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Executives

Jeff Warren - Vice President, Investor Relations

Omar Ishrak - Chairman and Chief Executive Officer

Gary Ellis - Chief Financial Officer

Mike Coyle - President, Cardiac and Vascular Group

Chris O’Connell - President, Restorative Therapies Group

Analysts

Matthew Dodd - Citigroup

Mike Weinstein - JPMorgan

Bob Hopkins - Bank of America

David Lewis - Morgan Stanley

Matt - Credit Suisse

Joanne Wuensch - BMO Capital Markets

Derrick Sung - Sanford Bernstein

Medtronic (MDT) F4Q 2013 Results Earnings Call May 21, 2013 8:00 AM ET

Operator

Hello, and welcome to today’s Medtronic’s Q4 earnings release conference call. [Operator instructions.] I would now like to turn today’s call over to your host, Jeff Warren, vice president of investor relations. Please go ahead, sir.

Jeff Warren

Thank you, operator. Good morning, and welcome to Medtronic’s fourth quarter conference call and webcast. During the next hour, Omar Ishrak, Medtronic’s chairman and chief executive officer; and Gary Ellis, Medtronic’s chief financial officer, will provide comments on the results of our fourth quarter fiscal year 2013, which ended April 26, 2013. After our prepared remarks, we will be happy to take your questions.

First, a few logistical comments. Earlier this morning, we issued a press release containing our financial statements and a revenue by business summary. You should also note that some of the statements made during this call maybe considered forward-looking statements and that actual results might differ materially from those projected in any forward-looking statement.

Additional information concerning factors that could cause actual results to differ is contained in our periodic reports filed with the SEC. Therefore, we do not undertake to update any forward-looking statement.

In addition, the reconciliations of any non-GAAP financial measures are available on the Investors portion of our website at medtronic.com. Finally, unless we say otherwise, references to quarterly or annual results, increasing or decreasing, are in comparison to the fourth quarter and full year 2013, respectively, and all year-over-year revenue growth rates are given on a constant currency basis.

With that, I am now pleased to turn the call over to Medtronic chairman and chief executive officer, Omar Ishrak.

Omar Ishrak

Good morning, and thank you, Jeff. And thank you to everyone for joining us today. This morning we reported fourth quarter revenue of $4.5 billion, which represents growth of 5%. Q4 non-GAAP earnings of $1.124 billion and diluted earnings per share of $1.10 increased 8% and 11%, respectively.

These results were a strong finish to a solid fiscal year, and more importantly, represented another step toward our goal of delivering consistent and dependable growth. Our performance was broad-based, with many businesses and geographies making significant contributions to our overall growth. In the second half of the fiscal year, we delivered 4.4% revenue growth, which was consistent with the model we shared at the beginning of the calendar year.

This quarter, our revenue exceeded our outlook, which contributed to a portion of the earnings upside, the details of which we will discuss later. We recognize that every quarter may not be a perfect fit on our trend line because of a variety of reasons, but the most important outcome for me is that we are establishing a track record of consistency. We’re still in the process of continuing to strengthen and geographically diversify our businesses so that we can reliably deliver balanced and consistent growth.

Looking back at FY13, I’m proud of the work that our approximately 4,500 employees around the world have accomplished. We improved our top line performance for the second consecutive year, delivering 5% growth, which exceeded our original revenue outlook. We maintained our market share in almost all of our businesses while delivering SG&A leverage. Our FY13 non-GAAP EPS grew 300 basis points [faster than] revenue, and we generated $4.4 billion in free cash flow.

And while these financial metrics are important, they come as a result of living our mission, partnering with our physician and administrative customers every day to bring our cost-effective and life-saving innovations to millions of patients around the globe.

Over the last several quarters, I’ve discussed the importance of stabilizing our U.S. ICD, U.S. Core Spine, and U.S. patient businesses, which represent nearly a quarter of our total revenue. Combined, these three businesses were flat in Q4, with two of the three businesses, U.S. ICD and U.S. Core Spine not only stabilizing but actually growing 2%. This is especially significant as Q4 was the first quarter in four and a half years where both of these businesses grew concurrently.

Gary will walk you through the details later, but this is noteworthy, especially since these businesses have been significant impediments to our overall growth profile. In fact, we’re optimistic that this stabilization will continue as we roll out our new products.

Earlier this month, we received FDA approval for our next generation [high powered] devices, and I was encouraged by the positive feedback I heard from customers on these products when I recently attended HRS.

U.S. pacing, however, declined 6% as the overall market continues to be affected by both lengthening replacement cycles and lower initial implant rates. While our U.S. pacing business was in line with the market, it is not recovering as [unintelligible] expected earlier this calendar year. This in clear contrast to the international pacing market, which is growing, and where we gained share.

Looking ahead, we believe our Advisa MRI pacemaker, which is doing extremely well in Japan and is now being introduced in the U.S., will lead to improved performance despite the slow market.

The remaining three quarters of our business continued to deliver solid performance, growing a combined 6% in Q4. In the cardiac and vascular group, we outperformed the market, driven by several areas of strength. In CRDM, the ongoing European launch of our new family of high powered devices and the second generation of [unintelligible] continues to go well. These products have led to sequential pricing and share improvement in Europe and our share is now at its highest level in over two years.

In pacing, our international business grew 13%, led by an outstanding performance in Japan. The Japanese market has clearly embraced our Advisa MRI product family, resulting in over 11 points of pacemaker share gains since launch.

In coronary, we grew by leading global stent share in the quarter, driven by the ongoing success of the Resolute Integrity drug eluting stent. Structural heart and endovascular also had very strong performances in Q4 as we continue to offer differentiated new technology in transcatheter valves, aortic stent grafts, peripheral vascular products, and cardiac surgery oxygen [unintelligible].

In many ways, our [CBG] organization strategy to continuously enhance the technology and economic value oriented service offerings, to streamline its customer presence, and to leverage its collective strength for value continues to be evaluated. This has meaningfully contributed to our ability to outperform the market in recent quarters. We’re taking our [CBG] approach even deeper, combining our CRDM and coronary U.S. district managers into a single cardiology-focused leadership structure that will better align our [CBG] solutions to the changing customer.

Now, let’s switch to the restorative therapies group, where our performance was equally impressive in Q4. In Core Spine, in addition to the growth in the U.S. that I mentioned earlier, we also continued to improve our share. We attribute the share gain to our new, innovative products and therapies across our spine portfolio. We’re also differentiating our spine business from the competition through enabling technologies from our surgical technologies business including imaging, navigation, and powered surgical instruments.

Hospitals are investing in our capital equipment for spine surgery as they see clear value from improved surgical precision and more efficient procedures. This shows up not only in increased revenue and share for our spinal implant, but also in the strong capital equipment performance in our surgical technologies business. We believe we’re still only on the leading edge of this large, differentiated opportunity in spine.

In [BMP], while our Q4 revenues declined 1%, it is encouraging to note that on a sequential basis this business has been relatively stable throughout FY13 after adjusting for bulk sales. We are awaiting the publication of systematic reviews of Infuse commissioned by Yale University’s Open Data Access Project. According to Yale’s public communication, the results are anticipated to be published in June.

