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St. Jude Medical (NYSE:STJ)

Q4 2012 Earnings Call

January 23, 2013 8:00 am ET

Executives

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

John C. Heinmiller - Executive Vice President

Eric S. Fain - President of Cardiac Rhythm Management Division

Analysts

Kristen M. Stewart - Deutsche Bank AG, Research Division

Michael N. Weinstein - JP Morgan Chase & Co, Research Division

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Matthew Taylor - Barclays Capital, Research Division

Frederick A. Wise - Stifel, Nicolaus & Co., Inc., Research Division

Rajeev Jashnani - UBS Investment Bank, Research Division

Operator

Welcome to the St. Jude Medical Fourth Quarter and Full Year 2012 Earnings Conference Call. Hosting the call today is Dan Starks, Chairman, President and Chief Executive Officer of St. Jude Medical.

Before we begin, let me remind you that some of the statements made during this conference call may be considered forward-looking statements. The 10-K for fiscal year 2011 and 10-Q for the fiscal quarter ended September 29, 2012 identify certain factors that could cause the company's actual results to differ materially from those projected in any forward-looking statements made this morning. The company does not undertake to update any forward-looking statement as a result of new information or future events or developments. The 10-K and 10-Q are available through the company or online.

During the call, non-GAAP financial measures may be used to provide information pertinent to ongoing business performance. Tables reconciling these measures to most comparable GAAP measures are available in the press release or on the St. Jude Medical website at www.sjm.com.

[Operator Instructions] It is now my pleasure to turn the floor over to Dan Starks.

Daniel J. Starks

Thank you, Tracy. Welcome to the St. Jude Medical Fourth Quarter and Full Year 2012 Earnings Conference Call. With me on the call today are John Heinmiller, Executive Vice President; Mike Rousseau, Group President; Eric Fain, President of our Implantable Electronic Systems Division; Don Zurbay, Vice President and Chief Financial Officer; and Rachel Ellingson, Vice President of Corporate Relations.

Our plan this morning is for John Heinmiller to provide his normal review of our financial results for the fourth quarter and full year 2012 and to give sales and earnings guidance both for the first quarter and full year 2013. I will then address several topics and open it up for your questions. Go ahead, John.

John C. Heinmiller

Thank you, Dan. Sales for the quarter totaled $1,372,000,000, down approximately 2% from the $1,407,000,000 reported in the fourth quarter of last year. Unfavorable foreign currency translations decreased this quarter's sales by approximately $23 million. On a constant currency basis, fourth quarter sales decreased approximately 1% versus last year. We will update our currency assumptions in a moment, but the actual average exchange rates during the fourth quarter were within our previous guidance range.

For the full year 2012, net sales were $5,503,000,000, down approximately 2% from the $5,612,000,000 reported last year. Unfavorable foreign currency translations versus those in 2011 decreased 2012's net sales by approximately $137 million, resulting in constant currency sales growth for the year of approximately 1%.

During the fourth quarter, we recognized $113 million or $0.36 per share in after-tax special charges. Additionally, during the fourth quarter, we recognized $46 million or $0.15 per share in charges related to adjustments to uncertain tax positions associated with the effect of settlement of domestic income tax audits for 2002 through 2009. For further information regarding these charges, please refer to details provided in our press release.

Comments during this call referencing fourth quarter and full year 2012 results, including EPS amounts, will be exclusive of these items.

In January 2013, the American Taxpayer Relief Act of 2012 was signed into law, which extended the R&D tax credit for 2012 and 2013 retroactive to the beginning of 2012. At the end of 2011, the federal research and development tax credit had expired. In this circumstance, GAAP requires us to estimate and record our effective income tax rate, assuming that the R&D credit is not extended, and record the tax savings related to the 2012 R&D tax credit in the first quarter of 2013. For purposes of this conference call and our calculation of adjusted net earnings however, we are assuming that the tax credit was extended at the beginning of 2012. As a result, comments referencing fourth quarter and full year 2012 results and our guidance for 2013 including EPS amounts are presented based on an effective income tax rate that contemplates the extension of the tax credit retroactive to January 1, 2012.

Earnings per share were $0.92 for the fourth quarter of 2012, a 7% increase over adjusted EPS of $0.86 in the fourth quarter of 2011 and above our guidance range of $0.86 to $0.88. We primarily attribute this quarter's EPS overperformance to the cost savings resulting from our restructuring and productivity improvement initiatives. In addition, our share repurchase program contributed $0.01 to the EPS overperformance this quarter. For the full year 2012, adjusted earnings per share were $3.48, a 6% increase over adjusted EPS of $3.28 for the full year 2011. We estimate that on a constant currency basis, fourth quarter earnings per share increased 10% and that full year 2012 EPS increased 11%.

Before we discuss our financial results for 2012 and offer our sales and earnings guidance for 2013, let me provide a few comments about currency exchange rates and the assumptions we are using in our outlook for this year. The 2 main currencies influencing St. Jude Medical operations are the euro and the yen. For the fourth quarter, the actual average exchange rates used for the euro and the yen versus the assumptions we used in providing our guidance for the fourth quarter did not result in a material difference in reported sales. In preparing our sales and earnings guidance for the first quarter and full year 2013, we are assuming that each euro will translate into about $1.30 to $1.35 and for the yen, that each JPY 86 to JPY 91 will translate into USD 1. Using these exchange rate assumptions for 2013, we estimate that foreign currency translations will reduce total reported sales for 2013 by approximately $45 million to $65 million, representing about 1% impact based on 2012 sales of $5.5 billion.

