Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Daniel J. Starks - Chairman, President and CEO

John C. Heinmiller - EVP and CFO

Analysts

Robert Hopkins - Banc of America

Michael Weinstein - JPMorgan

Fredrick Wise - Leerink Swann Llc

Tao Levy - Deutsche Bank

David Lewis - Morgan Stanley

Vivian Cervantes - Rodman & Renshaw Llc.

St. Jude Medical, Inc. (STJ) Q3 FY08 Earnings Call October 15, 2008 8:00 AM ET

Operator

Welcome to St. Jude's Medical Third Quarter 2008 Earnings Conference Call. Hosting the call today is Dan Starks, Chairman, President and Chief Executive Officer of St. Jude Medical.

The remarks made during this conference call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. Such forward-looking statements include the expectations, plans and prospects for St. Jude Medical.

The statements made on this conference call are based upon current expectations, and are subject to certain risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.

Such statements involve potential risks and uncertainties, such as market conditions and other factors beyond St. Jude Medical's control and the risk factors and other cautionary statements described in St. Jude Medical's filings with the SEC, including those described in the risk factors and cautionary statement sections of the St. Jude Medical's Annual Report on Form 10-K filed on February 27, 2008.

St. Jude Medical does not intend to update these statements and undertakes no duty to any person to provide any such update under any circumstance.

At this time, all participants have been placed on a listen-only mode, and the floor will be opened for your questions following the presentation. It is now my pleasure to turn the floor over to Dan Starks.

Daniel J. Starks - Chairman, President and Chief Executive Officer

Thank you, Regine and good morning and welcome to the St. Jude Medical third quarter 2008 earnings conference call. With me on the call today are John Heinmiller, Executive Vice President and Chief Financial Officer, Mike Rousseau, Group President, Joe McCullough, Group President and Angie Craig, Vice President of Corporate Relations.

I want to first ask John Heinmiller to conduct his normal review of our third quarter results along with his typical update for the entire St. Jude Medical business. I will then make a few comments and open it up for your questions. Go ahead, John.

John C. Heinmiller - Executive Vice President and Chief Financial Officer

Thank you, Dan. Sales for the quarter totaled $1.84 billion, up approximately 17% over the $927 million reported in the third quarter of last year. Favorable currency translations versus last years third quarter increased this quarter's sales by about $40 million.

The favorable impact of currency on reported sales for the quarter was approximately $10 million less, than we anticipated in July, when we provided guidance for the third quarter, based primarily on the strengthening of the U.S. dollar versus the Euro throughout the third quarter.

The federal research and development tax credit expired at the end of 2007 and was extended for 2008 and 2009 earlier this month, retroactive to the beginning of the fiscal year. Because the extension of this legislation occurred during our fiscal fourth quarter, GAAP requires us to estimate and record our effective income tax rate through the third quarter, assuming that the research and development credit was not extended and to recognize the retroactive benefit of this legislation during our fiscal fourth quarter.

For purposes of this conference call and our calculation of adjusted net earnings however, we are presenting our results as if the tax credit was extended for 2008, as of the beginning of the fiscal year. As a result, comments referencing our third quarter results and our guidance for 2008, including earnings per share amounts are presented, based on this assumption.

Earnings per share were $0.57 for the third quarter of 2008, a 24% increase over EPS of $0.46 cents in the third quarter of 2007. Before we discuss our third quarter 2008 sales results by product category with guidance for the fourth quarter of 2008, let me comment on the currency exchange rates we are currently using in our outlook.

The two main currencies influencing St. Jude Medical's operations are the euro and the yen. On our conference call one quarter ago, we assumed that for the second half of 2008, each euro would translate into about $1.54 to $1.58 and that each 105 yen to 110 yen would translate into $1.

We now assume that for the fourth quarter of 2008, each euro will translate into about $1.33 to $1.38 and that each 100 yen to 105 yen will translate into $1. This change in assumption regarding currency exchange rates has the impact of reducing total forecasted sales for the fourth quarter by about $30 million, $20 million of which relates to our Cardiac Rhythm Management product sales.

In addition, as we mentioned in our last earnings call, our fourth quarter this year will have 64 selling days, versus 61 selling days in the fourth quarter of 2007 due to our 52, 53 week fiscal year convention. Given that the Christmas and New Year's holidays both fall on a Thursday this year, we expect the two of these three additional selling days to have little impact on sales for the quarter.

Now for the discussion of sales by product category: For the third quarter, total Cardiac Rhythm Management sales, which include revenue from both our ICD and pacemaker product lines was $678 million, up 15% from last year's third quarter.

For the third quarter, ICD sales were $381 million, up 20% from last year's third quarter. U.S. ICD sales were $248 million, up 12% from last year's third quarter. International ICD sales were $133 million, a 39% increase over the third quarter of 2007, with $10 million of the increase due to favorable foreign currency translations.

For low-voltage devices, sales for the third quarter totaled $297 million, up 10% from last year's third quarter. In the United States, pacemaker sales were $134 million, up 2% compared with last year's third quarter. In our international markets, pacemaker sales were approximately $163 million, up 17% from the third quarter of 2007, including a $14 million increase due to favorable foreign currency translations.

For the fourth quarter of 2008, we expect total CRM product sales to be in the range of $680 million to $710 million. As I mentioned, our current exchange rate assumptions versus those we were using one quarter ago, reduced our guidance for fourth quarter CRM product sales by about $20 million.

Atrial Fibrillation or AF product sales for the third quarter totaled $135 million, up 35% over the third quarter of last year, including a $5 million increase due to favorable foreign currency translations.

