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St. Jude Medical Inc. (NYSE:STJ)

Q4 2008 Earnings Call

January 27, 2009 8:00 am ET

Executives

Dan Starks - Chairman, President and CEO

John Heinmiller - EVP and CFO

Analysts

David Lewis - Morgan Stanley

Bob Hopkins - Bank of America

Rick Wise - Leerink Swann

Mike Weinstein - JPMorgan

Tao Levy - Deutsche Bank

Larry Biegelsen - Wachovia

Kristen Stewart - Credit Suisse

Tim Lee - Piper Jaffray

Operator

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

The remarks made during this conference call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. Such forward-looking statements include the expectations, plans and prospects for the company, including potential clinical successes, anticipated regulatory approvals and the future of product launches, and projected revenues, margins, earnings and market shares.

The statements made by the company are based upon management's current expectations and are subject to certain risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. These risks and uncertainties include market conditions and other factors beyond the company's control, and the risk factors and other cautionary statements described in the company's filings with the SEC, including those described in the risk factors and cautionary statement sections of the company's Annual Report on Form 10-K for the fiscal year ended December 29, 2007 and Quarterly Report on Form 10-Q for the fiscal quarter ended September 27, 2008. The company does not intend to update these statements and undertakes no duty to any persons to provide any such update under any circumstance.

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

Dan Starks

Thank you, Dennis. Welcome to St. Jude Medical's fourth quarter and full year 2008 earnings conference call. With me on the call today are John Heinmiller, Executive Vice President and Chief Financial Officer; Eric Fane, President of our Cardiac Rhythm Management Division, Mike Rousseau, Group President; Joe McCullough, Group President; and Angie Craig, Vice President of Corporate Relations.

Our plan this morning is for John Heinmiller to provide his normal review of our fourth quarter and full year financial results for 2008 and to give sales and earnings guidance both for the first quarter and full year of 2009. I will then address several topics and open it up for your questions. Please go ahead, John.

John Heinmiller

Thank you, Dan. Sales for the quarter totaled $1.133 billion, up approximately 11% over the $1.18 billion reported in the fourth quarter of last year. Unfavorable foreign currency translations versus last year's fourth quarter decreased this quarter sales by about $29 million, which implies constant currency sales growth of approximately 14% for the quarter.

For the full year 2008, net sales were $4.363 billion, up about 15% over 2007. Favorable foreign currency translations versus those in 2007 increased 2008's net sales by approximately $120 million, resulting in constant currency sales growth for the year of approximately 12%.

During the fourth quarter, we recorded $319 million of in-process research and development expense, primarily related to our MediGuide acquisition and $162 million of pre-tax special charges, consisting principally of $101 million of non-cash asset impairment charges and $35 million of contributions to non-profit organizations including the St. Jude Medical Foundation.

Also during the fourth quarter, the federal research and development credit was extended for both 2008 and 2009, retroactive to the beginning of 2008. As a result during the fourth quarter, we recorded an $18 million benefit to income tax expense, which increased earnings per share by $0.05 representing the cumulative catch-up adjustment of this legislation for the first three quarters of 2008.

Comments during this call referencing fourth quarter and full year 2008 results including EPS amounts will be exclusive of these items.

Earnings per share were $0.60 for the fourth quarter of 2008, an 11% increase over the adjusted EPS of $0.54 in the fourth quarter of 2007. For the full year 2008, earnings per share were $2.31, a 25% increase over adjusted EPS of $1.85 for the full year 2007.

Before we discuss our financial results and offer our sales and earnings guidance for 2009, let me provide a few comments about currency exchange rates and the assumptions we are using in our outlook for this year. First of all, the two main currencies influencing St. Jude Medical's operations are the euro and the yen.

In preparing our sales and earnings guidance for the first quarter and full year 2009, we have used a range centered on the recent spot rates for the euro and the yen. Using this approach, we are currently assuming that each euro will translate into about $1.27 to $1.32 and for the yen, each 87 yen to 92 yen will translate into $1.

What is perhaps obvious but worth noting is that should the US dollar further strengthen during 2009 versus the euro, the yen, and a mixture of other currencies, our reported sales and operating profit would be less. On the other hand, should the dollar weaken, then obviously the impact of currency translation would be more positive than our guidance currently assumes.

We're going to be more explicit in our guidance here today related to our expected reported and constant currency revenue growth. In addition, we are also providing a guidance range regarding the impact of currency translations on our operating profit.

Keep in mind that the exact product revenue and the geography that the revenue comes from are important variables in determining the impact these exchange rate fluctuations can have on our operating profit. Having said that, we estimate that for 2009, generally between 45% and 55% of the revenue impact from foreign currency translations flows through to our operating profit.

I will now turn to our discussion of sales by product category. For the fourth quarter, total Cardiac Rhythm Management sales, which include revenue from both our ICD and pacemaker product lines, were $680 million, up 7% from last year's fourth quarter, including $21 million of unfavorable foreign currency translation.

As a point of reference, last year, we estimated that our fourth quarter 2007 CRM sales included a one-time benefit of approximately $20 million of sales related to a competitor’s recall of an ICD lead. Total CRM product sales for the full year 2008 were $2.701 billion representing a 14% increase over 2007. Favorable foreign currency translations increased 2008 CRM sales by approximately $68 million.

