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Boston Scientific Corporation (NYSE:BSX)

Q3 FY08 Earnings Call

October 22, 2008, 8:00 AM ET

Executives

Larry Neumann - VP of IR

Samuel R. Leno - EVP for Finance and Information Systems and CFO

James R. Tobin - President and CEO

Analysts

Robert Hopkins - Banc of America

Michael Weinstein - J.P. Morgan

David Lewis - Morgan Stanley

Rick Wise - Leerink Swann

Lawrence Keusch - Goldman Sachs

Joanne Wuensch - BMO Capital Markets

Kristen Stewart - Credit Suisse

Timothy Lee - Piper Jaffray

Larry Biegelsen - Wachovia Capital Markets

Sara Michelmore - Cowen & Company

Michael Jungling - Merrill Lynch

Bruce Nudell - UBS

Matthew Dodds - Citigroup

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Q3 Boston Scientific Earnings Call. At this time, all participants are in a listen-only mode. Later we'll conduct a question-and-answer session, the instructions will be given at that time. [Operator Instructions]. As a reminder, this conference is being recorded. I'd now like to turn the conference over to our host, Mr. Larry Neumann, Vice President, Investor Relations. Please go ahead sir.

Larry Neumann - Vice President of Investor Relations

Thank you, Laurie and good morning, everyone. Thank you for joining us today. With me on the call today are Jim Tobin, Chief Executive Officer; Sam Leno, Chief Financial Officer; and Jeff Capello, Chief Accounting Officer. We issued a press release yesterday afternoon announcing our Q3 2008 results. Key financials are attached to the release and we've posted support schedules to our website, which you may find useful as well.

The agenda for this call will include a review of the Q3 financial results, as well as, Q4 guidance through Sam, and an update on the CRM, Cardiovascular, and other businesses from Jim. Jim will also provide some overall perspective on the quarter and then we will open it up to questions.

Before we begin, we will be making some forward-looking statements on the call today. So I'd like to remind everyone of the Safe Harbor Statement. This call contains forward-looking statements. The Company wishes to caution the listener that actual results may differ from those discussed in forward-looking statements and may be affected by, among other things, risks associated with our financial performance, our restructuring plan, our programs to increase shareholder value, new product development, regulatory approvals, litigation, our growth strategy, the Company's overall business strategy, and other factors described in the Company's filings with the Securities and Exchange Commission.

I'd now like turn it over to Sam for a review of the third quarter results.

Samuel R. Leno - Executive Vice President for Finance and Information Systems and Chief Financial Officer

Thanks Larry. Let me begin our third quarter results by first discussing revenue. Consolidated revenue for the third quarter was $1.978 billion, within our guidance range of $1.950 billion to $2.060 billion. This represents a 3% decrease compared to the third quarter of last year. As previously discussed, we completed the divestitures of the previously announced five non-core businesses during the first quarter of this year. And excluding the impact of these businesses in both years, consolidated revenue for the third quarter was $1.966 billion net represents a 3% increase over the $1.915 billion in the third quarter of last year.

Compared to the foreign currency contribution assumed in our third quarter guidance range, foreign exchange contributed a negative $19 million to our third quarter sales results. Without this negative impact, we've would have been at the mid point of our guidance range. Overall the contribution of foreign currency to sales growth for the third quarter of 2008 was approximately $54 million or positive 3%.

Compared to the third quarter of last year excluding divestitures, domestic revenue increased 1%, while international revenue increased 5% and was down 2% in constant currency. Jim Tobin will provide a broader view of our businesses by major product category a bit later, but I'll share the revenue results at a higher level now, as well as, the drug-eluting stent and CRM market dynamics for the quarter.

Worldwide DES came in at $396 million and that was at the midpoint of our guidance range of $375 million to $420 million and down 12% from the third quarter of 2007. Our worldwide revenue includes $271 million of TAXUS sales and $125 million of PROMUS sales. Geographically, U.S. drug-eluting stent revenue was $209 million at the low end of our guidance range of $205 million to $225 million and 13% below the third quarter of last year. This includes $112 million of taxes and $97 million of PROMUS sales.

Our taxes revenue for the quarter was $11 million below what we had forecasted as a result of not receiving approval of TAXUS Liberte in the third quarter. We estimate our combined U.S. markets share for the third quarter was approximately 45%. Of this taxes came in at 24% and PROMUS was at 21%. This is equal to our total share for the second quarter even in the phase of new competitors entering the market and is also consistent with our standard objective of maximizing our total drug-eluting stent market share.

We are the only company in the industry with a 2 drug platform strategy including a well established and highly regarded Paclitaxel product in TAXUS and an excellent enrollment in this product in PROMUS. This gives us the unique ability to sell to our customers whatever they want to buy.

This coupled with what we believe is the best sales force in the industry, gives us the strength and ability to maintain our leadership position in the competitive drug-eluting stent U.S. market. Based on our estimate of the U.S. market for the quarter, we estimate that Medtronic loss to market share during the quarter to approximately 11% with J&J declining to about 22% and Abbott achieving approximately 22%.

TAXUS stent pricing in the U.S. was down approximately 7% compared to prior year while stents per procedure remained consistent. While we expect to see some continued price pressure with more competitors in the market, we have maintained our premium price for TAXUS versus the competition.

International drug-eluting stent sales were $187 million exceeding the midpoint of our guidance range of $170 million to $195 million and represents a decrease of 10% compared to the third quarter of last year. This includes $159 million of TAXUS and $28 million of PROMUS sales. Boston Scientific's market share in India is estimated to be 34% with TAXUS coming in at 26% and PROMUS at 8% and remain stable in Japan at about 45% which is all TAXUS.

Intercontinental excluding Japan came in at 26%with TAXUS at 22% and PROMUS at 4%. Combining this with our U.S. market share we estimate that our third quarter worldwide market share to be about 39% with TAXUS at 27% and PROMUS at 22%.

I would like to spend a few minutes on the market dynamics of our drug-eluting stents during the third quarter and we estimate the worldwide DES market in Q3 at approximately $1.016 billion which is about 5% decline in the second quarter and an 8% increase over the third quarter of 2007 with approximately 12% increase in unit volume offset by approximately 4% in ASP declines.

The U.S. market is estimated to be about $460 million which represents approximately 3% growth over the second quarter and approximately 8% growth over the third quarter of last year, with approximately 17% increase in unit volume offset by approximately 8% to 9% reduction in ASP for the industry.

USP sale volume in the quarter was approximately 251,000 procedures and that's consistent with last quarter, but up 5.5% over the third quarter of 2007. We estimate U.S. DES penetration was 70%, that represents a 4 percentage point increase from last quarter's 66% and a 7 percentage point increase over the third quarter of 2007. And based on MRG data, the penetration rate for the month of September was 71.4%. That represents a third quarter of increasing U.S. DES penetration rates and stable PCI volumes, both of which continued to demonstrate that the health of the DES market is steadily improving. Combining the increase in stent procedures volume with stable stents per procedure, we estimate that the U.S. stent unit market was 333,500 units for the quarter.

The international DES market remains strong for the quarter with 275,000 PCI procedures in India, up approximately 4% over last year. Penetration rate in international markets remain relatively constant with India at 49%, Japan at 66%, and intercontinental including Japan at approximately 59%. With the introduction of PROMUS into the U.S. market in early third quarter, the total market has become a bit more difficult to define as a result of Abbott's inclusion of it's share of the PROMUS profits included in its reported revenue. And as a result we have decided to disclose PROMUS and TAXUS separately in order to add clarity for everyone.

Turning to our CRM business, we continue to see good progress supported by the launch of several new products during 2008. Most notably, we began the launch of our COGNIS and TELIGEN platforms worldwide excluding Japan during the third quarter. Reported worldwide revenue of $572 million represented an 11% increase over the $517 million in the third quarter of 2007. U.S. CRM revenues were $377 million, representing a 10% increase over prior year, while international CRM sales were $195 million, that's an increase of 12% over the prior year.

Worldwide ICD sales of $423 million, were up in midpoint of the guidance range of $410 million to $440 million, and 14% over the third quarter of 2007. ICD sales in the U.S. were $291 million representing an increase of 11% over last year and near to midpoint of our guidance range which was $280 million to $300 million.

International ICD sales of $132 million were at the low-end of our guidance range of $130 million to $140 million and represents a 19% increase over last year. Sales from our other divisions in our product categories were also very good in the quarter excluding sales from our five divested non-core businesses, our non-DES and non-CRM worldwide revenues increased 5% over prior year to $998 million. This includes continued strong performances by our Endosurgery businesses with a 9% increase over the prior year, and that includes our Endoscopy sales of $238 million representing a 9% increase as well as Urology sales of $109 million also a 9% increase.

In addition, our Neuromodulation business continued its double-digit performance with 15% growth over prior year, while Neurovascular was up 7% and Electrophysiology was up 10%. Reported gross profit margin for the quarter was 66.9% which was 330 basis points lower than the second quarter of this year and 500 basis points lower than the third quarter of 2007. Adjusted gross profit margin for the quarter that excludes acquisition and restructuring related charges was 67.1% which was 320 basis points lower than last year and 490 basis points lower than the third quarter of 2007.

As has been the case since the beginning of 2007, revenue mix was a key contributor to the lower gross profit margin compared to prior year. In addition to the lower mix of DES to total revenue we also launched our PROMUS drug-eluting stent in the U.S. during the quarter. The change in the volume and mix of our DES revenues between PROMUS and TAXUS contributed to a gross profit margin reduction of about 364 basis points compared to the third quarter of last year and a reduction of about 210 basis points compared to the second quarter of this year.

The weakening of the U.S. dollar and the resulting settlement of our foreign currency hedge contracts and cost of sales eroded our gross profit margin by about 160 basis points from prior year. Our gross profit percentage for the quarter was also reduced by 120 basis points due to a one time write-off of inventory related to a warning letter received by one of our third party sterilizers. This resulted in reserving $23 million of TAXUS Liberte inventory that must be scrapped.

We are now in the process of rebuilding our TAXUS Liberte inventory requirements to support our targeted November launch as soon as we have successfully completed the launch of our new TAXUS Atom 2.25 millimeter drug-eluting stent product that was approved by the FDA on September 25th.

Our gross profit for the quarter included a negative $9 million or negative 45 basis points of gross profit margin related to the continuation of offering free LATITUDE Remote Patient Monitoring systems to patients receiving implants prior to October of 2006. That time we've also just announced the expansion of our manufacturing operations to a second manufacturing facility in Costa Rica and have begun transferring products to that facility. This expansion will help us reduce our manufacturing cost and positively impact our gross profit margin in the future.

