Boston Scientific Corporation Q2 2009 (Qtr End 06/30/09) Earnings Call Transcript

| About: Boston Scientific (BSX)

Boston Scientific Corporation (NYSE:BSX)

Q2 2009 Earnings Call

July 21, 2009 8:00 am ET


Ray Elliott – President & CEO

Sam Leno – CFO

Larry Neumann – VP IR


Robert Hopkins - Bank of America Securities

Michael Weinstein - JPMorgan

Larry Biegelsen – Wells Fargo

David Lewis – Morgan Stanley

Tao Levy – Deutsche Bank

Rick Wise – Leerink Swann

Kristen Stewart – Credit Suisse

Bruce Nudell – UBS

Matthew Dodds – Citi

Joanne Wuensch – BMO Capital Markets

Tim Lee – Piper Jaffray

Glen Novarro – RBC Capital Markets

Sara Michelmore – Cowan and Company


Welcome to the Q2 2009 Boston Scientific earnings conference call. (Operator instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mr. Larry Neumann; please go ahead.

Larry Neumann

Good morning everyone. Thank you for joining us. With me on the call today are Ray Elliott, Chief Executive Officer; Sam Leno, Chief Financial Officer; and Jeff Capella, Corporate Controller and Chief Accounting Officer.

We issued a press release yesterday afternoon announcing our second quarter. Key financials are attached to the release and we have also posted support schedules to our web site, which you may find useful as well.

The agenda for this call will include a review of the second quarter financial results as well as third quarter and updated full year 2009 guidance from Sam, an update of our business performance in the quarter from Ray, as well as his overall perspective on the quarter. We'll then open it up to questions.

As this is the start of Ray’s seventh day on the job, he’ll also be joined during the question-and-answer session today by Fred Colen, head of our CRM business; Hank Kucheman, head of our cardiovascular business; Steve Moreci, head of our endosurgery business; Joe Fitzgerald, head of our peripheral intervention business; Michael Onuscheck, head of our neuromodulation business; David McFaul, head of our international businesses; and Dr. Donald Baim, Chief Medical and Scientific Officer.

Before we begin, I'd like to remind everyone on our safe harbor statement. This call contains forward-looking statements. The company wishes to caution the listener that actual results may differ from those discussed in forward-looking statements and may be affected by, among other things, risks associated with our financial performance, our restructuring plan, our programs to increase shareholder value, new product development and launch, regulatory approvals, litigation, our tax position, our competitive position, our growth strategy, the company's overall business strategy, and other factors described in the company's filings with the Securities and Exchange Commission.

I will now turn it over to Sam for a review of the second quarter financials.

Sam Leno

Thanks Larry, I’m pleased to report excellent results for the second quarter on a number of fronts. We delivered top line growth for the quarter on a constant currency basis excluding divestitures of 7% with US growth of 10% and international growth of 5%.

This results in year to date constant currency growth of 6% which is at the mid point of the 2009 full year guidance that we provided to you at the beginning of the year. Adjusting for the impact of sales transition reserves related to the US launch of our Taxus Liberte stent in the second quarter of last year top line constant currency growth was still 6% for the quarter or at the middle of our guidance.

These results were highlighted by outstanding performances across most of our businesses. We continued to see impressive growth in our CRM division and our worldwide DES business, as well as solid performances in our endoscopy, urology, gynecology and neuromodulation businesses.

We also saw neurovascular continue to hold solid share despite a delay in our new product launches worldwide and our peripheral interventions business showed a slight upturn. Its also noteworthy that 41% of our revenue for the second quarter came from new products introduced in the last 24 months.

While we continue to monitor the potential negative effects of external economic conditions around the world, to date we have seen very little impact on our businesses overall. We have maintained our gross profit margin rate in spite of the US mix shift between Taxus and Promus and some modest DES share loss in Japan with the second quarter launch of Endeavor by Medtronic.

Our ability to maintain our gross profit margin rates is directly related to the gross profit margin improvements in our CRM division as well as value improvement programs throughout all of our manufacturing plants. And over the next several years we will look to improve our gross profit margins through the continued implementation of our multi year plant network optimization program and the launch of our Promus element stent in Europe in the fourth quarter of this year and in the US and Japan in the middle of 2012.

Our expense and headcount controls have been firmly in place for the past seven quarters and as a result of the success of these programs we continue to reinvest some of our savings into additional direct sales headcount as well as new product development related positions both of which are targeted to driven incremental profitable sales growth for us.

A combination of good sales growth, stable gross profit margins, and controlled expenses all contributed to delivering both sales and earnings per share at the high end of the guidance range that we provided during our first quarter earnings call.

Now let’s turn to the operating results for the second quarter, consolidated revenue for the second quarter was $2.074 billion and at the top of our guidance range of $1.960 billion to $2.080 billion. This represents a 2% reported increase from the second quarter of last year but included in our reported results are a negative 4% contribution from foreign currency and a negative 1% contribution from divested businesses.

Excluding the impact of these two items second quarter revenue was up 7% in constant currency. Compared to the contribution assumed in our second quarter guidance range, foreign exchange contributed an additional $29 million to our second quarter sales results. So without this additional currency tailwind our sales would have been $2.045 billion and that’s still approaching the upper end of our guidance range.

Overall the contribution of foreign currency to sales growth for the second quarter of 2009 was a negative $83 million. Compared to the second quarter of last year excluding divestitures US revenue increased 10% while international revenue decreased 4% on a reported basis but up 5% in constant currency. Ray will provide a broader overview of our businesses by major product category but I’ll address our sales results for all of our businesses at a higher level here.

Worldwide drug eluting stents came in at $441 million at the top end of our guidance range of $400 to $440 million and up 16% from the second quarter of 2008 which represents a 21% constant currency increase.

Our worldwide DES revenue includes $269 million for Taxus and $172 million for Promus and this represents a 61/39 split between Taxus and Promus. We continue to sustain our worldwide drug eluting stent leadership during the second quarter but an estimated global market share of 42% and that’s more than 20 percentage points higher than our next nearest competitor.

Geographically US DES revenue was $238 million at the top end of our guidance range of $220 to $240 million and 36% higher than the second quarter of last year. Recall that in the second quarter of last year we recorded a sales transition reserve which reduced our sales by $22 million. And excluding this impact our US DES revenue still increased 21% over the second quarter of last year.

This includes $111 million of Taxus and $127 million of Promus revenue and represents a 47/53 mix of Taxus and Promus in the US compared to 54/46 mix in Q1 of 2009. This change in the mix of our Taxus Promus sales is not surprising given the very positive Taxus impact that we saw in the first quarter following the launch of Taxus Liberte late in the fourth quarter of last year which continued into the first quarter of this year.

In addition we are seeing new business gains from a major customer that we contracted with earlier this year which is resulting in incremental Promus volume. While our drug eluting stent average selling prices in the US declined in the quarter by about 10% compared to last year and the slightly greater than expected the selling and service abilities of our commercial team continue to produce a commanding 50% total US market share in the quarter with 23 share points of Taxus and 27 share points for Promus.

This compares to a US market share of 45% in the second quarter of 2008 excluding the impact of the sales transition reserve that I mentioned earlier. We remain the only company in the industry with a two drug strategy offering our physicians greater choice in treating their patients.

With our two drug offering coupled with the strength of our commercial team we have demonstrated our ability to maintain significant leadership in the competitive US drug eluting stent market with 23 more market share points or almost twice the market share of our next nearest competitor and based on our estimate of the US market for the second quarter, we believe that [inaudible] market share of approximately 27% while J&J and Medtronic achieved approximately 13% and 10% respectively.

International drug eluting stent sales were $203 million exceeding the top end of our guidance range of $180 to $200 million and represents a decrease from prior year of 2% on a reported basis but were up 7% in constant currency. This includes $158 million in Taxus and $45 million in Promus sales and represents a 78/22 mix of Taxus and Promus internationally. Boston Scientific’s drug eluting stent market share in EMEA is estimated to be 32% which is down 2% sequentially from the first quarter and flat compared to the second quarter of 2008.

Taxus market share was approximately 21% with revenue of $54 million and Promus market share was 11% with revenue of $29 million. Together this represents a Taxus Promus mix in EMEA of 65/35. Our drug eluting stent share in Japan was down 1% in the quarter to 53% with revenue of $68 million.

This outstanding performance was driven by our successful launch of Taxus Liberte despite the competitive launch of Endeavor in May. During the quarter we estimate that Endeavor gained 13% market share points and while our sales in Japan today are 100% Taxus we still anticipate approval of Promus Xience during the fourth quarter with a fourth quarter 2009 or first quarter 2010 launch.

We estimate our Asia Pacific DES share remains steady at about 19% during the second quarter split 12% Taxus with $16 million in revenue and 7% Promus with $10 million in revenue or a Taxus Promus mix of 63/37.

Drug eluting stent sales in our Americas international region was $26 million representing approximately 58% market share with 45% or $20 million in Taxus revenue and 13% or $6 million in Promus revenue. This represents a 77/23 mix of Taxus Promus. So in summary our 42% global DES market share gives us clear worldwide drug eluting stent leadership.

Now let’s look at the drug eluting stent market dynamics during the second quarter, we estimate that worldwide DES market in Q2 at approximately $1.049 billion and down about 2% versus the second quarter of last year including a negative contribution from foreign currency of about 5%.

This includes a worldwide unit volume increase of approximately 11% offset by a worldwide market decline in average selling prices of approximately 13%. Excluding the impact of foreign currency we estimate the worldwide DES market increase approximately 3% including the impact of our second quarter 2008 new product sales transition accruals.

The US DES market is estimated to be about $480 million representing an increase of about 9% over the second quarter of last year and again, this excludes the impact of our sales transition accruals from last year. This represents a unit volume increase of about 17% offset by an 8% decline in US average selling prices for the entire industry.

In the US Taxus stent pricing was down approximately 8% from prior year and that was in line with our expectations. US PCI volume in the quarter was approximately 256,000 procedures and that’s up 2% compared to both last quarter as well as the second quarter of 2008.

We estimate that US DES penetration remained at 75% in the quarter and that’s a nine percentage point increase over the second quarter of 2008. So combined with the stability and stented procedure rates and stent’s [per] procedure we estimate that the total unit market of US stents in Q2 was approximately 342,000 units including 256,000 units of drug eluting stents.

The international DES market remained strong for the quarter with 324,000 PCI procedures in EMEA, 55,000 procedures in Japan, 92,000 procedures in Asia Pacific, and 63,000 procedures in the Americas. Penetration rates in international markets remained consistent with EMEA at 52%, Japan at 67%, Asia Pacific at 76% and the international Americas at 32%.

Turing to our CRM business we continued to see very good progress driven by the launch of several new products in the back part of 2008. Most notably we began the launch of our Cognis and Teligen platforms. That launch is continuing and we expect to receive approval for Cognis and Teligen in Japan in the fourth quarter of this year. We will begin the launch in Japan upon approval.

Once we have launched in Japan we will be competing with Cognis and Teligen in all of our major markets around the world. Reported worldwide second quarter CRM revenue was $609 million and that represents a reported increase of 5% and a constant currency growth of 10% over the $578 million reported in the second quarter of last year.

US CRM revenue was $405 million and that represents an 11% increase over the prior year and the fifth consecutive quarter of double-digit year over year growth. International CRM sales of $204 million represents a reported decrease of 5% from prior year but up 8% in constant currency.

Worldwide ICD sales of $454 million were in the lower half of our guidance range of $445 million to $480 million. This still represents a reported increase over the second quarter of last year of 9% and a constant currency increase of 13%. ICD sales in the US were $315 million representing a 14% increase over last year and international ICD sales of $139 million represents a 2% reported decrease from last year but up 10% in constant currency.