I will now turn to our discussion of sales by product category. For the fourth quarter, total cardiac rhythm management or CRM sales, which include revenue from both our ICD and pacemaker product lines, were $682 million, down 6% from last year's fourth quarter, including $11 million of unfavorable foreign currency translations. On a constant currency basis, total CRM product sales for the fourth quarter decreased 5%. Total CRM product sales for the full year 2012 were $2,854,000,000, down approximately 6% from last year. Unfavorable foreign currency translations decreased 2012 CRM sales by approximately $74 million. On a constant currency basis, total CRM product sales for the full year 2012 decreased 3.5%.

For the fourth quarter, ICD sales were $422 million, down 3% from last year's fourth quarter. U.S. ICD sales were $236 million, approximately flat with last year's fourth quarter. And international ICD sales were $186 million, a 7% decrease from the fourth quarter of 2011, including $6 million of unfavorable foreign currency translations. On a constant currency basis, ICD sales for the fourth quarter decreased 2%. For the full year 2012, ICD sales were $1,743,000,000, down 4% from last year. Unfavorable foreign currency translations decreased 2012 ICD sales by approximately $42 million. On a constant currency basis, ICD sales for the full year 2012 decreased 2%.

For low-voltage devices, sales for the fourth quarter totaled $260 million, down 11% from last year's fourth quarter. In the United States, pacemaker sales were $103 million. In our international markets, pacemaker sales were approximately $157 million, including $5 million of unfavorable foreign currency translations. On a constant currency basis, pacemaker sales for the fourth quarter decreased 9%. For the full year 2012, pacemaker sales were $1,111,000,000, down 8% from last year. Unfavorable foreign currency translations versus those used in 2011 decreased 2012's pacemaker sales by approximately $32 million. On a constant currency basis, pacemaker sales for the full year 2012 decreased 6%.

For the first quarter of 2013, we expect total CRM sales to be in the range of $655 million to $685 million. This guidance for the quarter assumes the trends we experienced in the pacemaker market in the fourth quarter continue and that our high-voltage market share remains stable. For the full year 2013, we expect total CRM sales to be in the range of $2,700,000,000 to $2,750,000,000. On a constant currency basis, the midpoint of our CRM sales guidance assumes that CRM sales will decline approximately 4% for the full year 2013.

Atrial fibrillation or AF product sales for the fourth quarter totaled $239 million, up 10% over the fourth quarter of last year, including $4 million of unfavorable foreign currency translations. On a constant currency basis, AF product sales for the quarter increased 11%. For the full year 2012, AF product sales were $898 million, an increase of 9% over 2011, including a $20 million decrease due to unfavorable foreign currency translations. On a constant currency basis, AF product sales increased 12% in 2012. For the first quarter of 2013, we expect AF product sales to be in the range of $225 million to $240 million. We expect full year 2013 AF product sales to be in the range of $950 million to $980 million. Our AF product sales guidance for 2013 assumes a constant currency increase over 2012 in the range of 7% to 11%.

Total sales of cardiovascular products for the fourth quarter of 2012 were $338 million, approximately equal to the fourth quarter of 2011. Total cardiovascular product sales for full year 2012 were $1,328,000,000, down approximately 1% from 2011, including a $36 million decrease due to unfavorable foreign currency translations. Excluding the impact of terminating a distributor contract at the beginning of 2012 in Japan, fourth quarter and full year 2012 cardiovascular products increased 6% on a constant currency basis over 2011.

Our cardiovascular product category is an accumulation of a number of different product lines. Historically, we have broken down the cardiovascular product category into structural heart products and vascular products, and we will continue to report those 2 subcategories. As a reminder, structural heart products consist of heart valve products, septal occluder products and left atrial appendage products. Vascular products include vascular closure products, FFR PressureWire, OCT products, renal denervation, vascular plugs and other vascular accessories, as well as third-party vascular products we sell under distribution arrangements in Japan.

For the fourth quarter of 2012, within the cardiovascular category, sales of structural heart products were $152 million, approximately equal to last year. For the full year 2012, sales of structural heart products were $612 million, an increase of 3% over 2011 or 6% on a constant currency basis. Sales of vascular products in the fourth quarter of 2012 were $186 million, down 2% from the fourth quarter of 2011 or approximately equal to last year on a constant currency basis. For the full year 2012, sales of vascular products were $716 million, down 3% from 2011 or down 1% on a constant currency basis. For the first quarter of 2013, we expect cardiovascular product sales to be in the range of $325 million to $345 million. We expect full year 2013 cardiovascular product sales to be in the range of $1,380,000,000 to $1,420,000,000. Our cardiovascular product sales guidance for 2013 assumes a constant currency increase over 2012 in the range of 6% to 9%.