For the fourth quarter of 2008, we expect AF product sales to be in the range of $140 million to $150 million. Total sales of cardiovascular products for the third quarter of 2008 were $207 million, up 10% over the third quarter of 2007 including a $10 million increase due to favorable foreign currency translations.

Within this category of products, sales of vascular closure products in the third quarter of 2008 were $89 million, a 5% increase over the third quarter of 2007. Sales of heart valve products in the third quarter of 2008 were $78 million, a 15% increase over the third quarter of 2007.

For the fourth quarter of 2008, we expect cardiovascular product sales to be in the range of $205 million to $220 million. Total sales of neuromodulation products in the third quarter of 2008 were $64 million, up 25% from the third quarter of 2007, including $1 million increase due to foreign currency translations.

For the fourth quarter of 2008, we expect sales of neuromodulation products to be in the range of $63 million to $68 million. The geographic breakdown of St. Jude Medical sales in third quarter of 2008 was 54% in the United States, versus 46% outside the United States or OUS. This compares to 57% U.S. and 43% OUS in the third quarter of 2007.

A detailed geographic breakdown of this quarter's sales by product shows high voltage at $248 million, U.S; $133 million, OUS; low voltage at $134 million, U.S; $163 million, OUS; Atrial Fibrillation product sales at $64 million, US; and $71 million, OUS; Cardiovascular product sales at $87 million, US; and $120 million OUS; and finally Neuromodulation products at 57... $55 million, US; and $9 million, OUS.

The gross profit margin this quarter was 74.7% representing a 110 basis points improvement over the third quarter of 2007. For the full year 2008, we expect gross profit margins to be in the range of 74.2% to 74.7%.

Our third-quarter SG&A expenses were 37% of net sales and for the full year 2008, we continue to forecast SG&A as a percentage of net sales to be in the range of 36% to 36.5%.

Research and development expense in the third quarter of 2008 was 12.1% of net sales, with expense up 12% from the third quarter of 2007. For the full year 2008, we expect R&D expense to be in the range of 12% to 12.5% of net sales as we continue to balance delivering short term results with the right investments in long term growth drivers.

Other expense was $5 million in the third quarter and for the fourth quarter of 2008 we expect the other income and expense line item will be a net expense of approximately $3 million to $6 million. Year-to-date our effective income tax rate was 27.5% which we anticipate will approximate the effective rate for the full year of 2008. As a reminder, this effective income tax rate incorporates the extension of the federal research and development credit in 2008, retroactive to the beginning of the year.

Moving on to the balance sheet; at the end of September 2008, we had $579 million in cash and cash equivalents and $1.402 billion in total debt. For the nine months ended September 27 2008, net cash provided by operating activities was approximately $650 million, a 33% increase over the first nine months of 2007.

The outstanding debt on our balance sheet primarily represents $1.2 billion of Senior Convertible Debentures due in December 2008 and $197 million of notes due in Japan... issued in Japan, which are due in 2010 and bear interest at a fixed rate of 1%.

In preparation for the December 2008 maturity of the $1.2 billion in convertible debentures, we made $500 million borrowing last week under our existing $1 billion bank credit facility. The cash proceeds of this borrowing are being held on our balance sheet and will be combined with our existing cash balances in December and used to retire the $1.2 billion in convertible debentures.

In addition, St. Jude Medical has entered into foreign currency exchange contracts to manage its exposure to foreign currency denominated inner company positions and third party trade receivables. The contracts will be mark-to-market and any resulting gains or losses are expected to be generally offset by losses or gains on the foreign currency exposure being managed.

Next, I want to offer some comments regarding our earnings per share outlook for the fourth quarter and the full year 2008. In preparing our EPS guidance, we have assumed that in the fourth quarter of 2008 and for the full year of 2008 the share count used in our fully diluted EPS calculation will be about 349 million to 351 million shares.

In addition, our guidance for the fourth quarter of 2008, excludes the catch up portion of the benefit that we will record for GAAP purposes, related to the extension of the federal research and development credit that is retroactive to the beginning of 2008. The company's expects consolidated EPS for the fourth quarter to be in the range of $0.59 to $0.61, and for the full year of 2008, we expect earnings per share to be in the range of $2.30 to $2.32.

As in previous years, we will give guidance for 2009 during our fourth quarter call in January. With that in mind, let me offer just a few preliminary comments regarding our 2009 outlook. We are right now in the process of developing our operating plan and budgets for 2009, and the visibility into a number of variables that will influence our 2009 results will become clear as we move closer to the start of next year.

One of these variables is the impact of foreign currency on our operations. Another factor is the positive impact from our ongoing productivity initiatives, which have the affect of reducing operating expense as a percentage of net sales. Taking all of this into account, we are optimistic that when we complete our 2009 operating plan, we will be comfortable that we will be planning to meet or exceed current consensus expectations of $2.61 for earning per share in 2009.

We will update everyone on our official guidance for 2009 in January, when we report our fourth quarter results. I would now like to turn it back to Dan Starks.

Daniel J. Starks - Chairman, President and Chief Executive Officer

Thank you, John. Our year-to-date 17% growth in revenue and 31% growth in earnings per share reinforces our confidence that St. Jude Medical is in the right markets with the right products at the right time.

I would like to spend the next few minutes reviewing the reasons for this confidence, starting with discussion of the Cardiac Rhythm Management or CRM market. Despite its many challenges, the CRM market continues to provide an unusually strong growth opportunity for St. Jude Medical. It sometimes is overlooked, that the CRM market itself has grown almost $1 billion in the last four quarters and will total approximately $11 billion this year.