For the fourth quarter, ICD sales were $387 million, up 8% from last year's fourth quarter. US ICD sales were $249 million, up 8% from last year's fourth quarter and international ICD sales were $138 million, an 8% increase over the fourth quarter of 2007 including $13 million of unfavorable foreign currency translation. For the year 2008, ICD sales were $1.534 billion, up 18% versus 2007. Favorable foreign currency translations versus those in 2007 increased 2008 ICD sales by approximately $28 million.

For low-voltage devices, sales for the fourth quarter totaled $293 million, up 5% from last year's fourth quarter. In the United States, pacemaker sales were $133 million, a 4% increase compared with last year's fourth quarter.

In our international markets, pacemaker sales were approximately $160 million, up 6% from the fourth quarter of 2008, including $8 million of unfavorable foreign currency translations. For the year 2008, pacemaker sales were $1.167 billion, up 10% over 2007. Favorable foreign currency translations versus those in 2007 increased 2008 pacemaker sales by approximately $40 million.

For the first quarter of 2009, we expect total CRM sales to be in the range of $650 million to $680 million. For the full year 2009, we expect total CRM sales to be in the range of $2.8 billion to $2.9 billion.

Atrial fibrillation or AF product sales for the fourth quarter totaled $156 million, up 33% over the fourth quarter of last year, including $4 million of unfavorable foreign currency translations. For the full year 2008, AF product sales were $546 million, an increase of 33% over 2007, including a $16 million increase due to favorable foreign currency translations.

For the first quarter of 2009, we expect AF product sales to be in the range of $135 million to $150 million and we expect full year 2009 AF product sales to be in the range of $650 million to $680 million.

Total sales of cardiovascular products for the fourth quarter of 2008 were $219 million, up 7% over the fourth quarter of 2007 including $3 million of unfavorable foreign currency translations. Total cardiovascular product sales for the full year 2008 were $862 million, up 9% over 2007, including $34 million of an increase due to favorable foreign currency translation.

Within this category of products, sales of vascular closure products in the fourth quarter of 2008 were $92 million, a 1% increase over the fourth quarter of 2007. Total vascular closure product sales for 2008 were $368 million, up 4% over 2007.

Sales of heart valve products in the fourth quarter of 2008 were $79 million, a 7% increase over the fourth quarter of 2007. Total sales of heart valve products for 2008 were $322 million, up 11% over 2007. For the first quarter of 2009, we expect cardiovascular product sales to be in the range of $230 million to $245 million.

We expect full year 2009 cardiovascular product sales to be in the range of $970 million to $1 billion. As a reminder, this guidance includes sales of Radi Medical Systems AB, which is being integrated into our Cardiovascular division.

Total sales of neuromodulation products in the fourth quarter of 2008 were $78 million, up 32% from the fourth quarter of 2007. For the full year 2008, neuromodulation product sales were $254 million, up 21% over 2007. For the first quarter of 2009, we expect sales of neuromodulation products to be in the range of $62 million to $67 million. We expect full year 2009 neuromodulation sales of $290 million to $310 million.

Let me pause at this point and recap our 2009 sales guidance. For Cardiac Rhythm Management devices, we expect sales for 2009 in the range of $2.8 billion to $2.9 billion. Sales of our AF products for 2009 are expected to reach $650 million to $680 million. For cardiovascular products, we expect 2009 sales in the range of $970 million to $1 billion and we expect sales of neuromodulation products for 2009 to be $290 million to $310 million.

If you add up the sales across all growth platforms, total sales in 2009 are expected to be $4.710 billion to $4.890 billion. This assumes currency translations will reduce total sales for 2009 by approximately $190 million compared with exchange rates used in 2008. Measured at a constant currency rate, we are guiding to consolidated sales growth in the range of 12% to 16%.

The geographic breakdown of St. Jude Medical sales in the fourth quarter of 2008 was 54% US versus 46% outside the United States or OUS. This compares to 53% US and 47% OUS in the fourth quarter of 2007. A detailed geographic breakdown of this quarter's sales by product shows high-voltage at $249 million US; $138 million OUS; low-voltage at $133 million US; $160 million OUS, atrial fibrillation products at $73 million US and $83 million OUS; and cardiovascular products at $88 million US and $131 million OUS; and finally neuromodulation products at $67 million US and $11 million OUS.

The gross profit margin this quarter was 74.9%, representing a 110 basis point improvement over the fourth quarter of 2007 and up 20 basis points sequentially from the third quarter of 2008. For the full year 2008, the gross profit margin was 74.7%, an improvement of 120 basis points over 2007.

For the full year 2009, we expect gross profit margins to be in the range of 73.5% to 74.5%. Compared with 2008, we estimate that negative currency translations in 2009 will reduce gross margins by about 50 basis points to 60 basis points.

Our fourth quarter SG&A expenses were at 36.8% of net sales. For the full year 2008, SG&A expenses were 36.7% of net sales. For the full year 2009, we expect SG&A as a percentage of net sales to be in the range of 35.5% to 36.5%.

Research and development expenses in the fourth quarter of 2008 were 12.2% of net sales, consistent with the fourth quarter of 2007. For the full year 2008, R&D expenses were 12.2% of net sales, compared with 12.6% in 2007.

For the full year 2009, we expect R&D expenses to be in the range of 12% to 13% of net sales, as we continue to balance delivering short-term results with the right investment in long term growth drivers.