Total sales of neuromodulation products in the fourth quarter of 2012 were $113 million, down 7% from the fourth quarter of 2011. For the full year 2012, neuromodulation product sales were $423 million, up 1% over 2011, including a $7 million decrease due to unfavorable currency translations. For the first quarter of 2013, we expect sales of neuromodulation products to be in the range of $95 million to $105 million. And we expect full year 2013 neuromodulation sales of $425 million to $450 million. Our neuromodulation product sales guidance for 2013 assumes a constant currency increase over 2012 in the range of 1% to 6%.

Let me pause at this point and recap our full year 2013 sales guidance. For cardiac rhythm management devices, we expect sales for 2013 in the range of $2,700,000,000 to $2,750,000,000. Sales of our AF products for 2013 are expected to reach $950 million to $980 million. For cardiovascular products, we expect 2013 sales in the range of $1,380,000,000 to $1,420,000,000. And we expect sales of neuromodulation products to be $425 million to $450 million.

If you add up the sales across all product platforms, total sales in 2013 are expected to be $5,455,000,000 to $5,600,000,000. This guidance results in consolidated sales growth in the range of flat to up 3% on a constant currency basis.

The geographic breakdown of St. Jude Medical sales for the fourth quarter of 2012 is detailed in our press release. In total, 46% of St. Jude Medical sales in the fourth quarter came from the United States, while 54% came from international markets.

The gross profit margin during the fourth quarter was 72.9%, down 60 basis points from the fourth quarter of 2011. And for the full year 2012, the gross profit margin was 73.7%, down 40 basis points from 2011. For the full year 2013, we expect gross profit margin to be in the range of 72.2% to 72.7%. We are forecasting a 100 to 150 basis point decrease in gross profit margin, which reflects a combination of both positive and negative factors impacting our operations. We are accounting for excise taxes, including the medical device excise tax as an inventoriable cost in 2013, which we estimate will reduce our gross profit margin by approximately 80 to 100 basis points. The move to lower cost manufacturing sites will again contribute a benefit to our gross profit margin. And in addition, we expect our gross profit margin will benefit from a number of continuous improvement initiatives targeting cost reductions. Offsetting these positive factors is the impact of geographic and product mix shifts, slightly lower average selling prices, which can result from overall challenging market dynamics, and the expected negative currency environment.

Our fourth quarter SG&A expenses were 32.8% of net sales, representing a 140 basis point improvement over the fourth quarter of 2011. For the full year 2012, SG&A expenses were 34.4% of net sales compared with 35.3% in 2011. For the full year 2013, we expect SG&A as a percentage of net sales to be in the range of 33.7% to 34.2%. As compared with 2012, our 2013 guidance represents a 20 to 70 basis point improvement in SG&A as a percentage of net sales. This results from a number of cost savings initiatives, including the restructuring of our divisions in order to leverage technology synergies, improve quality and reduce expense, and the centralization of certain administrative functions. We believe that efficiencies in the SG&A category will partially offset the decline in gross profit margin contemplated in our guidance for that line item.

Research and development expenses in the fourth quarter of 2012 were 11.5% of net sales and for the full year 2012 were 12.3% of net sales. We note that the restructuring activities initiated in August 2012 eliminated certain redundant R&D infrastructure costs, which benefited the fourth quarter R&D expense. For the full year 2013, we plan to reinvest the savings generated by our restructuring activities and expect R&D expenses to be in the range of 12.0% to 12.5% of net sales as we continue funding our portfolio of new growth drivers to accelerate long-term sales growth.

Other expense was $28 million in the fourth quarter and $95 million for the full year 2012. For the first quarter of 2013, we expect the other income and expense line item will be a net expense of approximately $20 million to $25 million. For the full year 2013, we expect other expense of approximately $85 million to $95 million, primarily driven by interest expense on our outstanding debt.

For the fourth quarter and for the full year 2012, our effective income tax rate was 21.6%. For 2013, we expect the effective tax rate to be in the range of 20.8% to 21.3%.

Moving on to the balance sheet. At the end of 2012, we had $1.2 billion in cash and cash equivalents and $3.1 billion in total debt. There were no borrowings outstanding under our $1.5 billion revolving credit facility available with the group of banks.

Next, I want to offer some comments regarding our earnings per share outlook for the first quarter and the full year 2013. In preparing our EPS guidance, we have assumed that in the first quarter of 2013, the weighted average outstanding shares used in our fully diluted earnings per share calculation will be about 285 million to 287 million shares and the weighted average outstanding shares for the full year 2013 will be about 288 million to 290 million shares. These share count assumptions take into account the $1 billion common stock repurchase plan, which we announced in December.

In addition, our earnings per share guidance for the first quarter of 2013 excludes the 2012 portion of the benefit that we will record for GAAP purposes related to the extension of the federal research and development credit that is retroactive to the beginning of 2012.

The company expects adjusted earnings per share for the first quarter of 2013 to be in the range of $0.91 to $0.93. And for the full year 2013, we expect adjusted earnings per share to be in the range of $3.68 to $3.73. This expectation includes the impact from negative currency translations, which we estimate based on our current exchange rate assumptions will reduce our reported consolidated sales by about $45 million to $65 million and will reduce our adjusted earnings per share in 2013 by approximately $0.06 to $0.09. On a constant currency basis, our adjusted earnings per share guidance represents EPS growth of approximately 8% to 10%.

I would now like to turn it back to Dan.