Excluding sales from our five non core divested businesses, our non DES and non CRM worldwide revenues decreased 2% compared to the second quarter of last year to $1.022 billion and were up 1% in constant currency. This includes constant currency increases of 7% in our urology/gynecology business, 6% increase in endoscopy, 18% increase in neuromodulation, and a 2% increase in our peripheral intervention business.

Our neurovascular business remained flat versus last year due to the delayed launch of Target, our new coil which is now expected to be launched in the fourth quarter of this year. In our non stent interventional cardiology business and in our electrophysiology business we saw constant currency decreases of 4% and 1% respectively.

As we continue to develop our new product pipelines for these businesses we expect the growth in these divisions to accelerate and begin to exceed market growth rates. We should see these benefits for our non stent interventional cardiology business in the next 18 to 24 months and in our electrophysiology business in the second half of this year.

Ray will talk more about some of the new product launches in these businesses in just a few minutes.

Reported gross profit margin for the quarter was 69.6% and adjusted gross profit margin for the quarter excluding restructuring related charges was 70.2% which was 10 basis points lower than both last quarter and the second quarter of 2008. The change in the volume and mix of our DES revenues between Taxus and Promus contributed to a gross profit margin reduction of about 190 basis points compared to the second quarter of last year.

We expect to begin earning back this gross profit margin during the fourth quarter of this year with the launch of Promus Element in EMEA. Partially offsetting the reduced gross profit margin due to DES product mix was the strengthening US dollar and the resulting settlement of our foreign currency hedge contracts and costs of sales which improved our gross profit margin by about 130 basis points compared to the second quarter of the prior year.

Our gross profit margin also improved by 40 basis points compared to last year as a result of the sales transition accruals that were recorded during the second quarter of last year. The remaining positive contributors to our gross profit margin came from a number of other smaller items with no single item being significant.

Our expectations for our gross profit for the full year 2009 remain in the range of 70% to 71%. We expect further gross profit margin improvements going into 2010 as we continue to launch Promus Element in Europe which will help to offset the negative gross profit impact of launching Promus in Japan in the fourth quarter of this year and spilling into the first quarter of next year.

Additionally we will begin to realize cost reduction benefits from our plant network optimization program and our continuing value improvement programs in all of our plants throughout 2010 and into 2011.

Our reported SG&A expenses in the second quarter were $671 million, and adjusted SG&A expenses excluding restructuring related items were $667 million which was 3% higher then both the last quarter as well as the second quarter of last year. The increase is primarily due to the addition of direct selling expenses including the previously discussed targeted increases to our worldwide CRM field sales force and expenses related to the large number of congresses and trade shows that occurred in the second quarter of the year.

We also have a $5.5 million of interest associated with legal judgments that are included in our SG&A this quarter, $3.5 of which will cease when the pay the nearest debt judgment which we believe will be in the second half of this year. While we continue to manage our expenses conservatively to ensure that we stay aligned with our top line performance, we will continue to make investments in additional customer facing positions, targeted to drive incremental profitable sales growth.

Reported research and development expenses were $263 million for the quarter and adjusted R&D expenses of $262 million and 12.6% of sales were consistent with last quarter and represent a 40 basis point increase over the second quarter of last year. Our annual R&D investments will remain somewhat consistent at about $1 billion per year.

These investments together with pursuing strategic acquisition opportunities will continue to support our commitment to advancing medical technologies. Operating expenses in total remain well controlled and our headcount management and approval process provided us with the tools necessary to maintain tight control over expenses in the future.

We continue to make targeted investments in customer facing field forces and R&D programs to drive profitable revenue growth in the future. Based upon our results for the first half of this year combined with our external forecast for the balance of the year we expect to spend approximately $3.650 billion for the full year 2009 in a combination of SG&A and R&D expenses.

Our reported GAAP operating income of $275 million for the quarter on an adjusted basis excluding acquisition and restructuring related charges, certain intangible asset impairment charges and amortization expense adjusted operating income for the quarter was $458 million and 22.1% of sales.

That’s down 100 basis points from last quarter, down 140 basis points from Q2 2008. This reduction in operating income margin in the quarter relates to a $16 million loss associated with an R&D program cancellation which reduced our operating margin by approximately 80 basis points.

This charge relates to future liability obligations that we are contractually bound to regardless of the status of the cancelled R&D programs. We also increased the level of spending in R&D by 40 basis points year over year as we continue to focus on developing new technologies that will contribute to profitable sales growth in the future.

I’d like to highlight the GAAP to adjusted operating profit reconciled items in a bit more detail. First we recorded acquisition related charges of $17 million both pre and after tax associated with asset acquisitions during the quarter.

Second we recorded intangible asset impairment charges of $10 million pre-tax or $8 million after tax associated with certain previous acquisitions. Third, total amortization expense was $126 million pre-tax or $103 million after tax and this was $9 million lower than the second quarter of 2008 and going forward our quarterly amortization expense should remain at this level.

Fourth we recorded $30 million pre-tax or $22 million after tax of restructuring related charges in the quarter which are primarily related to the production transfer cost as well as retention and certain other costs in connection with our previously announced plant network optimization program and our expense in headcount reduction initiatives.

These charges were all in line with our previous estimates. The cumulative effect of all these items was $103 million pre-tax and $150 million after tax. Interest expense was $92 million in the quarter and was $26 million lower than the second quarter of 2008 primarily as a result of our $1 billion in debt repayments during the last 12 months to get lower interest rates.

Interest expense in the second quarter was also $10 million lower than the first quarter of this year due to our $500 million debt prepayment in the first quarter together with lower interest rates. Our second quarter 2009 average interest expense rate was 5.5% and that compares to 5.9% in the second quarter of last year as well as the first quarter of this year.

Other net expense was $3 million in the quarter and includes $2 million of interest income. Interest income was $9 million lower than the second quarter of last year and $2 million lower than the first quarter of this year primarily due to a lower rate of return on our cash investments and as a reminder, our other net expense in Q2 2008 included approximately $96 million of losses related to the monetization of non strategic investments, a process that was completed in the first quarter of 2009.

The reported GAAP tax rate for the second quarter was 12.2%. On an adjusted basis our tax rate was 18% for the quarter including discrete tax benefits of $2 million which have a 60 basis point favorable impact on our second quarter effective tax rate. Our adjusted tax rate excludes the current tax effect of any item that has been excluded from our adjusted pre-tax earnings.

Our adjusted taxes also exclude an $11 million deferred tax benefit recorded in GAAP earnings resulting from a state tax law change. Our operational tax rate on an adjusted earnings basis for the remainder of 2009 is expected to be approximately 18% to 19%. And this change from our previously expected 21% adjusted tax rate is driven largely by the decrease in global interest rates required to be applied to the tax reserves carried on our balance sheet.

GAAP earnings per share for the second quarter were $0.10 per share compared to income of $0.07 in the second quarter of last year. GAAP results for the quarter included acquisition and restructuring related charges, intangible asset impairment associated with a prior acquisition, amortization, and the discrete tax benefit that I mentioned earlier.

Our adjusted earnings per share in the second quarter which excludes these items was $0.20 and at the high end of our guidance range of $0.16 to $0.21. This compares to $0.20 in Q2 2008. As a reminder the second quarter of 2008 adjusted earnings per share excluded $0.07 per share related to amortization and also excluded $0.01 per share of acquisition related charges, $0.04 per share of divestiture related losses and $0.01 per share of restructuring related charges.

Stock compensation was $33 million and all per share calculations were computed using 1.5 billion shares outstanding. Days sales outstanding were 63 days, a one day improvement over the second quarter of last year but a two day slippage compared to last quarter.

Continued strong cash collections in Japan and US were partially offset by a deterioration related to slower collections in our European operations. Slower collections are largely related to southern Europe where we are monitoring this situation closely and are taking steps to improve collections going forward.

Our days payable outstanding for the quarter were 31 days which was seven days lower than the first quarter of this year and two days lower than the second quarter of last year. This reduction is generally related to lower trade accounts payable balances in the US and IC regions as well as a large tax payment made during the quarter.

Days inventory on hand were 127 days, relatively flat with the first quarter of this year and up five days from June of 2008. The increase in days over last year were mainly a result of the introduction of Promus to support our dual drug strategy as well as inventory builds in support of product transfers related to the plant network optimization strategy.

Reported operating cash flow in the quarter was $419 million, which was $160 million higher than the second quarter of last year. Q2 2009 reported operating cash flow includes $74 million in payments related to legal settlements while Q2 2008 included $189 million in taxes related to divested businesses.

So excluding these items Q2 2009 adjusted operating cash flow was $493 million which is $45 million higher than Q2 of last year. Second quarter 2009 reported operating cash flow was also $158 million higher than the first quarter of this year. Q1 2009 reported operating cash flow included $36 million in legal settlements.

So excluding these items Q2 2009 adjusted operating cash flow was $196 million higher than the first quarter of this year primarily due to the timing of our annual bonuses and royalty payments as well as a net tax refund partially offset by higher accounts receivable balances.

Capital expenditures were $74 million in the quarter which was $5 million lower than Q2 2008 and $14 million higher than the first quarter of this year. Capital expenditures for the full year are expected to be approximately $375 million and reported free cash flow was $345 million in the quarter compared to $180 million in the second quarter of 2008 and $201 million in the first quarter of 2009.

We closed the quarter with $6.250 billion of total debt and $1.2 billion of cash on hand resulting in net debt of $5.1 billion. Total debt is $1 billion lower than the second quarter of last year as a result of our debt repayments during the last 12 months. Net debt is approximately $600 million lower than the second quarter of last year reflecting net cash flow generation.

We continue to focus our strong free cash flow on debt pay down and we expect to refinance a portion of our 2011 debt maturities by the middle of next year. We currently have access to approximately $2.6 billion of liquidity consisting of $1.2 billion of cash on hand, and approximately $1.4 billion through our revolving credit facility and our accounts receivable securitization facility.

At the end of the second quarter our debt to EBITDA credit facility covenant ratio was 2.9x which is well below the maximum permitted level of 4x providing us with $600 million of EBITDA cushion. This covenant as a reminder steps down to 3.5x at the end of the third quarter this year.

Fitch rating services raised our rating outlook one notch to positive from stable. This follows Moody’s and S&P’s outlook upgrades in the first quarter of this year. Fitch also confirmed our corporate credit rating at BB plus.

Our upward ratings momentum reflects the progress that we are making in strengthening our financial fundamentals, simplifying our business, driving profitable sales growth, and the overall improvements in our operations. We continue to work on improving our profit margins, increasing cash flow, paying down debt, as well as continuing to instill financial discipline.

Turning to the sales guidance for the third quarter of 2009 reported consolidated revenues are expected to be in a range of $2 billion to $2.1 billion and that’s a range that would give us an increase of 2% to 7% over the $1.966 billion of revenue recorded in the third quarter of 2008 excluding divestitures.

And if foreign currency exchange rates continue constant throughout the third quarter the negative contribution from FX should be approximately $30 million or approximately 1% relative to Q3 of last year. On a constant currency basis Q3 consolidated sales growth should be in a range of up 35 to up 8%.

For drug eluting stents we are targeting worldwide revenue to be in a range of $390 million to $430 million with US revenue of $220 to $240 million and OUS revenue of $170 to $190 million. For our defibrillator business we expect revenue of $445 million, $475 million worldwide with $310 to $330 million in the US and $135 to $145 million outside the United States.

The strength of our renewed product pipeline across all of our businesses is resulting in solid top line performance even during turbulent economic climates around the world. And as we indicated earlier we saw 41% of our second quarter revenues come from new products and we expect that trend to continue throughout this year.