In neuromodulation, both DBS and InterStim had strong performances as our consistent focus and market development and evidence generation is paying off. Surgical technologies delivered another outstanding quarter with advanced energy growing in excess of 20%. And neurosurgery, driven by continued adoption of imaging and navigation [unintelligible], posting double digit growth.

In diabetes, we had solid midteens international growth in Q4, where we have new products approved. In the U.S., however, the diabetes business continues to face near term pressure as we await FDA approval of our MiniMed 530G. In fact, U.S. diabetes, which contributes nearly $1 billion in revenue, did not growth in FY13. But we expect it to quickly return to faster growth once our new system is approved.

Let me now discuss our performance on a regional basis. The U.S. showed some encouraging signs, growing 3% in both the quarter and the year, representing the first full year of growth in the U.S. in three years.

In our international regions, revenue was up 7% again this quarter, driven principally by Japan and emerging markets. It is worth noting that our international regions have grown between 6% and 8% for 11 quarters in a row, which is the type of consistent and balanced performance that we are looking for across geographies.

In western Europe and Canada, we returned to growth again this quarter, an improvement from our decline last quarter, driven primarily by CRT-D products and CRDM. And while our results in Europe were better than last quarter, the market conditions across different businesses and countries remains complex.

Our team is navigating through these dynamics for potential growth opportunities using innovation as well as our breadth and scale to partner with different stakeholders. Looking ahead, however, we believe it is prudent to remain cautious about European expectations given these somewhat uncertain market conditions.

Japan had another strong quarter, up 19% in Q4, where a number of our newly launched products are driving growth. In addition to the Advisa MRI pacemaker I mentioned earlier, our Resolute Integrity DES gained 2 points of market share sequentially and our Endurant AAA and [unintelligible] Valiant Captivia thoracic stent grafts also posted strong growth.

In emerging markets, we grew 14%, driven by both central and eastern Europe as well as the Middle East and Africa, which both grew about 20%. Our emerging market results were in line with the expectations we communicated to you last quarter as we faced difficult comparisons from China due to the timing of the New Year holiday week.

In China, our integration of Kanghui is going well, with the business growing over 20% on a pro forma basis, offsetting our exit from the Weigao joint venture. We are excited about the long term value segment opportunity that Kanghui represents in the global orthopedics market.

Now let’s turn to our product pipeline, specifically our two largest midterm opportunities, the CoreValve transcatheter aortic valve and the Symplicity renal denervation system for treatment resistant hypertension. Both of these products are market leaders in Europe, and we are planning to launch them in the U.S. in FY15.

In the U.S. CoreValve pivotal trial, the last patient follow up is already complete in our extreme risk arm, and we will be complete in our high-risk arm this fall. Baseline patient demographic data will be presented at TVT this June. Extreme risk data will be presented in a late-breaker at TCT this fall, and the high-risk data is expected to be presented at ACC next spring. We have already submitted two of our [core modules] to the FDA, and are preparing for launch in the first half of FY15.

Turning to [unintelligible], we have made good progress in our U.S. clinical trial, and expect to complete the patient randomization soon. At this point, we’re expecting a late FY15 U.S. approval. It is also important to note that our Symplicity system was recently accepted into the FDA and CMS panel review pilot program, which allows CMS to begin consideration for national coverage determination while the FDA completes its regulatory review, a process that we expect to meaningfully reduce the time between FDA approval and full reimbursement.

In addition to our focus on top line growth drivers, we are also executing on both our product and SG&A cost reduction initiatives, which, combined with financial leverage from our share buybacks, will help us achieve our goal of growing earnings per share of 200 to 400 basis points faster than revenue. After successfully reducing product cost by $1 billion from FY07 to FY12, we are now [unintelligible] into our new product cost reduction initiative that is focused on taking out an additional $1.2 billion in product cost through FY17.

This program is important not only to maintain our gross margins by offsetting pricing pressure, but also to fuel the development of [tiered] products, which are essential to creating new value segment opportunities.

Included in our results this quarter is a restructuring charge of which nearly half of the planned position reductions are related to manufacturing consolidation efforts. We also continue to reduce headcount in slow-growing businesses and geographies. These are never easy decisions, but are necessary in order to increase investment in our faster-growing opportunities.

We’re also making progress in our plans to increase our U.S. cash flow through working capital improvements and have set a goal of increasing our inventory turns by 50% by FY17. In FY13, the first year of our five-year inventory improvement program, we improved our inventory [unintelligible] by 7%. Not only programs instill good fiscal discipline, but they ultimately strengthen our already robust levels of free cash flow genomes.

Over the next five years, we conservatively expect to generate over $25 billion of free cash flow and remain committed to returning 50% of this to our shareholders through dividends and share repurchases. We believe this level of commitment is appropriate given our current [unintelligible] of U.S. and international free cash flow. The remaining 50% gives us the flexibility to make the necessary investments for sustainable growth.

We are, and will continue to be, very disciplined in how we deploy this capital, with a strong focus on returns. We expect any M&A transaction to surpass our mid-teens risk-adjusted [unintelligible] rate and we do not expect these investments to be dilutive to shareholder EPS growth expectations.

As we look ahead to FY14, we remain focused on building credibility and a track record of delivering on our baseline expectations. Gary will discuss our revenue outlook and EPS guidance in a moment, but I would like to discuss a few more of the more important drivers we see in FY14.

On the positive side, we should continue to see traction from our new products. We should also see our momentum in emerging markets continue as we remove barriers to access, build [unintelligible] awareness, and expand our training programs. In developed markets, we’re expecting continued strength in Japan, especially in the beginning of the year. In the U.S., we are planning for continued stabilization in key markets while in western Europe, we remain cautious as we go into FY14.

Resolution of a number of critical regulatory issues is a priority for us in FY14. Specifically, the neuromodulation business is under an FDA warning letter, and we continue to work closely with the FDA to resolve the issues. In addition, the FDA recently identified, in an audit of our diabetes business, some deficiencies related to our insulin pump quality systems. And we’ve already begun instituting changes and actions in resolving these issues.

I take these quality compliance issues very seriously, and we are working hard to make sure we’re devoting whatever time and resources are necessary to resolve these issues quickly. Ensuring the highest level of quality and regulatory compliance has, and always will be, a personal priority for me and a central focus of everything we do at Medtronic.

We view FY14 as a pivotal year, as we not only make progress on delivering our transcatheter valve and renal denervation programs to the U.S. in FY15 but also begin to execute on transformational opportunities that we believe will establish durability in our long term performance and create potential upside to our baseline.

Our first long term transformational opportunity is accelerating globalization, particularly in emerging markets. There is a significant opportunity to deepen the penetration of our existing therapies where pricing and margins are comparable to developed markets. To realize this opportunity, we’re investing in joint programs with a variety of stakeholders to overcome barriers in the areas of [unintelligible] diagnosis infrastructure and training.

Through these activities, we’re also creating the necessary infrastructure and solutions to participate in the next wave of growth in the developing value segment. We intend to be a global leader in this segment, and our recent investments in Kanghui and LifeTech are key initial steps toward this goal.