We expect the global CRM market to continue to grow at mid to high single digit rate. Keep in mind that we have only two major competitors in this $11 billion space and the 2008 will be the fifth year in a row in which we have gained total CRM market share.

We expect to continue to gain share in the CRM market in 2009 and beyond for all of the reasons we have indicated previously. These reasons are important enough that I would like reiterate several of them briefly. First, as result of our leadership continuity, our sustained execution of a consistent strategic plan over the last 10 years and our consistent expansion of investment in R&D, our product line is stronger and more competitive than it has ever been relative to the competition. We have been averaging over 20 new CRM products per year. We have the only seven French high-voltage leads on the market.

We have the only full featured local language programmers on the market in Japan and in China. We have the only technology available to optimize B to B and A to B timing in an ICD within minutes during an office follow-up visit without the need for a separate echocardiography procedure. During the fourth quarter, we are just starting to roll out our Merlin@home wireless remote patient care system in United States and in Europe. This technology puts us in the wireless remote follow up space for the first time and is a particularly important addition to our product line when combined with capabilities of our electronic medical records program and with upcoming devices such as our Atlas [ph] ICD.

We are beginning a limited launch during the fourth quarter in Europe of our Atlas [ph] ICD product line which includes one of the most meaningful new technologies any company has brought to the ICD market in some time.

As Eric Fain mentioned, at our Annual Investors conference earlier this year, the Atlas [ph] ICD contains a patented algorithm that initially will be used to trend myocardium ischemia events by detecting ST segment shifts. This technology ultimately has the potential to predict an imminent myocardium infarction and notify the patient to get to an emergency room for intervention before the onset of symptoms or cardiac damage.

We are fully focused on leveraging our Merlin Wireless Remote Patient Care System, our 7 French high-voltage leads and our patented ischemia detection technology, not only to gain CRM market share but also to increase both the cost effectiveness of an ICD propellers and the value of an ICD for referring physicians and for patients.

The product line advantages, I have mentioned briefly are only the tip of the iceberg. I appreciate that every company talks about how good its products are but the proof is in market share changes.

St. Jude Medical is the only CRM Company that has gained CRM market share every year the last five years in a row. We expect to be in an even stronger position with respect to our product line compared with our competitors moving forward than we have been doing the last five years.

Second, moving past product based reasons for our optimism that we are well positioned to continue gaining CRM market share, I would like to move on to the topic of our people.

Historically, St. Jude Medical has gained CRM market share, even though we've had a disadvantage with respect to field coverage. Using the U.S market as an example, we previously have talked about our addition of approximately 450 field sales and support people over a four quarter period, at the same time that the competition conducted layoffs and suffered significant involuntary loss of experienced talent.

Similar dynamics with respect to people played out in other geographies as well. What once was a disadvantage for St. Jude Medical with respect to people and coverage has turned into an advantage. Again, I appreciate that every company has [ph] some advantage with respect to service and coverage, and that it can be difficult to sort through competing claims. The proof is in trends relating to customer contract, numbers of centers implanting each company's devices and ultimately market share.

Although we do not disclose full details about the first two metrics for competitive reasons, we have provided enough visibility about these metrics to help everyone understand the many reasons that we have gained CRM market share every year the last five years in a row, and the basis for our confidence that we will continue to gain CRM market share going forward.

Our third category of reasons, for our optimism that we will continue to gain CRM market share, in addition to the strength of our products and of our people is the impact of our additional programs. For example, we have strong customer and product line synergy between our Atrial Fibrillation or AF program, and our CRM business. We are leaders in developing additional heart failure diagnostics, such as our six vector impedance based pulmonary edema diagnostic technology and our direct left atrial pressure sensing technology to go along with the potentially break through ischemia detection technology we already have discussed.

All of this is surrounded by our commitment to connect patient data and our devices directly to every major electronic medical record system. There is plenty more to say about the value of our competitive position in the CRM market, but I would like to move on to talk about Atrial Fibrillation or AF.

The AF market is the second major example where St. Jude Medical is in the right market with the right products at the right time. This market already is a $1.5 billion market even though it is less than 10% penetrated. The broad AF market is continuing to grow at a strong double digit rate and is on track to become a $3 billion to $4 billion market over the next five to seven years.

St Jude Medical's AF program is well positioned to benefit from the growth of the AF market as evidenced by our 33% increase in revenue from AF products during the first three quarters of 2008. Just as with the CRM space, we have leadership with products, people and programs.

Starting on the product side, our EnSite mapping and navigation technology, supported by our full pipeline of next-generation enhancements has given us clear leadership in a key segment of the market. We have a strong number two position in the conventional EP workstation space and are in the process of integrating this technology into our EnSite platform.

We invented the concept of guiding sheaths for ablation procedures and have clear leadership position both in guiding sheaths and in diagnostic EP catheters. We are just beginning to launch our next-generation low profile high intensity focused ultrasound or HIFU ablation technology for echocardio use to leverage the favorable clinical data now published from multiple clinical trials using St. Jude Medical's Epicor Surgical Ablation system.

We are just beginning to launch our confirmed AF implantable loop recorder in Europe to help physicians confirm definitively whether AF has been eliminated by an ablation procedure as part of the decision, whether to terminate prominent post [ph] procedure

We have an expanding line of additional ablation technologies and more, in our AF product development pipeline that we will disclose in the future, when the time is right.