Turning to SG&A, our reported as SG&A expense in the third quarter was $610 million which was 15% lower than the third quarter of last year and 7% lower than last quarter. Adjusted SG&A expenses excluding restructuring related items were $602 million which was 7% lower than last quarter and $110 million or 15% lower than the third quarter 2007. We continue to make excellent progress towards completing our restructuring initiatives.

Reported research and development of $252 million for the quarter was 12.7% of sales that was down $19 million compared to the third quarter of 2007. And consistent with last quarter, the majority of the reduced R&D expenses compared to prior year were a result of divested businesses. Research and development expenses for the rest of the company were essentially flat with prior year. We remain committed to advancing medical technologies and we will invest accordingly in both, internal R&D, as well as strategic acquisition opportunities.

We reported GAAP operating profit of $28 million for the quarter on an adjusted basis, excluding J&J related litigation charges, the EBIT gain and milestone payments, acquisition related credits and restructuring related charges, as well as amortization expense and intangible write downs, operating income for the quarter was $424 million and 21.4% of sales, that was down 210 basis points from the second quarter of this year. The factors contributing to our reduction in gross profit margins also contributed to our year-over-year reduction of operating profit margins and they were partially offset by our stringent operating expense controls.

I'd like to highlight the GAAP to adjusted operating profit reconciling items in bit more detail. Our total amortization expense was $131 million pre-tax, $96 million after tax, which was $24 million lower than third quarter of last year. Our run rate amortization of $131 million is inline with our expectations for the quarter. As previously announced, we wrote off certain intangible assets in the amount of $155 million pre-tax and $129 million after tax during the quarter related to previous acquisitions.

As announced, we recorded a charge of $334 million pre-tax, $266 million after tax related to a ruling by a federal Judge in a patent infringement case brought against the Company by Johnson & Johnson. This case related to the near stent that productively stopped selling in 2004. We recorded a gain of $215 million pre-tax, or $184 million after-tax related to the July receipt of the acquisition related milestone payments for Abbot Laboratories for the U.S. approved Lubxiance [ph]

We also recorded acquisition related credits of $8 million on both the pre-tax and after-tax basis to adjust the second quarter accounting for purchase research and development associated with the company's acquisition CryoCor, a company that addresses a trial fibrillation. And final, we recorded $34 million pre-tax, $25 million after-tax of restructuring related charges in the quarter, which are primarily related to employ severance and retention costs as well as third party payments in conjunction with our previously announced expense and headcount reduction initiatives. These charges are inline with our previous estimates.

The cumulative effect of these items was $396 million pre-tax and $324 million after-tax. Interest expense was $112 million in the quarter, which was $35 million lower than the third quarter of 2007 primarily as a result of our debt repayments of $1.425 billion during the last 12 months together with lower interest rates.

Interest expense was also down $6 million in the second quarter this year, as we prepaid an additional $500 million of bank debt in the quarter and also benefited from a full quarter of reduced interest expense related to prepaying $300 million of bank debt in the second quarter. Our average interest expense rate was 5.9% compared to 6.4% in the third quarter of last year and very consistent with our second quarter.

We have fixed our effective interest rate and our net debt through the end of 2009 as a result of hedged contracts that take effect throughout the second half of this year. Other net income was $16 million including a net gain of $15 million related to the sale of the company's non-strategic investments which I will discuss in more detail in a moment.

In addition, there were other expenses of approximately $10 million in the quarter. Interest income was $11 million in the quarter which was $8 million lower than the third quarter of last year, primarily due to significantly lower investment rates and both interest income and cash investment rates were consistent with the second quarter.

Looking at our tax rate, the reported GAAP effective tax rate for the quarter was 8.1% and the adjusted effective tax rate was 24.5%. Our tax rates for the quarter reflect discreet tax benefits of $7 million. On a year-to-date basis, our operational effective tax rate of 23.4% was slightly above our expected rate of 23%. These tax rates do not reflect any benefit for the U.S. R&D tax credit, which was subsequent through the end of the third quarter approved and was extended with a retroactive effect back to January 1st of this year. Accordingly, our full annual benefit for the 2008 U.S. R&D tax credit will be recorded in the fourth quarter. As a result we have anticipated that our operational or adjusted effective tax rate will be approximately 14% for the quarter and 21% for the full year 2008.

GAAP earnings per share for the third quarter was a loss of $0.04 compared to a loss of $0.18 per share in the third quarter of last year. GAAP results for the quarter include a loss of $0.07 related to the J&J related litigation charges, the Abbott gain and milestone payments, acquisition related credits, and restructuring related charges I mentioned earlier. Our adjusted earnings per share in the third quarter, excluding amortization expense, intangible asset write-offs, the J&J related litigation charges, restructuring and acquisition related charges as well as the gain on the sale of non-core investments and the tax benefit associated with the company's previous sale of non-strategic businesses was $0.16 compared to $0.20 in the third quarter of last year.

As a reminder, in the third quarter of 2007, adjusted earnings per share excluded $0.09 per share related to amortization, $0.06 per share related to acquisition related charges, and $0.23 per share of divestiture related losses. The $0.16 achieved this quarter falls in the middle of our guidance range of $0.14 and $0.19 and included in this $0.16 is a one penny charge of expense resulting from the inventory write-off due to the issues at our third party sterilizer as well as another $0.005 per share of expense related to the continuation of offering free LATITUDE Remote Patient Monitoring systems to patients receiving implants prior to October of 2006.

Stock compensation was $31 million in the quarter and all per share calculations were completed using 1.5 billion shares outstanding. Turning to working capital management, day sales outstanding were 63 days at the end of the quarter, which was an improvement of one day compared to the last quarter and 5 days better than prior year.

Continued cash collection improvements across all regions particularly in the U.S. and Japan were the main contributors to this improvement. Days inventory in hand were 120 days, and that's down 2 days compared to the second quarter this year, but down 14 days compared to the third quarter of last year. And while our days inventory in hand for the quarter was essentially flat compared to last quarter, the inventory dollars have increased over the last quarter due to the inventory bills necessary to support new product launches.

Third quarter 2008 reported operating cash flow was $638 million and that's an increase of $163 million over the third quarter of last year. Reported operating cash flow includes $250 million milestone received.... related to the FDA approval of Abbott's XIENCE drug-eluting stent in the U.S., operating cash flow excluding the XIENCE milestone was $388 million, a decrease of $87 million compared with the third quarter of last year, and that decrease is primarily due to additional estimated income tax payments in the third quarter of this year compared to last year, as well as restructuring payments and lower adjusted operating income during the quarter.

Capital expenditures were $72 million in the quarter, which is $15 million lower than the third quarter of last year and $7 million lower than the second quarter of this year. Free cash flow was $565 million in the quarter representing a $178 million increase over the third quarter of 2007 and $386 million higher from the second quarter of this year.

In June we announced definitive agreements to sell our investments and the portfolio of companies and venture funds that are expected to raise pre-tax proceeds in excess of $140 million. In the third quarter we received cash proceeds of $60 million together with a note receivable for $23 million to be paid over several years. In conjunction with these transactions, a monetization of our other non-strategic investments, the company recorded net pre-tax gains of $15 million which is $9 million after-tax or $0.01 per share.

We expect to record additional pre-tax gains of approximately $10 million and expect to receive cash of $65 million in the fourth quarter of this year subject to certain closing and other conditions. These gains recorded in the third quarter partially offset a net pre-tax loss of $96 million that were recorded in the second quarter of this year.

We close the quarter with $6.774 billion of total debt as well as $1.734 billion of cash on hand resulting in net debt of $5.040 billion. Net debt is $1.880 billion lower than the third quarter of last year, as a result of pre-paying approximately $1.4 billion of bank debt during the past quarter while at the same time increasing cash on hand by approximately $500 million.

In the third quarter, we reduced net debt by approximately $600 million by pre-paying an additional $500 million of debt while increasing cash on hand by over $100 million. Our next debt maturity of $825 million is not due until the year 2010. Subsequent to the closure of third quarter, the company posted a $717 million surety bond backed by a $702 million letter of credit and $50 million of cash to secure the damage award related to the Johnson & Johnson patent infringement case.

The annual cost of the surety bond is the letter of... and a letter of credit is approximately at $7 million and neither will be treated as debt for purposes of calculating [ph] bank covenants. The letter of credit will reduce to credit availability of our $2 billion revolving bank credit facility to approximately $1.3 billion. As a reminder we have appealed that judgment and would not expect to make any payments for the next 12 to 15 months.

In the midst of very turbulent financial markets we continue to manage our debt portfolio, cash investments, cash flow, and working capital very conservatively. We currently have access to approximately $3.3 billion of cash that consist of $1.7 billion of cash on hand and approximately $1.6 billion through a combination of our revolving bank facility and our accounts receivable securitization facility. We have no reason to believe that access to funds would ever be restricted for us.

At the end of the third quarter, the debt to EBITDA ratio under our credit facility was 2.8 times which is well below the maximum permitted level of 4.5 times resulting in over $900 million of EBITDA cushion. As a reminder, our covenants provided for an exclusion from calculation of EBITDA as defined by the agreement of up to $300 million of restructuring charges incurred through June of 2009. We have approximately $65 million remaining available under this exclusion at the end of the third quarter.

In addition, our covenants provided for an exclusion from the calculated EBITDA of up to $500 million of litigation charges in any four consecutive quarters. Our banking syndicate remains very solid and demonstrated their continued support to Boston Scientific by funding our recent $703 million letter of credit.

I am pleased to say that we remain well ahead of schedule in reducing targeted expenses. We previously disclosed that we would exit 2008 with a run-rate annualized savings and operating expenses of a range of $475 million to $525 million, and that we plan to achieve over 90% of the savings in 2008. We also announced that we would be eliminating 4,300 physicians with 2000 associated with the businesses identified for divestiture and 2,300 physicians from our ongoing businesses.

Our savings initiatives are running ahead of schedule as evidenced by our third quarter operating expenses, while also overcoming the adverse impact of operating expenses of the weakening U.S. dollar of approximately $12 million.

With respect to headcount, our divestitures were completed during the first quarter of this year and the associated 2,000 physicians have transitioned out of the company as planned. With respect to our restructuring reductions, we are tracking ahead of original timeline for the third quarter of 2008 with over 85% of the physicians eliminated.