Not only do we believe that a tiered product portfolio will sustain our emerging market growth over the long term, we also believe that it will benefit our developed market businesses through reverse innovation as an increasing number of developed market customers seek value options over time.

Our other transformational opportunity is to systematically address the economic value needs of our customers and other stakeholders. In the changing [unintelligible] environment, where payment models and customers are evolving, we believe that successfully addressing the growing importance of economic value considerations while still delivering clinical value will position us as the premier global medical technology solutions partner, creating value for healthcare systems around the world.

In general, our industry has been slow to adapt to this changing landscape, which I believe has led to increased pricing pressure and ultimately slow market growth. Whereas in the past, physicians alone were the ones who were making purchasing decisions, increasingly other stakeholders are influencing or making those decisions. Thus, medical technology innovation must evolve to meet the needs of a broader set of stakeholders, proven through both clinical as well as compelling economic evidence.

Ultimately, we must drive to not only improve patients’ lives, but also ensure that the overall healthcare ecosystem remains viable. This is an important shift in our focus, one that will enable us to be leaders in the new, emerging global healthcare landscape.

Let me also share with you why we believe we are uniquely positioned to increase our competitive advantage in this new environment. We have a number of key strengths: our market leading products, our in-hospital footprint around the world, our healthcare economics expertise and [unintelligible] resources, and our strong financial position. Together, this gives us unprecedented breadth, global reach and scale, and collectively these strengths will further differentiate Medtronic.

Finally, over the past year, we have been testing, piloting, and implementing a variety of programs to demonstrate economic value in new and interesting ways around the globe. And in the coming quarters, you’ll see an increase in the number of examples of [unintelligible] at work.

Ultimately, our goal is to be more than just a device provider, but rather the premier global technology solutions partner. Let me now ask Gary to take you through a more detailed look at our results before we take any questions. Gary?

Gary Ellis

Thanks, Omar. Fourth quarter revenue of $4.459 billion increased 4% as reported and 5% on a constant currency basis after adjusting for our $48 million unfavorable impact of foreign currency.

Q4 revenue results by region were as follows. Growth in central and eastern Europe was 24%. The Middle East and Africa grew 21%. Growth in Latin America was 18%. Asia-Pacific grew 13%, including 19% growth in Japan. Growth in greater China was 10%. South Asia grew 6%. And the growth in the U.S. was 3% while western Europe and Canada grew 1%.

The emerging markets were up a combined 14% in Q4, and represented 12% of our total sales mix. Our Q4 emerging market and greater China growth was negatively affected by difficult comparisons due to the timing of the Chinese New Year.

Excluding this impact, we estimate that our emerging markets and greater China business grew in the mid to high teens. Looking ahead, we would expect emerging markets to consistently grow in the high teens. As we address the barriers and work with stakeholders our goal is to ultimately drive 20% growth in the emerging markets.

Q4 earnings and diluted earnings per share on a non-GAAP basis were $1.124 billion and $1.10, an increase of 8% and 11% respectively. Q4 GAAP earnings and diluted earnings per share were $969 million and $0.95, a decrease of 2% and an increase of 1% respectively as the prior year’s GAAP numbers included the gain on the sale of our Physio-Control business unit.

This quarter’s non-GAAP pre-tax adjustments included a $5 million gain associated with the acquisition-related items and a $182 million net restructuring charge that is largely driven by the planned reduction of approximately 2,000 physicians, which predominantly took place in CBG and spine.

From a geographic perspective, about half of these reductions were located outside the United States. In addition, nearly half of the reductions are related to manufacturing and consolidated efforts as we continue to focus on reducing product costs. This restructuring is expected to result in approximately $200 million to $225 million in annual savings.

In our cardiac and vascular group, revenue of $2.342 billion grew 5%. Growth was broad-based, with all of our [CVV] businesses making contributions. CRDM revenue of $1.332 billion grew 4%. Worldwide ICD revenue of $755 million grew 2%, which was significantly better than the market, which we estimate declined 1%.

Our shock reduction and lead integrity alert technologies, combined with proven long term lead performance, continued to receive strong market acceptance. In the U.S., our ICD revenue grew 2%, and we continue to see market stabilization.

We estimate we gained over 100 basis points of share over the past year. Our lead [unintelligible] ratio continued to increase sequentially and is at the highest point in several years.

Our ICD implant volumes were sequentially stable for the fourth quarter in a row. At the same time, our U.S. ICD pricing improved modestly on a sequential basis, declining 3% year over year. This was the first quarter in several years where we have seen a sequential improvement in our pricing.

As we look ahead, we are launching our next generation of high powered devices in the U.S. this month. Our Viva/Brava CRT-D family, with our proprietary adaptive CRT algorithm, significantly reduces RV pacing and improves response rates to CRT therapy, resulting in improved device longevity and a reduction in heart failure hospitalizations.

In addition, both the Viva/Brava CRT-D and the Evera ICD contain the hand shock reduction algorithm, battery and circuit design improvements to extend device longevity, and an improved physio curve design, which meaningfully reduces device size and enhances patient comfort.

Patient revenue of $505 million grew 5%, outperforming the global market by over 500 basis points as we gain share on both a year over year basis and sequentially. Our international pacing business grew 13%, driven by strong customer demand for the Advisa MRI pacemaker in Japan.

AF grew over 20%, driven by over 30% growth of our Arctic Front Advance cryoballoon system with EvenCool Cryo Technology as customers continue to adopt this second-generation system because it offers a more efficient, safe, and effective treatment for paroxysmal AF.

Coronary revenue of $465 million grew 5%. Worldwide [DES] revenue in the quarter was $290 million, including $107 million in the U.S. and $29 million in Japan. Resolute Integrity’s deliverability, recent positive data regarding early dual antiplatelet therapy interruption, unique FDA labeling for diabetes, and long term clinical performance is receiving strong customer acceptance globally, despite competitive product launches of next generation platform iterations.

While we have now anniversaried the initial launch of Resolute Integrity in the U.S., this quarter we received FDA approval for longer lengths of this product, and we continue to benefit from the launch in Japan.

In fact, Resolute Integrity continues to gain share in markets around the world. We gained nearly 2 points of share sequentially in the U.S., 2 points of share sequentially in Japan, and 3 points of share in Europe.

In renal denervation, while Q4 revenue was modest, physician interest and acceptance of this therapy continues to grow, and the long term outlook for this opportunity in hypertension remains robust. We are investing in developing referral networks, reimbursement, clinical and economic evidence, and technology development to further strengthen our leadership position.

This summer, we anticipate CE mark for our Symplicity Spiral multi-electrode catheter, which will reduce ablation times from the current 16 to 24 minutes down to only 2 minutes, and all through a very small six-branch catheter. Results from our first in-human trial for spiral, as well as the first data set from our global Symplicity registry, will be presented at [unintelligible] later this week.

Also on the clinical front, we submitted our IDE to the FDA for Symplicity HTN-4, which is focused on expanding the indication to include uncontrolled hypertension patients with systolic pressure between 100 and 160 mm of mercury. We believe our technology, strong clinical data, market development efforts, and pioneering IP position represent a large, multi-billion dollar opportunity in renal denervation.