The good news for us is that only a small portion of our business is considered [elective] and we are seeing only limited effects of the economy on the results of those franchises. Additionally the sales growth and strength that we are seeing across our diversified portfolio of businesses is more than offsetting any broad economic effects.

For the third quarter adjusted earnings per share excluding charges related to acquisitions, divestitures, restructuring, and amortization expense are expected to be in a range of $0.17 to $0.21 per share. This includes and effective tax rate on adjusted earnings of 18% to 19% in the third quarter of 2009 as a result of the change in published interest rates that I discussed previously.

The company expects earnings per share on a GAAP basis for the third quarter of 2009 to be in a range of $0.08 to $0.13 per share. Included in our GAAP earnings per share estimate is approximately $0.01 to $0.02 per share of restructuring related costs and $0.07 per share of amortization expense.

During the third quarter we will see the anniversary of last year’s transition in the DES business and the shifting of market share from Taxus to Promus. As we have previously disclosed the profit contribution of a Promus stent is 50% of the $1.00 contribution of selling a Taxus stent. So the bad news is is that we have an adverse mix of Promus and Taxus compared to our expectations of a year ago, but the good news is is that we have more total US market share than anyone outside of Boston Scientific ever expected.

And this reduced profit contribution will be restored over time beginning with the launch of Promus Element in Europe in the fourth quarter of this year. The strength of our Taxus drug eluting stent franchise along with our improvement in DES market share helped to offset some of this impact and we anticipate this beneficial mix continuing.

We’re also seeing the benefits of our CRM acquisition with significant improvements in operating profit margins that are helping to offset the impact of the shift and the profitability of our DES franchise. With the first half of 2009 behind us we are tightening our guidance range for the full year and we are now expecting revenues to be in the range of $8.1 to $8.4 billion.

We are also now expecting to achieve adjusted earnings per share for the full year between $0.82 and $0.86 excluding acquisition, divestiture, major litigation and restructuring related charges as well as large discrete tax items and amortization expense.

Included in this estimate is an effective tax rate of 18% to 19% on an adjusted earnings basis for the last half of the year. The company now expects net income on a GAAP basis of between $0.47 and $0.53 per share. So that’s it for guidance. Our third quarter earnings call will be at 8:00 am Eastern Standard Time, on October 20, 2009.

Now let me turn it over to Ray for a more in depth review of our businesses.

Ray Elliott

Thanks Sam, Boston Scientific is apparently the only institution in creation where you don’t get to rest on the seventh day. Let me begin with both a qualitative and strategic review of our businesses starting with CRM and then I’ll share some impressions on the quarter overall and where I believe we can and should go over the next 100 days or so.

Since this is my first opportunity as CEO to report on the CRM business I want to acknowledge the excellent work done by thousands of CRM employees over the past few years. They have revitalized this business from top to bottom, transforming quality, realigning R&D priorities, and developing a pipeline capable of impressive results.

Our CRM business is in solid shape today thanks to their efforts. The second quarter results show continued positive momentum from our recent product introductions particularly Cognis and Teligen. As Sam said we have delivered steady overall growth in CRM revenues due mainly to the strength of our US defib sales which grew at 14% for the second straight quarter.

This is more importantly the fifth consecutive quarter of double-digit sales growth in our US CRM business. We also saw the highest US pacer revenue in four years supported by the growing adoption of our advanced Altrua platform.

International defib sales were up double-digit as well at 10% on a constant currency basis and we anticipate accelerating international performance in the second half of the year as we begin to roll out our Latitude patient management system in Europe happening as we speak.

CRM sales this quarter both worldwide and in the US were at their highest levels since we purchased Guidant. Its also important to note that our CRM business reported sequential quarterly growth across every major product segment both worldwide and in the US.

While de novo implantations in the US market have been flat to down since 2006 replacement [cans] have increased by more than 30% per year. We expect to sustain these positive trends on the strength of our new products which remain on track to generate an amazing two thirds of CRM sales in 2009.

Cognis and Teligen the world’s smallest and thinnest high energy devices achieved 100% full field inventory levels during the quarter, importantly up from only 70% in the first quarter. They continue to be very well received. Since their recent launch we believe that we have gained almost three share points in the US.

In May we announced European approval and the first implantations of our Endotak Reliance 4-Site Defib Lead System which combined the 3 lead connections into a single pin to port connector.

Last week we announced CE Mark approval for the Latitude Patient Management System and we began a phased rollout in 14 European countries. The introduction of Latitude in Europe will build on our experience in the US where we already have astonishingly more than 130,000 patients enrolled on the system.

Since 2006 Latitude has been the most rapidly adopted remote cardiac device monitoring system in the industry. We fully expect to extend this success as we introduce its demonstrated benefits to patients and physicians all over Europe. We would aspire to document and prove its economic benefits to the healthcare system coincident with its clinical significance.

In the second quarter we also launched our first RF wireless ICD system for programming purposes in Japan with the introduction of [Comfia]. Turning to clinical trial updates, there were several highlights from the second quarter that underscore our long standing and continuing commitment to clinical science.

Most notably less than a month ago on June 23, the landmark Madit-CRT trial reached its primarily end point. Preliminary results indicate that CRT-D therapy significantly reduced the relative risk of all cause mortality or first heart [inaudible] intervention by 29% when compared to traditional ICD therapy.

This result comfortably exceed the target reduction goal of 25% and clearly demonstrates that early intervention with CRT-D therapy can slow the progression of heart failure. Boston Scientific is the sole sponsor of this trial, the world’s largest device trial for high risk modally symptomatic heart failure patients.

US reimbursement for CRT-D in patients who fit the Madit-CRT criteria is already in place and we believe this trial has the potential to significantly expand CRT-D indications. We estimate that over the next few years Madit-CRT could expand the CRT-D market by as much as $250 million in the US and $400 to $500 million worldwide.

We expect to file for label indication around year end and anticipate FDA approval in mid 2010. additional data from the Altitude clinical science program which analyzed nearly 86,000 patients monitored by the Latitude system, showed that real world survival rates for ICD patients exceeded rates from the clinical trials confirming and enhancing the benefits of ICD and CRT-D device therapy.

An analysis of long-term data from Madit II clinical study was presented at the HRS demonstrating that the life saving benefits of ICD therapy actually improved over time. At eight years, one life was saved for every six patients who received an ICD; a dramatic improvement over the two year Madit II data which showed one life saved for nearly every 17 patients.

This was the first time long-term data were presented on the life saving benefits of ICDs in a primary prevention population. We are confident the results from these two studies will reinforce the clinical effectiveness of ICD and CRT-D therapy and this alone could ultimately help grow the market.

We should also benefit from the potential impact of the joint commission referred to as Core Measure for ICDs and sudden cardiac death. Let me give you a quick update on our EP business, this quarter we launched our Blazer DX-20, steerable diagnostic catheter in the US and early sales are exceeding expectations.

We anticipate a European launch in the third quarter. Additionally the Blazer Prime, an improved version of the Blazer ablation catheter which enhances torque ability, track ability, tip control, and durability, is on target for launch in the US in the third quarter, pending FDA approval.

Looking to the fourth quarter we anticipate the launch of Blazer [open irrigate] ablation catheter in Europe with US clinical trials beginning around the same time. Overall EP market growth continues in the double-digit range and we plan to maximize our share of this growth by leveraging our historic strengths, our current product line, and the new [crial] core technology platform.

With respect to [crial] core we anticipate the A fib portion of the market to grow at rates in excess of 20% per year for the foreseeable future. Our CRM strategy is working and with additional Madit-CRT data to be presented in September this market is poised for substantial expansion. Our CM business is now and will continue to be a major growth driver for Boston Scientific.

Now let me turn to the cardiovascular business with an equally public hats off to our CV group. Its hard for me to believe that anyone other than ourselves going back a year ago, and with knowledge of anticipated competitive releases we could be sitting here today with a 50% share in the US in DS market but in fact we are.

We also report another strong quarter of DS results with 42% worldwide market share. We maintained our US leadership in part due to the launch of our Taxus Liberte atom stent late in the quarter. Taxus drove 23% of the market share with Promus at 27%. Over the remainder of the year we expect gains in our US Taxus share position as we complete the Taxus Liberte atom launch and introduce the Taxus Liberte long stent.

As previously announced we received FDA approval for Taxus Liberte long on July 13 and expect to begin launching later this quarter. We gained incremental Taxus share at a premium price especially with Taxus Liberte long. We also saw a continued strengthening of the stent market during the quarter.

US PCI growth year over year was approximately 2% while penetration held steady at the solid first quarter level of 75%. We believe that in the US Xience had a 27% share for the quarter while Cypher and Endeavor were at 13% and 10% respectively giving us a 23 share point lead over our nearest competitor.

In Europe DES penetration was up to approximately 52% and our DES share was estimated at 32% split approximately 21% Taxus and 11% Promus. In Japan the launch of Taxus Liberte has continued to go very well with a second quarter share estimated at 53%, all of which is Taxus.

Our Taxus Element and Promus Element product introductions are progressing as planned. Taxus Element has already been launched in unregulated markets with extremely positive feedback. Both Promus Element and Taxus Element are on target for CE Mark approval and launch in the fourth quarter of this year, coinciding nicely with the recent announcement by Abbott with respect to the launch of Xience Prime in Europe.

The Promus Element US and Japan launches are on target for mid 2012 with Taxus Element US launch on target for mid 2011 and in Japan in late 2011 or early 2012. Also slated for launch in the fourth quarter of this year or the first quarter of 2010 is Promus in Japan which is consistent with Abbott’s announcement of Xience/Promus timing there.

Finally our Platinum trial is progressing very well throughout the world with the workhorse portion of the studies enrollment far exceeding our own internal plan. The Element platform will provide a noticeable improvement for physicians in terms of deliverability. We are confident that our Element launch cadence will be highly competitive with Xience Prime on a worldwide basis. We are pleased with our progress on the integration of Labcoat which we view as true next generation DS technological platform, beyond both Taxus Element and Promus Element respectively.

Looking briefly at other CV product lines, our US leadership in PCTA balloon catheters continued with a 57% share. We continue the launch for a new imaging catheter iCross, and our are planning a number of additional new product launches over the next four quarters including the Apex platinum pre-dilatation balloon catheter for improved radiopacity, the [NC] Quantum Apex post-dilatation balloon catheter and [connetix] guidewires.

In our peripheral interventions business we maintained a strong worldwide position in a growing market. We continue to hold the number one position in multiple product categories. The US launches of the Sterling ES PTA balloon catheter, the carotid Wallstent, and the Express renal SD stent as well as the international launch of the Epic vascular stent continue to drive positive momentum for this business.

With these launches we expect to expand our PI leadership. In summary our cardiovascular business continues to be very well positioned with the unique two drug offering, a long list of leading franchises, improving market fundamentals, and a robust product launch cadence for 2009 and beyond.

We firmly believe our overall cath lab leadership will increase over the next two years. Our neurovascular business continued to maintain its global leadership position recording another quarter of strong sales in spite of new competitive product offerings. Our Access business catheters and guidewires, grew 10% as our customer base continued to expand and convert to our Synchro 2 guidewire technology.

Our Icad, intracranial atherosclerotic disease stent business grew 16% worldwide and of note experiencing a record 68% growth in China. Despite some softening in our coil business as a result of competitive launches in both coils and injunctive stemming, we maintained approximately 42% market share and approximately 60% share respectively.

We are looking forward to providing you with more details on the launch of an outstanding new coil and stent later this year. The endosurgery folks have continued their string of steady performance, its up 6% constant currency for the quarter with endoscopy growing 6% and urology/gynecology growing 7%.