Turning to sales guidance for the fourth quarter of 2008, consolidated revenues are expected to be in the range of $1.965 billion to $2.080 billion. That would be down 2% or up 4% based on top and low end of the range from the $2.007 billion reported in the fourth quarter of 2007 excluding divestitures. And if current foreign exchange rates hold constant through the fourth quarter, then negative contribution from foreign currency should be approximately $25 million or negative 1% to our sales growth rate.

For drug-eluting stents, we are targeting worldwide revenue to be in the range of $400 million to $440 million with U.S. revenue of $220 million to $240 million, and OUS revenue of $180 million to $200 million. Included in our U.S. drug-eluting stent and total sales estimates for the fourth quarter of the incremental TAXUS Liberte sales resulting from the replacement of customer stock for the return TAXUS Express.

In Q4 2008, we expect to ship approximately $20 million of TAXUS Liberte product to replace returned TAXUS Express product. This $20 million will be incremental to our normal run rate. We expect the majority of these replenishments to occur during the fourth quarter of this year with an immaterial amount in the first quarter of 2009.

For our defibrillator business, we expect revenue of $425 million to $455 million worldwide with $295 million to $315 million in the U.S. and $130 million to $140 million outside of United States. For the fourth quarter, adjusted earnings per share excluding charges related to acquisitions, divestures and restructuring as well as amortization expense are expected to be in the range of $0.18 to $0.23 per share. This range includes approximately a $0.01 impact from the replenishment sales for the TAXUS Express returns I addressed earlier and the company expects earnings per share on a GAAP basis in the fourth quarter of 2008 to be in the range of $0.10 to $0.15 per share.

Included in our GAAP earnings per share estimate is approximately $0.01 per share of restructuring related cost and $0.07 per share of amortization expense. Based upon the earnings per share guidance for Q4, we expect the full year adjusted earnings per share to be in the range of $0.78 to $0.83 per share and prior to this earnings call the research analysts consensus estimate of adjusted earnings per share as noted on first call were $0.22 for the fourth quarter.

During the fourth quarter the company expects to make a payment related to the MDL litigation associated with our acquisition of Guidant in 2006 and as previously announced we expect this payment to be approximately $220 million which has been previously reserved. Capital expenditures for the fourth quarter and full year 2008 are expected to be approximately $130 million and $325 million respectively. And as... and consistent with last year and as a result of a later launch of TAXUS Liberte than we had previously estimated as well as our 2009 operating plan process which is currently in progress we'll not provide formal guidance for 2009 until our fourth quarter earnings call.

That's it for guidance, our fourth quarter earnings call will be at 8.00 AM Eastern Standard Time on February 3, 2009 and now let me turn it over to Jim for a more in-depth review of our businesses.

James R. Tobin - President and Chief Executive Officer

Thank you, Sam and good morning everybody. I am going to take you through the non-financial aspects of the business starting with CRM. As Sam said, our CRM business posted another quarter of double-digit growth. Worldwide defib sales reached their highest level in more than three years, while showing strong year-over-year growth of 14% as well as positive sequential growth for the fourth straight quarter.

Building on the solid performance of the past two quarters, we are now beginning to show more consistent sales growth reflecting a revitalized franchise. The most significant events of the quarter were the U.S. and European launches of COGNIS and TELIGEN, the world's smallest and thinnest high energy devices. While the benefits of device size cannot be overstated. These products also features substantially improved programming capabilities and extended battery longevity. COGNIS and TELIGEN provide more power and functionality in a smaller can, effectively eliminating the trade offs that physicians typically have been forced to make with high energy devices.

As a result, we're seeing strong customer preference including 100s of doctors now implanting COGNIS and TELIGEN who had not used Boston Scientific devices in the past year. While it's too early in the launch process, we are seeing quick adoption and some modest share gains in both the U.S. and Europe. These devices are already exceeding expectations within our product mix and the earlier than expected approvals have allowed us to get a head start on achieving our goal for strong defib growth in the second half of the year. As is the case with most launches, there are some wrinkles that needed to be ironed out.

The COGNIS and TELIGEN header is an improved design and we have seen a small number of issues with sets screw seal plugs. We have conducted reinforcement training with our entire field force to ensure that all of them know the right implant protocol. COGNIS and TELIGEN transmit on a slightly different radio frequency than prior devices. In a handful of hospitals we've run into phone systems that can cause RF interference. Interference can be seen in the simple switch over to using a one that resolves the issue.

We continue to execute well on our product pipeline. We now have more than a dozen major CRM approvals in 2008. The recent COGNIS and TELIGEN launches have complemented the successful introductions of LIVIAN, CONFIENT, and the ALTRUA Pacemaker Family and the ACUITY Spiral LV Lead. These new technologies are built on the strength of our enhanced quality systems, improved reliability and safety, and advanced patient monitoring capabilities.

Our sales force is energized by these new product offerings and motivated to take more share. As sales continue to grow, we plan to successfully expand our sales force globally on a pay as you go basis. We have worked hard to align expenses with revenues. So we will add people only as necessary in specific regions where we feel it would be most profitable.

COGNIS and TELIGEN are real game changers and we want to take full advantage of having them in our portfolio. They represent the significant progress we've made rebuilding our CRM organization and revitalizing our pipeline. We will also benefit from improved profitability as we rollout higher margin products and begin to realize efficiencies and cost savings as a result of improvements in our quality systems.

To encourage the overall market growth, we continue to invest in clinical studies that promote the advancement of heart failure treatment. Results from our landmark made at CRT trial, will assess whether CRT therapy can slow the progression of heart failure in minimally symptomatic patients. We expect the trial to yield positive results, possibly as early as Q2 of next year which should reinforce similar outcomes from prior studies on a larger, more definitive scale.

As we have seen with previous randomized controls trials sponsored by Guidant and others, made it CRT has the potential to expand the CRM market by increasing the number of patients who stand to benefit from this life saving therapy. Overall, I am very pleased with the progress we continue to make in CRM. We are setting ourselves apart from the competition by offering a range of new products to deliver unmatched value to our customers and their patients. We've never been in a stronger position to leverage our competitive advantage, build customer preference, and grow this business.

So, now let me turn to our cardiovascular and other businesses. Let me start with some comment on the corporate warning letter. We continue to make very good progress in our efforts to improve quality and to resolve the warning letter. As you have seen over the past several weeks we've begun to receive FDA approvals for class three products including TAXUS Atom and TAXUS Liberte. Previously, under compliance hold as a result of corporate warning letter. In addition to the approvals we've already received we are looking forward to receiving approvals on products such as APEX, PTCA, Balloon Catheter, Carotid WALLSTENT, and our Express SD Renal Stent.

We were informed by the FDA yesterday that we are in substantial compliance with its quality systems regulations and that the agency has agreed to remove the restrictions imposed by the corporate warning letter related to Class III product approvals and certificates to foreign governments. The corporate warning letter remains in place pending final remediation of some MDR filing issues which we are actively working with the FDA to resolve.

In the DES market, we executed the launch of our PROMUS Stent platform exceptionally well and we were able to maintain our market share leading position in the U.S. with our two drug strategy. We saw encouraging signs during the quarter. PCI levels grew worldwide year-over-year and penetration rates increased to more than 70% in the U.S. market. This is the third consecutive month where MRG has reported U.S. penetration at 70% or more. So, we believe the recovery is continuing and the market is strengthening. We are encouraged by these two important metrics and we are confident that the DES market will continue to move in the right direction.

As you know, we received FDA approval for our PROMUS Everolimus-Eluting Coronary Stent System on July 2nd. The launch execution by the CV team has been great. During the quarter we were able to adjust and improve our PROMUS inventory levels so that we can launch additional accounts starting now while continuing to serve our current customers with very high service levels. We remained very optimistic about the opportunity we have here.

Based on the MRG data, we exited the quarter with U.S. market share of 44% in September with PROMUS slightly north of 25 and TAXUS at roughly 19. Based on this data, we believe that XIENCE is also slightly north of 25, Cypher is at 20, and Endeavor is currently at 10.

Our strategy of maintaining overall drug-eluting market share leadership has worked well. We are the only company who offer two distinct drug platforms and there is no question in my mind that this gives us a considerable advantage in the DES market. Going forward, our focus will be to maintain leadership in this market. I am confident that our stent pipeline which continues to deliver new products positions us very well to do just that. TAXUS Atom, the first 225 DES in the U.S. and our in-stent restenosis indication expansion were proved and then launched in the U.S. We have already launched TAXUS Atom in over 600 accounts. This stent has been very well received and we expect to gain additional share as a result of having the only approved 2.25 millimeter stent on the market.

In addition, we announced the approval of TAXUS Liberte which we will launch in early to mid-November. This timing will allow us to focus on the ongoing PROMUS and TAXUS Atom launches as well as rebuilding our TAXUS Liberte inventory. Last week at TCT there was a lot of clinical data released that reinforces the strength of our TAXUS franchise. The SYNTAX trial results show comparable depth in M&I data between TAXUS Express and CABG for multi-vessel patients.

CABG patients actually showed a statistically higher rate of stroke and as expected DES patients had increased rates of revascularization. This trial is important as it is helping to inform physicians and patients as to the best treatment options for left main and three vessel disease.

The HORIZON's AMI trial demonstrated superior efficacy and comparable safety results with TAXUS DES versus BMS in AMI patients. This is important because DES use is below 50% in this patient population so upside there still exists. The OLYMPIA trial shows TAXUS Liberte to be highly safe and effective with the low occurrence of cardiac events and stent thrombosis in a large all comers registry. The arrived registry shows TAXUS Express who had similarly low reintervention rates in patients with diabetics compared to non-diabetics.

The TAXUS element clinical trial completed enrollment during the quarter and we plan to submit the PROMUS Element IDE and [indiscernible] for approval this year. This will be called the Platinum trial, which we are targeting to begin enrolment around the beginning of the year and to complete enrolment by the end of 2009.

We expect FDA regulatory review to be complete and to launch PORMUS Element in the U.S. and Japan in Q2, 2012. We are currently on track to meet all of those targets. These two platforms will set a new standard for DES portfolio performance and they are a key part of our leadership strategy.

Looking briefly at other CV lines, our U.S. leadership in PTCA balloon catheters continued with 62% share and this performance will be strengthened by the APEX Balloon launch which we expect in Q1 of '09. We planned on launching Kinetics our next generation coronary guide wire in Q2 of '09. Our IVUS platform iLab continues to be readily adopted by CathLabs worldwide as evidenced by approximately 1300 iLab installations and 8% year-over-year revenue growth globally. IVUS procedural penetration has now increased to approximately 14% of PCI procedures in the U.S. and remains very strong in Japan at 67%.