Other expense was $4 million in the fourth quarter, and for the first quarter of 2009, we expect the other income and expense line item will be a net expense of approximately $5 million to $8 million. For the full year 2009, we expect other expense of approximately $20 million to $25 million for the year, primarily driven by interest expense on our outstanding debt.

For 2008, our effective income tax rate was 27.5%, and for 2009, we expect the effective income tax rate to be in the range of 26.5% to 27%.

Moving on to the balance sheet, at the end of December 2008, we had $136 million in cash and cash equivalents and $1.202 billion in total debt. During the fourth quarter, we made a $500 million borrowing, under our existing $1 billion multi-year credit facility, which matures in December 2011.

We also entered into a three year credit agreement with a consortium of banks, which enabled us to borrow $360 million and issued $88 million of three year notes in Japan. These borrowings, along with cash on hand were used to fund our previously announced fourth quarter acquisitions, as well as the repayment of our $1.2 billion in convertible debentures.

In addition to these new debt issuances, the outstanding debt on our balance sheet at the end of December 2008 included $230 million of previously issued notes in Japan, which bear interest at 1% and mature in May 2010 and $20 million of short-term commercial paper notes.

With regard to our new three year credit agreement, I would also like to highlight, that in addition to the $360 million that we borrowed in December under the terms of the three year credit agreement, we borrowed an additional $180 million in January 2009, increasing our cash on hand and bringing our current debt outstanding on this facility to $540 million.

Next I want to offer some comments regarding our earnings per share outlook for the first quarter and the full year 2009. In preparing our EPS guidance, we have assumed that in the first quarter of 2009, the share count used in our fully diluted EPS calculation will be about 349 million to 351 million shares, with the weighted average outstanding shares for the full year 2009 estimated at 353 million to 355 million.

The company expects consolidated earnings per share for the first quarter of 2009 to be in the range of $0.57 to$0.59. And for the full year 2009, we expect consolidated earnings per share to be in the range of $2.48 to $2.54. This expectation represents EPS growth of approximately 7% to 10% over the 2008 EPS of $2.31. And at constant currency rates, this growth would be approximately 15%.

I would now like to turn it back to Dan Starks.

Dan Starks

Thank you, John. Events of the last quarter remind us of the ancient Chinese curse, 'May you live in interesting times'. The good news is that St. Jude Medical is well positioned to thrive in interesting times. While not recession-proof, our business is strongly recession-resistant.

For example, our constant currency sales growth trends throughout 2008 show a steady increase despite the growing recession throughout the year. We delivered 9% constant currency sales growth in Q1, 13% constant currency sales growth in Q2 and Q3, and 14% constant currency sales growth in the fourth quarter of 2008.

The fourth quarter's 14% constant currency sales growth is particularly notable, given that difficult comparison as a result of a one-time sales benefit of $20 million in the same quarter in 2007.

Our sales results reflect the important actions we have taken to diversify and expand our growth platforms to the point where St. Jude Medical sales growth program to is about much more than ICDs. We expect to deliver double-digit, average annual sales growth from each of our divisions including our cardiovascular program for the foreseeable future.

We look forward to reviewing all of our major growth programs with you in more detail at our annual investor's conference next week. We also look forward to updating you on our program for continuing to leverage the middle of our income statement.

As a preview to next week's investor conference, I'd like to update you on our insights into the global markets for ICDs and pacemakers, which we refer to as our CRM market.

In the beginning of 2008, we said we expected the global CRM market to grow at a mid-to-upper single-digit rate or about 5% to 7%. We need to see the other companies' fourth quarter results to finalize our calculations. But it now appears that the global CRM market grew about 5% to 6% on a constant currency basis and about 8% on a reported basis for full year 2008.

For the full year 2009; we expect the global CRM market to continue growing at approximately a mid single-digit rate.

Given the continued strength of our product lines, our people and our overall position in the market, we expect St. Jude Medical to continue to gain share in the global CRM market in 2009. We will update you at our investors conference next week on the strong line up of new ICD and pacemaker products we have teed up for 2009, that will help us achieve these gains.

We also look forward to updating you next week on why we continue to view the Atrial Fibrillation or AF space, as one of the most compelling growth opportunities in medical devices and why St. Jude Medical is determined to keep its current leadership position. We expect the broad market for AF and other electrophysiology products to become a $3 billion to $4 billion market over the next five to seven years.

We have said in the past that the CABANA trial is one key ingredient to fully developing the potential of this market. As a reminder, the CABANA trial is designed to randomize 3000 AF patients between drug and ablation therapy, and follow each patient for two years. It will be an independent trial funded primarily by the National Institute of Health and by St. Jude Medical.

Clinical data from the feasibility portion of the CABANA trial are expected to be presented either at this year’s ACC scientific sessions at the end of March or at this year’s HRS scientific sessions in May.

The CABANA pivotal trial is expected to begin enrolling patients before the end of this quarter. It will take several years for data to become available from the CABANA pivotal trial, but in the meantime, we expect the broad market for AF and other electrophysiology products to continue growing at a strong double-digit rates, driven by the number of physicians who are beginning to perform AF ablations, the ongoing publication of favorable clinical data in the under penetrated nature of this market.