Endoscopy’s second quarter results were driven by the US launch of the WallFlex Biliary stent and continued commercialization of the WallFlex Esophageal stent. The WallFlex family is our third generation of market leading stents for the treatment of GI obstructions. Endoscopy continues to see strong global market and technical adoption of our resolution clip for GI bleeding.

These types of improved technological adaptions in such areas as homeostasis and esophageal stemming continued to expand the footprint of the endoscopy market, now approaching $2 billion. We will enhance our expansion of the GI market with future product launches into enterable feeding.

Neurology/gynecology’s growth for the quarter was based on strong performance in our growing women’s health business which was offset by slower momentum in our urology business. Our women’s health business continued to deliver double-digit growth of 15% on the strength of several new product launches.

The urology business maintained its leadership position and grew in line with the market at 4%. Momentum continued in our pelvic floor franchise with the recent launch of our Solyx single incision sling system and our Uphold pelvic floor repair kit. In addition we executed two new women’s health launches during the quarter with our second generation ProCerva HTA procedure set as well as our new Pinnacle Posterior Pelvic Floor Repair Kit.

We expect these launches to continue to drive growth in our women’s health business third and fourth quarters. Based on our current growth trend in pelvic floor products versus the market growth at 10%, we should overtake Johnson & Johnson for the number two position by year end.

The endosurgery pipelines will continue to be productive in the third and fourth quarters. We will begin to commercialize the WallFlex esophageal fully covered stent which received FDA clearance last month along with new RX Biliary catheters, expanded sizes of our market leading radial jaw 4 biopsy forceps, along with Duet for pelvic floor and the next generation laser fiber for kidney stone removal.

Finally our worldwide neuromodulation team delivered a constant currency sales growth of 18% in the second quarter with the US growing at 17%, that’s good work. As we said earlier trial implants, a significant leading indicator for permanent implantation procedures were up 20% in the first quarter so the strong performance in the quarter was as expected.

Trial implants in the second quarter were also up more than 20% leading us to expect a strong third quarter as well. As a demonstration of our commitment to strengthening clinical evidence for spinal cord stimulation we’re initiating a trial to access the therapeutic effectiveness and cost effectiveness of spinal cord simulation compared to reoperation in patients with failed back surgery syndrome. The trial is called Evidence and it is the first randomized controlled multi center trial using rechargeable devices.

The study will enroll 128 patients at 20 sites in the US, Canada, France, and the United Kingdom. In the important age of comparative effectiveness and cost justifications, we believe this trial will become a seminal study that could initiate consideration of spinal cord stimulation much earlier in the continue of care.

During the second quarter we successfully launched our lead adapter the M-1 which allows a precision plus system connect to the previously implanted leads of a primary cell, non rechargeable competitive system. This gives us access to an otherwise captive replacement market.

As well as offering an alternative it doesn’t require removing and replacing the previously implanted leads. Let me finish in the next few minutes with some overall perspective on the following. First some thoughts on what we liked about the quarter and whether its sustainable, what we didn’t like or at least feel we could do better and then a few hot topics or takeaways from the quarter.

Second I’d like to share a few more thoughts on strategy, tactics and areas of focus over the next 100 days or so. Likes and dislikes, let’s begin with what we liked about the quarter. Number one solid and diversified sales performance across almost all product and geographic segments, 7% growth despite worldwide recession and strong product competition with the associated price pressure.

I can see no reason at this point of time to alter our 2010 and 2011 aspirations of 5% to 7% constant currency sales growth. My confidence in no small part is based upon what I believe is the finest and clearly on a per person basis the most productive sales forces in the business. We just need more of them.

Number two, if what I said about our sales forces is true, and it is, then we much given them new products and patient solutions to sell and we are. The pipeline build and new product flows are very strong from Taxus Liberte Atom and Long to Latitude in Europe, to a vast new array of both PI and endoscopic stents.

In the second quarter new products were 41% of sales, exceeding our own internal goals. Number three, those new products have a great deal to do with both our CRM and DES momentum. CRM is growing double-digits, had a dozen new product approvals last year, is taking share points, and improving profit margins; the fifth consecutive quarter of double-digit defib growth and the highest pacer growth in four years in the US.

DES has market leadership with a 23 share point lead over our nearest US competitor, a unique two drug strategy, four different platforms, and a robust pipeline that we will try to share a little more with you about as we plan for our prior to year end analyst day.

Number four, new product momentum without leadership in clinical science would carry dramatically less weight. It is particularly relevant with the potential for seminal ground breaking trials that marry together both advanced patient care and cost effectiveness.

We have this strength in spades with recently reported or in process trial results such as Madit-CRT, Madit II, Altitude, Syntax, [Sampress], Maps and Platinum to name only a few. And number five that we liked in the quarter, innovation in the aforementioned academic and clinical sciences are fundamental to our beliefs and a core strength but we are not an academic institution. We are commercial.

Our sales growth, new products, CRM-DS momentum and clinical science strength are producing cash and this free cash flow generation year to date at $546 million is allowing for an accelerated debt repayment and the important potential return to investment grade status sooner rather than later.

How about what we didn’t like in the quarter, or at least those areas that we could do better. In some cases of course these are just inverses of the things we liked. Number one, while we liked the new product flow in the CRM-DS momentum we are less enthusiastic about our time to market.

We need to improve our processes even in a difficult regulatory environment and we need to rethink our funding and project prioritization. Endosurgery must get more resources and we must restore healthy growth to the non DES portion of our cardiovascular business. A common belief would be that the vast majority of this funding must come from CRM and DES reductions. I disagree.

We have made substantial one time investments in for instance quality, while we must maintain our enhanced and hopefully best in class status in quality systems we must also learn to convert in this case one time non repeating remediation dollars to innovation dollars.

Number two, while no one could deny the exceptional nature and outputs of our clinical science and study programs the heath care reform world is changing around us, rapidly and as we speak. We have to build the infrastructure and communication systems. This should include an internet where appropriate and not just traditional [inaudible] publications, which should make a stronger case for Boston Scientific’s product benefits, both comparative clinical effectiveness and cost efficiency.

Not just to customers but also to patients, healthcare systems, payers, governments, and society at large. And number three I said previously that we liked the cash in the quarter but we were less enthusiastic about both the leverage drop through to operating profit and the resulting conversion to cash ratios.

One could argue that in this quarter operating expenses including substantial investments for worldwide CRM and neuromodulation field force expansion, accrued interest for the [inaudible] case and a $16 million loss on an R&D program termination but we all know there is always something.

Suffice it to say that I would intend to have a laser like focus on quality of earnings. I’ll talk more about that subject under go forward strategies and tactics. And finally on this portion of the wrap up, what about our own hot topics or at least takeaways that we would like you to think about relative to our second quarter. Here are mine.

There are many industry studies and trials but Madit CRT is a landmark. It could conceivably change the markets face and size through significantly expanded indications. Next, CRM sales for the quarter were at their highest level since we acquired Guidant and despite all the competitive buzz in the US we are 23 share points in DES above the next player in the US.

Sometimes a single sentence is self-explanatory. Next we have no reason not to believe and every reason to believe that Promus Element and for that matter Taxus Element will receive a CE Mark and be launched in the fourth quarter. Once again during the upcoming Q&A period we will not disadvantage ourselves by disclosing the ins and outs of our European regulatory pathway strategy.

Next we have very real confidence in our sales and EPS guidance ranges for the second half and the splits between the quarters. We have less visibility and confidence in the eventual detailed outcome and current uncertain status of healthcare reform legislation however that we are heavily involved and firmly believe we have been in the past and will be in the future part of the solution and not part of the problem.

Let’s go now to strategies, tactics, and areas of focus for the next 100 days or so and assuming they are correct for well beyond that timeframe. First let’s think about the likely strategic formula or at least at this stage the thesis of that formula and then we can talk about the tactics that may help us arrive at a successful conclusion.

That strategic formula is likely a three step process and frankly a playbook that Sam and I are both very familiar with. Step one, drive sales and marketing growth with both new product and new market expansion. Correspondingly drive margin expansion with volume effects on standard costs, mix, and active COGS based efforts towards being the low cost provider not just the low cost manufacturer.

We use price sophistication as a key tool not just price increases which may or may not be available to us in the near term or further out. Our research has already shown that price leakage is also a significant opportunity. Shift to true marketing, i.e. needs creation for mostly sales support tactics.

Step two structure the business with increased capability to produce a leveraged or positive drop through effect from sales to operating profit. Improve the intra company internal rate of return on our expense base, zero base budget the non sales base functions and shift costs where possible to areas of greater direct return. Use our expert knowledge of the fixed variable components of costs for an improved construct. Allocate our costs to fully loaded top to bottom managed businesses.

Verify that our various country models and international structures support profitable sales growth while maintaining the current set of channel options. Target a minimum 30% consolidated adjusted operating profit to sales ratio over the first strategic planning period and a minimum 15% compound annual growth rate in earnings per share.

Step three, take the improved operating profit and tax rate focus along with increased working capital attention and metric to translate net profit to cash with a higher conversion ratio. The accelerated cash production could obviously be used selectively for acquisitions but job one must be increased velocity of debt pay down and the recovery of our investment grade rating.

The debt financing obligations for 2011 will be targeted for mid 2010 completion. At the beginning of our formula, I will start with our focus on and attention to sales and marketing. What might that look like. Here’s a sampling of a few out of many tactics for real focus over the next 100 days.

Appropriate and inter divisional cross selling efforts and fully integrated cardiovascular product offerings to healthcare systems and GPOs will be executed. We will need to be certain of uncluttered and non duplicated common primary call points. No one has the strength of share or current CRM and DES platform to do it better if at all.

Our Boston Scientific offering will be trademarked and branded cross care. Number two, pricing sophistication gains through integrated price volume mix analysis at the SKU level, finer segmentation, strategy driven and disciplined negotiation, tiered marketing of our broader offerings, and validation of the need for a close correlation between field force size, compensation, and corporate profitability.

An initial thesis would suggest that we could benefit handsomely from an additional 300 to 500 feet on the street during 2009 and 2010 combined. Next, structure our best in class comparative effectiveness functional group in our company that merges our clinical science and evidence based outcomes with healthcare economics that will be usable on a global basis. With the digitization of healthcare, the internet, e-marketing and remote monitoring along with other linked in tools, become a necessity.

We have governments around the world focused on increased coverage, efficiency and transparency. We will need to advocate, educate and engage. Where necessary we’ll need to change our business models. I was tempted to do a more definitive piece here on healthcare reform scenarios, but as it relates to Boston Scientific the lack of clarity currently and the need to collectively understand and execute our [inaudible] in that position, I decided to postpone that discussion from today’s earnings call.

And as a final example of a detailed focus for the next 100 days or so the issue of R&D and innovation superiority, the initial thesis is to focus our intensity more with fewer projects and a reallocation of resources that should help us to accomplish a number of goals. First more targeted intellectual horsepower behind each product.

Diversify our base through both buy and build philosophies. Target diseases not subsets with where possible integrated and more complete patient solutions. Next extend our viewpoint to early intervention as much as possible in addition to both quality of life and longevity. Next manage the PDP or product development process better through disciplined return capital invested and internal rate of return tracking.

Post mortem analysis for learning, increased speed to market techniques, [inaudible]] divisional application of core technologies and if applicable, centers of excellence. Disease areas are subset solutions for strong consideration would certainly include disruptive advancements in CHF congestive heart failure, A fib, structured heart, the high mortality issues of acute ischemic stroke, and sudden death cardiac arrest, a broad array of GI track changes or needs including both [gert] and enteral feeding, women’s health and the potential even for our current end plant technologies to address the obscenity, diabetes, and migraine worlds.

In closing I would be remiss if I didn’t mention that it is a great privilege and an honor to return to working with both friends on the Board and in management of Boston Scientific. It is a company with great promise for which we will create a new value proposition for both patients and stakeholders.