We recently announced an important collaboration with GE Healthcare that will improve endovascular ultrasound workflow between our respective imaging systems, which benefits both, from the patient in the cardiac CathLabs and we are planning Q1 '09 launches of iLab 2.0 with tissue characterization and iCross [ph] which is an improved imaging catheter that reduces push force.

In summary, we believe we are very well positioned as the only company with a two drug offering, a long list of franchise strengths, and improved market fundamentals. We believe our relative strength as the overall CathLabs leader will increase over the next two years.

We remain the market leader in neurovascular. Though our growth has flattened recently due to Corus's reentry and of course in our first ever competition in the jumpy aneurysm stents. Despite this short-term pressure, we've retained 47% overall share for neurovascular. The MAPS trial has passed the halfway point in terms of enrollment. MAPS is a randomized clinical trial comparing GDC 360 coils with BSE coded matrix coils. It will be the pivotal trial in the industry and the comparative trial for all the companies in the future.

Our position combined with around 11% growth in the market and upcoming coil and stent product launches makes us optimistic about our prospects in neurovascular. In our peripheral interventions business, we hold a strong worldwide position in a growing market and are number one in multiple product categories. We just launched our newest peripheral balloon, the Sterling ES PTA Balloon Catheter with an ultra low profile design and we are also planning to launch the Carotid WALLSTENT soon. With approvals pending in Carotid, Renal, and biliary stents, we also expect gains in balloons and wires from these new product launches in both, U.S. and international markets.

Endosurgery had a solid quarter with 9% overall growth, with Endoscopy and Neurology, Gynecology, both growing at 9. The Endoscopy business continues to perform well globally. We had double-digit growth in our biliary and hemostasis franchises and good growth in metal stents. In biliary, continued commercialization with the SpyGlass Direct Visualization System drove increased utilization. Hemostasis continues to benefit from widening adoption and utilization of our Resolution Clip device. Metal stent growth was driven by the global launch of our WallFlex Biliary Uncovered Stent.

Within the urology gynecology division in the U.S., our market leading neurology stone management segment grew above the market at 4%, while the gynecology business grew at an impressive 20%. Growth in gynecology was driven by a clinical Pelvic Floor Repair kit, the Advantage Mid-Urethral Sling, and the HDA product line. I am pleased with the performance in the Endosurgery Group in the face of short time challenges, while we transition our engineering resources away from the directive activities and back on to new product development projects.

Finally, our Neuromodulation business continued its double digit growth up 13% in U.S. and 15% worldwide during the third quarter. This growth occurred despite recent new product launches by competitors in the market. With the launch by Medtronic in Q1 in St. Jude, ANS in Q3, the size differential we've enjoyed has been closed. However, we maintained our technology advantage with our multiple independent current control.

Additionally, our OMG device continues to provide patients with the opportunity to feel the difference our precision system can make. This strong showing in the spinal cord stimulation market is a positive indicator of our future in Neuromodulation.

Let me close with some overall perspective on the quarter. We made progress in several key areas and we were encouraged by a number of important accomplishments and developments. For the second consecutive quarter we maintained an impressive 45% aggregate share in the U.S. DES market despite the arrival of new competition. Ironically the distance between our share and that of our nearest competitor has increased because we can offer both classes of drugs. And in September PROMUS and XIENCE were neck-in-neck with less than a share point separating the two.

We have now received FDA approval for PROMUS, TAXUS Liberte and TAXUS Atom. So we are the only company in U.S. market with a two drug platform and a small vessel DES. In addition to the good news in our DES franchise the U.S. market showed reasons for optimism with penetration... with a penetration number beginning with 7 even higher in September and PCI volumes up.

In CRM it was another quarter in which we posted double-digit growth and took a little share. The U.S. and European launches of COGNIS and TELIGEN have been very well received by our customers and they marked real milestones for the CRM business. These devices are clear differentiators and they are setting us apart from the competition. As we have received more than a dozen CRM approvals this year and COGNIS and TELIGEN symbolize the strength of our pipeline and are bright class prospects in this market. With the launches of PROMUS and COGNIS and TELIGEN, folks can see really for the first time the power of the BSC-Guidant combination in the marketplace.

Now let me touch briefly on two recent developments that could benefit from perspective and context. The first is the judgment in the J&J case. I would ask you all to remember that this matter is far from resolved. We are appealing the damages award and we are probably a year or more from knowing how this case will ultimately wind up. In the meantime keep in mind that J&J is appealing two cases in which their Cypher stent was found to infringe two of our patents. So, stay tuned, more to come here.

The second is the involuntary selling by our co-founders. The key word here is involuntary. As Pete said in one of our press releases, they in no way reflect on the company. Pete and John got caught in a perfect storm which included historic turmoil in the financial markets, assets frozen in the Lehman Brothers bankruptcy, and a black out period for all officers and directors of BSE due to the fact that our third quarter financial results have not been released yet to the public. If there is any good news in all of this it is the fact that as we announced last week it looks like the majority of this selling has already occurred.

I want to close on another area of strength which is our balance sheet. In Q3 we continued to focus on our restructuring plan and it continued to deliver the operating results we want. During the quarter we generated $638 million of operating cash flow, paid down $500 million of debt, and reduced SG&A and R&D expenses by $128 million. So we made a good deal of progress in Q3 and we began Q4 with some solid momentum and a lot of reasons to be upbeat about our future. And with that I will turn it back to Larry who will moderate the Q&A.

Larry Neumann - Vice President of Investor Relations

Thanks, Jim. Laurie, let's open it up to questions and in an effort to enable us to field as many questions as possible in the remaining time, I would ask that you limit your questions to no more than two at a time and then return to the queue. Thank you.

Question And Answer

Operator

[Operator Instructions]. And our first question is from the line of Bob Hopkins with Banc of America. Please go ahead.

Robert Hopkins - Banc of America

Hi. Thank you and good morning. Two quick questions, first, a very quick one on guidance, and then one on gross margins. First, Sam on guidance, previously you had given sort of a high-teens growth objective for both '08 and '09. Obviously '08 is lowering guidance a little bit here. I was just wondering, does this mean that you don't believe that you can grow high-teens in 2009 as well, or just any clarification on what you're saying now about '09 versus what you've said previously?

Samuel R. Leno - Executive Vice President for Finance and Information Systems and Chief Financial Officer

Yeah, what it means is that when we talk about '09, we talked about those as aspirational. And now when we know a lot more about our total market share and a split between COGNIS and TAXUS, there is still more to learn in the fourth quarter. We are not prepared yet because we're right in the middle of our operating plan process that we haven't even discussed with the Board yet. And we have TAXUS Liberte to launch and few of the new products that are just picking up steam. So all those factors have been worked into our estimates for 2008 fourth quarter as well as 2009. But we really need to complete our operating plan process, get that in front of the Board before we can go out definitively with the guidance for 2009.

Robert Hopkins - Banc of America

Okay. And then more importantly I have a question on the sequential decline in gross margin. I'm just trying to understand the various impacts there, and just to clarify, did you say that 210 basis points of that sequential decline was basically due to the different mix between TAXUS and PROMUS versus what you expected?

Samuel R. Leno - Executive Vice President for Finance and Information Systems and Chief Financial Officer

Yeah, combination of volume and mix.

Robert Hopkins - Banc of America

Volume and mix, are there any inventory slop outs in there or is that purely the different margins associated with those products?

Samuel R. Leno - Executive Vice President for Finance and Information Systems and Chief Financial Officer

That 210 basis points is purely volume and mix. We have some other adjustments that we spoke of ... what I would think about gross profit margins, so the adjusted margin in the quarter was 67.1%, affecting that in a negative way was about 1.2 points of gross profit margin for the right offer of the Liberte inventory that we had already built, and we're now in the process of rebuilding it. And about 50 basis points for the LATITUDE patient monitoring system that will provide free to patients who got implants prior to October of 2006. And both of those are items that occurred in the third quarter, so that it will not occur again. So, that would give you about a 68.8% of gross profit margin. And then tax was 160 basis point, that's a huge impact. And we now know that the dollar is continuing to weaken or to strengthen. We saw just this morning that the dollar strengthened a lot against the yen as well as the pound. We have no idea were that's going to go. But it's already going to contribute based on today's rates, a lower negative drag on gross profit margins going into the fourth quarter. So just those items alone, that should put us... all things... all other things being equal in the low 69%.

Robert Hopkins - Banc of America

But just to be clear on a sequential basis, the sequential decline to put it in buckets, 210 basis points of that was related to mix in volume with PROMUS and TAXUS and the balance sequentially was related to a combination of currency and the issues with TAXUS and sterilization?

Samuel R. Leno - Executive Vice President for Finance and Information Systems and Chief Financial Officer

That's correct.

Robert Hopkins - Banc of America

Okay. And then if you just lastly on gross margin, it sounds like some of these things won't happen again in the future. So it's 68.5 to 69 kind of a low point for you for gross margins you think as we look forward?

Samuel R. Leno - Executive Vice President for Finance and Information Systems and Chief Financial Officer

Yes, we won't give the guidance on gross profit margin, the best we can do is unravel the Q3 and let you work your own models out. But we have as we're going to launch TAXUS Liberte, we are hoping that's going to be a successful launch, and that gives us the ability to get a couple of more share points, that's good news on our gross profit margin. We'll also have the full quarter effect of PROMUS which goes the other way. So, based on what you believe our total share will be for drug-eluting stents in the fourth quarter and how much of that share will be serviced by PROMUS versus TAXUS, that's going to give you a different outcome for gross profit margins.

Everybody believes and if you look at the analyst report, no one believe we'll be at 45% at least a very few did in total market share or that we would perform as well as we did with our TAXUS against PROMUS and XIENCE. So we're, actually, even though we had the write-offs that occurred in the third quarter, we're on a pretty solid launching pad going forward in the Q4 as well as 2009.

Robert Hopkins - Banc of America

Thanks, Sam.

Samuel R. Leno - Executive Vice President for Finance and Information Systems and Chief Financial Officer

Yes.

Operator

Our next question from the line of Mike Weinstein with J.P. Morgan. Please go ahead.

Michael Weinstein - J.P. Morgan

Thank you for taking the questions, I want to just follow-up to that. So first Sam, the 150 basis points to the weaker dollar, that's more than to entire quarter's... were there just some bad hedging contracts there?