Our AF program already is one of our most robust growth drivers with a revenue increase of 33% for full year 2008 and a pipeline full of new products, some of which we will review with you at our Investors Conference next week. It is noteworthy that for the fourth quarter of 2008, AF program revenues already were approximately 14% of St. Jude Medical's total global sales mix.

We also will update you next week on why the growth of our neuromodulation program has accelerated so strongly and why we think we can sustain this growth. Our Eon Mini product line has become best-in-class for spinal cord stimulation for chronic pain patients due to its size, longevity, permeability, and a full portfolio of [leads]. Keep in mind that our Eon Mini product line has only been on the market one full quarter.

We expect to continue gaining share in the spinal cord stimulation market throughout 2009, as we continue to rollout this product. At the same time, we are only just beginning to enter the European market for deep brain stimulation. We expect our deep brain stimulation program and a full pipeline of new products to help sustain accelerated growth in 2010 and beyond in our neuromodulation business.

With respect to our cardiovascular business, we expect that St. Jude Medical's cardiovascular program will return to sustainable double digit sales growth in 2009 and beyond. We look forward to presenting you with more on this topic next week. This presentation will include a review of the four new product lines we acquired with Radi Medical Systems, a new indication in our vascular closure program, the impact of our new Angio-Seal Evolution product line, details on the progress we are making with the Trifecta Stented tissue valve program together with the timing of our anticipated entry into the pericardial segment of the tissue valve market, and a discussion of other new initiatives.

We will devote a portion of our Investors Conference next week to giving you more information about the benefits of our acquisition of MediGuide brings to St. Jude Medical's growth programs. Although it is not yet been approved for market release in the United States, St. Jude Medical now has a proprietary tracking and location technology that can be registered through a fluoroscopic [early] image real time during a catheterization procedure.

Long-term, we expect this technology to benefit catheterization procedures in the electrophysiology cath lab, in the interventional cardiology cath lab, in placing ICD and pacemaker leads with virtually no fluoroscopy, in deep brain stimulation procedures and more. This tracking and location technology can adjust for cardiac respiratory and other patient movements' real time during intra-body navigation with a medical device.

Another reason St. Jude Medical is well positioned to thrive in challenging times is that we have been so proactive and consistent with long-term investments to optimize our cost structure and cash flow. We now are manufacturing both ICDs and pacemakers for the first time in Puerto Rico.

We recently opened one new manufacturing facility in South Carolina and will open a second new manufacturing facility in South Carolina next quarter. We plan to open additional manufacturing facilities in under cost advantage locations in 2010 and in 2011, as part of our global business expansion and global business presence.

In addition to expanding in cost advantaged locations, we have been working to optimize cost through continuous improvement of business processes and of infrastructure. For example, our SAP Enterprise software installation already is more than 50% complete increasing our spending short-term by creating the infrastructure we can leverage for significant productivity gains longer-term. We are on track to meet our goal of delivering an operating profit margin of approximately 29% by the year 2012.

To summarize, we expect 2009 to be a challenging year for the entire global economy. We cannot fully predict the impact this volatility will have on St. Jude Medical in the short-term, but as a result of our consistent focus over the last 10 years on diversifying our growth drivers and optimizing our cost structure, St. Jude Medical is well positioned to continue delivering robust growth in 2009 and beyond. We look forward to providing additional supporting detail during our Investors Conference next week on February 6th.

With that, I would like to turn it back to our moderator and open it up for questions. Dennis, would you take questions please?

Question-and-Answer Session

Operator

Yes, sir. (Operator Instructions). The floor is now open for questions. And thank you. Our first question is coming from the line of David Lewis with Morgan Stanley.

David Lewis - Morgan Stanley

Good morning.

Dan Starks

Good morning.

David Lewis - Morgan Stanley

Dan, I wonder if you could talk about just looking at the AF and neuro diversity has been driving a lot of growth through the last several quarters. Your market share growth rates for both segments are obviously pretty substantial. Can you talk about market share gains sort of in both categories, expectations for AF share gains either in ‘08 or for ‘09 and the same for neuro?

Dan Starks

We estimate that we have about a one-third share of the total market for AF and electrophysiology products, and we estimate that the market is growing at somewhere in the range of about 15% with our growth, a little stronger than twice that.

On the neuromodulation side, we expect the spinal cord stimulation segment of the neuromodulation market to continue growing at somewhere in the range of about 15%. You saw that our sales for the full year grew at 21% but more relevant to expectations for 2009 with the release of our Eon Mini product line at a reported basis.

Neuromodulation sales grew 32%, again a little bit more than twice the rate of the market. So, that gives you a metric on rate of share gain. We will look forward to talking more about the flow of new products in both atrial fibrillation and in neuromodulation next week at our Investors Conference. We expect continued share gain in both of those markets during 2009.

David Lewis - Morgan Stanley

Thanks Dan. Two more quick questions here; one, just on the (inaudible) that we have seen multiple industry competitors talk about kind of a softening in this marketplace. Based on your '09 guidance, it doesn't really seem that you are expecting much of a softening.

If you are seeing weakness specifically in ICDs, where do you think that weakness is? Do you view it as economic sensitivity or difficulty in penetrating the primary prevention market?

Dan Starks

We have not seen weakness. I suspect that one company's weakness might be another company's share gain. We think growth dynamics in the CRM market on a global basis have been surprisingly stable viewed from constant currency perspective. One year ago, we said we expected constant currency growth to be about 5% to 7%. It appears that growth did actually fall right in that range.