In structural heart, revenue of $310 million increased 8%, including mid-teens growth in transcatheter valves. We estimate the international transcatheter valve market grew approximately 10%. Our CoreValve and CoreValve Evolut devices continue to have leading share in the international transfemoral market.

In Q4, we successfully launched our Engager valve in Europe, our first entry into the transapical segment, which represents approximately 20% of the European TAVI market. One-year data from our CoreValve ADVANCE study was just presented at EuroPCR this morning.

In this rigorous, real-world study, CoreValve’s survival rates are among the highest ever reported. Stroke rate is low and stable, and CoreValve demonstrates exceptional, stable hemodynamic performance. 30-day results from our Engager European pivotal trial were also just presented at EuroPCR, demonstrating high procedural success and exceptional PVL performance.

Our U.S. CoreValve pivotal trial enrollment is complete, though we continue to enroll patients through both the continued access program and our expanded use registry. We also continue to invest in next-generation technology. We have submitted for CE mark for a valve in valve indication as well as for our [envail] delivery system. We also expect to do the first in-human implant of our Evolut-R recapturable TAVI system in the summer.

In endovascular, revenue of $235 million grew 10%, with solid growth in both our aortic and peripheral businesses. In aortic, we continue to see strong growth in Endurant in Japan, and we expect to launch Endurant in Japan in Q1. In the U.S., we’ve increased our share sequentially this quarter with Endurant II. Our thoracic business grew over 25% on the strength of Valiant Captivia in the U.S. and international markets.

In peripheral, our market leading drug eluting balloon business posted strong double-digit growth. We continue to make rapid progress in our U.S. drug eluting balloon pivotal trial for an SFA indication, and we expect a U.S. market launch of this important therapy in the first half of FY16.

Now turning to the restorative therapies group, revenue of $2.117 billion grew 4%. Results was driven by growth in surgical technologies, neuromodulation, and diabetes. Spine revenue of $811 million was flat, both globally and in the U.S. Core spine revenue of $671 million was flat globally and grew 1% in the U.S..

Excluding [BCP], our core spine business grew 2% globally and grew 3% in the U.S., outperforming the U.S. markets as we gain share on both a sequential and year over year basis. In fact, we estimate our U.S. core spine share increased 2 percentage points in FY13. Our Solera posterior fixation system, Bryan artificial cervical disk, Atlantis Vision Elite cervical plate, and [ANP] interbody devices all drove incremental revenue in Q4.

U.S. market fundamentals remain relatively stable, with low single digit price mix declines and flat procedure volumes. Surgical technologies revenue of $407 million grew 11%, driven by double-digit growth in neurosurgery and advanced energy. Neurosurgery performance was driven by sales of large capital equipment, including O-arm imaging and StealthStation surgical navigation systems.

In addition, sales of Midas Rex powered surgical equipment and service revenue drove growth. In advanced energy, strong double-digit growth of both Aquamantys bipolar sealers and PEAK PlasmaBlade electrosurgical products drove results. We also added additional advanced energy sales reps to capitalize on the strong growth in this business. In ENT, our business continues to contribute solid and consistent mid single digit growth.

Turning to neuromodulation, revenue of $492 million increased 7%. These results were driven by strong global growth in DBS and gastro uro. In DBS, we had another strong quarter of double-digit growth in both the U.S. and international markets, as we continue to focus on building neurologist referral networks. This targeted training and education is raising awareness of the therapy and resulting in double digit new implant growth, which is encouraging for the long term health of this business.

Gastro uro also [unintelligible] in Q4, driven by sales of InterStim therapy. In western Europe, InterStim grew over 20% and in the U.S. we are seeing solid adoption of InterStim therapy for bowel control.

In [unintelligible] continues to drive growth and share gains in the U.S. In western Europe, growth continues to be driven by the acceptance of our SureScan MRI spinal cord stimulation systems, the only system with CE mark approval for full body MRI scans.

Diabetes revenue of $407 million grew 4%. In international markets, growth was 14%, as we continue to see strong adoption of the [unintelligible] pump with low glucose [unintelligible] and [unintelligible] CGM sensing. In the U.S., revenue declined 2% as customers anticipate FDA approval of the U.S. version of this pump and sensor, branded the MiniMed 530G.

We have now deferred $23 million of revenue, including $14 million in Q4, as we plan to convert some of the recently sold pumps to the new technology when approved. We look forward to the presentation of the results of the in-home portion of ASPIRE, our randomized trial evaluating the safety and efficacy of the Threshold Suspend automation feature and our sensor-augmented pumps.

Looking at our pipeline, we started the first user evaluations of our next generation pump platform, the MiniMed 640G, and expect to launch it in international markets in the first half of FY14. We have also submitted our next-generation sensor, the Enlite II, for CE mark approval.

Turning to the rest of the income statement, the Q4 gross margin was 74.6%. After adjusting for the $10 million non-GAAP adjustment from the restructuring charge, as well as the 30 basis point negative impact from foreign exchange, the Q4 gross margin on a non-GAAP operational basis was 75.1%, which was below our expectations.

However, it is important to note that this was not due to pricing pressure, as our standard gross margin was flat year over year as we continue to successfully offset pricing pressure through our cost of goods sold reduction program. Rather, the variance in our expectations was driven by other product costs, where our higher than expected financial results triggered a catch up in [unintelligible] expenses that negatively affected the gross margin by 30 basis points. Excluding these items, our Q4 gross margin was 75.4%.

It is also worth noting that our gross margin includes additional spending related to the resources diverted to address quality issues in neuromodulation in diabetes, which negatively affected gross margin by approximately 20 basis points. Looking ahead, we would expect the gross margin for fiscal year 2014 to be in the range of of 75% to 75.5% on an operational basis.

Third quarter R&D spending of $409 million was 9.2% of revenue. We continue to invest in new technologies and evidence creation to drive future growth. For FY13, R&D expense was 9.4% of revenue. We would expect R&D expense in fiscal year 2014 to be somewhat less, around 9%, due to the tradeoffs we are making to partially offset the device tax as well as shifting R&D resources to resolve pending quality issues, which gets recognized in cost of goods sold.

Third quarter SG&A expenditures of $1.475 billion represented 33.1% of sales. After adjusting for the 10 basis point negative impact from foreign exchange, Q4 SG&A was 33%. In FY13, we delivered 40 basis points of SG&A leverage, achieving a goal we set at the beginning of the year.

We continue to focus on several initiatives to leverage our expenses. In FY14, we expect to drive an additional 30 to 50 basis points of improvement, which would result in SG&A in the range of 33.8% to 34% on an operational basis. And it is worth mentioning that we typically see most of our level in the fourth quarter.

Amortization expense for the quarter was $84 million. This came in slightly less than the outlook given on our Q3 call, due to the writeoff of certain intangibles. For FY14, we would expect amortization expense to be approximately $85 million per quarter.

Net other expense for the quarter was $12 million of income, which was more favorable than our original forecast, primarily due to three factors. First, the Puerto Rico excise tax was less than expected due to a lowering of the rate during the quarter. Second, we received income from a litigation settlement with NuVasive, although it is important to note that the majority of our litigation against NuVasive is still unresolved.