Daniel J. Starks

Thank you, John. I would like to begin by commenting on our CRM business results for the fourth quarter. On the high-voltage side of our business, we were encouraged that ICD unit volumes increased at a high single-digit rate, both in the United States and on a total global basis. Usage and average selling prices or ASPs during the fourth quarter support our view that ICD market dynamics are beginning to stabilize. We believe that we gained about 30 basis points of total global market share in the ICD segment of our business, although we will need to wait until other companies report to finalize our market model for the fourth quarter.

Increases in ICD unit volumes during the fourth quarter were offset by declines in system ASPs. Declines in system ASPs were primarily attributable to replacement devices becoming a higher percent of our sales mix and to a continued decline in our high-voltage lead-to-port ratio during the quarter.

On the low-voltage side of our business, unit volumes declined both in the United States and on a total global basis. We attribute this primarily to a decline of volume in the low-voltage market, but we also believe we lost approximately 60 basis points of global market share during the quarter on a year-over-year basis. We attribute this share loss to new competitive product offerings, as well as to our willingness to walk away from the market share opportunities that are driven by especially low ASPs. We were pleased that due to strong operating discipline during the fourth quarter, system ASPs for our low-voltage devices declined at only a low single-digit rate on a constant currency basis both in the United States and on a total global basis.

Looking forward to full year 2013, we are making the conservative assumptions that the global CRM market will continue to decline at a low to mid single-digit rate on a constant currency basis and that St. Jude Medical will hold its current market share. We view the opportunity for market share gain or stronger market growth to be potential upside to our revenue expectations for 2013.

I would also like to note that we have put forth considerable effort over the past several years to broaden our growth drivers, and for the first time since the 1990s, in 2013, more than 50% of our revenue will come from sources other than our CRM business as our growth drivers continue to become a higher percent of our sales mix. We continue to view our new growth drivers to be a significant competitive advantage. We have been disciplined and strategic in where we have chosen to invest and are confident in our ability to accelerate sales on a sustainable basis.

One of our most successful growth programs in 2012 was our portfolio of products used in the electrophysiology cath lab, which we refer to as our AF business. Our focus on AF and on our broad portfolio of innovative products for the EP cath lab is a significant competitive advantage. For the full year 2012, revenue from products in our AF business grew approximately 12% on a constant currency basis. We expect this revenue to continue growing at a high single-digit or low double-digit rate in 2013. Revenue from our AF business is on track to surpass the revenue from our pacemaker business on an annual basis as early as 2014.

One highlight to monitor within our AF business in 2013 is the progress we continue to make advancing our MediGuide program. Investors may recall that we launched our first MediGuide system in Europe in 2011. In 2012, we expanded our limited launch of MediGuide systems to 4 additional centers in Europe and 2 centers in the United States. Initial customer feedback is encouraging and reinforces our optimism that MediGuide has the potential to become disruptive technology in the electrophysiology cath lab. In 2013, we are focused on expanding our portfolio of MediGuide-related products, generating clinical evidence, documenting the value of the technology, launching MediGuide systems into at least 12 new centers and preparing for full commercial release of this product platform in 2014. We will provide more information about this technology and the related pipeline of new products next week at our Annual Investor Meeting, including a presentation from Dr. Lakkireddy from the University of Kansas Hospital, who is the first physician in the United States to incorporate MediGuide technology into his center's clinical practice.

Next, I would like to comment on the growth profile of our structural heart and vascular product program within our cardiovascular business. Excluding the impact of a legacy vascular product distribution contract in Japan that ended toward the beginning of 2012, revenue from our structural heart program and from our vascular program both increased 6% on a constant currency basis in 2012. For full year 2012, cardiovascular revenue from legacy products in declining markets such as mechanical heart valves, vascular closure products and third-party products in Japan totaled $623 million, down 12% on a constant currency basis. Cardiovascular revenue from products in growth markets such as fractional flow reserve or FFR products, optical coherence tomography or OCT products, particle TAVR products, our EnligHTN renal denervation systems, trifecta tissue heart valves, left atrial appendage and PFO closure products and vascular plugs totaled $705 million, an increase of 18% on a constant currency basis. We expect growth rates for both our structural heart and vascular programs to accelerate in the second half of 2013 as growth drivers continue to become a higher percent of our sales mix. We will provide more detail about the progress we expect to make with our portfolio of cardiovascular growth drivers in 2013 at our Annual Investor Meeting next week.

The next topic I would like to address with respect to fourth quarter sales results relates to our neuromodulation revenue. We are optimistic that our neuromodulation revenue will return to growth in 2013 despite a 6% decline in neuromodulation revenue on a constant currency basis during the fourth quarter. Inventory constraints related to product improvements negatively impacted neuromodulation sales during the second half of 2012. These inventory constraints have now been resolved. We have a normal supply of spinal cord stimulation products and are back in the market with deep brain stimulation or DBS products in Europe. We expect to restore high single-digit or low double-digit growth to our neuromodulation sales before the end of 2013.