With respect to people and programs focused on AF, we began our AF program in 1993, with our collaboration with Dr. John Schwartz [ph] in the first catheter managed [ph] ablation procedures for patients who suffered from chronic end stage atrial fibrillation. This evolved into the formation of our AF division in 2004, under the leadership of Jane Song and her management team.

Today, we have a 15 year head start and the broadest and deepest program in one of the best growth opportunities in medical devices. We welcome the entry of other companies into the AF space, to help develop the market.

The neuromodulation market is a third example where St. Jude Medical is well-positioned, and yet another one of the best growth opportunities in medical devices. This market also already totals at least $1.5 billion, is less than 10% penetrated, is growing at a strong double-digit rate, and is on track to be become a $3 billion to $4 billion market over the next five to seven years.

We reported 25% growth of neuromodulation revenue this quarter, even though we're just beginning to roll out our Eon Mini product line. We face only two competitors in spinal cord stimulation. We have a strong patent portfolio covering multiple neuromodulation segments. We're making steady progress, and our efforts to expand our business into Parkinson's disease, essential tremor, depression and migraine as well as other potential neuromodulation indications longer term.

We are capturing synergies between our CRM business and our neuromodulation business, based on the low-voltage simulation technology vendors, international infrastructure and other characteristics that are similar to both the... both businesses.

Our structural heart and vascular closure businesses complete our growth platforms. For now, we will conservatively describe these platforms as addressing additional markets already totaling $2 billion and continuing to grow at an average compound rate of about 5%. At our next Annual Investors conference in February 2009, we will update you on the upside we see for these businesses as well as our program to more fully leverage our current products.

Some of our initiatives already are visible. For example, our recent acquisition of CryoGen operations from Datascope for eventual use in our Angio-Seal product line.

Looking at all these markets together, CRM, AF, neuromodulation, structural heart and vascular closure, a number of takeaways become clear. First, St. Jude Medical today, competes in multiple large and growing markets. These markets total approximately $16 billion and are growing at an average rate of about 7% to 8%.

The average growth rate of the markets in which we compete will accelerate as AF, neuromodulation and other new growth drivers become a larger percent of our total business. Second, we have customer synergy, technology synergy or both across all of our growth platforms. This aspect of our competitive strategy is sometimes under appreciated.

Third, we have a number one or number two market shares in each one of our major growth platforms. This combined with the synergy we enjoy across all our growth platforms positions St. Jude Medical to gain unusual leverage from each growth drivers.

It is no coincidence that we usually gain market share in multiple growth programs at the same time. For example, we gained market shares simultaneously in all or most of our major businesses on a year-over-year basis in 2006, 2007 and year-to-date in 2008.

The fourth point that deserves emphasis is that in each instance where our growth programs have become mature, we are focused on optimizing our cost structure and on strengthening our cash flow.

I already mentioned our acquisition of CryoGen operations to support our Angio-Seal product line long term. We are making good progress following through on our commitment to expand manufacturing operations in cost advantage locations. For example, we recently opened a new manufacturing facility in South Carolina and another such facility under construction in South Carolina.

We are expanding our investment in manufacturing operations in Brazil. We recently received FDA approval to begin manufacturing pace makers at our new 150,000 square foot facility in Puerto Rico. In the future, we will open additional manufacturing facilities in other cost advantaged locations as part of our global business expansion and global business presence.

Our SAP Enterprise software installation already is approximately 50% complete, increasing our spending short term but creating the infrastructure we can leverage for significant productivity gains longer term. We are pursuing a full menu of other structured continuous improvement programs as well.

As a back drop to all of our internal programs to grow our sales and to improve our productivity, our cash flow and balance sheet give us the flexibility to support our growth from time to time as appropriate with the combination of stock buybacks and sensible acquisitions.

During the third-quarter for example, we completed our acquisition of EP MedSystems and our acquisition of Datascope's CryoGen operations and other vascular sealing assets to support our growth longer term.

All of these factors taken together are the drivers behind our 17% growth in revenue and our 31% growth in earnings per share a year-to-date. The same factors leave St. Jude Medical well positioned to continue delivering an average growth and earnings per share of at least 15% going forward.

I'm referring to all of these factors when I indicate that our results this year rein enforce our confidence that we are in the right markets with the right products at the right time.

I would now like to turn it back to Regine to moderate questions and ask every one please to limit your self to two questions, so that we can reach as many people on the line as possible.

Regine would you go ahead please

Question And Answer

Operator

[Operator Instructions]. Our first question is coming from Bob Hopkins with Banc of America.

Robert Hopkins - Banc of America

Hi, thank you and good morning. My two questions I would like to refer them to John. Just to clarify some of the comments that were made. John, in terms of the hedging that you are putting in place, sounds like that's mostly related to transactional situations and not translational. Is that correct?

John C. Heinmiller - Executive Vice President and Chief Financial Officer

That's right; we're putting in place contracts that are typical, those used by other companies in our peer group. We are really only aware of one other situation that's out there where people have attempted to hedge their translational exposures. But these are contracts now will give us added flexibility as we move forward managing that area.

Robert Hopkins - Banc of America

Okay. And so than, roughly when I look at... so looking forward over that 12 months given where exchange rates are, for 2009 looks like you might have somewhere in a neighborhood of a $100 million top line headwind, and than maybe a $40 to $50 million operating income headwind as a result. Is that roughly a ball park of where you think you'll be in terms of a translational headwind?