I would be equally remiss if I didn’t mention that its exciting times as always to be back working with Sam, my colleague and friend for as of next month, believe it or not, 38 years. With that I’ll return it back to Larry to star the Q&A.

Question-and-Answer Session


(Operator Instructions) Your first question comes from the line of Robert Hopkins - Bank of America Securities

Robert Hopkins - Bank of America Securities

Just to be clear, the commentary that you just made sounds like you’re reiterating the long-term guidance that Boston Scientific has in place today so is that correct, that you’re comfortable with the 5% to 7% constant currency top line and 15% bottom line growth that exists today and in part is that a function of your enthusiasm towards Madit-CRT and are you seeing any signs of acceleration here in the near term post those trial results.

Ray Elliott

I comment on the first part and ask Fred to jump in on the CRT because I haven’t had the chance to go beyond the review if it as you heard, I wouldn’t say reiterate, again what I said in the script and its not long-term guidance obviously, its two year guidance, I would suggest that based on everything I’ve seen at this point in time from the date of review, I am comfortable with what I’m seeing.

If additional factors come into play then obviously we would inform you and there is a range to it so obviously we’re not arguing that 7% is the magic number for the next two years. We’re simply saying that based on the data that range I’m comfortable with as I see it at this point in time.

Fred Colen

We are very, very optimistic about Madit-CRT. Obviously the Madit-CRT executive committee is working feverishly to prepare for the presentations and as well figuring out how the data can be presented as soon as possible in some medical journals. I can tell you that the Madit-CRT data will be presented at the European Society of Cardiology meeting in Barcelona on September 1 as well as the Heart Failure Society meeting in Boston about two weeks later.

I think that you will see at that point in time that this is in deed a very exciting clinical study and we believe its going to be marked in deed as a landmark trial in the treatment of heart failure patients. We are very excited about this upcoming event and we believe that the industry at large but we in particular will benefit from the positive outcomes of this study.

Robert Hopkins - Bank of America Securities

And then on the gross margin side, you have talked about this plant network optimization and the $100 million potential benefit is the right way to think about that $100 million as the majority of that will accrue in 2010 or is there some that accrues in 2009 and also on cardiac rhythm management margins would you say they were 70% of the way there in terms of your goal or is more like 50 or is closer to 90.

Sam Leno

In terms of the plant network optimization, where we are on that is we started the process. We have about a three year program underway. We have said before that we’ll see very little of that in 2009. We’ll begin to see it showing up early in 2010. It will continue on through 2010 and we should be complete with that somewhere in the middle to the end of 2011 timeframe. So we’ll see the vast majority of that show up in 2011 with the full year impact ultimately taking place in 2012.

CRM margins overall we made very good progress in CRM margins. I won’t quote an exact number but as you know we said that last year overall operating profit margins for CRM were about 15%. We thought we’d add about 12 points of margin to that business this year with a target to be at 30% overall operating profit margins going in or sometime in 2009. And we’re on track to do that.

The margins are driven a lot by new products, they’re driven my better management of scrap which had been a historic issue for that business as you know and we’re also focused maybe for the first time ever at the serious value improvement programs that will be taking place throughout this year and forever more.

So bottom line is we’re on track to accomplish those previously stated goals.

Ray Elliott

I didn’t mean to skip over your 15%, as you heard in the script we’ll be focusing a minimum goal of both a 30% ratio on operating to sales and the 15% compound on EPS so to the extent of what I know at this point in time and to the extent that those are going to become absolute internal goals as minimums for the company, I would suggest we keep those where they are.

Sam Leno

We’re also in the midst as we always are this time of the year, of updating our strategic plan. We’ve also launched beginning of our operating plan for 2010. Those will continue on the balance of the year and we typically have those presented and approved by the Board very late in the year. That would give us the ability to firm up our go forward view of the world when we close out the year in January.


Your next question comes from the line of Michael Weinstein - JPMorgan

Michael Weinstein - JPMorgan

On the drug eluting stent market, the pricing market environment took a step down this quarter I think your pricing was down 10% on a year over year basis and I think you said the market was down 8%, so I would appreciate any additional color on what’s transpiring there and then on the guidance for the tax rate, when we started the year was 21%, it looks like for the year its going to average now around 18%. And so contribution from a lower tax for the full year would be about $0.03 to the bottom line so if I adjust your new guidance, $0.82 to $0.86 for the $0.03 tax guidance it would suggest for the year you’re closer to the low end of the range then maybe the higher, the middle of range where you started off the year, and would just appreciate any thoughts on that and why that might be versus maybe where you thought you were back in January.

Sam Leno

Let me address then in reverse order, the tax guidance you said 18% and 19% operationally we also have also discrete items that go up and go down. We’ve been blessed most recently last several quarters with favorable discrete items but we don’t know what they are which is what makes them discrete items. So the reason we give an operational range is because we don’t know exactly what the source of earnings will be.

And the reason that we don’t give full credit to even that improvement is we don’t know for sure if we’ll get tagged with any negative discrete items that do happen from time to time. So I think you’re a bit heavy with your assumption that its an additional $0.03 based on how we look at the world.

What we don’t know is if the tax rate going forward in 2010 will prevail at those rates, our operating plan process will shake that out. But clearly we’ve been helped by the benefits of a lower effective tax rate for this year. We gave a range to start the year of $0.80 to $0.90 so I don’t know that that would conclude that we’re operating at the low end of the range because we haven’t finished the year out but going against us is still heavy Promus mix versus Taxus and that’s a drag on our as you know on our gross profit margins.

If we see some continuous improvement in our tax this year with long for example that’s just been recently approved that may help our gross profit margin going forward. So I think in the aggregate the range we gave I think we’re probably hovering close to the mid point of that range, maybe a tad below it but I don’t think we’re operating at the bottom part of the range.

On the pricing, I thought we said we were declining at 8% in US stent Taxus pricing compared to prior year. I did make one reference to 10% but it wasn’t our pricing decline, it was 8% for us in Q2.

Ray Elliott

I think it’s the other way around. I think we’re 8% and I think we anticipate the market being 10%.

Michael Weinstein - JPMorgan

But that would be an acceleration from your prior comments in the first quarter in market pricing.

Sam Leno

About the same.

Ray Elliott

It may be 1% difference but I think its pretty close to the same.

Michael Weinstein - JPMorgan

On this discussion, you’re endorsing this idea of 15% long-term earnings growth, you’re quasi endorsing the 5% to 7% top line growth for the next couple of years, the street is a little bit below that, but let’s say the 5% to 7% is right, to get from 5 to 7% top to 15% plus bottom, in addition to the de leveraging the company would have, you’d obviously would have to have margins expand and potentially some benefit from tax so part of my question is one, how do you go from 5 to 7 to 15% plus and is there some implied assumption that the tax rate is going to continue to come down that’s going to help you to get there.

Ray Elliott

The quasi support I would state as affirming the work that has been done to date prior to being here and then reviewing the data feeling comfortable with that, so its strong support relative to time here I guess if you want to call that quasi. Its got a lot to do with as I mentioned in the commentary on new products and the continuing flow of new products, new markets, taking a look at the structures of how we run the business, the cost structures, the shifting of costs into things that give more immediate returns back.

In many cases to the extent those are COGS related, there’s opportunity for margin expansion. I think often times people focus on margin expansion as are you selling your stuff for more. And as opposed to doing what you know we’ve done in the past and that’s work every line of the COGS and make sure that as Sam commented everything from scrap rate and all the other variables we’re focused on.

The other thing I would take a very close look at is there’s a high fixed component here at least higher fixed component that I’ve traditionally probably liked in med device businesses and one of the ways of getting at that is the cause shifting making your business more variable. Of course it works as well on the way up as the way down so you’ve got to make sure you’re selling more.

So there’s a lot of, as good a business as this is and as good as the improvements have been made here and they are good improvements, I’m amazed by the opportunity here and I think we’ll all get after that. So again on a week’s worth of data and time as a director, I’m comfortable with the opportunity and with laying out those kind of targets.

Sam Leno

I would also say that we have a lot of leverage points clearly in sourcing Promus Element. We said that Promus as a mix issue has taken away about $220 million of gross profit and we’ll claw about 20% of that back starting in the middle of the fourth quarter of 2009 this year and that will go into next year. So that will be a big recovery.

We’re also as you know have routinely been able to drive $0.03 to $0.05 cost reductions through our VIP focused improvements and part of this year we never saw any of that really in the CRM business and now we have the CRM businesses and plants focus as well so we do expect to see those improvements that will, are always there with some capital investments to help drive available for the taking to help shore up margins.

Ray mentioned in his comments that its also an opportunity for us to look at what we have invested in quality without losing our focus on quality to conduct our quality programs more cost effectively and that should help us as well as when you’re a company our size with that kind of margins, its easy to stop paying attention to the details and what we found in a recent focus on how we price product, we do have some profit leaks that we can shore up and we are in the process of shoring them up now and those all effect gross profit margin improvements.

And then we have operating expense leverage and significant leverage in interest expense as we continue to pay down debt pretty rapidly.

Ray Elliott

And I mentioned it just in passing and its one of many points I made so it may have got lost in the shuffle, but I’m also fascinated and excited by the opportunity of that cross care and the cross selling opportunity we have. We have an amazing product line up when you start putting all of those products together for call point focus and if you compare it to the other companies where yes they have strength in one and probably a little less in the other, the combined strength and in some cases obviously people don’t have both product lines but as you combine those together and then you add in the ability in endo and other things obviously broadly service hospital areas but are a different call point, the opportunity there is huge and I have some early data which I’m not going to share right now, but some early data on the impact of the programs in terms of sales growth versus when they were individual sales there against the combined sale.

When you do that, and the opportunity to growth volume profitably is really outstanding.


Your next question comes from the line of Larry Biegelsen – Wells Fargo

Larry Biegelsen – Wells Fargo

On Madit-CRT you said reimbursement is already in place, could you give us a little bit more color on that and should we start to see an impact immediately following the result at ESC this summer and the dollar impact you provided on the call, what does that assume for growth in de novo implants.

Fred Colen

As it relates to the reimbursement, so first and foremost the reimbursement for CRT-D patients is largely in place. When you look at the details, I’m talking about the United States now, that is in place in 47 of the 50 states. It is basically an indication for treatment for heart failure and so from that standpoint we don’t think there’s a lot that needs to be done on the reimbursement side.

Its more a matter of creating the confidence in the mind of the physicians that this is indeed the right therapy for heart failure patients. As it relates to when that will happen I think that will happen over time. It will not be a one time event. I think that confidence will continue to rise. That certainly will be the case once the world will see the results as presented on September 1 and then I think that will go on with continued analysis of the data and further publications of the data and I think over time we will see an up tick in penetration as well as obviously an improvement because of the fact that there will be an implant of the CRT-D device versus an ICD so there is benefit on both penetration as well as on the system opportunity.

So I think that’s largely the answer I would have on that. As it relates to numbers our estimate I think we said is that our estimate is that in the next three years we believe that this could be an opportunity in the United States for about $250 million and on a worldwide basis as it relates to the overall market impact of about $400 to $500 million worldwide. So those are the dollar numbers that we have estimated that this would in total drive at.

Larry Biegelsen – Wells Fargo

Does that imply any improvement in the flat to slightly down de novo implant growth that you mentioned earlier in the call.

Fred Colen

Yes, it takes all of the effects into account, so it takes into account the current situation around de novo market scenarios, it takes into account a further improved market growth penetration as well as an improved system price opportunity.

Ray Elliott

Let me just add a little additional comment just to make sure we’ve got it dead accurate, it is covered by Medicare, it is covered if its considered medically necessary so just to make sure we’re giving you the fullest information and then if you really care about minutia, Idaho, Tennessee and North Carolina are the three states that don’t cover it.