The next topic I would like to touch on is EPS leverage in 2013. Although we expect sales growth in 2013 to remain challenging due to macroeconomic factors, structural changes in health care and the emerging nature of many of our growth drivers, we are firmly committed to delivering superior growth in EPS during 2013 without sacrificing investment in research and development. As a baseline comparison, we delivered adjusted EPS growth of 11% on a constant currency basis in 2012 on constant currency sales growth of just 1%, while investing 12.3% of revenue in research and development. Our guidance for 2013 reflects that we expect to deliver adjusted EPS growth greater than sales growth again this year due to the benefit of the restructuring we completed in 2012, our ongoing expansion of manufacturing in cost advantage locations and our share repurchase program. We are committed to meet or exceed this EPS guidance without reducing our investment in research and development.

I would like to conclude my prepared remarks by emphasizing the high priority St. Jude Medical places on the quality of all of our products. At St. Jude Medical, we are keenly aware that our products are placed inside the human body and that many patients depend on the safety and reliability of our products to stay alive. Our highest priority in 2013 is to complete the remediation already underway of FDA inspectional observations and to continue strengthening the quality systems for all of our products on a total global basis.

One of the major social challenges of our time is how to provide high-quality affordable health care on a universal basis to an aging population. One part of the answer to this challenges is that medical devices have to be of the highest quality. Another part of the answer to this challenge is that medical device companies have to create innovative technology which reduces the cost of health care, at the same time, it helps improve patient outcomes.

St. Jude Medical has become one of the largest and most successful medical device companies in the world because we have excelled at delivering high-quality innovative products, which reduce health care cost and improve outcomes for patients who suffer from expensive epidemic diseases such as atrial fibrillation, heart failure, hypertension, stroke and chronic pain.

Next week at our Annual Investor Conference, we look forward to giving you more information about our strong pipeline of new products designed to continue to improve health care in a high-quality and cost-effective way.

We are now ready to open the call for questions. Tracy, would you please take the call?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question is coming from Kristen Stewart with Deutsche Bank.

Kristen M. Stewart - Deutsche Bank AG, Research Division

I just wanted to, I guess, ask just on the FDA warning letter, if you can maybe just give us just your thoughts on the progress that you've been making and any sort of timelines that you might expect. And then secondly, just what, I guess, gives you confidence in holding market share across ICDs and pacemakers going forward in 2003 [ph] as you see it in your guidance?

Daniel J. Starks

Sure, Kristen. With respect to the FDA warning letter, once we received FDA's inspectional observations last October, we reacted as though we already had received a warning letter. So in October, we formed remediation teams. We implemented monthly progress reports to FDA. We gave highest priority to fully remediating all of the deficiencies noted in the Form 483, and now some of which were also noted in the warning letter with the very highest degree of urgency. So some of our remediation already has been completed. The remainder of it is going full steam ahead and is fully baked into our guidance. So we expect to have all aspects of the warning letter remediated with priority and with urgency during 2013. Eric, is there anything else that you want to say about the warning letter?

Eric S. Fain

No, I think you covered it.

Daniel J. Starks

Okay. And on the topic of ICD and pacer market share -- a part of our -- let me say that on the ICD side of the business, our fourth quarter results and our full year results for 2012 reaffirmed to us that our ICD market share is currently stable and that we expect this stability to remain a baseline for our ICD business in 2013. Next week, we will offer an update through Eric Fain's presentation on additional developments on the ICD side of our business in European markets. And so I'll wait for our presentation next week to give you a little more information about that. On the pacemaker side of the business, we lost market share in the fourth quarter of 2012, and we expect our market share to continue to be vulnerable in the first part of 2013 just due to product cycles. So there are several observations that we'd like to offer about the pacemaker market. The first observation relates to the fact that most of the pacemaker market, as many appreciate but I just want to make the point visible, about 60% of the revenue opportunity for the global pacemaker market comes from outside the United States. So this has become, over time, primarily an international market rather than a domestic market. That would be point one. And then point two, as we look at the dynamics in Europe in particular, it's clear to us that total market unit volumes were impacted negatively in the fourth quarter of 2012 by austerity measures and related budget limitations in Europe. So in the fourth quarter, a number of customers stopped doing all but emergency procedures. We found this to be especially the case in Italy, Spain and Portugal but also to a lesser extent, in other countries. A related dynamic is that where procedures continued to be done at a normal level, there remains very significant pressure on average selling prices. And as a matter of operating discipline, we do not offer premium products at low ASPs, although we note that some of our competitors do. Later this year, we will strengthen the value tier of our product line and become more competitive in the value tier segment of the market in Europe with new products that Eric Fain will address next week in his update on the product flow for our CRM business. Another factor here on market share relating to the pacemaker side of our CRM business is that in the fourth quarter of 2012, where we were not participating in the MRI segment of the pacemaker market in Japan, we have a several quarter gap between our competitive product offering and our Accent MRI market launch in Japan. So in Japan, we will still not be participating in the MRI segment for another couple of quarters. But in the second half of this year, we will fully compete in that segment of the market in Japan. So when you net all of that out, the way that we model it, Kristen, we see a stable market share with an opportunity for upside.

Operator

Our next question is coming from Mike Weinstein with JPMorgan.

Michael N. Weinstein - JP Morgan Chase & Co, Research Division

Dan, maybe I'll start from kind of the highest level on the guidance. We went back the last couple of years with medical device markets slowing. It would turn out that you've guided in January, and then ended up having to back off of that guidance by the middle of the year. It looks like you approached this year's guidance with a different intention. Can you just talk more big picture about how you think about guidance and how you approach this year versus prior years?