And third, fluctuations in foreign currency resulted in greater gains from our hedging program. As you know, we hedge our operating results to reduce volatility in our earnings from foreign exchange. In Q4, net gains from our hedging program were $21 million.

Based on current exchange rates, we expect FY14 net other expense to be in the range of of $150 million to $190 million, which includes an expected $120 million impact from the U.S. medical device tax. For Q1 FY14, we expect net other expense to be in the range of of $55 million to $65 million, based on current exchange rates.

Net interest expense for the quarter was $48 million. Excluding the $21 million noncash charge for convertible debt interest expense, non-GAAP net interest expense was $27 million. At the end of Q4, we had approximately $11.1 billion in cash and cash investments, and $10.7 billion in debt after issuing $3 billion of senior notes in March and repaying $2.2 billion of convertible debt in April.

It is worth noting that we no longer have convertible debt outstanding, and going forward the non-GAAP adjustment will not be applicable, which results in a difficult comparison for the next four quarters. Based on current rates, we would expect FY14 net interest expense to be in the range of of $150 million to $160 million, a level that is more comparable to our FY13 GAAP net interest expense.

It is also worth noting that at the end of Q4, we changed our time principle for classifying our investments on the balance sheet. Our preferred method is now based on the nature of our investment liquidity instead of the stated maturity date. To conform the prior period balances to this new methodology, approximately $6.8 billion of investments have been reclassified from long term investments to current assets as of April 27, 2012.

In Q4, we generated over $1 billion in free cash flow, bringing our FY13 free cash flow to $4.4 billion. We are committed to returning 50% of our free cash flow to shareholders. In FY13, we have paid over $1 billion in dividends and repurchased over $1.2 billion of our common stock. As of the end of Q4, we had remaining authorization to repurchase approximately 27 million shares. Fourth quarter average shares outstanding on a diluted basis were 1.023 billion shares.

For Q1, we would expect diluted weighted shares outstanding to decline by approximately 8 million shares and for the full fiscal year 2014 we would expect diluted weighted shares outstanding to be approximately 1.008 billion shares.

Now let’s turn to our tax rate. Our effective tax rate in the fourth quarter was 16%. Excluding the impact of one-time items, our adjusted non-GAAP nominal tax rate in the fourth quarter was 16.9%. Included in this rate is a $43 million net tax benefit associated with the finalization of certain foreign tax returns, reversal of a valuation allowance, and the tax impact of certain foreign dividend distributions.

Excluding the impact on one-time items, our FY13 adjusted non-GAAP nominal tax rate was 18.3%. For FY14, we expect an adjusted non-GAAP nominal tax rate in the range of 19% to 20%.

Let me conclude by providing our initial fiscal year 2014 revenue outlook and earnings per share guidance. We were pleased by our improved performance in FY13, and growth in our end markets has been relatively stable. Based on this, we believe that constant currency revenue growth of 3% to 4%, which is consistent with the revenue outlook we had in fiscal 2013, remains reasonable for fiscal year 2014.

While we cannot predict the impact of currency movements to give you a sense of the FX impact, if the exchange rates were to remain similar to yesterday for the reminder of the fiscal year, then our FY14 would be negatively affected by approximately $240 million to $280 million, including a negative $45 million to $55 million impact in Q1.

Turning to guidance on the bottom line, based on the expected constant currency revenue growth of 3% to 4%, we believe it is reasonable to model earnings per share in the range of $3.80 to $3.85. When evaluating this range on an operational basis, it is important to keep in mind the one-time tax benefits that we received in FY13 as well as the headwinds from the medical device tax and incremental interest expense in FY14. Taking these adjustments into account, earnings per share of $3.80 to $3.85 would imply growth of 6% to 8% on an operational basis.

As in the past, my comments and guidance do not include any unusual charges or changes that might occur during the fiscal year. I will now turn it back over to Omar, who will conclude our prepared remarks. Omar?

Omar Ishrak

Thanks, Gary. Before I open the lines for Q&A, let me conclude by reiterating that our broad-based Q4 growth was a strong finish to a solid fiscal year, and represented another quarter [unintelligible] toward our goal of delivering consistent and dependable growth.

We are still early in the process of strengthening and geographically diversifying our business in order to deliver this performance reliably. There are still areas of uncertainty that are reflected in the guidance we are giving for FY14. However, we intend to execute in areas we can control, including growing our market and building our business so that it is strong enough to offset the variables that are beyond our control.

And over time, we aim to reliably deliver on our baseline expectations, which are consistent with [unintelligible] revenue growth, consistent EPS growth of 200 to 400 basis points faster than revenue and returning 50% of our free cash flow to shareholders.

At the same time, we are positioning Medtronic to play a leading role in transforming global healthcare by addressing the long term imperatives of economic value and globalization. We are only at the beginning of establishing our track record, but we believe the [unintelligible] execution of both our baseline and long term growth strategies, combined with strong and disciplined capital allocation, will enable us to create long term, dependable value in healthcare.

With that, we would now like to open the phones for Q&A. In addition to Gary, I’ve asked Mike Coyle, president of our cardiac and vascular group, and Chris O’Connell, president of our restorative therapies group, to join us again for the Q&A session.

We’re rarely able to get to everyone’s questions, so we respectfully request that you limit yourself to only one question, and if necessary, one follow up, so that we can get to as many people as possible. If you have additional questions, please contact our investor relations team after the call. Operator, first question please.

Question-and-Answer Session

Operator

[Operator instructions.] Your first question comes from the line of Matthew Dodd with Citigroup.

Matthew Dodd - Citigroup

Emerging markets was up 14%. Sounds like if you make a few minor adjustments maybe 15% to 17%. But it’s below your plan of 20%-plus, and when we look at fiscal ’14, do you think 20%-plus is still reasonable for emerging markets? Or is 15% to 20% more reasonable just based on what you think the markets are growing?

Omar Ishrak

Twenty is certainly the number that we stated, but it’s a number to work towards. And that’s certainly going to be our goal. But I think 15% to 20%, if you were going to pick between the two, I would say 15% to 20% is probably a more realistic outlook. But I’m holding all the regions accountable to try to get to 20%. There are barriers here that we have to overcome that are taking perhaps a little longer than we originally anticipated. So that’s what I would say on that.

Matthew Dodd - Citigroup

And then Gary, quick one for you, I know you don’t like giving quarterly guidance, but if you look at the first call progression, is the $0.90 for Q1 reasonable? Or should we think about more of a ramp as we go through the year?

Gary Ellis

As you said, we don’t like to give quarterly guidance. But as we highlighted on our expectations, the $3.80 to $3.85 obviously includes some operational headwinds we’re dealing with, the interest expense, the medical device tax, for example. And if you take those into account, I think the $0.90 right now is indicating like a 6% to 7% growth in earnings per share, which would be basically not including that medical device tax and interest expense, [unintelligible] on the modeling.

Right now my guess is that if you looked at it, [DSI] probably would see a shift. I think as you update your models, you’ll probably be shifting a couple of cents from Q1 to Q4. But in general, that guidance we gave should really kind of [unintelligible] across all of the quarters as we go forward. So I think the number currently in Q1 is probably a little bit high as people take a look at their models.