Samuel R. Leno - Executive Vice President for Finance and Information Systems and Chief Financial Officer

No, not bad hedging contracts. It's the absence of really good hedging contracts that we have helping us in previous quarters. So now we're down to sort of normal hedging contracts and if you look at the effect on sales, growth for FX, it had virtually no impact on operating profit which is how hedged contracts are supposed to work. And a little bit...

Michael Weinstein - J.P. Morgan

Right. So if I think of that... and so as this contracts roll out and the dollar in the fourth quarter obviously is going to move to a headwind versus a tailwind, do you still expect there to be a negative impact from this contract in the fourth quarter, is that what you're saying?

Samuel R. Leno - Executive Vice President for Finance and Information Systems and Chief Financial Officer

No, I am not saying that.

Michael Weinstein - J.P. Morgan

Okay.

Samuel R. Leno - Executive Vice President for Finance and Information Systems and Chief Financial Officer

At some point in time, the contracts help us instead of hitting us. So if the dollar strengthens enough, what we'll see is headwind on sales growth, but a buoyancy at the gross profit and operating profit margins.

Michael Weinstein - J.P. Morgan

Okay. In my recollection on the LATITUDE program that Larry was capitalizing in those programs, when... there was a big giveaway of LATITUDE programs into the big write-off couple of years ago, I assume that's no longer the case on what you're saying?

Samuel R. Leno - Executive Vice President for Finance and Information Systems and Chief Financial Officer

Well, you maybe recalling in the third or fourth quarter of 2006, we made a statement back then that we would provide free LATITUDE Patient Monitoring devices for all patients who had received a wanted version of implants prior to October of 2006. And in that period we took a charge of $30 million, which is our best estimate for what the cost would be for that commitment. And as it turns out, while you see in the $10 million or $9 million for this quarter is a bit stronger use, a bit stronger demand for that free monitoring system than was originally was contemplated back in October 2006, but the two are tied together.

Michael Weinstein - J.P. Morgan

And then, there is one more gross margin question, one more actually GAAP, non-GAAP question. The write off of some intangible assets here can you tell us what that was... what was written off?

Samuel R. Leno - Executive Vice President for Finance and Information Systems and Chief Financial Officer

Yeah, it was related to three previous acquisitions of technology that actually didn't pan out for us. I won't be specific as to which ones, but there are three acquisitions we had done previously that proved not to be revenue generating and as a result they were impaired when we did our annual impairment testing.

Michael Weinstein - J.P. Morgan

Okay, let me ask one real quick to Jim. Jim, what played out with the stock in the last few weeks here, and given your current cash flow generation, and the fact that you don't have any debt that you have to pay down until 2010, is share repurchase on the table, not on the table, how do you think about that?

James R. Tobin - President and Chief Executive Officer

We did a serious look at that as an alternative and the recommendation that we've made to the Board is to not go in that direction. Fundamentally, it boils down to two things, number one, it doesn't seem to do any good long-term and number two, and more importantly, we want to make sure that we keep our cash available for two reasons, one is that we know where some of that cash is going to go, sooner or later, over this next 18 months. There are three or four events that we can plan for ahead of time that would use virtually all of the cash we have on the balance sheet right now. But we generate $100 million a month or something and so we'll be replacing that. But, when you can see all of your cash allocated to things in the future, you want to make sure that you got plenty. And number two, as we do build up excess cash and pay down debt over the next year, 18 months. We're going to find ourselves in a position where we're going to be able to enhance our top line growth through some targeted close to market or on the market kinds of tuck-in sort of acquisitions that would give us a leg up on growth. And so basically, that boils down to we got better uses for the cash than buying back stock.

Michael Weinstein - J.P. Morgan

Thank you for taking the questions.

Operator

Our next question from the line of Tao Levy with Deutsche Bank. Please go ahead.

Unidentified Analyst

Hi. Good morning this is actually Hemant [ph] for Tao. Thanks for taking my question. My first question is a macro question, in consideration of the challenging macro economic environment are you guys seeing anything extraordinary relative to pricing for your products, in other words, are hospitals being more aggressive with their purchases.

Samuel R. Leno - Executive Vice President for Finance and Information Systems and Chief Financial Officer

We havealways been aggressive and they're still aggressive and it hasn't really shifted. I guess that's the bottom line.

Unidentified Analyst

Okay, And then in the CRM segment, can you just give us a sense of the mix in tachy, particularly looking at COGNIS and TELIGEN, I think last quarter you have talked about those devices representing about 20% of your sales in Europe. Can you just you give us a sense may be in Europe and also in the U.S. what these devices represent in terms of total tachy sales? Thanks.

Samuel R. Leno - Executive Vice President for Finance and Information Systems and Chief Financial Officer

We've shied away from breaking that out. What I would say is that we have not seen the growth in the CRT segment that we had hoped for particularly in Japan but in all other markets to a lesser extent. So, we're not seeing the development of that side of the high energy business as much as we had hoped.

Unidentified Analyst

Okay, and then what's the latest in Japan with the CRM franchise there?

Samuel R. Leno - Executive Vice President for Finance and Information Systems and Chief Financial Officer

Well, we basically lost our distributor and a bunch of business with it in April. And so, we've essentially rebased and are rebuilding the business. It's going to take some time to see that mature. That's not something that is going to happen over six or twelve month kind of period. It's probably more like 18 months to 2 years to rebuild our own direct field force and to regain the kind of business that we lost with that distributor. So, things today are actually going quite well in Europe and in most international markets offset by a big chunk of going backwards in Japan.

Unidentified Analyst

Thank you very much.

Operator

Our next from the line of David Lewis with Morgan Stanley. Please go ahead.

David Lewis - Morgan Stanley

Good morning. Sam, just to comment on gross margin one more time, if we think about a lot of numbers moved around here, the 210 basis points of price and mix, was there any impact... I know you said PROMUS, TAXUS pricing was firm, any impact in terms of basis points on the quarter on GM as it relates to non-core products, whether its bare metal, balloons, wires, so the effect of maybe some aggressive bundling or bundling in and have any extent?

Samuel R. Leno - Executive Vice President for Finance and Information Systems and Chief Financial Officer

No, that's just not an issue for us. The big moving components of gross profit margins are the ones that I addressed. If there's anything else in mix, it's inconsequential and there's nothing in bundling.

David Lewis - Morgan Stanley

Okay. And thinking about the fourth quarter, I know you're hesitant to give GM guidance, but if we think about, given you had Atom, given you have Liberte, given how you finished up your third quarter. Can you give us some general ranges in terms of where you would expect PROMUS, TAXUS to end up here in the fourth quarter?

Samuel R. Leno - Executive Vice President for Finance and Information Systems and Chief Financial Officer

We could, but we won't.

David Lewis - Morgan Stanley

Okay, fair enough.

Samuel R. Leno - Executive Vice President for Finance and Information Systems and Chief Financial Officer

It's hard to call. Honestly it sort of fits in the category of almost anything we would say is likely going to turn out to be wrong.

David Lewis - Morgan Stanley

Understood. So, I guess, Sam, as it relates to growth guidance for this year and for next year, is there anything that you've seen based on doing better this quarter on global DES year? Obviously, the margin issues are nice job explaining, is there anything you've seen so far that suggest that this high-teens growth is not obtainable, or you're just simply being conservative and don't want to give that guidance until we get to the Board?

Samuel R. Leno - Executive Vice President for Finance and Information Systems and Chief Financial Officer

We are just not going to address 2009 at all for the reason I stated. We're still in the middle of our operating plan, which is a considerable undertaking given the size and complexity of our business and all the moving parts. And the launch of Liberte is going to be interesting and exciting and a bit difficult to forecast in the short-term. So, we do need the additional quarter of visibility to see how the total market share for drug-eluting stents and our mix of TAXUS and PROMUS shakeout, not just for the quarter, but also the exit rate what we see in the last month or so. The quarter is going to be a real important contributor to finalizing our expectations for 2009.

David Lewis - Morgan Stanley

Understood. But, Jim, your impression of Liberte is certainly not going to hurt the company and the DES franchise?

James R. Tobin - President and Chief Executive Officer

No, I view it as a... as sort of a team with great defense. It's going to arrest the slide in TAXUS, it's going to... it performs better than I think people really realize. And it's going to be a well received product. And that plus the TAXUS Atom product, and then just actually haven't adequate inventory on the PROMUS side, we have a lot of things to like about how we're going into Q4 here.

David Lewis - Morgan Stanley

Okay. Then just one last question, then I'll jump back in queue. You talked about the SG&A cost kind of going faster than you expected. Through that process, have you identified other areas of cost reduction that would take that number above that 525 top end?

James R. Tobin - President and Chief Executive Officer

Yes, we have. We haven't disclosed what they are. But I think we're already seeing the benefit of a lot of those activities in the run rate already. One quarter doesn't make a year, but if you look at the Q3, we have roughly $850 million of total SG&A and R&D, which are the two issues that we're targeting. That number... those two numbers were forecasted in October 2007, finish the year at $4.1 billion, and it was again that bogie that we said in 2009. We would be down to $3.6 billion. If you annualize Q3, you'll get a lower number than that. If you annualize Q2, you get $3.6 billion exactly. And that's even covering the negative effect of what has been a strong currency and therefore inflated operating expenses.

So, we're doing quite well against SG&A. I think the issue for next year, frankly is all about the top line and mix of products. It's all about top line and margin.

David Lewis - Morgan Stanley

Okay, thank you very much.

Operator

We go next to the line of Rick Wise with Leerink Swann. Please go ahead.

Rick Wise - Leerink Swann

Good morning, everybody. Turning to ICDs for a second, Jim I think you highlighted the pipeline and your hopes for market share. Maybe can you help us get more perspective on what's next in the pipeline post COGNIS and TELIGEN that could impact market share, is it further LATITUDE placements, you gained share in the quarter, your numbers of guidance, just my rough back of the envelope suggest you think sort of holding share constant in the fourth quarter, again based on other estimates, can you give us some perspective on all that?

James R. Tobin - President and Chief Executive Officer

Well, here is the deal, okay. We launched COGNIS and TELIGEN earlier than we had expected to and because almost everything in that device is new, we had to essentially put in place a component pipeline for like 130 components or something like that. So, we've been on allocation with that product since its launch and it only launched on August 4. So, we didn't... its less... it is basically less than half the quarter. That rollout is going very, very well and I... until we see the Medtronic numbers, I hesitate to be too bullish. But you get the sense that we are doing pretty well in the market place despite being inventory challenged and despite it being Q3 and we got people pretty well fired up here with this and other new products. So I'm actually pretty optimistic about how we're going to do going forward, particularly in the U.S. market. I think the challenges in international are greater, primarily in Japan, so that moderates our overall sort of worldwide share taking capability. But, I'm optimistic.