John C. Heinmiller - Executive Vice President and Chief Financial Officer

Yes, I think that... as we indicated, we aren't going to give guidance for 2009 officially until we get out to our January call. We are certainly mindful of the currency environment and what changes are taking place and then we'll factor that as well as all the other variables that we keep our eye on during this time of the year as we formulate our 2009 operating plan.

And then... the bottom line comment was that we expect to be comfortable with our $2.61 consensus EPS that's is out there.

Daniel J. Starks - Chairman, President and Chief Executive Officer

And, Bob, this is Dan. Let me say a little bit more on the topic of FX impact on bottom line. I think that's a dynamic; that really is very widely misunderstood as it relates to St. Jude Medical. I think the help [ph] just clarified for everybody's thinking going forward. If you look at the third quarter results here for 2008 you'll notice that the... our revenue was negatively impacted by $10 million due to actual versus assumed FX rates.

It did have an impact on our bottom-line? As you look forward to our fourth quarter of 2008, we've indicated that the negative currency impact is about $30 million versus our prior expectations but again that $30 million didn't trickle [ph] to the bottom line guidance in anyway that your question kind of a was working to get at.

There are so moving parts in the business that theron [ph] on currency and the bottom line that we just consider to be one factor among many that we manage and net out when we offer our guidance and when we think about what's levels of the investment to make where in the business. If you thought about FX and the bottom line, it's... you think that we manufacture products in Swedish Kroner, we manufacture products in Brazilian Real, we manufacture in Canadian dollars, we manufacture in U.S. dollars.

Once we manufacture in one of those currencies, the inventory is then transferred to some location that may very well be in another currency. So there is a currency transaction inside the company at the point of manufacturing transfer to inventory. That inventory maybe further transferred in our global distribution that may involve another currency translation at another timeframe, at another rate of the... then the... that product though, when it's sold we can mark the currency impact precisely with the way that we recognize sales. But the payment then is going to come at a different time. And, it's going to come at a... at likely a different currency translation again.

So, there is just so many moving parts in there. We... our experience has been that as long as we're... we stay on top of the business in the way that we have, those... all of those different currency translations really net out. They run through our other income and expense line. And as you see, there hasn't been a lot of volatility in our other income spend and expense line, which really just goes to show how minimal that impact is on the bottom-line.

So, it would inappropriate to take a percentage or significant percentage like a 40% and work it drop it to the bottom-line and refer to that as a headwind, it really isn't.

Robert Hopkins - Banc of America

But just to simplify then, because obviously it will be a headwind for next year. From a translational perspective, so... are you saying my math isn't right. The 40 to 50% roughly ballpark won't fall through and be a headwind for next year on a translational basis.

Daniel J. Starks - Chairman, President and Chief Executive Officer

Yes, what I'm saying is that if you put aside the math, and the kind of theoretical if all else was equal and this was the only thing happening, that you'll... that's not the circumstances that we have. My point is that rather than the theoretical discussion, my point is that in the real world of all of the different currency translations that take place from the point of manufacture to the point of earnings. I am just saying that there is lot more transactions taking place like that and the simple rule of thumb is not the best one.

Robert Hopkins - Banc of America

Okay. And then to just my second question and just to again clarify for John on the convertible debt. Could you just give us a sense to the incremental cost of refinancing that as we... once that transaction has taken place?

John C. Heinmiller - Executive Vice President and Chief Financial Officer

I think that the interest rate on the convert versus the interest rate on the borrowings that we'll do is an incremental number that is easily factored into our other income and expense category. So as I mentioned on the call, we did pre fund the debt portion that we now need to pay that debt in December. We have a five year bank credit facility that runs through 2011. That we're using part of the capacity that we have under that and that now is on our books at that higher interest rate and it really barely moved the guidance for other income and expense for the quarter by a digit.

So, where we can accommodate that and have that factored into our guidance already here in the fourth quarter and it's just not that significant.

Robert Hopkins - Banc of America

Can you give us the incremental just the rates on the convert versus the 500 million of borrowing?

John C. Heinmiller - Executive Vice President and Chief Financial Officer

Well, the $500 million borrowing will have an interest rate of about 4.5%, and the convert had an interest rate of 1.2% and all that information is publicly available if you want too make that calculation, it's the difference of those two. And then the interest income that we can earn on the $500 million borrowing is certainly higher than the 1.2%.

So we have to factor all that in. And we done that in providing our guidance and it's a if you want to get real precise and make those kind of calculations we can. But I'm telling you it's factored into the... to the other income and expense guidance where we expect in the fourth quarter to have quarterly other expense of $3 million to $6 million.

Robert Hopkins - Banc of America

Okay. Great, very helpful, thank for the details.

Operator

Our next question comes from Mike Weinstein with JPMorgan.

Michael Weinstein - JPMorgan

Good morning. Thanks for taking the questions. Dan, you talked on the call and certainly you've talked consistently over last several years about delivering a minimum of 15% EPS growth. Is... based on what you can see today is there any reason why that you think you would not be able to do that in 2009?

Daniel J. Starks - Chairman, President and Chief Executive Officer

No. As a... and I'm hoping that the model that I gave really flushed that out and supported that. We will have a very strong confidence. I mean here we are where year-to-date we've reported EPS of 31% and we've got a number of fundamental dynamics that has been benefiting the business during this year in prior years and will continue to benefit the business going forward. We have some dynamics that really will continue to strengthen our relative to prior period. So we like where we're positioned and looking forward to 2009 with a lot of confidence.

Michael Weinstein - JPMorgan

Thanks for that. The commentary you gave during the... your prepare remarks about the 261 consensus. That would be up 13% and of course... you basically trying to say that at this point we look very achievable to you guys?