We are estimating that the growth in the fourth quarter of the global market growth for pacing in ICD products combined at a constant currency level in the fourth quarter stayed in that range of 5% to 6% growth. We expect about the same level of growth on a constant currency basis again in 2009. So, we see surprisingly stable growth dynamics in the global CRM market viewed from a constant currency perspective.

David Lewis - Morgan Stanley

Okay. Just last question and I will jump back in queue. But Dan, I am thinking about your Chinese [proverb] and thinking about 2009 guidance. Given your investments specifically in CRM and other areas of your business, it appear that '09 could be a significant leverage year for St. Jude and thinking about your EPS guidance, do you now view 2009 as still a significant leverage year for St. Jude or given your proverb, is this an opportunity for St. Jude to continue spending and take share and I will jump back in queue. Thank you.

Dan Starks

I think a good way to look at our guidance is from a constant currency perspective and maybe again if you look at our results in 2008 from a constant currency perspective and look at our guidance for 2009 from a constant currency perspective, it will give everybody a better idea of the fundamentals inside our business.

In 2008, revenue at constant currency was about 12%, earnings per share at constant currency were above 15%. The guidance we have given this morning for 2009, indicate revenue from a constant currency perspective in the range of about 12% to16% with EPS from a constant currency perspective of 15%.

So, really solid, really stable growth dynamics 2008 and 2009. We will continue to be flexible in our investment during 2009. The guidance we've given this morning gives us room for some flexibility and as we make additional investment decisions during the year, and as we see how actual sales develop we'll continue to provide update.

David Lewis - Morgan Stanley

Thank you.

Dan Starks

Sure. You're welcome.

Operator

Our next question is coming from the line of Bob Hopkins with Bank of America.

Bob Hopkins - Bank of America

Hi, thank you and good morning. Can you hear me okay?

Dan Starks

Yes. You're coming in fine.

Bob Hopkins - Bank of America

Great. Dan, first question for me is on ICDs. I'm just curious, in the quarter, did you see any pushback from hospitals in terms of quarter end bulk purchasing of ICDs; did that impact your numbers at all in Q4?

Dan Starks

No.

Bob Hopkins - Bank of America

It didn't, okay.

Dan Starks

No, it didn't. We really saw a very typical, normal customer dynamics at quarter end.

Bob Hopkins - Bank of America

Okay. Do you think that was unique to St. Jude or do you just didn't see it across the board in any of your hospital contacts?

Dan Starks

I can't say whether that's unique to us or not. I understand that some of the other participants in the market have been talking about their perception of softness in at least in their ICD business.

But I think that it may be as we go forward into 2009, it may be that we'll begin to identify different growth trends, but we're really encouraged that throughout 2008 and throughout the fourth quarter of 2008, and as you see from our guidance for 2009, we really see very stable growth dynamics in the global CRM market.

Bob Hopkins - Bank of America

And then when you look at this 2009 guidance that you'd given for CRM, implicit in that guidance, what sort of ICD market share gains are you anticipating there? Over the last couple of years you’ve taken anywhere from one to two points per year. Is that a trend that you expect to continue or are you forecasting more moderate share gains going forward, just want to get a sense for that?

Dan Starks

Yes, I will break out the ICD separately from the combined pacer and ICD business, as we really think it is more meaningful to look at the CRM market as a whole build for growth dynamics and for share gain. But I think our guidance will imply that we expect to continue to gain share at approximately the same rate as we had in the past.

Bob Hopkins - Bank of America

Okay, thank you. And then just one other quick follow-up, I was just curious that your businesses in AF and Neurostem, which you’re growing quite nicely. There was a question earlier about market share gain expectations for ’09. But I’m just curious in both those markets for 2009 what sort of market growth do you expect for AF and Neurostem in 2009 implicit in your guidance? Thanks.

Dan Starks

Yes implicit in our guidance is about 15% growth I think mid-teens growth would be a good range to think about both for AF market growth and for the Spinal Cord Stimulation portion of the neuromodulation market.

Bob Hopkins - Bank of America

Okay, great. Thanks very much Dan.

Dan Starks

Welcome.

Operator

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

Rick Wise - Leerink Swann

Hi, good morning everybody.

Dan Starks

Good morning.

Rick Wise - Leerink Swann

Couple of questions, maybe Dan starting with ICDs again you’ve often encouraged us to think about things in a rolling six months basis and unless there’s a right way to think about it. But basically ICD sales averaged about $384 million a quarter in the first half and pretty much the same in the second half. Again differentiate values and things going on, I was just curious to hear your thoughts about how the second half performance. Did you expect more, how do you view the performance and maybe just in your flexions on is Boston Scientific re-launch affecting you at all?

Dan Starks

I think you are exactly right, Rick, that it's most helpful to look at the growth trends across two quarters in a row rather than isolated quarters particularly with the way that one of the major players in the market has a fiscal quarter that isn't the same as the fiscal quarter of the others of us.

If you look at our business on a half year basis, the most meaningful comparison is versus the half year of the prior year rather than sequential quarters. There are a number of differences I think just in seasonality. But if you look at our US ICD business for the second half of 2008, we grew about 10%.