As far what's next, you know the things that we've talked about. There are things we haven't talked about, I am not going to talk about it now, alright. But we're investing to continue to drive the technology leadership that Guidant has historically had. And... although I think the period of recalls kind put a hitch on our get along as far as new product development there for a while, we are rapidly catching up and Fred Colen is doing a great job of driving this stuff through the process. So, just stay tuned on the new product front, okay.

Rick Wise - Leerink Swann

Okay. Just following up on that, patient numbers continue to be... I don't know what to say weak. What turns that around, is it going to be new product? And maybe last, just a quick thought on the listing of the Medtronic injunction, assuming we launch at risk on October 31st, have you dialed in, baked in the assumption that they're going to get a little more share near term as they launch a rapid exchange version of Endeavor? Thanks, Jim.

James R. Tobin - President and Chief Executive Officer

Yes, I don't think that rapid exchange at this point is going to make that much difference for them. The marketplace now has alternatives that in the Everolimus category they just simply work better than Endeavor and what catheter it's on just isn't going to matter that much. Might arrest a slide a little bit, but it's not going to make much... it's not going to give them upside.

The Pacer side of the business, when the merger occurred there were no new product Pacer projects in the pipeline and there were none that were planned to be funded. So the real issue here is that the product line... the Pacer product line had become a little bit long in the tooth. Now the launch of new leads and the launch of ALTRUA I think have sort of resulted in bringing us back to competitive, but the Ingeneo product line that will be out next year I think will for the first time in many, many years put Boston Scientific in the lead in terms of capabilities in the Pacer side of things, but that's still in the future.

Rick Wise - Leerink Swann

And when will that launch occur?

James R. Tobin - President and Chief Executive Officer

I am not quite sure yet but '09 second half.

Rick Wise - Leerink Swann

Sounds good, thank you.

Operator

We'll going next to the line of Larry Keusch with Goldman Sachs. Please go ahead.

Lawrence Keusch - Goldman Sachs

Hi, good morning guys. Jim, just a couple of questions for you and then one for Sam. In terms of the defibrillators and some of the early things that you had to contain with whether the set screws or the telemetry. On the telemetry side specifically, I know that you indicated that you can use the wand which is coded to the programmer but what are the options to sort of resolve that in appearance with the phone systems on the telemetry side so people can use wireless? And then as you look at Liberte and that getting out on to the market, you think about your share going forward, do you think that Liberte really moves PROMUS users back to attack this platform, or is it more a product that allows you to try to gain incremental share from the other competitors out there? And then just quickly for Sam, if you could just run through of the $1.7 billion cash, where is that sitting sort of percentage U.S. or OUS, and what are the discreet items that Jim was talking about, the four items or so that are coming up, that you are going to have to use the cash right, I presume one of them is the debt maturity?

James R. Tobin - President and Chief Executive Officer

Okay. As far as the wireless piece goes, that is fixable with a program with a software change. And so, I think that's a relatively short-term prospect and that will happen. Likewise, the set screw issue is something that we have a program to address and that we'll require a filing, so it isn't going to happen overnight but all of these things are things that can't be upgraded overtime. But, the thing that, I want to emphasize there is that this has been a... the biggest issue in the roll-out has been our sort of constrained position in inventory, not product issues.

These things are performing very, very well and people love them and ironically, despite all the sophistication of what's in and it can, what really sells the thing is the thinness of the device. I mean, when you don't have that, you try to pretend it doesn't matter but trust me, it matters. Okay? Sam, you want to talk about.... as far as Liberte goes, I see Liberte as a resting the slide of TAXUS. I don't see it as gaining share really in terms of shifting anything back and forth. There are people that have been with TAXUS for years, who have tried alternatives over this last 90 days. And not all of that's going to stick, and so when they come back, they are going to come back to something new on the TAXUS side. It really is an improvement despite others attempts to say it's just repackaged TAXUS. It's better, it is clearly better and TAXUS element will be even better than that. And... so this matters, but it doesn't... it's not going to be multiple share points of gain. Sam, you want to talk about this.

Samuel R. Leno - Executive Vice President for Finance and Information Systems and Chief Financial Officer

Our cash, yeah, our cash today the $1.7 billion we have approximately $1.2 billion is in the U.S. and about a $0.5 billion located outside the U.S. But because of the structure that we have, there are no negative tax consequences of bringing that cash back home to the U.S. if that's where it's needed. In terms of where it's invested, it has to... we have roughly 64% invested in government funds and securities, 29% in time deposits, about 7% we just have a normal operating cash flow.

In terms of the four items, I will identify three of them, I think the fourth one is really an inbound item. We have the MDL settlement that we mentioned earlier, which is about $220 million cash outlay we expect to take place fourth quarter this year and it spill over to first quarter of next year. As a result of the negotiation process, no, we haven't resolved the differences with Advanced Bionics and the previous shareholders, we have the final payment of $500 million late in the first quarter of 2009, just around the corner. We at some point in time in the 12 or 15 month period we will have to pay J&J something, maybe. But that still remains to be seen. So that's a big question mark. But offsetting that in part, we at some point in time we'll get another $250 million inbound from Abbott when they ultimately gain approval for XIANCE in Japan.

Lawrence Keusch - Goldman Sachs

Okay, great. And Sam, one last quick one, can you extent that UCP [ph] to do any of your short-term funding.

Samuel R. Leno - Executive Vice President for Finance and Information Systems and Chief Financial Officer

No.

Lawrence Keusch - Goldman Sachs

Is that, ....Okay, great. Thanks very much.

Operator

We go next to the line of Joanne Wuensch with BMP Capital Markets. Please go head.

Joanne Wuensch - BMO Capital Markets

Thanks. It's Joanne from BMO. In terms of ICD pricing, could you give an idea of how that's playing out in the market, particularly now that you have more competitive products? And also you've been talking a lot about the drags on gross margins during the quarter, can you talk about maybe some of the items possibly ICDs and pacemakers, which helped push up gross margins in the quarter? Thank you.

James R. Tobin - President and Chief Executive Officer

As far as pricing goes, we've seen the ability to achieve an uplift in COGNIS and TELIGEN. So, that has been very helpful. There is the stage of the introduction of the product, there is also higher cost of course. So, those two are more or less offset. But the price piece, I think will stick and the cost is coming down, it already has come down. So, it just has to work its way through what little inventory we have. So, that's on the new product side of things. On everything else the sort of historical 2% or 3% a year kind of price declines that the industry has seen for a long time are what we continue to see in the rest of the ICD product line.

As far as sort of good news on the margin side particularly in the CRM business, you sort of pay a one time penalty with new product introductions but then because we have ironed out in part of the development process, a lot of the process issues that historically have been doubled guiding the new product launches. We start these things at yields that, that used to end up that and then those yields get better as we go. And so that results in lower scrap and just much better performance in the plants. So overtime and not lots of time, over the next year and year and a half you will see CRM margins go from good to great.

Joanne Wuensch - BMO Capital Markets

Thank you very much.

Operator

And our next question, from the line of Kristen Stewart with Credit Suisse. Please go ahead.

Kristen Stewart - Credit Suisse

Hi, good morning, thanks for taking my question. I have one for Jim and one for Sam. I guess Jim first, you had commented on PROMUS Element in the past in the U.S. and Japan, I was just wondering if there is any updates on the launch time lines for Europe?

James R. Tobin - President and Chief Executive Officer

The agreement runs out, I think it's November 21st of '09 and we expect to be able to launch PROMUS Element in Europe about that timeframe. So we're on track in Europe, which is the first one. There's an '10 date for non-Europe, non-Japan, non-U.S all other. We expect to make that date as well. And we talked about U.S. and Japan so I am... I remain positive on the prospects of us meeting the timelines in all regards.

Kristen Stewart - Credit Suisse

And Sam, just with respect to the gross margins again. In the last couple of quarters you've been seeing a benefit from reduced project HORIZON spending. Were you still seeing that this quarter and now that you have a substantial performance with QRS, would you expect to see little bit of a benefit on the gross profit line going forward as some of those costs roll off?

Samuel R. Leno - Executive Vice President for Finance and Information Systems and Chief Financial Officer

Yes, we've seen the benefits already. Compared to last year we have about $11 million benefits, so that's helpful to our year-over-year gross profit margin but sequential quarter those costs are really done. Largely, coming into this year and for the most part complete at the end of the first quarter.

James R. Tobin - President and Chief Executive Officer

One thing I will add to that Kristen is that to get ourselves back to compliance, we used a fire for effect kind of approach. We spent what it took to get us from there to here. So that then gives us the opportunity to go back and kind of reengineer those systems to make them more efficient there and without compromising effect. And so that overtime and that won't happen overnight, but overtime that will be a bias positively instead of negative.

Kristen Stewart - Credit Suisse

And Sam I know you're not giving any guidance for '09 but I am just wondering if you can help us get a better sense for what the sensitivity is maybe with respect to foreign exchange on the P&L as we look ahead. How effective are your hedges and to what degree you believe you can mitigate any of the kind of headwind from foreign exchange?

Samuel R. Leno - Executive Vice President for Finance and Information Systems and Chief Financial Officer

Yes, the last question is probably easy to answer than the first. The whole purpose of our hedging program and we do a pretty good job at this, is in fact to just have to negate the effect on operating profit from any rapid movement of currency up or down. And now that we have the really beneficial contracts behind us, we are back into sort of normal contracts. Going forward, we should see a very little effect on operating profit dollars as a result of movement in foreign currency.

The top line anyways is guess, your guess is good as mine, we will quantify as we always do the effect that we expect of the full year growth rate on sales when we provide formal guidance as part of our fourth quarter call by using the rates in effect at that point in time. But even internally we do not speculate in any of our internal guidance or assumptions what's going to happen to foreign currency beyond today.

Kristen Stewart - Credit Suisse

You hedge on a rolling basis and its out, is it 24 months or 36 months?

Samuel R. Leno - Executive Vice President for Finance and Information Systems and Chief Financial Officer

That's all 36 months, so we have... we target about 85% of our inter-company transactions. What we're hedging is inter-company cash flows, inter-company sales. We target about 85% and we ratchet down as we get into year two and down further as we get into year three.