Daniel J. Starks - Chairman, President and Chief Executive Officer

Yes, now keep in mind that we're just not giving our guidance yet for 2009. So don't get too close to a number and we've said that we're optimistic that we're well positioned to meet or exceed that number. So to take the whole thing into account and then we need to finish preparing the operating plan, finish making our investments decisions and then we'll again look forward to providing a good update next quarter.

Michael Weinstein - JPMorgan

Okay. Let me switch gears, John on the OpEx hedging that you did. Can you give a sense of how much you did and kind of what was your timing and how far out you went?

John C. Heinmiller - Executive Vice President and Chief Financial Officer

Well that again, we put in contracts to manage the currency exchange exposures that we have in our inter company accounts and in trade receivables that are in foreign denominations where... and the timing of those is matched to those balances that we're hedging and then we mark-to-market the contracts that we have. So we are nicely positioned now and it just really enhances the flexibility that we have with our cash balances and the other movements that we are managing.

Michael Weinstein - JPMorgan

Then just to be clear, relative to 2009 have you done everything that you think that you need to do it or want to do at this point?

John C. Heinmiller - Executive Vice President and Chief Financial Officer

Yes, I think we have everything, we have the mechanisms in place we have everything in place but we want now and then we will just continue to extend the program as we need during 2009.

Michael Weinstein - JPMorgan

Okay. Perfect, I let some others jump in queue here. Thanks.

Operator

Our next question comes from the line of Rick Wise with Leerink Swann.

Fredrick Wise - Leerink Swann Llc

Good morning, everybody. Turning to the ICD market a couple of things, may be you could just talk generally whether you are seeing or concerned Dan about the economic impact on procedures for ICDs or may be anywhere else at St. Jude, but more specifically Boston has launched new products recently. Our doctor check suggests that they're being... they're getting favorably received. Can you talk about the impact of that launch as well, if any?

Daniel J. Starks - Chairman, President and Chief Executive Officer

Sure, sure. The... one of the favorable dynamics for our business is that we think that we will have very little impact from the negative impact from the general economy on our market conditions on the growth rates that we assume in our multi-year planning. And generally our devices are... even though we're as part of our devices as we are, and think they're wonderful, we... are realistic that very few people actually seek them out, if they don't absolutely have to have them. And so, we expect very little impact.

People need to have their food. They need to have a place they're going to sleep in, they need to keep their health at a functioning level. And our devices really are all devices that there are on key health concern. So, we expect very minimal impact from the broader and economic dynamics, and think that we're in a good defensive position that way.

With respect of the ICD market and competitive conditions, I won't comment specifically on any one competitor. I'll say generally that this is a competitive market, that we think that all of the competitors in the space are tough. Everybody has products that are usable. And in this kind of very tough competitive environment, we've been the only company to gain share every year in a row for the last five years.

So... and we're going to gain it again this year. And we fully expect to gain market share again next year-end and continuing beyond next year. So we like our position. It is based on so many fundamental dynamics that are unaffected by kind of bells and whistles of other companies competitive developments. And I think when you think about something like the impact of our ischemia detection technology on the one hand, and kind of say now, compared to that dynamic, we are talking about one device being 4 millimeters thinner than another device, and even though it's 4 millimeters thinner than another device, it actually has a 20% larger surface area.

Those are... that really falls into the bells and whistles. I'm sure both comments are correct. But it's really not clinically material. It's not a driver of physician choice. It may be something that physicians refer to if they are making a choice for another reason. It's an easy thing to reference but there is really no fundamental change in the competitive dynamics of those kinds of product comparison.

I think things like ischemia detection and quick out [ph] the B to B, A to B timing optimization and having the only 7 French high-voltage leads in the market. Those are the kinds of things that really drive physician choice. Those are lined up in favor of our continued gain of market share.

Fredrick Wise - Leerink Swann Llc

Okay. And turning to your comments on productivity initiatives, your hired [ph] SAP... the SAP install being 50% done. Remind us when it is done, maybe you John, you could flesh out what impact it's going to have? And I assume, once it's done, we're going to see positive... their implications for operating margins and balance sheet management and cash areas as well?

John C. Heinmiller - Executive Vice President and Chief Financial Officer

Yes, you're right. You're absolutely right, Rick. That said that the double edge of the sword of offering examples to be just kind of create [ph] and to add flavor and help people see that we are not just using buzz words. The downside of it is then I hate to see the example of highlighted kind of more that it ought to be.

When we think about productivity gains for example, we are not banking on a particular enterprise software implementation, yes, we are doing it, yes it does have an impact and it... but it's one of so many different factors that are all happening at the same time. If you think about the beneficial impact of our Unity platform on gross margin and the beneficial impact of the consolidated platform, nature of our Unity platform on the cost effectiveness of product development and having the developed feature sets only once for the high and low voltage applications rather than having to develop them twice.

There is so many additional dynamics that we are balancing and then at the same time that you take, a single one of those dynamics and look at it little bit closer you have to take it in the context of, okay, now what else are we doing at the same time as an additional expansion of investment, where... like here in the third quarter just finished we bought EP MedSystems, we made a modest acquisition of Datascope CryoGen and other vascular closure assets. Those things you see reflected in the SG&A as a percent being little bit higher on a sequential quarter basis compared to Q2.