I think that's a good way to look at it, particularly given the comparison in the fourth quarter of our sales against the anomaly of Medtronic's recall of its Fidelis in October of 2007, and given the way that for each companies year-over-year comparison, October fell into the equivalent of our third quarter for Medtronic, but it fell into our fourth quarter for us.

So I think if you look at just the quarter alone year-over-year, it doesn't give the best picture, but we think the market the US ICD market grew about 7% in the second half of 2008 with our business growing at about 10% and that's right within the range of our expectations.

So really we were not surprised by competitive dynamics. We weren't surprised by market dynamics and I would say that the second half of 2008 was right on track for us, both from a US ICD perspective and a global ICD perspective as well as just from the total market dynamics during the second half of the year.

Rick Wise - Leerink Swann

Right, two others. John, I should make sure, I assume your guidance includes, incorporates Radi and MediGuide. Maybe you could give us some perspective on your assumptions there in '09. And last again back to Dan. Dan, I was up at the Boston A-Fib meeting and I'd be curious of your perspective again on what seems to be a major new entrance in the market. Obviously Medtronic has made a couple of acquisitions. It seems to me it has implications for AF market, AF competitively versus you, and maybe segmentation versus complex arrhythmia treatment and more simple. I'd be curious to hear your broad perspective there and how that might change the landscape going forward. Thanks.

John Heinmiller

Okay, Rick, let me ask you to clarify a little bit. On the first question you asked with respect to Radi and MediGuide. I'm not sure that I fully understand your question there. Could you just?

Rick Wise - Leerink Swann

I just want to make sure, if there are any revenues assumed, I assume that was incorporated in your 2009 guidance?

John Heinmiller

Yes absolutely. Both the revenue assumes the impact of those acquisitions that on the revenue side that's entirely Radi impact. There's no impact from MediGuide in our modeling for 2009 and our EPS guidance assumes absorbing the investment associated with Radi and MediGuide. So yes it's all in. It's an all in guidance that we've given you

Rick Wise - Leerink Swann

Okay.

John Heinmiller

And with respect to the Boston AF meeting and competitive dynamics. The Boston AF meeting was -- as a number of commentators have already published, the Boston AF meeting reflected continued strong growth, expanding market, expanding entrance from a clinical perspective more and more physicians are beginning to perform AF ablation procedures. I think what was most notable about the Boston AF conference this year was that there were no huge developments. It really to me, it struck me that we were hearing reports on incremental insights from the investigators rather than anything, any dramatic change.

So I think we're seeing more convergence in clinical practice and I think we're seeing signs that the AF ablation market is coming more mainstream in the electrophysiology and cardiology world. So all of that is consistent with what we would like to see in AF market dynamics and again, the idea that more and more data from smaller clinical trials is being published that is favorable to the value of AF ablation and the idea that we're about to hear feasibility data from the CABANA trial and about to begin enrollment of the pivotal portion of the CABANA trial. All of that is very encouraging and consistent with our hopes and aspirations for continuing to be able to develop the AF market.

With respect to any particular competitor, I don't want to say all that much about it. You would get our collective competitive juices up and we would start making probably some sharp comments about our view of comparative competitive strength and growth opportunities. Any time a company with meaningful resources enters a space that’s emerging the way AF is, it can only bode well for the continued development of the market and continued credibility of the therapy.

So we view the presence of other participants that way as positive and we are optimistic and enthusiastic about our continued leadership in the overall space. From a competitive perspective, I think we look forward to seeing and watching competitors who may not be as close to the therapy come to understand the value of what they bought in, what the limitations of it are.

Rick Wise - Leerink Swann

That was good. Thanks.

Operator

Our next question is coming from the line of Mike Weinstein with JPMorgan.

Mike Weinstein - JPMorgan

Thanks for taking the questions. Good morning.

Dan Starks

Good morning.

Mike Weinstein - JPMorgan

Let me make sure I understand from your math just quickly just for the 2009 guidance. If I back out and assume contribution from Radi for 2009, I get to about 10% to 14% organic revenue growth assumed. Is that about right?

Dan Starks

Yes I don't have actually have the math right in front of me Michael, but something like that I am sure is about right.

Mike Weinstein - JPMorgan

Okay, perfect and then John, your commentary about the FX impact, the flow through to the bottom line in 2009, you gave a $190 million number in terms of the revenue impact and then you talked about the impact on operating profit from that. So that gets me to about an $0.18 to $0.22 hit at this point on your ’09 numbers because of the dollar. Is that what you get?

John Heinmiller

Yes.

Mike Weinstein - JPMorgan

That’s yes, Sorry?

John Heinmiller

Yes, sorry.

Mike Weinstein - JPMorgan

Okay. So that's basically, if I back that out that basically implies with your current guidance the ex-currency if we think about organic EPS growth, we backed out the currency impact from the bottom line, that would get me to close to 17% EPS growth ex the currency impact to your bottom line. Is that a way to think about it or should we think about it more that you'll tighten the belt incrementally in 2009 because of the dollar, so don’t think of it as an organic 17% ex currency number?

Dan Starks

Michael, let me jump in here for John. Now we don't want to get pinned down to precise calculations, so I'm not going to say that the 17% organic EPS growth is the way we look at it, and that’s exactly the right way to look at it on the one hand. On the other hand, the way that you're thinking about it is directionally correct. And I think you're right, that there is that kind of strength in our organic EPS growth ex currency.