Operator

Your next question comes from the line of Mike Weinstein of JPMorgan.

Mike Weinstein - JPMorgan

If I look at the U.S. business, it’s your best quarter in three years, maybe even a little bit more than that. One way we’re looking at it, as we try to wade through the anniversary of the Resolute launch, is that if we looked at it ex-Resolute, it’s also you’re best quarter in a few years. So the one question probably everybody has is repeatability. And so if you could just talk about, in particular, the performance in the CRM business this quarter in the U.S. and whether you feel like that’s a sustainable number, or if there was anything that really pushed it at the end of the quarter.

Omar Ishrak

I think we’ve certainly seen signs of end markets stabilizing to some degree. But there are many dynamics here, including the ability to launch new products, and some Resolute share gain in this. And I’m going to ask Mike Coyle to really take this one, because [unintelligible] is obviously driving it.

Michael Coyle

We’re obviously on the front end of a pretty robust new product introduction cycle here in the U.S., with the Advisa MRI in the early part of the quarter, but really starting to have impact on the back end of the quarter. And we’ll be just heading into our high power new product introductions with both the Viva/Brava system here in the CRT-D segment and then the Evera device system as well.

So that’s really the thing that’s giving us the catalyst, not only in terms of market share, but also giving us some cover for the pricing pressure, not just because of these high-end technologies, but now we have multiple tiers to deal with, competitive pricing dynamics. So those are the primary drivers.

And as you saw, we’re also continuing to take market share in the DES segment with Resolute Integrity and we’re seeing channel strength across the businesses, across [EVG], so I think we’re really getting some benefit, principally as we’ve talked about before, from the shift over to CRDM, picking up the ball here from what Resolute Integrity has been providing us over the last fiscal year.

Mike Weinstein - JPMorgan

Let me try and cover a few items you covered on the call really quickly. One, you said you expect CoreValve approval in the U.S. in the first half of FY15. The question there is have you gotten signoff from the FDA to separate the two cohorts and submit the [extremers] cohort early. And then second question is on the commentary around the FDA and the insulin pump quality systems, it sounds like that’s going to impact the timing of 530G approval. Can you just give us some insight there?

Omar Ishrak

Let me quickly take on the diabetes question, then I’ll ask Mike to provide the answer for the CoreValve. In terms of diabetes, clearly until we get approval it’s not going to get launched. And so that does affect the timing to some degree. We’re planning for it within the calendar year. I think that’s the best I can tell you right now.

We’re working closely with the FDA and doing everything we can to ensure that the quality systems are compliant, and per the requirements. And in addition, we’re working with them on any other needs that they may have for the approval itself. So the best I can tell you is that we’re still looking at it for the calendar year. When exactly, it’s impossible for me to estimate.

Mike Coyle

And on the CoreValve IDE, nothing really has changed. We’ve completed the enrollment phase and the extreme risk side, and completed the follow up phase in the extreme risk side. High risk, we will be finishing up in the coming quarters. At this stage, we are viewing those as being submitted modularly, but planning for them to be reviewed together. And if that changes based on what the data looks like, then we will communicate that.

Mike Weinstein - JPMorgan

And Mike, just so I’m clear on that, if the FDA waits for the high-risk arm in order to review it, then it’s unlikely you would have approval in the first half of FY15?

Mike Coyle

We see a path to getting there that way, but it would certainly be much more difficult.

Operator

Your next question comes from Bob Hopkins, Bank of America.

Bob Hopkins - Bank of America

I just want to follow up on some of the things that have been asked about here, with the theme of the pipeline. Can you give us a sense as to when we’ll see the results of your U.S. trial for renal denervation in the United States? Should I assume maybe ACC or PCR of 2014?

Mike Coyle

For renal denervation, we’re obviously in the process of completing the enrollment and randomization phase. We would think we would be looking late in the fiscal year before we would see those data being recorded with complete follow up.

Bob Hopkins - Bank of America

So that would put you at about ACC or PCR, correct?

Mike Coyle

At this stage, it’s a little early to tell. It would be late in the fiscal year.

Bob Hopkins - Bank of America

And then just a follow up on CRM and the drivers of your share gain, and what you assume in fiscal year ’14, just to be specific, as you put together your fiscal year 2014 guidance, do you assume that you’re going to be able to continue to take share at the pace that you’re taking it currently?

Omar Ishrak

Well, I think share gain is an important factor here, because our end markets are clearly not growing at the rate we’re growing. And so again, I’ll let Mike give some color to that, but that’s certainly in our consideration.

Mike Coyle

There are multiple factors that I think are going to help us drive market share capture. Obviously the Advisa MRI in Japan we’re going to continue to get benefit of that until the anniversary. The Advisa MRI launch here in the U.S. [unintelligible] really in the second half of Q4, so we will have the benefits of both the price premium we have gotten there, as well as the ability to take share and initials and to use the broader product range we have to deal with pricing pressure, which we think will help us in our share position overall.

In Europe, the Viva/Brava launch has really been very well received. It’s not just the fact that our Adapta CRT technology is really the first feature that has actually been able to show increase in CRT response, but it’s also addressing reductions in heart failure hospitalization which is a hot button, both in Europe and in the U.S.

In addition, the Attain Performa lead obviously gives us our first quadripolar lead in the marketplace and we think is offering, from physician feedback we’ve received, significant advantage over competitive product in terms of the narrow dipole giving us an opportunity to have lower phrenic nerve stimulation as well as the use of the [unintelligible] Express algorithm, which automatically adjust for what the physician adjust for, the LV capture thresholds in the lead impedance.

So these are giving us ASP increases as well as the opportunity to take share in Europe, and we will have the Viva/Brava system without the Attain Peforma lead in the U.S. for most of the year. And then obviously we have not even begun the launch of the Evera product line, which gives us size and longevity advantages which we think will help us in the standard CRT segment. Not to mention that we’ve also been growing north of 20% in the AF segment, because of the cryo advance technology, our Arctic Front Advance technology.

So we think we have a number of ways to continue to take share in that segment, and we think that will be an important part of getting to the guidance we’ve given.

Gary Ellis

Just quickly, if you think about it, our end markets are kind of growing in a 2-3% range overall. Our guidance of 3-4% says that we will continue to outperform the market in FY14. That doesn’t assume at the level we did in FY13. If we performed at the levels we did in FY13, we’d probably even exceed our guidance. So there is some assumption in our guidance that we gave for the revenue that assumes that we basically continue to gain share and outperform the market, across all businesses, not just CRDM.

Operator

Your next question comes from David Lewis with Morgan Stanley

David Lewis - Morgan Stanley

Omar, obviously a lot of focus on the call today on the pipeline, and FY15 is looking like one of the most interesting pipeline years for the company in terms of catalyst. But a lot of that traction with the pipeline may occur late FY15 into FY16. I just wonder, if you think about the timing of that pipeline, over the next 18 months, do you feel comfortable with your organic growth? Or is this a period where Medtronic looks to maybe supplement this sort of gap period, 12-18 months, externally, or with M&A?