Kristen Stewart - Credit Suisse

Thanks very much.

Samuel R. Leno - Executive Vice President for Finance and Information Systems and Chief Financial Officer

You're welcome.

Operator

Our next question from the line of Tim Lee with Piper Jaffray. Please go ahead.

Timothy Lee - Piper Jaffray

Hey, good morning. Thanks for taking the question. Just a couple of follow-ups here, just first on the gross margin line, as we look to fourth quarter, outside of product mix shift issues, I mean, are there any extraneous factors that we should be looking for with the roll out of TAXUS Liberte, could we see an inventory write-off charge on TAXUS Express?

James R. Tobin - President and Chief Executive Officer

Well we tried as best we could at the end of the second quarter to estimate what that inventory charge would be. It actually got a bit better because with the delayed launch of Liberte as a result of the FDA approval not occurring until the start of the fourth quarter, we actually will have less write-off. That was netted into the $11 million negative difference that I mentioned earlier. So no, we don't expect to see any major inventory write-offs as a result of the launch of Liberte and the return of Express. I think we have a pretty good handle on those numbers.

Timothy Lee - Piper Jaffray

Okay. And then just switching gear to the just the CRM side, on the ICD front, Jim, I think in your comments you had said, in terms of your sales force expansion it's on a pay as you go basis, when do you expect to be I mean... can you see headcount as in Q4 or is that more of an '09 type event?

James R. Tobin - President and Chief Executive Officer

We've begun to... we've already put people into Europe to support the COGNIS and TELIGEN launch and that is ongoing. Because we were doing it during Q3 and it's hard to find anybody to recruit during Q3. But, so we've begun, and we will continue that in the U.S. this quarter and into next year. But it's a... it will be up on ongoing program. It's not going to be a whole bolus of people all at once.

Timothy Lee - Piper Jaffray

And then just one last one. I mean the international ICD sales were up 19%. Can you just give us some sense of what Japan... was Japan down or was Japan up relative to what kind of growth we are seeing in Europe and other markets?

James R. Tobin - President and Chief Executive Officer

Japan was backwards.

Timothy Lee - Piper Jaffray

Okay.

James R. Tobin - President and Chief Executive Officer

So that's offset by Europe and the rest of ICD.

Timothy Lee - Piper Jaffray

And just any type of ballpark growth rates for Europe and other geographies in terms of growth?

James R. Tobin - President and Chief Executive Officer

Market growth.

Timothy Lee - Piper Jaffray

More years growth, specifically.

James R. Tobin - President and Chief Executive Officer

I am sorry.

Timothy Lee - Piper Jaffray

More euro growth specifically in those areas?

James R. Tobin - President and Chief Executive Officer

Well, we are... if you look at international defib, okay, so the whole thing. Those numbers go from 111 last year to 132 this year, so whatever that is, but it's significant.

Timothy Lee - Piper Jaffray

All right. Thank you very much.

Operator

And our next question from the line of Larry Biegelsen with Wachovia. Please go ahead.

Larry Biegelsen - Wachovia Capital Markets

Hi, thanks for taking my question and I dropped for a minute earlier so I apologize if this was asked. Over the last several weeks you shared with us that you had some difficulty with PROMUS supply due to the success of the product relative to your expectations. And then more recently you indicated there is no supplies with PROMUS. Can you give us some insight into what happened there, what was the problem, and how are you able to resolve it so quickly? And what do you estimate your shares in XIENCE and PROMUS was for the full quarter. I heard what you said, you exited I think in September out and how do you expect that to trend for the remainder of the year and then I just have one follow up, thanks?

James R. Tobin - President and Chief Executive Officer

Well, fundamentally what happened was that we expected to have Liberte about same time that we have PROMUS and had ordered inventory and we have to order six months in advance. So we're by definition, there is a certain amount of guessing that goes on. So that created the problem in the first place. What happened was that Abbott has been very responsive in helping us solve the problem.

In addition, we took a penalty, we basically moved units that would have been used in Europe and moved those into the U.S. and so we were able to... we paid the penalty in Europe for that but we were able to bridge ourselves in the U.S. that way. So a combination of those things, there was some individual codes where releases had failed and they just happened to hit us in specific codes, that's and this kind of thing, that's not unexpected.

The Abbott folks did a great job in protecting us as best they could there. So as we sit right today, we have inventory of everything. Okay, and no back orders on the PROMUS side. So that's... that is how we got where we are. The expectation is that we'll be able to resume opening accounts really starting now. That's three months sooner than I expected it to be, when let's say two months ago. And we'll have lots of inventory starting beginning next year, when we... in recognition of this situation had ordered a bunch for January and it looks like that's going to happen.

So we're... it wasn't one thing, it was a combination of things but we put, we take a lot of pride in serving our customers at very, very, very high service levels. TAXUS service levels have averaged 99.97% over its history in the U.S. That's about as good as it get and we want to make sure that we serve our customers that way with PROMUS as well.

Samuel R. Leno - Executive Vice President for Finance and Information Systems and Chief Financial Officer

One of the questions you asked, Larry was I think yes, what was the total PROMUS share. We think it was around 43% with us having 21% and Abbott having 22%. It's going to be difficult I think for the external community to sort out what Abbott really had. As I mentioned before, because they include, we believe they include in their revenue the sharing of PROMUS profits that comes by selling products to us.

Larry Biegelsen - Wachovia Capital Markets

But you're not... it sounds like you're not capacity constrained or inventory constrained for the remainder of this year?

James R. Tobin - President and Chief Executive Officer

Well, we still have a lot of accounts that we could roll out to and we're going to do that in a measured way. We don't really get to full unconstrained inventory availability till January.

Larry Biegelsen - Wachovia Capital Markets

Okay. And just on the CE Mark approval for PROMUS Element and the TAXUS Element. Are you... I know you're not disclosing much on your regulatory strategy there, but the clinical data that you're going to use to file, have you disclosed or will you disclose what you're going to be or if there any clinical data that you're going to be using to file there to help us understand that timeline a little bit better?

Samuel R. Leno - Executive Vice President for Finance and Information Systems and Chief Financial Officer

We'll talk about that perhaps in the future but not now.

Larry Biegelsen - Wachovia Capital Markets

Okay.

Operator

We have a question from the line of Sara Michelmore with Cowen. Please go ahead.

Sara Michelmore - Cowen & Company

Great, thank you. Kind of bringing up the rear here I think. Jim, maybe you can just talk about, I know you don't... you are not planning to give 2009 guidance until January, but could you just give us a sense of where you are in terms of your visibility and ability to forecast at this point in the year. I think about where you were this time last year and you had so many variables to contend with as you communicate the 2008 guidance. I am just wondering if you can just kind of talk us through how good you feel about the forecasting process this year and kind of what the challenges are this year versus last? And then, just as a follow-up, Jim, you talked about acquisitions and the appetite to do some tuck-ins, given the current backdrop in terms of smaller companies, assuming that the idea there is to enhance the top line growth over a period of time, I mean, what timeframe really are you looking for tuck-in acquisitions to enhance the top line? Is that 2009, 2010 type of directive or is it a little bit longer term? Thanks.

James R. Tobin - President and Chief Executive Officer

I want to watch the market settle out here, and try to understand what evaluations to do and that sort of thing. This is an extraordinary period. The funding windows are closed for a lot of small companies. And, so we look like sort of the port in the storm here in some sense. So, I want to be positioned to be opportunistic. That's not to say we have anything planned, but it would seem like the market is coming to us in this regard. So, I want to be able to take advantage of that should it happen.

But there are actually no plans at this point to do anything in this regard that you wouldn't have expected sort of in the normal course. Let me... your point about the challenges of forecasting '08 versus '09 is a really a good one. Clearly we're in better shape to... we've got narrower ranges to deal with on the key variables going into '09 that we did in '08. Sam, do you want to talk about that little bit because you were really driving that bus.

Samuel R. Leno - Executive Vice President for Finance and Information Systems and Chief Financial Officer

Yeah, sure. Coming into '08, we had a whole lot more uncertainty about so many things. On the CRM side, we had ten new products coming out. We had some sense of when they would come out and some targets, but you never know for sure until we actually hit those milestones. We did a great job of that, in fact, we're ahead of the game in most of the launches we have CRM. But coming into '08, it was... there were just targets and expectations. And on the drug-eluting stent side, we had couple of new competitors coming out, new products for us. We don't know really when anybody would come out. We had some expectations and everybody missed their dates by one way or another including ourselves. So the visibility we had coming into this year was rather limited. But even at that, I think we did pretty commendable job of providing full year guidance, and especially quarterly guidance and on the quarterly guidance we never missed a quarter. We came in within the range of sales and earnings in each and every quarter. And the reason we provide ranges is to make sure that whenever we do provide a forecast, we don't need all the stars lined up perfectly for us to be able to hit the numbers. So that's why we have ranges.

Coming into the fourth quarter and indeed even more so going into 2009, the visibility is a whole lot greater, and the reason that we need to wait until we get the fourth quarter behind us is to remove the last major moving part of estimation, which is how successful we're going to be with the launch of Liberte, how successful we'll have with a full quarter of TAXUS Atom helping us? And how successful we'll be with further penetration from additional product coming to us through PROMUS. So, the exit rate is even more important than a full quarter that we're going to experience in Q4 this year to achieve the forecast we set for ourselves.

Expenses are very, very easy to forecast. We have tight control over expenses, very tight control over headcount. We had good visibility into the cash that we generate with our focused effort on managing working capital in a more refined way. The wild card is mix for us. And that's a smaller wild card in 2009 as we enter that year than it was coming into 2008. But it's a wild card nonetheless and that's where we're going to focus a lot of our attention, not just on the mix of product but also on our ability to continue get more focused than ever on driving manufacturing costs out and you're going to hear a lot more about that in our fourth quarter call.

Sara Michelmore - Cowen & Company

That's helpful. And I assume that PROMUS is one of the biggest components of that mix question, is that correct?

James R. Tobin - President and Chief Executive Officer

Total market share and how much of the total share is PROMUS and how much of the total share is TAXUS.

Sara Michelmore - Cowen & Company

Okay. And theoretically, though, you should have a better feel for that exiting Q4 as well?

James R. Tobin - President and Chief Executive Officer

We do and we also have some major cost, product cost improvements aimed at all of our product lines and that's especially true in the CRM side. Now that they have a clear handle on new products and a lot more focus on manufacturing cost improvements through their own VIP programs, we expect big things to happen in terms of taking product cost out on the CRM side and also on the legacy Boston Scientific side.