Mike Weinstein - JPMorgan

Okay. And so you understand what I'm doing, right? You're basically guiding to 7% to 9% EPS growth and are backing out the FX impact.

Dan Starks

Yeah I think you are right on track.

Mike Weinstein - JPMorgan

Dave let me turn to beyond 2009. If we think about the long-term growth of the company, I don’t want you front run too much since you are meeting in 10 days.

But you have successfully described your company as a double-digit top line and bottom line grower; you guided this year to come out to 10% to 14% organic growth ex the currency and ex the acquisitions.

Is that in your view still the sustainable growth profile of the company, a double-digit top line company with leverage to the bottom line?

Dan Starks

Yes. Absolutely.

Mike Weinstein - JPMorgan

Perfect. Great. Look forward to seeing you guys in 10 days.

Dan Starks

Thank you.

Operator

Our next question is coming from the line of Tao Levy with Deutsche Bank.

Tao Levy - Deutsche Bank

Good morning. Just not to be nitpicking, but you did increase your '09 guidance a little bit by a couple of pennies. Anything new in the moving parts versus what you guys talked about in early December?

Dan Starks

Really nothing new though. I think the message that we are doing our best to communicate is that the growth program that we have described to you in the past and to others in the past is on track, that we are executing it in accordance with our expectations.

And that as the prior question worked to clarify, we've continued to see on a constant currency basis a strong opportunity to continue delivering double-digit, top line and some leverage on a multi-year basis to the bottom-line growth.

Tao Levy - Deutsche Bank

Got you, okay. And where there any benefits in the quarter from acquisitions like EP MedSystems, did that add a lot John?

John Heinmiller

Did you say that it did add a lot?

Tao Levy - Deutsche Bank

Or a little bit in the quarter. I don’t know, because A-Fib now was a big number, and so you made one or two acquisitions in '08?

Dan Starks

Tao you’re exactly right. We closed on our acquisition of EP MedSystems in July of 2008. And I actually don’t remember the exact level of revenue at the point of our closing the annual revenue, it was modest, and so we did enjoy that modest contribution to our growth in the fourth quarter.

Keep in mind that as you’re looking at the fourth quarter, in particular, although there was modest contribution from EP MedSystems, I don’t think it would rise to a level of materiality, but there was modest contribution.

The reported sales growth in the fourth quarter for our broad AF and EP business was 33%, but the constant currency sales growth for that revenue in the fourth quarter was closer to 38%. So, really very strong dynamics and trend and momentum in the AF space coming into 2009.

Tao Levy - Deutsche Bank

Okay; and just my final question. When you look at your businesses in a whole and obviously given all the global economic headwinds; are there any areas that you’re paying a little bit more of attention to or maybe a little more vulnerable.

And I was thinking within EP lab investments, any of your mapping technologies or maybe consider a little more capital equipment intensive. So I was wondering, is there anything in any of your business that you feel again is a little bit more vulnerable?

Dan Starks

One value of the decentralized senior executive organizational structure they have here at St. Jude Medical is that, we can pay an intense level of attention to all parts of our business.

And we are doing that really going into 2009 and the same way that we have in the past. So there is not a part of the business that we are paying more attention to as a result of the macroeconomic dynamics.

And I think with respect to impact of macroeconomic dynamics on our business, we are not naive that a prolonged global recession can have impact on St. Jude Medical's business, and we describe ourselves as not recession-proof but recession-resistant. So we are not naive about the potential of impact from global economic factors.

But on the other hand, the fourth quarter was a pretty bad quarter from a global economic perspective and in the fourth quarter, we delivered our strongest constant currency revenue growth of the year.

Tao Levy - Deutsche Bank

So it seems like relatively stable going forward in this challenging environment.

Dan Starks

We have a lot of confidence moving into 2009.

Tao Levy - Deutsche Bank

Great. Thanks a lot.

Dan Starks

You're welcome.

Operator

Our next question is coming from the line of Larry Biegelsen with Wachovia.

Larry Biegelsen - Wachovia

Hi, Dan. Hi, everyone. Thanks for taking my question. First, help me understand. You said the constant currency growth rate in the fourth quarter for revenues was 14%.

You probably had about a 2% benefit or negative impact, I'm sorry, from the one-time benefit from Fidelis in the fourth quarter of '07. But you also had 66 selling days this quarter versus 61 last year. This quarter closed on January 3, and last year closed I think on the 29 of December. So that's about an 8% more selling days.

So if we think that it maybe was 8%, if we take all that together, about 8% growth constant currency. It would be useful to hear how you think about that, the increase in selling days this quarter? Thanks.

Dan Starks

Yeah, well Larry, I think the best way to get at that is to combine results across our third and fourth quarter and look at those trends versus the prior year, rather than work to make too much out of the fourth quarter in isolation that way.

Our math is a little bit different than yours, in the way that we think about the selling days. As we mentioned back a couple quarters ago, we operate with a 52 week, 53 week convention and several years we have a 53 week fiscal year. This was a 53 week fiscal year for us.

So there was an extra calendar week in our fiscal year, but we counted three extra selling days by our math in that extra week. And we didn't really know what to make of it by way of how to value those selling days.

Because two of those selling days were the Friday, were between Christmas and New Year on a Friday, and we really don't think that there was much business transacted on either of those two selling days.