Omar Ishrak

M&A is always a possibility. But in our guidance, our planning right now, we haven’t [received] anything concrete, although things can happen. Really our formula here is to attempt to repeat what we had over the last 12 months. And therefore, we’ve kind of kept the guidance where it was earlier this year. And agree that some of the products have anniversaried, but we’ve seen enough new product activity that we feel there’s enough reason for us to expect to repeat the year, or at least meeting the guidance that we just stated.

You know, there are many issues here that we’ve got to overcome. The markets are still uncertain. Europe, as you’ve seen, was down last quarter, up this quarter, and it’s somewhat volatile. We’ve got these approvals of some of these products, where the timing is uncertain. So there are pressures. We’re just assuming that the amount of new product activity that we’ve seen across the board, and there’s a lot of that, is enough to offset those.

So that’s really all I can say, and we’ve got to work through the next 18 months and [unintelligible]. This is a balanced look and we’ve got to work towards achieving it. But it’s a level of execution that I want this team to be able to deliver on.

David Lewis - Morgan Stanley

And then Gary, maybe just a quantification. You talked a lot about what’s embedded in broader guidance, specifically CRM. If you look to spine, obviously another encouraging quarter. Can you just talk about what you think you saw across the balance of the year in terms of spine market share? What’s the expectation for fiscal ’14? And is there any embedded expectation of acceleration if the June results with BMP are positive?

Gary Ellis

The answer is no, we’re not expecting, from the June results necessarily, any uplift from, for example, [unintelligible], any growth there. But as we did highlight in the call, [unintelligible]’s testing has stabilized a little bit, which is obviously minimizing the drag that we had on the overall spinal business, starting to become a little bit less as we go forward, as we’ve anniversaried that product, falling off. But the reality is, the other core spine business, with all the new products we’ve been launching, continues to gain share, and as I indicated in the call, we’ve picked up a couple of points of share here in FY13 on the core spinal business, with AMT, with Solera, some of these new products, and we expect that to continue as we go forward, that we will continue to gain share. I’ll let Chris expand on that.

Chris O’Connell

That’s right, Gary. I think the spine story is very consistent with what we’ve talked about in the past, that our relative performance in the market is steadily increasing, and we’re clearly in share capture mode at this point in time. We have the bulk of our Solera systems in the market and that’s really driving our overall growth.

But as Gary pointed out, we’ve added new technologies into the mix, like the Bryan cervical disk in the U.S., where we’ve now doubled our modest market share from 5% to 10% in that category just six months after launch, where we have new AMT and body devices into the market. But also, what’s really driving our spine business is the use of enabling technologies like imaging and navigation. Our O-arm imaging business is up in the 30% range this year, and where we have O-arms placed in key accounts, we’re seeing up to 10 points higher growth in our core spine business.

So we’re getting more and more traction in terms of combining some of our unique surgical capabilities on imaging navigation, power monitoring, etc. to drive our overall spine implant business, which is really helping customers achieve their goals.

Operator

Your next question comes from Bruce Nudell, Credit Suisse.

Matt - Credit Suisse

Hey, this is Matt in for Bruce. You mentioned cost uncertainties in Europe, and I wondered if you could talk about, relative to the weakness that you highlighted in January in Europe, has Europe kind of stayed the same? Or do you think it’s gotten a little better? And what factors are different now versus what you saw then?

Omar Ishrak

You know, what we talked about in January potentially was a reflection of the new year cycle. There was a difference in the holiday period which really put pressure on sales for that quarter. Since then, the market has stabilized back to the normal levels that we’ve seen prior to January, early in Q3, which we talked about at that time.

And so to that degree, the market has returned to some degree of stabilization, but I can tell you that in Europe you’ve got a variety of countries, they’re all dealing with different types of economic pressures, and healthcare is certainly central in their mind as a cost item. And so while we’re working with governments to make sure that we provide the right value with what we have, at the same time, there could be austerity measures in a variety of countries. There could be a [re-look] of some of the regulations like they’re doing in the U.K. where the NHS has recently, in the last couple of weeks, completely retooled in the way they’re organizing things.

So there’s a variety of activity going on in Europe, and that’s why we say that it’s somewhat uncertain, because there are a number of governments out there driving policy, all the way from austerity to [unintelligible] healthcare policy. That’s the best I can give you. But in general, I’d say that our weekly run rates, for example, are comparable to what we had in November, December of last year.

Gary Ellis

Obviously in our third quarter earnings call, we were very nervous about what happened in January, and were much more cautious. And as we saw in the results, western Europe and Canada grew 1% this quarter. Last quarter, I think it was down 1%, 1.5%. So the fact of the matter is, yes, we saw an improvement in the January, significant shortfall, clearly has improved over this quarter.

But as Omar said, that being said, the marketplace is still very volatile, just 1% or 2% growth in the market. And that’s with us outperforming the market. The reality is probably the market in Europe is flat to even slightly down, and the fact that we’re kind of growing 1% to 2% is outperforming the market. So in general some of our fears on the third quarter earnings call maybe were a little bit overstated, but the fact is Europe is still very volatile.

Matt - Credit Suisse

And then you mentioned an easement in U.S. ICD pricing pressure in the quarter. And I wanted to see if you had a sense, are you getting a mix benefit there? Or do you think the like for like environment is actually getting a little better?

Gary Ellis

I think we’re getting a bit of a mix benefit, but we’re also doing more of our provisions and discounting on multi-line deals across our cardiac and vascular group. And this gives us an opportunity to spread the discounting that the customers expect, or are asking for, from targeted reductions from competitors across a much larger revenue base, which has given us an opportunity to push off some of that discounting. So those items, I think, in addition to probably most importantly the new product, are what give us the opportunity to manage this pricing a little more effectively than we were doing six months ago.

Omar Ishrak

You know, one comment that I’d like to make, probably in response to a number of questions earlier, is that in our outlook for FY14, we talked a lot about new products and their success. But I also want to point out that let’s not underestimate the impact of our CBG sales force are approaching the cardiac [line] administrator. Now we’ve had like two years of doing this. We’re learning how to optimize our presence [unintelligible] the [line] industry to make [unintelligible] more effectively, and I think that’s probably a factor as well, in our success.

Mike Coyle

There’s no doubt that the nature of the decision making process for therapy choice and brand selection has changed, and it is now much more of a group decision making process among the interventional physicians and the cardiovascular line administrators. And by organizing the way we have, we are just more efficient at being able to identify their needs and then deliver them across a multiline offering. And so that is becoming a bigger and bigger part of how we approach the customer and the customers are responding to it.

Operator

And your next question comes from the line of Joanne Wuensch with BMO Capital Markets.

Joanne Wuensch - BMO Capital Markets

One is, can you set expectations for the [unintelligible] results? What would you consider to be a best case, and what would you consider to be a worrisome outcome?

Omar Ishrak

I don’t want to conjecture on that. The results are due in June. Let’s see what comes out, and then we’ll kind of go from there. But it’s inappropriate for me to speculate on either what they’ll be or what we think would be good or bad.