Larry Biegelsen – Wells Fargo

And the de novo implant question, but can you quantify that, what if its flat to slightly down how much you expect that to improve. It sounds like its incorporated in that dollar amount but you’re reluctant to say by how much its dependent upon de novo implant growth.

Ray Elliott

Well the trends catch up and I can’t remember I don’t have the data in front of me and I think its something like 2012 or 2013 and this has been going on for three years so you’ve got a five or six year period where the lines start to cross again and what will happen is replacement cans were in fact reverse position over time with de novo and I think its 2012 2013.

Fred Colen

Yes, I think that is right and we’re looking at a time window of 2009 to 2012, so that’s the three years we’re talking about.

Larry Biegelsen – Wells Fargo

And then on drug eluting stent in Japan if the 13% number you gave for Endeavor was calendar year it assumes they probably exited above 20 for the quarter in June, and if that’s the case who are they taking share from.

David McFaul

I think the 13% that was mentioned was the worldwide number or US number it wasn’t mentioned specifically for the Japan market. I think if we look at the Japan market we’ve been very fortunate with having such a strong team there hold on to market share with the introduction of a third player into that market and I think we could safely say that there exit percentage is around 20 to 21 I think is what we estimate it at and far lower than we would have expected from the launch of a third player.

So in terms of where is that, most of that market share coming from and when we do the analysis because our team has held on to share at the 47% level on an exit and over 50% for the quarter we believe that most of that share is coming from the other competitor.

Larry Biegelsen – Wells Fargo

And just lastly have you heard back from the European trade commission on an extension to the supply agreement for Promus.

Ray Elliott

We’re in discussion and have constant contact with them, but we wouldn’t comment on the call back at this point in time.


Your next question comes from the line of David Lewis – Morgan Stanley

David Lewis – Morgan Stanley

Just a quick clarification, would you say that given the existing cost initiatives that there would be CRM leverage or anniversarying QA, QC spending in the next two years, 2010 and 2011 you have a significant amount of visibility and be able to drive that 15% but if we take it out past 2011, some of the initiatives that you talked about this morning and gave that great detail on, those things would have to play out to sustain those levels, do you see that as two discrete components.

Ray Elliott

I don’t but because we’re going to, I don’t want to say redo strategic plan but we’re going to rework the strategic plan. I haven’t got data that suggests my ability to answer that. That’s the problem so that would be one answer and therefore it is focused on the two years at this point in time.

Secondly at least in the past I’ve been hesitant other then with a major acquisition or something where its important to communicate the out years for people to understand what may happen I’ve been hesitant to go beyond a couple of years at the most and preferably just the next year in medical devices just because our world, there’s a lot of variables in that and I want to make sure that we’re giving people the best we can.

So at this point its focused on the timeframe as stated.

David Lewis – Morgan Stanley

And given the various managers we have on the phone, I wonder if you could comment on two areas, one just specific European strategies to fix holes in distribution that have been talked about here at the company in the last four to six quarters, and then secondarily on neurostimulation it looks like if share losses continue a little bit on an incremental basis and when can we expect share stabilization in neurostimulation.

David McFaul

I wonder if I can ask a little more clarification in terms of what you’re specifically meaning in terms of holes of distribution.

David Lewis – Morgan Stanley

Specifically on CRM outside the US.

David McFaul

You’re looking more worldwide in terms of not just Europe because in Europe we’ve added a large number of feet on the street and I believe that we’re direct in a lot of smaller places around Europe that give us good coverage. We’re enhancing that so I think Europe is in very good shape as far as coverage goes and any place that we see an opportunity to add more feet on the street to give us more coverage we’re certainly aggressively pursuing that.

I think around the world when you look at certain markets when you look at for instance the emerging markets like Brazil or China, we’re certainly taking very good steps in order to make sure that we’re able to penetrate those markets in a way that we’ve never been able to before.

Ray Elliott

I think too the comment of adding feet on the street that I put in place between 300 and 500, a chuck of that is obviously in Europe, its not all in the US but I think there is a feeling on all of our parts and certainly on mine at looking at the new product opportunity and the level of productivity we have on a per rep basis. There’s an opportunity here to grow the sales force and therefore particularly in CRM fill in a lot of the gaps that may be perceived.

Michael Onuscheck

First thing I would say is that we actually came off a pretty good quarter. Q1 for us was very soft but domestically we’ve reestablished ourselves in this marketplace and we won’t really know whose gaining share or lost share in this quarter until both St. Jude and Medtronic report. When we look at the domestic market we did a ton in this division last year in terms of doing a quality system upgrade and a move into a new facility.

And so we felt a little bit of that impact in the early part of this year but we did launch a new product in the first quarter. We’ve got new products that are actually submitted to the FDA right now which will help us accelerate our growth in both the domestic and international markets. We’re feeling pretty confident right now that we’ve got the right strategy in place to get back on what we’ve done traditionally in the pain segment.

And we’re really pretty pleased with the results in the quarter. Our expectations are that we’re back to being healthy again in our top line growth.

David Lewis – Morgan Stanley

In terms of your internal plans related to the conversion of Promus Element do plans call for a high degree of conversion let’s say 80% or do they call for a full 100% conversion by the second or third quarter of next year.

Sam Leno

We won’t comment on the second or third quarter of next year but our plans do call for a very high rate of conversion. We won’t give a precise number. We have an opportunity not only to convert the vast majority of Promus Element but also with Promus Element to take additional share. We haven’t disclosed what our plans are but the upside is pretty significant.


Your next question comes from the line of Tao Levy – Deutsche Bank

Tao Levy – Deutsche Bank

On the operating expense side I think you mentioned it looks like its going up a little bit versus a prior comment, and is that related to the additional folks you want to add on the sales forces or CEO transition costs imbedded in there.

Sam Leno

There’s no real CEO transition costs as notable, primarily it’s a focus at adding more sales and sales related personnel as we talked about in previous calls. And we think that’s an investment worth making so its primarily that. It’s a few other odds and ends that are more timing related from one quarter to the next but in general we were not surprised at our level of operating expenses but we wanted to do and my comment was lay an expectation on for the full year which is why I said a combination of SG&A and R&D expenses would be approximately $3.650 billion, just so there’s no confusion.

Tao Levy – Deutsche Bank

And will that still allow you to achieve the I think you had mentioned in a prior call the 150 basis points of operating margin improvement with the added expense.

Sam Leno

Can you help refresh my memory on where I made that comment and what it was about.

Tao Levy – Deutsche Bank

I think you were just talking about annual improvements of around at least 150 basis points of operating margin, you made it in the last couple of conference calls. I think it was not specific guidance but just a big picture outlook of how you manage your expenses.

Sam Leno

I think what we said was that over the next several years if we go back to 2007 when we announced our restructuring plan we had targeted to be at 30% operating profit margin in 2010 but as a result of doing much better with total market share driven by a bigger proportion of Promus then we had originally thought, that 30% target would go up by a year, maybe a little more than a year as we now have to overcome the margin gross profit and operating profit margin pressure that that much Taxus has provided to us.

So we’re still improving our operating profit margin year on year, that’s our expectation. A lot of it is driven by the improvements that we’re expecting, 12 points of margin improvement coming from our CRM business which is 30% of our total portfolio.

Tao Levy – Deutsche Bank

And then just on the gross margin you talked about 70 to 71% is that going to be in tact also for the back half of the year just because obviously the hedging benefits are going to probably be a bit lower in the back half of this year so I wasn’t sure if your comments were just on full year basis or also in the back half of the year.

Sam Leno

My comments were for the full year as well as for the back half of the year. It’s a pretty broad range, 70 to 71% so that gives us the ability to have different mix contributions especially on the Taxus side but also with the expected continued market share movement that we ought to get from Cognis and Teligen, that should help our gross profit margins as well.

So it pertains to the back half just as much as the front half.


Your next question comes from the line of Rick Wise – Leerink Swann

Rick Wise – Leerink Swann

Maybe I’ll start with the a strategic question you very emphatically made the point that you’re anxious to drive innovation maybe talk to us about your early thoughts about driving innovation outside Boston via acquisition, is this a priority you highlighted a lot of interesting market when, how, where, how big, how soon can we see some external initiatives.

Ray Elliott

Do you want a list of targets.

Rick Wise – Leerink Swann

I’m taking names right now.

Ray Elliott

Those are the target areas subject to further review. In all those areas I mentioned we also have internal projects so it is a buy versus build or a buy and build in many cases where we’re acquiring technology from the outside to merge with existing programs inside but there’s nothing on that list even as you get into obesity, diabetes and other areas that is not being worked on as well internally with some really interesting technology.

So the question becomes what portion of the disease or subset or if you can get after the whole disease are we targeting and we have databases here in our medical group and in our clinical science group that focus very carefully on disease indications and portions thereof or the entire disease.

My preference is to lean more to start to finish disease profiles, continue of care and therefore if I did send you a copy of which I never would, our plans that combined acquisition and internal technology you would see that kind of approach. The problem we have today is bless everybody here there’s just too many, too much, and too many multiples of things so what we want to do is tighten that down to some very specific diseases and then you will see a blend, you’re not going to see big acquisitions.

In start we can’t afford it, don’t want to do it and we’re focused on investment grade rating return and secondly there’s nothing big to buy in most cases in those areas anyway. They tend to be a combination of smaller technologies and we have the ability to merge those together in here to target specific diseases.

Rick Wise – Leerink Swann

Post the Madit-CRT data maybe just talk a little bit about your strategy to drive the penetration you’re envisioning, is this is ET or heart failure doc oriented [inaudible] and maybe just help us understand how you’re going to make it happen.

Fred Colen

First of all I think that once the data is going to see the day of light, there’s going to be a lot of enthusiasm in the medical community and obviously that is important not only for the implanting physicians but also for the referring physicians and the heart failure specialists.

And I think in the heart failure space this is actually going to be a pretty big stimulus for heart failure treatment and probably one of the most important things that has happened in the last five years or so as it relates to treatment of heart failure patients.

So I believe that once the data will the day of light and all of the detailed analysis gets done over time, all that’s better understood, obviously with our goal to make people understand the data as best as possible in terms of education and marketing events that we will obviously undertake I believe that the in particular the heart failure physicians will be very enthusiastic about this opportunity and I think that’s going to be a big stimulus in the referring chain to get more patients to electro physiologists for implant.

Typically the bottleneck has been with the referring docs with understanding of the benefits of the therapy and I think this is clearly going to be I believe a major step forward in improving to the also referring docs and the general cardiologists that this is an excellent treatment for heart failure patients also in a very early stage to prevent worsening of the ongoing disease. So I think there’s going to be a lot of buzz and interest in this.

There hasn’t been a lot of new innovative approaches in the heart failure space in the last several years and so I believe that this will indeed provide that kind of fuel to drive that engine a lot better. And then I think you have to look at not just Madit-CRT but you have to look at all the other things that we are working on, the Madit II data as well as our work that we are doing on the Latitude database in terms of the Altitude initiative is creating a lot of enthusiasm in the medical community at large, you’ve seen it at HRS.

So we clearly are working on the designs that matters and that will indeed prove that this is an effective therapy and that over time we can also prove that this is going to be a more cost effective strategy for the treatment of heart failure in particular.

Rick Wise – Leerink Swann

If I’m doing the numbers right your nine months reported for this year, nine months reported and guided third quarter GAAP numbers suggest $0.18 to $0.23 for the first nine months of GAAP EPS, that implies given your full year guidance a fourth quarter of $0.29, $0.30 something like that again if I’m doing it right. I assume that’s part tax rate, is the big driver since the fourth quarter sales don’t seem to be dramatically different then the first nine months quarterly rate, is that all about Promus mix or is that the biggest element in making that dramatic fourth quarter.