Sara Michelmore - Cowen & Company

That's helpful.

Samuel R. Leno - Executive Vice President for Finance and Information Systems and Chief Financial Officer

I think, Sara, one thing that's a little different from most of these launches is that the XIENCE PROMUS roll-out in where that all settles out and what the ultimate market share there is, I don't think we'll be fully settled until end of first quarter. So, that's a little bit longer than what you saw with, for instance, TAXUS roll-out back in '04.

Sara Michelmore - Cowen & Company

Great, thank you.

James R. Tobin - President and Chief Executive Officer

Welcome.

Operator

And we have a question from the line of Michael Jungling with Merrill Lynch. Please go ahead.

Michael Jungling - Merrill Lynch

Thank you. A question for Sam, firstly, on how you book the gains and losses on foreign exchange contracts, so they are going to gross margin or they're going to below EBIT.

Samuel R. Leno - Executive Vice President for Finance and Information Systems and Chief Financial Officer

They go into COGS, gross margin.

Michael Jungling - Merrill Lynch

And if we take the current spot rates for the dollar and also or dollar-euro or dollar-pounds, what would be the foreign exchange headwind to margins in the fourth quarter using your hedging at the moment?

Samuel R. Leno - Executive Vice President for Finance and Information Systems and Chief Financial Officer

Yes, I did look at the margin impact but it's going to be a 1% drag on sales. I would guess the effective margin is negligible, but I don't know that. I have to look to be sure.

Michael Jungling - Merrill Lynch

Okay. And then a question for Jim. If you look at the PROMUS pricing, can you give us a sense of how it compares to XIENCE in U.S? And I've got a quick follow up as well, thank you.

James R. Tobin - President and Chief Executive Officer

Well, I know my pricing, I don't really know theirs. I know what MRG thinks it is. The fact is that since we were largely inventory constrained since July 2nd, we really didn't have any incentive to be aggressive on price and so it wouldn't surprise me if PROMUS weren't a little bit higher than XIENCE.

Michael Jungling - Merrill Lynch

Great. And also Jim, a last question is I think Medtronic maybe in a position to launch an MRI compatible pacemaker in 2009. I am just curious how important you think MRI compatibility is for an EP and also what impact this would have on your pacemaker business in 2009? Thank you.

James R. Tobin - President and Chief Executive Officer

Well, I think that MRI compatibility is inevitability. We have our own program that is way more comprehensive than pacers and expect to be successful with that so that this will be another case of we won't be first, but we will be best. Everybody will have to have MRI compatibility over the next three, four, five years in order to be competitive in the marketplace. So will they be ahead of us there? Yes, will it matter a lot? Probably not in the short-term but overtime it will and overtime we'll be competitive.

Michael Jungling - Merrill Lynch

Okay. And, just one last follow-up for Sam, if I look at your EPS guidance and look backwards, is it fair to say that your EBITDA margin guidance for the fourth quarter is between 27% and 30%?

Samuel R. Leno - Executive Vice President for Finance and Information Systems and Chief Financial Officer

We haven't provided specific numbers for EBITDA margins.

Michael Jungling - Merrill Lynch

Okay. Thank you.

Samuel R. Leno - Executive Vice President for Finance and Information Systems and Chief Financial Officer

All right, I think we're going to, we've been running for a little over an hour and half, we are going to take just two quick questions.

Operator

Thank you. That will be from the line of Bruce Nudell with UBS. Please go ahead.

Bruce Nudell - UBS

Hi, good morning, pardon my voice. Jim, Q2 U.S. ICD market major players there's a 1 billion to 1.20 billion, hazard a guess on Q3?

James R. Tobin - President and Chief Executive Officer

Right, U.S. defib market, is that what you're saying?

Bruce Nudell - UBS

Yes, it was 1.20 billion in Q2, Q3 is a little slower generally but and any guess as to where the number will shakeout?

James R. Tobin - President and Chief Executive Officer

Our guess is that Q1 of '08, Q2 of '08, and Q3 of '08 are almost the same number.

Bruce Nudell - UBS

Okay, great. Another question Jim, HORIZON's was positive, fears regarding lasers [ph] were fading. SYNTAX, well generally positive also had the toughest third, or at least maybe it should still be rough for CABG. When you shake that all out and think forward to 2009, where do you think DES volumes will be relative to '08?

James R. Tobin - President and Chief Executive Officer

I see DES continuing to gain ground. HORIZON's was positive and so there is room there. And Syntax from an interventionalist point of view was the best, most comforting failed trial in the history of anything. Okay, because it basically says those that have been doing left main, we now have the data that show that, that was the right thing to do all along. This 2% stroke difference statistically significant, that's a big deal, because you can have another PCI, you can have a touch up PCI, but you can't have a touch up, let's not... let's pretend that stroke didn't happen procedure.

So that's a big deal and yes the sort of the really sickest third of CABG patients are beyond the reach of PCI, but that means the other two-thirds aren't. So from an interventionalist point of view it basically said that being more aggressive was the right thing to do for the patient... for most patients and the right thing to do from a data point of view.

Bruce Nudell - UBS

So, to a put a number on it, would you go like plus five next year in volumes?

James R. Tobin - President and Chief Executive Officer

I haven't gotten that far yet. We're still trying to absorb what it all means aspect. But clearly, it's positive and the other thing that I saw that honestly, I didn't expect, okay. Prior to XIENCE PROMUS launch, penetration had crept back from 61 to 67. The month that those products launched, we saw it jump from 67 to 70, one time. step-up and now it's kind of nosed up to 71. I mean we know it can happen now. Nobody, had predicted that. Will HORIZON's and SYNTAX have a similar but maybe a little bit slower three point impact in penetration, it's not our to question.

Bruce Nudell - UBS

And my final question is, could you just comment on the PROMUS TAXUS split in the U.S. and contrast it with the dynamics seen in I guess EMEA, where it's a much smaller percent of the overall Boston share?

James R. Tobin - President and Chief Executive Officer

We approached Europe completely differently from the way we approached the U.S. The strategy in Europe was essentially gross profit protection strategy and we got what we got. In the U.S., it was a market share protection strategy and we got what we got. And the way to think about this is that every, let's say it takes two PROMUS share points to make up a TAXUS share point. So 26, call it PROMUS share plays like 13 from a profitability point of view, on top of the 19 that we have. So from a profit point of view, it plays like 32.

From Europe, 20... what is it, 24 plus 8, 26 plus 8. So that plays like 30. So from a profit point of view the U.S. strategy is actually marginally more profitable than the European strategy. But it maintains market share leadership, actually expands our leadership versus whoever number two is. And the effect of that is that when the self-manufactured products show up, we're going to see a one-time bump-up in profitability that will blow the doors off.

Bruce Nudell - UBS

Got you. Thanks so much.

Operator

And our final question is from the line of Matthew Dodds with Citigroup. Please go ahead.

Matthew Dodds - Citigroup

Hi, thanks and good morning. I just want to follow-up on Bruce's question also on the PROMUS, and something you've said earlier, Sam about the shift in the inventory from the OUS to the U.S. And since you gave PROMUS numbers this quarter, could you say, how that 28 million compared to the second quarter, meaning, was that number down because of this inventory shift? That's the first question.

Samuel R. Leno - Executive Vice President for Finance and Information Systems and Chief Financial Officer

I am not sure that I was understood the first time. What we did when we saw that we needed more inventory in the U.S., was to reduce the incomings in the Europe and aim them at the U.S. instead. What that did was, mean that the growth that we had expected to see in Europe, we didn't have the inventory in Europe to support. But prices are much higher in the U.S. than they are in Europe. So, net-net that's a good thing to have done. So, it means that the continued rollout of PROMUS in Europe basically took a time out for three months. But it will resume as inventory gets well.

Matthew Dodds - Citigroup

Jim, I guess the simple question was... is that 28 million, can you say if that was down?

James R. Tobin - President and Chief Executive Officer

I don't know what that 28 million is. I can't relate to that.

Samuel R. Leno - Executive Vice President for Finance and Information Systems and Chief Financial Officer

So, that was your third quarter PROMUS sales.

Matthew Dodds - Citigroup

Is that a worldwide number?

James R. Tobin - President and Chief Executive Officer

No, that was the international number.

Matthew Dodds - Citigroup

Oh, that's the international, okay. I just wondered if that was down from second quarter?

James R. Tobin - President and Chief Executive Officer

It was up a little.

Matthew Dodds - Citigroup

Okay.

James R. Tobin - President and Chief Executive Officer

I don't know.

Matthew Dodds - Citigroup

Thank you. Then one quick question for Sam. Sam, in the SG&A, you got down to almost 30% in the quarter. And I know last year the third quarter was also kind of the low point out, but the fourth quarter was down even a little more. Is 30% about as low as you can get or with some of these additional cuts, can you actually get below that number when you look forward? How well can that number get at SG&A relative to....

Samuel R. Leno - Executive Vice President for Finance and Information Systems and Chief Financial Officer

I won't give you a number response Matt. But I think we are doing a very good job, if not a great job in controlling expenses. I think the benefits of our restructuring plan are largely complete. We have little more to go. And so the further benefit we will see that will be of a consequence would be related to natural leverage that we get from the fixed variable cost embedded in operating expenses versus the sales growth. So, I think we can do better, but we would require additional revenue in order to do that and provide better leverage. But, we are not focused so much on the percent of sales and focus on the number because that's what helped get us really focused internally at managing our expenses where we focus on headcounts, where we focus on targets for every one of our businesses and every one of our corporate staff functions and every one of our international regions. That's what allowed us to get the expenses really well on hand and want to keep them well in hand and by the throat for the duration.

Matthew Dodds - Citigroup

Alright. Thanks Sam and thanks Jim.

James R. Tobin - President and Chief Executive Officer

You are welcome.

Larry Neumann - Vice President of Investor Relations

So with that we are going to end the call for today and I would like to thank you all for joining us and appreciate the continued support you show in Boston Scientific. Before you disconnect, Laurie will give you the information regarding the replay of this webcast. Thank you.

Operator

And ladies and gentlemen this conference call will be made available for replay starting today October 22nd at 10:30 AM Eastern Time. The replay of the conference runs until November 2nd at midnight Eastern. You may access the AT&T teleconference replay system by dialing 1-800-475-6701. Please enter the replay access code 958858. International participants dial 320-365-3844. Those numbers again 1-800-475-6701. International participants dial 320-365-3844. The replay access code 958858. Well, that concludes our conference call for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect. .

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