Daniel J. Starks

I can tell you how we approached it this year. We approached our guidance this year with the determination that if we were going to err with our revenue guidance, we were going to err on the side of being conservative. And that has been our general attitude with initial guidance in past years as well. Although in past years, we have been surprised by negative developments that unfolded during the years, particularly with respect to a number of points that maybe are not worth revisiting here on this call. But in the last couple of years, there have been negative developments that, I think, were not predicted by any of us. And this year, it may turn out to be the same, but our expectation is that we have -- that if we have erred, we've erred on the side of being conservative.

Michael N. Weinstein - JP Morgan Chase & Co, Research Division

Okay. Let me just ask more -- two product-specific questions. One, with MediGuide now launching, can you just talk about the gating factor? You talked about 12 installations in 2013. Why is it 12 and not 2 or 3x that amount? And then second, can you give us an update on the neuromodulation warning letter and what expectations we should have for resolution in 2013?

Daniel J. Starks

Sure. Yes. With MediGuide, we keep in mind, for example -- I'm not going to mention because some of you will think of other technology that has been offered by other companies in past times, where the tools needed to make the technology clinically valuable and cost-effective were really not available at the time that the capital equipment became available. And people can think of examples where expensive capital equipment is sitting in the corner of EP cath labs and people use it to hang their lead rather than use it in their clinical procedure. So we are very focused on that as a negative customer experience that has resulted from other companies' new technology. And we are determined that, that will not be the case with the MediGuide technology. So we are making ourselves be patient and very disciplined at the rate with which we roll out the MediGuide technology. And we're going to make sure that the disposable tools that are needed to make the MediGuide technology fully usable and clinically relevant and cost-effective are available at the same time that customers receive the capital equipment. So we will offer more information about the flow of new products related to the MediGuide platform next week at our annual investor conference. So that's the first gating item. The second gating item is that we want the technology to be well understood, and we want the value of the technology to be well understood at the point where we initiate full global launch. And in order for that to be the case, we need more clinical evidence. So we now have a core of centers who are generating the clinical evidence that we want to have in hand and fully communicated to customers around the world at the time that we fully launch the MediGuide technology. So we are walking before we run. And we go from 1 system to 6 systems to 12 systems, and then we expect everything is on track here for full commercial launch in 2014. So that's how we're looking at it. Michael, you asked me a second question.

Michael N. Weinstein - JP Morgan Chase & Co, Research Division

Neuromodulation.

Daniel J. Starks

Okay, yes. So we've made very good progress remediating the neuromodulation warning letter and the remediation is largely behind us. We had a very encouraging inspectional result in September. We had a reinspection from FDA. The reinspection resulted in only one observation. It was a minor observation relating to a flowchart that was not within document control. We remediated that the same day we received the observation. And other than that, we had a very clean inspection. So the remediation has really -- is nearing its conclusion. Eric Fain will talk a little bit more about the remaining remediation next week at our annual investor conference. We expect the remediation to be complete during 2013.

Operator

Our next question is coming from Bob Hopkins with Bank of America Merrill Lynch.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

So a couple of quick questions. First, I just wanted to clarify some of your comments on ICDs. Dan, could you mention specifically what the ASP decline was that you saw in the quarter?

Daniel J. Starks

Let's see. It was -- well, Bob, the point here is that I can't. I mean, you can do the math, so...

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Yes. That's right. It seems like it was down 10% or so, and that seemed much higher than previous. So I just wanted to make sure my math was right.

Daniel J. Starks

Yes. Your math was right, but the main drivers of that -- so that -- your math is right, but the math can be misleading. We actually were encouraged by the stability of ASPs, by the relative stability of ASPs in the fourth quarter. The ASP decline that the math produces was largely driven by replacement. This was system ASPs. And so to the extent that replacement devices become a larger percent of our sales mix, that affects system ASPs as no leads -- all right, I know you know it, Bob, I'm just kind of saying it for others on the call. And then the second point was we saw our lead-to-port -- high-voltage lead-to-port ratio continue to decline in the fourth quarter. And so on a year-over-year basis, there was a meaningful difference in lead-to-port ratio that affected system ASPs. So the math is correct. But if you were to take the kind of apples-to-apples kind of ASP comparisons, those ASP dynamics were stable compared with prior quarters. And we've generally thought about it in terms of low to mid-single-digit declines in ASPs. And in a steady-state, the high single-digit volume increases that we saw in our portfolio in the fourth quarter netted out to our being encouraged by the relative stability of the ICD market coming into 2013.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

I agree those unit volumes are encouraging, but this minus 10% in the quarter and I hear your explanation. I guess, the logical follow-up question would be how long do we -- are we in this kind of unique situation where mix is generating these kinds of ASP declines? So when do we return to what you refer to as steady-state?

Daniel J. Starks

Well, I mean, the answer would be a little bit different with respect to the market itself and our particular mix. And so with respect to the market itself, the message that I want to make clear is that we think that market dynamics are encouraging. And in the same way that we've all been talking about at what point will we see the ICD market tend to stabilize, we saw encouraging signs of return to stability in the ICD market based on the percentage increase in usage in the fourth quarter. So that's one message. On the second point of dissecting our particular financials, all of that is reflected. Everything that we see with ASP pressure, everything that we see with model mix shift, with replacement shift, with geographic shift, all of that is reflected in the guidance we've given for our CRM business here this morning. And our guidance reflects an expectation that our CRM business, on a revenue basis, will continue to decline during 2013, but that it will decline at a low single-digit level.