So there is just so many moving parts that it's even though every one industriously works to get as close to each one as they can, it's just not realistic to map them all out unless you are inside our business, going through our operating plan and its stick [ph] books of doing all those net outfits that each of you want to do so. The best I can really offer is to say that our guidance has been pretty good

We've met or exceeded our guidance every single quarter for ten years, except one. And so, that's the best I can offer you. So, we'll continue to work to make all those calculations in the same way that we've done it for the last ten years, continue to provide them going forward.

Fredrick Wise - Leerink Swann Llc

Thanks so much, Dan,

Daniel J. Starks - Chairman, President and Chief Executive Officer

You are welcome.

Operator

Our next question comes from Tao Levy with Deutsche Bank.

Tao Levy - Deutsche Bank

Hi, good morning.

Daniel J. Starks - Chairman, President and Chief Executive Officer

Good morning.

Tao Levy - Deutsche Bank

I was wondering if you could comment on ICD placing. What you're seeing out there and are hospitals becoming a little more aggressive in trying to get prices down and negotiating things down, just given their current environment.

And then my second question is that is on A-Fib, one of your competitors is seeking to get approval for specific A-Fib indication for their catheter. I was wondering, where you guys stood on getting a label for A-Fib for your ablation catheters. And in the interim, is that going to be an issue for you guys, if again the other company can get that approval, and your catheters don't have one.

Daniel J. Starks - Chairman, President and Chief Executive Officer

Tao on the topic of ICD pricing, we have not seen any major changes in pricing dynamics for ICDs or for... really for other parts of our business. And that means that pricing pressure is always there, and always strong, and always one of the dynamics that we stay on top of.

So, we see continued price pressure on ICDs just as always. And... but really, nothing unusual. On the topic of just atrial fibrillation labeling and spaces generally that... with one of the points to keep in mind is key to our growth profile and our product segment that we label as AF products, is that the actual ablation catheter itself is a very small part of the product portfolio. And it's a small part of our total product bundle and of our total revenues. So what we are really focused on is the procedures that take place in the EP lab, and Electro-Physiology lab.

And yes, the most intellectually interesting is atrial fibrillation ablation procedure, but it's that full range of procedures that we brand our AF business. And it's that all it's that full range of products used in that full range of procedures that we bring into each case, including in the cases that physicians, where physicians are working to cure AF. So the AF ablation catheter itself is really... has not been that big a part of the total revenue opportunity.

And I think it would be a misplaced focus to look at specific labeling on one catheter in particular, understanding that physicians choose among our full range of catheters for different parts of their procedure and for different procedures and different physician preferences and there is no one size fits all.

I expect that dynamic to continue going forward.

Tao Levy - Deutsche Bank

And are you seeking that label expansion, if so what's the timing on that?

Daniel J. Starks - Chairman, President and Chief Executive Officer

Yes, sure we are. We have got number, both on surgical approach and on the catheter approach. We have trials underway and... but I think it's probably not the most important factor to focus on.

Tao Levy - Deutsche Bank

Right, okay, thanks.

Operator

Your next question comes from David Lewis with Morgan Stanley.

David Lewis - Morgan Stanley

Hi, good morning.

Daniel J. Starks - Chairman, President and Chief Executive Officer

Good morning.

David Lewis - Morgan Stanley

John, Just a local question here on guidance I appreciate your trying to provide the visibility here heading into '09. Dan talked about a series of broad operational leverage dynamics, it's just specifically we think about Unity, we have a lot of middle income statement type leverage. When you think about leverage for next year, what percent do you think comes from gross margin expansion versus broader operating corporate leverage?

John C. Heinmiller - Executive Vice President and Chief Financial Officer

Again I think that... as we mentioned, we are right in the midst of a process where we prepare down to that level of the details and here we have a good sense of where we are headed and the best way we wanted to just provide the outlook for that is just by expressing the confidence. In that we'll be able to meet or exceed that current consensus expectation of $2.61 and we really aren't going to get into any more detail on 2009 at this point. We'll provide that kind of detail in January, when we give the guidance.

David Lewis - Morgan Stanley

Got it. It sounds like that will [ph] beat this FX force here but in terms of most of trends [ph] you are making sound more transaction versus translation but did you put most of these forward contracts in place after the recent movement of the dollar or prior to?

John C. Heinmiller - Executive Vice President and Chief Financial Officer

Well, I think that... I mean the important thing that they are in place. I don't want to get into the details of exactly what day did we effect to put them in place, we're happy that and confident that they will achieve the kind of hedge outcome that we're looking forward because we're obviously very familiar with the transaction and the timing of the transactions that we're hedging.

David Lewis - Morgan Stanley

Okay. Then last question, Dan you talked a lot about your AF franchise and how long the company's been in that business. We've seen your competitors move into that business and certainly a validation of the St. Jude strategy, the competitors seems to be focusing on energy source as a mode of differentiation. Can you talk about the role of energy source and whether you think you may have to make a move with a similar energy source in the next several years?

Daniel J. Starks - Chairman, President and Chief Executive Officer

Well, first just on kind of assumption about competitors focusing on energy source. I really don't see it that way. The way I see it is... I see it as competitors with fragmented, incomplete programs working to grab at something. And I really don't think that's our principle focus on energy source. And I think that again as a person thinks about the revenue opportunity, he thinks about the procedure impact. It's really is not being driven by energy source. I think the question of ultimate energy... I think the question of how will energy sources shake out five years down the road? What's the procedure going to look like? What's the catheter delivery process going to look like? What's the mapping technology going to look like? Just all of that is fluid.

And we could offer kind of proprietary insights on it. But I won't. And I think as you talk to physicians in the field about it, you'll get a wide variety of comments. And so, you get champions of different energy sources. But I think, I'm not going to offer our own proprietary insights into what... where we see the market going, and how we see the technology developing in a way that is not highly visible to the competition.