Sam Leno

In the GAAP numbers we have an Abbott milestone payment that’s coming in that we expect to get later on this year and that’s a big number, its $250 million so that throws off any reasonable comparisons of the first nine months to the last three months of the year. And the tax rate is largely the benefit is coming from two areas, most significant of which is we’re obligated to approve interest under FIN 48 based on published government rates and they went down by about two points.

And as a result it gave us a pretty significant improvement in the effective tax rate for the year. There’s always a mix shift issue on an operational basis that take place from one quarter to the next but the principal reason that you’re seeing us with a different number is because of the interest rates.

Those interest rates could bounce right back again three or six months from now, right back at 21%.


Your next question comes from the line of Kristen Stewart – Credit Suisse

Kristen Stewart – Credit Suisse

I was just wondering if you could give us any more details around this program termination, what specifically it was.

Sam Leno

What I will say is that we cancelled an R&D project and with an R&D project came a liability that if we had stayed with it liability would be experienced and expensed over time. But as a result of mothballing the R&D project we are still obligated to pay that liability over time but under GAAP because we no longer have an expectation of the benefit that comes with an R&D and the related commercialization of the project, we’re obligated to [recrue] that liability up front.

Kristen Stewart – Credit Suisse

Was that more in the CRM or endosurgery or—

Sam Leno

We won’t disclose exactly where it was, that would be a competitive disadvantage to us but that happens from time to time. This one happened to be a bit unusual and it cost us $16 million in the quarter.

Kristen Stewart – Credit Suisse

In your ASP commentary I think you said worldwide ASPs were down 13% is that including the negative effect of currency.

Sam Leno

We don’t include currency in our ASP calculations. So its without that. I’m going to go back also and make a correction in a comment that Michael Weinstein had asked, he had picked up on the fact that I did make a statement that the US DES average selling price declined 10%. That was wrong, its 8%. Its in line with the market also which declined at 8%.

Kristen Stewart – Credit Suisse

I guess thinking about the DES market we’ve now seen penetration in the US stay stable around 75% I think you said volume growth was around 2%, where does the market go from here if you’re facing 8% headwinds, is there anything at all that you foresee that could perhaps drive higher volume growth or perhaps a decelerate in terms of the ASP declines and have you seen our would you expect to see any impact on the Bari 2D trial.

Sam Leno

We’ve been pretty consistent in our expectation that the DES market is a flat market and will continue to be a flat market for as far as we can see.

Kristen Stewart – Credit Suisse

And I guess you had mentioned healthcare you were going to hold back some of your comments but I was just wondering if you could share with us what do you see as the major area of concern facing Boston Scientific going forward from a reform standpoint.

Ray Elliott

I think it depends where it comes out, that’s the problem trying to speculate at this point but I think as we, what we want to make sure is that we don’t have backdoor taxing is a major concern. What I mean by that is we don’t want to end up with in the period we’re in in this country to ensure that corporate taxes in our case as we reinvest higher portions back into the business that we don’t end up with a financing process initiated by the government that in effect does not enhance innovation and patient outcomes and it becomes an in effect a backdoor tax.

That would be one large area. There are so many things on the table right now. The reason I didn’t frankly put it in because its and interesting subject that effects all of us is I would have returned to my history of two hour earnings reports because right now the number of things of the table but the big one or I would say the one that caught my most attention would be trying to stay away from that kind of financing to the government and focus on innovation and development.

I think we also, I don’t know whether we did it intentionally but I think the Bari 2D trial I think we skipped over that.

Dr. Donald Baim

I think the important about the Bari 2D trial was it was really a study as to whether preemptive revascularization using either in an non randomized way PCI or surgery would improve the outcome of patients with diabetes and there are very few situations where preemptive revascularization in people with minimal symptoms actually do improve outcome. This was an other example of that. So we shouldn’t move to preemptive revascularization but it doesn’t change the current management strategies of people with either symptoms or large areas of myocardial ischemia nuclear testing have been referred for whichever revascularization treatment if most appropriate.

Ray Elliott

That trial wasn’t randomized anyway.

Dr. Donald Baim

No, in terms of revascularization it was not between surgery and MPCI.

Kristen Stewart – Credit Suisse

And then just on the diabetic population what risk do you really see from the [spirit 4] what level of confidence do you have that Taxus will in fact prove to be better than or equivalent to Xience.

Dr. Donald Baim

Spirit 4 removes the [inaudible] reflex of routine and geography but still includes the fact that it’s a trial again Taxus Express not Taxus Liberte so therefore without the benefits that we know Taxus Liberte has in small vessel [resenosis] and long lesion peri procedural myocardial infarction which are all part of the composite end point.

With that said the Spirit 2-3 pool data point to an advantage of Taxus in diabetics and it will be interesting to see we have no reason to think it wouldn’t be extended in the Spirit 4 data but we won’t know until September.


Your next question comes from the line of Bruce Nudell – UBS

Bruce Nudell – UBS

It was interesting to hear that 47 of 50 states basically allow CRT-D to be extended to class 2 patients with [inaudible] today do you feel that the patients who are coming into, who are in the device funnel as it were who have very low ejection fractions, I think the sweet spot in reverse, was 25% or lower and the sweet spot was 150 milliseconds QRS, do you think that they’re not getting CRT today and when you take your $250 million estimate that either equates to 10,000 CRT-D units that you wouldn’t have gotten otherwise so in other words more patients in the funnel, versus 50,000 upgrades and where is the balance in where you think those $250 million are coming from.

Fred Colen

As it relates to the reimbursement so basically I already covered that part, patients who need a CRT-D device can get those devices and that’s essentially in place for reimbursement. There is a little bit of spill over into class 2 already today. We know that and that is a minor portion but that is happening here and there. That clearly has been taken into account also in our prediction models for the future.

So there is some spill over and some patients are getting treatment even today off label by physicians in case they need it in particular with very low ejection fractions as you said. The other side is there are a lot of patients out there who could in deed benefit from an expanded use. We believe that there are somewhere in the range of 150,000 to 200,000 patients that could benefit from an expanded use of CRT-D.

I think that combined with a larger penetration uplift in the system price, all of that together gets us to the estimate that we made. Also taking into account some of the spill over that is happening even today. So that’s about as best as I can explain to you on the phone.

Bruce Nudell – UBS

But fundamentally it sounds like most of this is going to be or a lot of its going to be from new patients recruited into the system who are not otherwise committed to device therapy today. Is that a fair assumption.

Fred Colen

That’s probably a fair assumption although I also would not underestimate the effect of a higher system price because of the additional left ventricle lead and things like that. So but I think your assumption is correct.

Bruce Nudell – UBS

And then on the DS side, thanks for that great detail, could you just and I just lost my place in all the commentary could you just recap what the ex US pricing environment was and then more generally the US was down I guess 8%, is 2010 the year with the new product introductions that that trend could be reversed or is those trends likely to continue until there’s actually a major shift in technology.

Sam Leno

On the price you’re right, the US decline as we mentioned was about 8% and I think we said OUS if I recall was about 10%. But the price decline is a big greater globally then it is in the US on average. Whether or not that continues I think its too early to predict because there’s just no way to separate the effects of the broader economic issues from the competitive issues that take place as we have new products coming to market.

But I think its our expectation like other new products that come to market there is always an upside for potentially higher average selling prices when new products and new technologies come into the market space. Its just difficult to predict right now.

Ray Elliott

I think I would add too is that a lot of the contacting that’s out there is step function contracting that varies by date, its not all as if it’s a Jan 1 date so part of what you have, I think your point is valid that there would tend to be extended pressure of some kind both in the economics that Sam mentioned as well as the fact that no new large technologies tends to move in slightly in that direction.

Offsetting though is what I mentioned, is the timing and language contained in various major agreements and groups we deal with layered in over time so you’ve got kind of these two opposing forces. We intend to be very disciplined around our agreements and our pricing so that the net effect of that my guess is still a little bit of quarterly decline. I still think there’s a little more negative then positive but at this point without all the rest of the data its tough to really predict it very accurately.

Sam Leno

I also said that on a worldwide basis we saw or are estimating in Q2 unit volume increase was about an 11% upside but that was offset by about a 13% ASP decline for the market overall.

Bruce Nudell – UBS

And just from a big picture point of view, do you think cardio devices can escape major ASP pressure going forward given the fact that teaching hospitals have been targeted by [Medpack], a lot of cardio procedures done there, commercial insurance has been a sugar daddy for the whole medical device industry, there may be changes afoot, or is really tax reform really your biggest worry from a healthcare reform standpoint.

Ray Elliott

No I think it’s all [inaudible], the earlier question was what am I most worried about and obviously there’s a longer list of things, I am not of the opinion that that gets to us as early. I think there’s bigger issues with insurance. I think there’s continuing issues despite the contribution of the pharma groups so it’s a question of where are you in that order and what are you going to do to counter the effect of that as legislation comes through over several years.

And I think our view is we’re down the line somewhat at least as best as we can understand at this stage with not a lot directed at us. We’re trying obviously to get our responses and group together as [Advamed] and others and then I think counter to that is the ability of us to do a better job of proving what we actually do.

It’s the old story that you hear of unintended consequences and we’re not doing perhaps a good enough job of explaining what happens if you reduce the prices. What changes in the model. What support is there in the operating room. What’s the effect on our R&D programs and future development of patient quality of life and benefits.

So part of the obligation here for us is not to sit around and wait for the government to explain what the world looks like but rather for us to explain what our world looks like. The difference for us is I think we have a little more time than some of the other groups certainly I would say our friends in the insurance area and pharma.

So do you avoid it, no. Is it a good thing what they’re doing, yes I believe it is. But we have to make sure that it’s the patient that’s kept first in line here. That’s the person who’s paying for the government programs in the end game.


Your next question comes from the line of Matthew Dodds – Citi

Matthew Dodds – Citi

Since you’ve only got five minutes I won’t ask about hip and knee pricing on this call, so there was one thing I wanted to check on with you on your comments towards the end about the first 100 days, when you talk about the negotiations, the cross selling, years ago when a lot of the stent companies and CRM companies combined there was a lot of talk back then about bundling and using that as leverage and I guess my sense is it hasn’t really caught on so I’m wondering if from your perspective from the outside now how much of that is going on in cardiology between even things like stents and the interventional products that you have and then lumping on CRM before we even get into endosurgery or neuro stent, how much opportunity is there in your estimation.

Ray Elliott

In part it goes back to the previous question, the world we live in today and the world going forward suggests a different model. So was it successful in the past and is there a history here of making that work well, I would probably think the answer would be a solid no. But we are in a changing world of cost effectiveness, transparency, of pricing and services, the economics and healthcare economics and so on.

And I think what and secondly by the way I’m not convinced that historically the companies that tried it had balanced product offerings on across the line. If you look at the number one and number two share positions we have in the US particularly it would suggest to you that you can’t be in a position when one half of your product line is a forth market share player and the other one is first because that’s not going to work or you’re going to have declining price in the one that’s fourth because you’re forcing the bundled buy.

But where you have number one and number two market share positions, efficiency of call point in a changing world that we’re going to be living in now or in the future, I think that suggests that there is a model there that works. I think it only works for us with no disrespect to our other players and I think the early data that I’ve looked at, I won’t disclose what it says because I think the data sample is too small but I will tell you that the early work I’ve done on this here both prior as a director and more recently in meetings here would suggest that we have the capability not only to do that but in fact have incremental sales beyond what you would do separately with the product lines.

Matthew Dodds – Citi

And then on neuromodulation the evidence trial, how long are we talking before we’ll get data on that. I assume that’s a pretty long trial.