Operator

Our next question is coming from Matt Taylor with Barclays.

Matthew Taylor - Barclays Capital, Research Division

I just wanted to follow up on that last question. Could you help us parse out in terms of the 2 dynamics, replacements versus the change in lead-to-port ratio from competitive leads, how much of the change in ASPs comes from each of those?

Daniel J. Starks

We won't give that level of detail, but most of the change in ASP came from those 2 combined.

Matthew Taylor - Barclays Capital, Research Division

Okay. And I guess, I just want to follow up on kind of the current temperature in the field on Durata and how you think things will change this year as we continue to get more data points on the stability of Durata performance. Can you give us a sense of how you're thinking about the momentum in the high-voltage business and how you think you may be able to start regaining some of that share that you've been losing on the lead side?

Daniel J. Starks

Sure. The starting point would be -- the first 2 things that would be part of our analysis would be the market share, our ICD market share dynamic in the fourth quarter. And although it never is appropriate to make too much out of a single quarter, on the other hand, it's the latest data point we have to work with. And we need to see the other major companies' numbers for the comparable period. But based on the information that we have to date, our best estimate is that we gained market share in the ICD business here in the fourth quarter. So that is -- so there are obviously major implications of that. So there's a lot going on in our ICD franchise and our current technology in the unique capabilities available from our product line, particularly the Quadripolar Left-Heart Lead that will continue coming forward into 2013. Another dynamic that everyone can see reflected in the fourth quarter results and in our assessment here that we gained a small amount of share and at least held share is that we have the benefit of the replacement market tailwind that played out in 2013 but will continue to play out -- that played out in 2012 but will continue to play out in 2013. So in past years, we've indicated that there was about a 10-point gap in market share for our de novo ICD business versus our replacement ICD business. And that, that 10-point gap was just a function of the math, so to speak, where we have gained market share on a consistent basis over so many years. And so we've made the point that if we stopped gaining share in the de novo segment, we still would gain share in the total ICD business for 5 years or so as the de novo devices came up for replacement. And that we estimated that would give us about, as I recall, about a 5-point gain in total market share as the replacement market share came up toward the level of our de novo market share. So we have that as another strength and point of stability in our ICD franchise. So both -- and then Eric Fain will offer an update on how we will continue to refresh our ICD product line in Europe. And when we put all of that together, that gives us an optimism and a confidence that we will at least be able to continue to hold share in our total CRM franchise in 2013 in the way that we have reflected holding share in 2012.

Matthew Taylor - Barclays Capital, Research Division

Okay. What data points are you looking for this year in terms of Durata updates that you think will be important?

Daniel J. Starks

Yes. Matt, as I was answering the first part of your question, I neglected to address that. The major information that is most compelling to physicians, and you asked about the tone of the field, is the 5-year follow-up data, survival data for the Durata product line compared with other product available in the market. And so those data are robust data. They're third-party audited data. And those data reflected 98.7% survival of the Durata lead line at 5 years compared to competitive of 98.1% 5-year survival. So that's what -- all along here with respect to Durata, the facts have been very friendly to us. And so as the facts continue to just be reinforced here and we do expect to see various centers publish their experience with Durata leads and follow up in their own centers' experience with Durata leads, and we expect those data to be favorable. So I think that there isn't a single event. I think there just is the ongoing confidence and ongoing reinforcement of positive safety and reliability performance of the Durata lead line that will increasingly become front of mind for people as they think about their lead choices.

Operator

Our next question is coming from Rick Wise, Stifel, Nicolaus.

Frederick A. Wise - Stifel, Nicolaus & Co., Inc., Research Division

Let me turn to some of the pipeline products or some of the recently launched products. Dan, can you -- I'll just say a couple of them. Can you update us on Portico in Europe, some details on the early uptake and talk a little bit about the strategy, about the accounts that you're looking at? And maybe enlighten as well, what's next there on the product front or on the data front, if could you give us some perspective?

Daniel J. Starks

Sure, Rick. I'd like to defer most of the answer to your question to the morning of Friday, February 1, when we really are -- we're preparing presentations on all of the points that you've raised. And it would be more efficient for everybody if we give an organized presentation and open it up for Q&A at the conclusion of the organized presentation. So that's most of my answer. But the way that we think about the Portico product is the main significance of the Portico product in 2013 will be the visibility of progress in moving toward the endpoint of being fully launched into the TAVI market in Europe. That's the main significance of the Portico program in 2013. And the reason I say that is that we don't look at Portico as being one of our most significant new revenues in 2013 as we will be still developing and rolling out additional sizes. And we start out here with just participating in a very small segment of the TAVI market in Europe. And we will expand our participation in the TAVI market in Europe during 2013. So we will get -- we have gotten and will continue to get an expanding amount of revenue. But it's not about the revenue for the Portico program in 2013. It's about being able -- everyone being able to track our progress with the pivotal CE Mark trial on the 25-millimeter size of the Portico and tracking the progress we continue to make on the 27- and 29-millimeter transfemoral versions of Portico, and then also the transapical delivery of all of the Portico product lines. So those milestones will validate the progress with Portico as a new growth driver with the revenue from the Portico program being far more significant in 2014 than it will be in 2013. On the renal denervation side, on the other hand, we expect a more significant increase of revenue in renal denervation in 2013 than we would expect on the TAVI side of our program. And we will -- I won't steal the headlines here with the program development on renal denervation, but we are looking forward to launching into Europe a second-generation EnligHTN line of renal denervation technology, and we look forward to here... In renal denervation, it's largely a matter of all of us who are serious about the market opportunity to develop the market and that's going to take significant clinical trial work and development of clinical evidence and development of cost effectiveness. And so that will be a major focus for us in 2013. But the uptake on the product line itself will be quicker in the renal denervation space than it is in the TAVI space. And you'll see that. We'll look forward to talking about that more with our future quarterly results and we'll look forward to giving more information about all of that to you and everybody else next week at our annual investor meeting.

