just to narrow it down, the 175 million is mainly associated with interventional medicine?
More or less.
Thanks so much Mike.
And we do have a question from the line of Larry Biegelsen with Wells Fargo. Please go ahead.
Great. Thanks for taking the question. Just two for me, one I just wanted to follow-up on Zytiga, and also the accretion beyond 2019. So first just on Zytiga, the company has publicly disclosed it looks like it’s about 200 million in sales, last year, how much is U.S. versus OUS, can you disclose the terms with J&J and what are your deal assumptions for the U.S. I think everybody on this call knows that generic could enter the U.S. market any day. So that is my first question on Zytiga? And then I will just ask the second one, Dan any color on the accretion beyond 2019 it's a little unusual for the deal this size to only give us the first year, any color beyond 2019? Thanks for taking the questions guys.
Sure Larry, I will take the second one first, relative to accretion, so we are talking about a midyear close for next year, it’s already $0.02 to $0.03 accretive to our adjusted EPS. So imagine that when you get into 2019, you have a full year of that and then also have us starting to achieve the $175 million synergy number that we said we would have by year three.
So that is why when you look at it - Mike went through a lot of the strategic aspects of why we like this from a financial perspective hard not to like the ROICs we have, it’s immediately accretive a lot of the deals we have done this year we have talked about the deals we have done prior in 2018 some are dilutive.
This one comes right out of the gate accretive in 2019 and from a margin perspective over that timeframe as well from a gross and operating it will be accretive and it’s - from all the financials stats you look at it is winner from that standpoint.
For the first question I can take that. So the royalty rate for Zytiga is not specifically disclosed by BTG. They have said it's kind of mid to high single-digit royalty on global Zytiga sales, and I think that is where we leave that relative to the licensing business.
Brad next question please and this will be our final question.
And our final question comes from the line of Robbie Marcus with J.P. Morgan. Please go ahead.
Okay. Thanks for taking the question [Technical Difficulty]
My apologies for that connection, we do have a question from the line of Isaac Ro with Goldman Sachs. Please go ahead.
Hey guys good morning. So just a quick question on that 175 in synergy, could you maybe just break down a little bit on how you think the revenue versus cost piece will play out overtime, just maybe any detail on separating the two and if you think a little bit more about - close to the deal closing, when we might get more information on specifics, is it possible you will maybe give us interim update or we have to wait for the deal close to get more specifics on how those break down.
Yes. So we are not going to give you breakdown on the revenue and the cost synergies. Obviously we are financially disciplined company. So we want to appropriately conservative in our synergies and ensure that we deliver on them, which is what we have done quite frankly in all of the tuck-in deals where there has been a current base of business on revenue and costs.
We have been very good at delivering and exceeding upon our synergy numbers, but I'm not going to break out the detail of that. Jeff talked about the revenue synergies and the portfolio in OUS and significant cost synergies given some of the overlaps. And we will provide updates as appropriate as we work through the eventual closing.
Okay. So it sounds like we might get some interim update between now and deal close. Is that maybe qualitatively or just kind of curious like if we will get any incremental information between now and close. Thank you.
We will give you information as appropriate. So we obviously have our guidance calls coming up. And as we get more information or enabled to we will give more details.
So, I think we are going to wrap the call here. So thanks everybody for the interest and we look forward to giving you more details as time goes on. Have a great day.
And then before you disconnect, Brad will give you pertinent details for the replay. Have a great day.
And ladies and gentlemen today's conference will be available for replay after 9:45 AM today through December 11, 2018. You may access the AT&T teleconference replay system at anytime by dialing 1-800-475-6701 entering the access code 457300. International participants may dial 320-365-3844. Those numbers again are 1-800-475-6701 and 320-365-3844 again entering the access code 457300. That does conclude your conference for today. Thank you for your participation and for using the AT&T Executive Teleconference Service. You may now disconnect.