David Lewis - Morgan Stanley

That's really helpful answer. John, just one last question, given your confidence in sort of '09 outlook and leveraging the business, could you comment at all on the buyback plans here at these share prices?

Daniel J. Starks - Chairman, President and Chief Executive Officer

Yes. Why worry John, let me try to... we're of course not going to comment. But other than what we said in our prepared remarks to say that we have the flexibility to do it. We've done it in the past. We consider it to be a tool in our tool kit going forward. And from time to time as appropriate, we will undoubtedly make announcements to that effect. But we would never comment other than to make an announcement and we are not making any announcement today.

David Lewis - Morgan Stanley

Great. Thank you very much.

Operator

Your next question comes from the Larry Biegelsen with Wachovia.

Unidentified Analyst

Thanks. Good morning, it's Steve Bishop [ph] for Larry. One quick question within the ICD space, can you give us your latest thoughts on the importance of MRI compatibility? What's the timing for your efforts in that space? What do you think MRI compatibility can mean for a company that has an advantage in that area? And if possible, could you make comments specifically to the high and low parasites?

Daniel J. Starks - Chairman, President and Chief Executive Officer

No. We won't say that much about it, Steve. We... just for again for competitive and proprietary reason that... I think that over time, I think that everybody in the space will have MRI compatible technology.

When we think of MRI compatibility, we don't think of a device that you can't MRI. So we wouldn't think of a device placed in the trunk... in the... with those sub clavian position we wouldn't think of it being MRI compatible if you can't MRI the trunk with it. But we are actually very excited about our own MRI program. We deliberately have not commented on it and I am not going to do so today.

There will be a point here in the future when we will offer more details. But for now we are just keeping it under wraps, other than to say that we like our position. And long term, I think that... everybody will offer MRI compatible systems. We may very well be the first to have a true MRI compatible system but other than that kind of good tourist [ph] comment I won't offer any specifics.

Unidentified Analyst

Okay. And then, one more also with in the ICD space. Appreciating that you are not altering your view on the longer term growth opportunity in CRM, can you look back at 3Q, and the quarter that you just completed. And then with the first half of the year as a backdrop, high single-digit ex-currency growth outside the U.S., low single-digit growth in the U.S., any deviation from those trends in the market at large.

Daniel J. Starks - Chairman, President and Chief Executive Officer

Well... we will... we did not see any meaningful change in growth dynamics during the third quarter. We will need to see the other companies' numbers here in the third quarter to really update our market model. But generally speaking, there we saw just continued steady growth right along the... with... that conformed with the expectations we set previously

Unidentified Analyst

Okay. Thank you very much.

Daniel J. Starks - Chairman, President and Chief Executive Officer

You're welcome. We got time for just one more question, Regine. Is there another question on the line?

Operator

Yes sir, your last question comes from Vivian Cervantes with Rodman & Renshaw.

Vivian Cervantes - Rodman & Renshaw Llc.

Hi, good morning. Thank you for sneaking in this last question. Coming from TCT, and some of the news still that's coming into the world of PFOs, there seems to be some noise that maybe there is some development in there, vis-à-vis a tough enrollment environment, some competitors have completed enrollment, others are saying they're close to completing. And again at TCT, there is some buzz of activity. Just wanted to get your thoughts on that market, and the... your client's opinion [ph]?

Daniel J. Starks - Chairman, President and Chief Executive Officer

Well, yes they on the PFO closure, if we segment the PFO space into stroke application and migraine application, I'm... I believe that you are exactly right that there is at least one trial that is well along and under stroke application and maybe I'm not sure if the enrollment's been completed or not. But on the PFO for migraines, so our Escape trial was a... it was evaluating PFO Closure for migraine patients. We've actually closed that trial due to the difficulty of enrollment over the course of about three years or so we enrolled... really we're able to enroll only 50 some patients, and when you ask then what do we think about the space? We think that the space is... it continues to be a promising space.

The... with respect to PFO Closure from migraine, I know there was some encouraging data at TCT on that from a center and that's not surprising to us. The space remains of interest, the challenge is that the clinical practice doesn't correspond to the regulatory requirements for enrollment criteria. And so we spent three years working to bridge the gap between clinical practice and inclusion criteria and working to find a happy medium ground that would facilitate the reasonable enrollment of patients and we just weren't able to get there.

So for now, we've suspended our pursuit of PFO Closure... indication for... migraine indication for PFO Closure here in the United States. We continue to provide the product in Europe and continue to see some growth in that product program in Europe. But for St. Jude Medical's purposes in the near term, it's not something that we referred to for sometime as a one of our growth drivers and it will be appropriate to take it off the list of our growth drivers that we are particularly excited about.

Vivian Cervantes - Rodman & Renshaw Llc.

Great, thank you. I appreciate the color.

Daniel J. Starks - Chairman, President and Chief Executive Officer

You're welcome. And then I apologize if we have exhausted our time for those of you who are still in the queue. But thank you for joining us. And Regine, I'll turn it back to you for your closing comments.

Operator

Today's call is being recorded and will be available for replay beginning at 12 o'clock PM Eastern Standard Time. The dial-in numbers are 800-642-1687 for the U.S. and 706-645-9291 for international and enter pin number 67122966. Thank you. This does conclude today's teleconference. Please disconnect your lines at this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: St. Jude Medical, Inc. Q3 2008 Earnings Call Transcript
This Transcript
All Transcripts