Michael Onuscheck

We’re going to enroll 128 patients across the four countries. We expect that the enrollment for this could be a little tough because we’re going to randomize the patients between a spinal cord stimulation device or a reoperation for reconstructive spinal surgery and its going to be a little tough to get the patients to go randomized to that.

But we expect that we’ll be able to do this within an 18 month window if we start at the point right around the beginning of the third quarter, 18 months from there, we’ll be looking at some pretty good data. Now we will have some interim looks at this because this isn’t going to be data that we submit to the FDA. Its going to be data as evidence to the marketplace. So we’ll get some interim looks at this and I think the first interim look is right around [inaudible].


Your next question comes from the line of Joanne Wuensch – BMO Capital Markets

Joanne Wuensch – BMO Capital Markets

We’ve talked a lot about the DES pricing environment in the US and worldwide could you please comment on what it looks like for [DM] pacemakers.

Fred Colen

So as it relates to pricing on the CRM side, as you probably know we have been able and this is a historical always done kind of strategy with new products we’re able to get a price uplift and certainly we have been able to do that with our [inaudible] device launches so we have done that around the world and with that in mind if you look at the whole movement of price over time I would say its very well within the range of our historical expectations. There is nothing abnormal there.

And so we get an up tick because of new products and then the kind of slowly degrades over time and you lift it up again with new products. That is going on as it historically has been and we really see no change in that pattern.

Joanne Wuensch – BMO Capital Markets

And how does that compare to the broader market pricing.

Fred Colen

There is no news on that side either. There is obviously a lot of pressure as it relates to hospital budgets and cost containment but its generally in the 1% to 2% range I would say.

Ray Elliott

Let me make a comment with respect to the mechanics around it, one of the things that I’ve asked Sam and his team to do is to get a much more refined sophisticated IT based system to look at price volume mix because often the questions we get are really about pure price and market driven price economics and sometimes the databases and what we’re capable of answering tend to mix price and mix together.

So as we get further down the road we’re going to be able to comment on as in the past pure price, the implications of mix primarily new products and volume being units of sale and I think that will be frankly more effective for the listening audience.

Joanne Wuensch – BMO Capital Markets

I’m going to assume that you’ve seen the total Madit-CRT data set and it sounds that you are quite excited about the potential for that market probably more so now than you did prior to seeing that, is that the right read.

Fred Colen

Let me just clarify I have not seen the Madit-CRT data set all I see is the Madit-CRT executive committee working in a very energetic and very positive and upbeat fashion. I have not seen the data set, I’m not commenting on that at all but I do expect it to be positive news and I think that this is going to be a very important clinical trial in the history of the treatment of heart failure patients.

Joanne Wuensch – BMO Capital Markets

Gross margins, you’re talking about 70 to 71% in 2009 and you have multiple programs and ways to expand that into 2010 if we assumed anywhere from 100 to 150 basis point up tick in 2010 would that be about right.

Sam Leno

We won’t comment on 2010 or beyond, what we’re focusing on are the opportunities we have to improve margin. Let’s not forget we also have opportunities to have margin pressure with pricing and other things going on as well. So we manage as best we can improvement in overall operating profit margin with a clear focus on taking full advantage of every lever we have to improve gross profit margins but there are frequently some counter balances.


Your next question comes from the line of Tim Lee – Piper Jaffray

Tim Lee – Piper Jaffray

Just on the drug eluting stent side, how should we think about the US mix going forward and could we see further shift to Promus and in particular how should we think about the potential impact from Spirit 4 and even if the results are consistent with the prior studies, the bigger study which I suspect could carry some more marketing muscle.

Hank Kucheman

Good question, I would say that the mix shift that you have seen here over the last quarter really reflects the anticipated pull back of Taxus following a very strong launch of Taxus Liberte. As you know you go through the evaluation period and that launch commenced in Q4 and continued through Q1. The other key factor that may be not appreciated by many is that we had a pretty major contract and a lot of incremental business gain from a major customer which yielded a very significant amount of increase in Promus units.

And those were the key contributors during the quarter in terms of the mix shift. As Ray and Sam have alluded to previously I believe that the launch of Taxus Atom as well as long will work to improve the Taxus mix in the second half.

Dr. Donald Baim

I think what the Spirit trials have shown and I expect Spirit 4 to be no different is that Promus Xience outperforms Taxus Express 2 and that outperformance is confined to smaller vessels and to some extent with peri procedural MIs to longer lesions, well we know that Taxus Liberte also out performs Taxus Express in those two sub groups of small vessels and long lesions.

So its not particularly relevant to the devices that we have on the marketplace now in essentially every country and then the pattern in the Spirit 2-3 of better performance in the diabetic population is one that we’ll have another chance to take a look at in Spirit 4 with almost a thousand diabetics.

So I think that the findings will be interesting but one has to look at them through the lens that it’s a device that we now know we can beat on the Taxus side with Taxus Liberte and not with our current Taxus Liberte product.

Tim Lee – Piper Jaffray

Just tying that mix question to the earnings outlook, given your current 2009 earnings is the expectation is that the Q2 US mix this is a low watermark for Taxus on a going forward basis.

Sam Leno

We haven’t disclosed that level of granularity and won’t because it could move up and down from one quarter to the next.

Tim Lee – Piper Jaffray

And then on the CRM side, with the rollout of Latitude, anecdotally were there any hospital tenders in the past that you were excluded from due to the lack of remote patient monitoring and I suspect you’ll be able to get your fair share of those on a going forward basis, just any color on that front.

Fred Colen

So as it relates to the European market there clearly have been tenders where we were excluded because the fact that we did not have an offering of remote monitoring side and since we are now rolling that out, we’ll have that opportunity in the future so this is clearly going to be a benefit for us in those markets.


Your next question comes from the line of Glen Novarro – RBC Capital Markets

Glen Novarro – RBC Capital Markets

I just want a little bit more color on the ICD performance in the quarter, you did say that ICDs came in at the low end of guidance and I’m wondering is that because you took less share then you were expecting and if so who did better, was it St. Jude or Medtronic in the quarter. Or is it possible that the overall market in the US and worldwide was just smaller than you thought. And then just on DES penetration, it looks like we’re starting to level out here. We still went up here in Q2 relative to Q1 but the gains are now smaller. Are we going to stop at 75% penetration or do we still have some runway left.

Ray Elliott

Fred why don’t you take that under the understanding that the band of guidance was a relatively narrow band so being at the top, middle or bottom wasn’t a material fact differential as opposed to just where we positioned.

Fred Colen

So on that side, so we believe that we have continued to take share with our new products in particular on the [inaudible] franchises, CRT-D and ICD. It is hard to get your arms around the market dynamics including de novo replacements as well as market share if you don’t know the results from your competitors. The major competitors being St. Jude and Medtronic and that’s still to come as you know.

The other point that I would like to make which is an important fact for the second quarter is that you may know and you may realize that Medtronic is having an extra week in their current quarter and that is an event that happens once every six years or so and that’s happening this quarter on the Medtronic side and that’s adding some complexity to what’s understanding what is the real market and what is the real market share between the big players.

But most importantly I would say we are absolutely confident that we continue to, we took share in the second quarter and we are confident to continue to take share in the rest of the year and that has to do with many different strategies that we have in place but one important factor is that on the Cognis and Teligen side we now and for the first time have full inventory available in the US as well as in all the markets that we’re in.

So we believe that bodes well for us to continue to take share with Cognis and Teligen for the rest of the year along with about four or five other strategies that I won’t go into because we don’t have the time to explain it all but we are confident for the rest of the year with Cognis and Teligen market share taking.

Glen Novarro – RBC Capital Markets

Can you give us any color as to what you think the US and worldwide ICD market did in terms of growth rates in 2Q, broadly, any range you can give us would be helpful.

Fred Colen

Its very hard to estimate that. As you know we get some real data always several months after the fact. So we have got some data from April. That shows a slight recovery in the US as it relates to the de novo market for ICDs and CRT-D devices. In my comment is still that in the US the market is still pretty much stable, slight growth, for sure not a negative. And we think that in the second quarter the market in the US may have been about $1.1 billion in that range so its relatively flat and then its hard to speculate.

And outside the US obviously it is always a bit better and there is some more market growth outside the US but also that is hard to quantify without getting a full picture of our competitors.

Glen Novarro – RBC Capital Markets

And then just on the DES penetration.

Dr. Donald Baim

Penetration fell from the upper 80’s to the low 60’s on safety concerns and I think as those safety concerns have been largely put to rest we seen this recovery to 75. There are additional long-term safety issues and some new anti platelet agents that will address the safety issue but whether and how fast we get back up to the 85% level will depend on some of the longer-term data in acute MI drug eluting stent use. Some of the other expanded indications but one would expect that to be a slower asymptotic growth not anything that will be a step function.

Glen Novarro – RBC Capital Markets

And that’s part of the DES guidance that we’re getting for 3Q and that is a little bit more increase in DES penetration but I don’t want to put words in anyone’s mouth but we’re not seeing 77, 78% this year or maybe a year from now.

Dr. Donald Baim

I think it’s a little hard to predict and some of it will depend on the, how the longer-term safety data is received and the two year results of trials like [horizons].

Glen Novarro – RBC Capital Markets

And then just Bari 2D, does this really impact penetration at all.

Dr. Donald Baim

I don’t think so, if preemptive revascularization had been proven superior for diabetics, it could have led to additional growth because those are not people currently treated. The fact that preemptive revascularization didn’t provide benefit leaves us operating under the same rules that we have.


Your next question comes from the line of Sara Michelmore – Cowan and Company

Sara Michelmore – Cowan and Company

Let me ask the converse of a question that was asked earlier as I look at some of these non core product lines it strikes me that one option may be for you to consider divesting some product areas or business lines, just curious what your appetite is for that and if that is an option for some of these product areas.

Ray Elliott

When I’m done sending Rick the target list for buys, I can send you the target list for divestitures I guess. We don’t have any plans, we went through a period of that when I was a director here and the company did a great job of going through that. We don’t have any plans at this stage. The plans we have are to strengthen those businesses as you can tell based on the inputs I’ve given so far and the inputs I’m getting here.

Having done that process, again I happened to be a director at the time, the management here having done that process theoretically we are left with no non core businesses and therefore that would make that go away anyway.

Sara Michelmore – Cowan and Company

And just a follow-up question on the Madit-CRT I think you mentioned in your prepared remarks that you would file for an expanded labeling claim for that. How critical is the labeling going to be in terms of developing the incremental market and I know Medtronic has similar plans to filing expansion on the reverse HF study as well.

Fred Colen

I think that is going to be critical. I think there is more and more focus and attention to what’s on label use in general. I do believe that not every CRT-D system is the same. There is a lot of different [inaudible] as it relates to the left ventricular leads and positioning or positioning capability on the left ventricular side so we have the benefit of having this positive outcome of the Madit-CRT study with our systems and we can demonstrate this benefit.

I’m not so sure how others can piggyback on that that easily and I think we are optimistic that we will get a label that indication extension ourselves and we’ll have to see how that works out for our competitors.

Sara Michelmore – Cowan and Company

And just on DES any update on the Labcoat element program and what the timeline looks like there in Europe.

David McFaul

We’ve had some discussions with the European regulators about the Labcoat Liberte trials that we’re done and we’re weighing the advisability of launching that product versus going directly to a Labcoat on our element stent backbone. So that, and those decisions are not final.

Ray Elliott

Thanks folks, Larry is going to close it off after me but I did want to point out that true to history that is a new record for us which I’m sure is killing you of two hours and 18 minutes.

Larry Neumann

So I’d like to thank everybody for joining us today and for your continued interest in Boston Scientific.

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