So, we think there probably was one additional selling day from a meaningful perspective and we really don't know what to make of that. You see stable trend in market dynamics an stable trend in our continued growth.

Larry Biegelsen - Wachovia

And John if you strip out FX from the gross margin in 2008, and you look at the guidance for '09. Could you kind of give us an apples-to-apples to comparison. And I am just trying to understand if you are anticipating an improvement in the gross margin in '09 on a constant currency basis?

John Heinmiller

We do have an anticipation that we will continue do get some leverage on the gross profit line on a constant currency basis. So blended in there is some activities where we are expecting to get a benefit.

Larry Biegelsen - Wachovia

Thank you very much. That's all from me.

Dan Starks

Thank you. Next question.

Operator

Our next question is coming from the line of Kristen Stewart from Credit Suisse.

Kristen Stewart - Credit Suisse

Hi, thanks for taking my question.

Dan Starks

You're welcome.

Kristen Stewart - Credit Suisse

I was wondering if you could just render some of the one-time items in the quarter, particularly the one-time charge related to the remote monitoring that you will be [giving off], I guess with our charge.

Is that something that we should expect to continue? And I think a couple of your competitors include that in their ongoing results, so I made sure you excluded that, right?

Dan Starks

John, what can you say about the special charges in the fourth quarter?

John Heinmiller

Yeah I think they are detailed on the attached income statement to our press release. And as you point out, the one on remote monitoring, what we've got there are devices that have already been implanted where we are going to go back now and free of charge supply a monitor to those patients only and that's what's reflected there. So on an ongoing basis the future results will include on an operating basis those monitors.

Kristen Stewart - Credit Suisse

So on a go-forward basis you will be including the charges related that was just excluded this quarter.

John Heinmiller

Yes, just because the devices that the monitors are being supplied for had already been implanted.

Kristen Stewart - Credit Suisse

Okay. And then just on some of the impairment charges, what specifically were the write-down related to?

John Heinmiller

For example, where we had an intangible asset on our books related to our acquisition of Velocimed, and we took the position that we were going to terminate our Escape clinical trial in the PFO space, then that lead to an impairment charge on that asset. So it was really mostly just non-cash intangible asset that we were going through and making that assessment on.

Kristen Stewart - Credit Suisse

And then just last question is on the SG&A guidance of 35.5 to 36.5 as a percentage of sales. Can you give us a little color on what are some of the actions that you think will drive that lower to keep it.

It hasn't been below 36 in a number of years. I'm just curious if you're seeing greater productivity in your sales or if there's any cost reduction programs that are going to be implemented.

Dan Starks

Sure, Kristin, there is a lot there. So I'm not going to give you a crisp answer, but we have numerous cost reduction programs that we have been investing in on a multi-year basis, some of which I've touched on, and that have at the front end increased SG&A as an investment to position us to then leverage SG&A down.

The SAP implementation would be one example but that kind of program has been part of our focus on a regular basis, and so we have worked to calibrate everybody in what period are we increasing our investment either increasing our investment in field, sales and service, or increasing our investment with infrastructure projects including the SAP implementation.

We have other implementation projects like that that add up but in isolation aren't that large, and all with the idea that when the top line accommodates it and when our multiyear growth program accommodates it, we will expand investment and time that investment so that again when appropriate, we will begin to leverage it.

So, most of the SG&A expansion has been investment in global field and service coverage, and expanded investment in related marketing and expanded investment in infrastructure projects.

Kristen Stewart - Credit Suisse

Okay. Thanks very much.

Dan Starks

You're welcome. I think we have time for one more question.

Operator

Okay. The next question is from the line of Tim Lee with Piper Jaffray.

Tim Lee - Piper Jaffray

Yeah, thanks for taking the question, just getting here under the wire. Just following up on some of the earlier comments on or questions on the recession resistant comments; are you getting any anecdotal feedback from your clinicians across any of your product categories that you are seeing any type of deferral procedures by patients?

Dan Starks

Yes, Tim, I am going to hesitate to answer that just directly when you say any. I mean I don't doubt there must be anecdotes here and there in our global field organizations. I wouldn't necessarily know about those. So, I mean, literally answering your question on any, I can't, just too many data points.

Generally though, and in a meaningful way, and as we work to get reports from our global organizations on what do they see, and in my discussions with clinicians, they were really not seeing an impact. We are all worried about whether we will see an impact as the recession continues and depending on how long the recession continues, but we just haven’t seen it yet.

Tim Lee - Piper Jaffray

And thanks, and just one real quick one on the AF side; is there any difference in the growth rates between some of your diagnostic catheters and your therapeutics, or is it just strong growth across the board?

Dan Starks

Well, it is strong growth across the board. There are a number of components behind that strong growth across the board and I'm sure there are differences inside those components, but we are seeing strong growth across the board.

Tim Lee - Piper Jaffray

Okay. Thank you very much.

Dan Starks

You're welcome, and with that, our time is up. I would like to thank everybody for joining us and turn the call back to you Dennis to read your concluding comments.

Operator

Thank you, sir. Today's call has been recorded and will be available for replay beginning at 12 PM Eastern Time today. The US dial-in number is 800-642-1687 and the international number is 706-645-9291, and the pin number is 78357348. Thank you. This does conclude today's teleconference. Please disconnect your lines at this time.

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Source: St. Jude Medical Inc. Q4 2008 Earnings Call Transcript
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