Joanne Wuensch - BMO Capital Markets

The second follow up is you’ve talked about a more healthy economic approach to selling over time into the hospital purchasing process. You mentioned that a little bit in how it’s helping your pricing in your [unintelligible] business, but is there another way that we can think about measuring that over time?

Omar Ishrak

Well, you know, we’re going to work on that to try to highlight some of the key factors there. In the end, we want to deliver overall growth and performance, and the exact reason for that, either it’s not that important to be too specific about that, but we do know that hospitals and physicians are sensitive to the economics of their purchase, and we try to line ourselves up in a way that we can demonstrate the value of what we have in that language.

Now, having said that, the other thing to look at are perhaps deals that we make where we have combined imaging, navigation, as well as [unintelligible]. That clearly is a deal that we can make, only because we have that selection of products and the users see some value in that collection. So going forward, looking at the number of accounts where we have all of that, and how our spine [unintelligible] is doing, may be a measure. And then as you further refine the CBG look, we might even do more sophisticated programs that you can highlight.

Mike Coyle

Just one other thing to keep in mind, in addition to simply being broader offerings and targeted call points for line administrators as well as the interventional physicians, we’re also offering a large number of value-added programs, [unintelligible] outpatient clinics and patients flow through the cath labs. Use of technology like Care Link Express to have ERs be able to identify a patient with a device immediately when they come in the door, without having to wait for a represent. [We think blood] conservation is a program that minimizes the use of blood products.

We’re also helping with market development, with things like Heart Mark, which basically allow them to look in an [attachment] area and see what the level of therapy is that’s being provided to various untreated needs and see if they are at national averages above or below. So these are all things that actually get translated from the viewpoint of the cardiovascular line administrator into value that we can claim credit for in lieu of pricing. So it’s share, it’s pricing, it’s basically our ability to partner and be viewed as a strategic partner in addressing the healthcare needs that these administrators are struggling with.

Omar Ishrak

One other comment I’d make is that as we formulate the strategy as we go forward, we’ll help you understand some of the specific drivers, but we’re still in the process ourselves of organizing this, figuring out how to communicate this and organize the structure. So it’s still early in the process, but developing a framework for economic value. And when we’re ready, we’ll share it with you.

Gary Ellis

And the only thing I would add to what everyone’s said is basically in the end, this economic value and our ability to work with the line administrators is a way for us to differentiate ourselves from the competition. And I think you’ve seen that in the share gains and results we’ve had so far, and we expect that to continue.

Operator

And your final question comes from the line of Derrick Sung with Sanford Bernstein.

Derrick Sung - Sanford Bernstein

I wanted to follow up with you on some of the comments you made around further combining the CBG group down to the district manager level. Does that combination initiative, economic value center you talk about, does that result in any sort of selling line synergies? And/or, more broadly speaking, when we think about the 30-50 basis points of SG&A leverage that we’ll be seeing next year, how much of that, if any, comes from selling line synergies and where might you be with some of the selling line pilot programs that might lead to some cost savings there?

Omar Ishrak

Let me just give you a little perspective and then I’ll let Mike also add to that. First, the primary goal of this is to align with the customers. That’s the primary goal. Second, to the degree that our people are required to deliver care, to deliver therapy, which a large number of our clinical representatives do, that will never go away. So our relationship with physicians at that level will always stay. We view that with great importance, and that will never go away. This move is primarily around aligning with the way our customers themselves are looking at their own business. Now having said that, in any organization there will be some efficiencies. And I’ll let Mike comment on that.

Mike Coyle

I would just echo Omar’s comments. First of all, first line sales representatives are physician focused, as they have always been, and are aligned with our original businesses, because that’s where you have to win first, is with the physicians.

But this move toward consolidation at the next level up for sales management is really to make us much more nimble and efficient in dealing with the hospital, and viewing it more holistically as the cardiovascular line, because frankly where we’re seeing our [hospital] customers winning is where they are aligning their various cardiovascular lines under a single administrative leader. And so this makes us more efficient both at the physician level and at the first line sales management level.

But there are efficiencies, and I would just remind you, from our discussion of the Resolute Integrity launch, we basically went from a 10% market share to a 30% market share, with no extension of our sales force in terms of adding new people. And the way we did that was marry up the existing coronary focused sales reps with mostly CRDM clinical specialists who had excellent cardiology relationships to be able to basically move much more quickly in terms of putting those products into the market.

And the other thing that it allows us to do, for example, with [IDNs] is because Medtronic approaches those IDNs as a single CBG supplier, we were able to hold off what competitors were trying to do in terms of basically pushing out contracts when we brought Resolute Integrity into the marketplace so that we would be blocked from coming in. When we approached those IDNs and basically talked about the broader CBG system, they were basically not willing to extend contracts for competitors, and that really helped us ramp Resolute Integrity very quickly. So there are synergies that we’re realizing from the strategy of beyond simply the first line sales management consolidation.

Gary Ellis

There’s no question that what’s going on on CBG, what we’re also doing across the restorative therapies group, in our regions, that is where we’re getting some of the leverage that we’re talking about in the SG&A. It’s making our own sales organization much more effective and more efficient. We’re obviously getting the benefits that both Mike and Omar talked about, but there’s no question a part of the 30 to 50 basis points of improvement in SG&A are coming from some of these as a result of it being more efficient and leveraging these resources.

Derrick Sung - Sanford Bernstein

We have been hearing some anecdotal evidence that Biotronik is getting a little bit more aggressive on the pricing front there in the market, and our survey shows that they may be picking up a little bit of share. Just wanted to get your thoughts on how you would respond to that threat of a low price strategy from a competitor in the near term. I understand that you’re talking about this tiered pricing strategy, so you clearly have a long term strategy that you’re putting in place to address that. In the near term, how do you respond to that low price threat from a competitor?

Omar Ishrak

I think in all of this, our ability to provide evidence for value is pretty critical. And the more we tie it to clinical [unintelligible], economics, the better off we’ll be. And that’s a thread across all of our businesses, and that will help us deal with any low-cost competitor, in that we’ve differentiated ourselves by demonstrating the value that we have.

Mike Coyle

Specific to that statement, Biotronik is not the only one who’s been using aggressive pricing tactics to try to take market share. In fact, some players who’ve not historically done that have become more aggressive in that particular area. But if you look at, for example, our product tiering now available to us on the pacing side, we have six tiers of technology that we can be able to bring to deal with giving pricing where it has to be given, but protecting our higher-end technologies from that kind of pricing pressure.

So I think we’re in a good position to use the [blood] CBG strategy, the services that we talked about, and frankly, the fact that we are the ones who bring that next generation of technologies, the key therapies, things like renal denervation, like transcatheter valves, drug eluting balloons, like the cryoablation technologies, that also give us an opportunity to establish a relationship on the basis of what we bring totally in our program. And those things together are giving us an opportunity to basically protect pricing and take market share.

Omar Ishrak

Thanks for all your questions, and before I end today’s call, as you think about your summer calendars, I’d like to note that an every other year cadence for our analyst meeting is more appropriate, and we do not plan to host an analyst meeting this year. I would also note that we anticipate holding our Q1 call on August 20. With that, and on behalf of our entire management team, I’d like to thank you again for your continued support and interest in Medtronic. Thank you.

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