Frederick A. Wise - Stifel, Nicolaus & Co., Inc., Research Division

Right. If I could just follow up on the P&L, just two quick follow-ups. On the R&D, John, you were saying that spending in the fourth quarter was from the refocused organization and you're going to reinvest that in 2013. Just in thinking about our models, I mean, it sounds like it will be hard to get that going aggressively, sort of flip a switch in the first quarter. Is it going to be more back end-loaded? And maybe you could talk a little bit about where that spending is going.

Daniel J. Starks

John, what do you want to say about that?

John C. Heinmiller

Well, I think that we wouldn't start to lay out quarter-by-quarter. I think we're comfortable that we're going to have everything we need to continue to invest in these growth platforms that we're focused on. And the spending may, in fact, ramp a little bit during 2013, but all of that is factored into our guidance. And we would see it as really not all that material when you look at the overall results of St. Jude Medical. And then I think that the point would be we've got a lot of focus and a lot of attention to supporting the programs that we'll continue to develop both the markets, as well as the products in these growth categories that we're involved in.

Operator

Your next question is coming from Rajeev Jashnani with UBS.

Rajeev Jashnani - UBS Investment Bank, Research Division

Just a question on the gross margin. I think the guidance implies up to 50 basis point reduction once you back out the medical device fee. And I know you talked about currency as having a negative impact. And maybe you could put that into context as to how you're viewing the gross margin longer-term with some of the initiatives you're taking and also some of the ASP pressures that you're observing.

Daniel J. Starks

John, what do you want to offer for additional comment on gross margin expectations?

John C. Heinmiller

Well, I think it's-- I think that the overall guidance that we've given for the gross profit margin just contemplates all of those different variables. It's really a relatively modest overall impact of average selling price, but that certainly is factored in. But when we look at the overall business, we're factoring in a low single-digit ASP decline, which is what we've been experiencing. And then on top of that, to offset that, we have the benefit of continuing to have higher volumes come from our cost-advantaged manufacturing locations. We have a number of initiatives that are focused on just reducing costs throughout our manufacturing operations. And that is something that we will again experience in 2013. And then obviously, the negative factors, the big one being the device tax, excise tax flowing through our cost of goods sold as well as another year where we expect the currency to have a slightly negative impact. So I think we've had a good visibility into our gross profit margin. We came right in -- our 2012 results came right in where we had predicted them to be for the year. And now we've got this, the model or the equation has shifted a little bit, which is primarily the 80 to 100 basis point impact of the excise tax is flowing through the cost of goods sold.

Rajeev Jashnani - UBS Investment Bank, Research Division

Right. Just have one quick follow-up, just on the market. It sounded like there was pretty healthy underlying growth that you saw in the ICD market, that is. I was just wondering if you could comment on maybe what, if anything, that may be helping that out and just the sustainability of that. I know it's been a tricky market to call, but your comments would be appreciated there.

Daniel J. Starks

Rajeev, we may -- with our larger group, we may be able to offer better color commentary to you next week with the participation of Denis Gestin, the President of our International business, and with Joel Becker, the President of our U.S. Division. But generally, I think there isn't any special magic to it, I think. We've been observing in the United States here over the period of the past couple of years, we've been observing the impact on usage of the review from various sources of the documentation related to ICD prescription and the reimbursement guidelines and the way that the prescriptions match or didn't match with the reimbursement, just all of those kinds of audits that have gone forward that have tended to reduce the implant volume. And I think that all of us expected that as those investigations annualized and as the current market compared to similar conditions a year ago that we would see more encouraging year-over-year comparisons on volumes. So I think that what we've seen here in the fourth quarter in the United States market is just that. And on the international side, I think again it's just that there are so many specific markets contributing to the total international number and that the level of penetration in so many of these markets is really just so low. We've always seen opportunity for significant volume increases at lower ASPs but significant volume increases in international markets. So I think we really saw that both in the U.S. and in international markets here in the fourth quarter, and it was really all as anticipated.

I'd like to thank everybody for joining us on the call and turn the call back over to you, Tracy, for your concluding remarks.

Operator

Today's call is being recorded and will be available for replay beginning at 12 p.m. Eastern. The dial-in numbers are U.S., (855) 859-2056 and international, (404) 537-3406 and enter PIN number 85710908. Thank you. This does conclude today's teleconference. Please disconnect your lines at this time.

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