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Executives

Larry Newman – Vice President, Investor Relations

Sam Leno – Chief Financial Officer

Raymond Elliot – President, Chief Executive Officer

Fredericus Cohen – Executive Vice President & Group President CRM

William Kucheman – Senior Vice President & Group President Cardiovascular

David McFaul – Head of International Business

Analysts

Michael Weinstein – J. P. Morgan

Robert Hopkins – Bank of America

[Larry Viegelson – Wells Fargo]

Tao Levy – Deutsche Bank

David Lewis – Morgan Stanley

Bruce Nudell – UBS

Rick Wise – Leerink Swann

Kristen Stewart – Credit Suisse

Joanne Wuensch – BMO Capital Markets

[Derrick Thong – Sanford Bernstein]

Tim Lee – Piper Jaffray

[Adam Finestein – Barclays Capital]

Matthew Dodds – Citigroup

Sara Michelmore – Cowan and Company

Boston Scientific Company (BSX) Q3 2009 Earnings Call October 20, 2009 8:00 AM ET

Operator

Welcome to the Q3 2009 Boston Scientific earnings conference call. (Operator Instructions) I would now like to turn the conference over to our host Mr. Larry Newman.

Larry Newman

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

We issued a press release yesterday afternoon announcing our third quarter results. Key financials are attached to the press release and we have posted support schedules to our website that you may find useful.

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

We will also be joined during the question and answer session today by Fred Cohen, Head of our CRM business, Hank Kucheman, Head of our Cardiovascular business, Steve Mereci, Head of our Endosurgery Business, Joe Fitzgerald, Head of our Peripheral Interventions Business, Mike Onuschuck, the Head of our Neuromodulation business, David McFaul, Head of our International Group, and Dr. Keith Dawkins, Associate Chief Medical Officer.

Before we begin I’d like to remind everyone of our safe harbor statement. This call contains forward-looking statements. The company wishes to caution the listeners 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 plans, 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 the call over to Sam for a review of the third quarter financial results.

Sam Leno

Before I review the results of operations I’d like to discuss some trends that we’re seeing across a number of our businesses and regions. The global economy issues remain a challenge. Increased focus on health care systems here and abroad is resulting in greater price pressures on our businesses around the world.

This coupled with gradual and general slowdown in the growth in some of our larger serve markets is putting pressure on our top line growth opportunities as well as on our gross and operating profit margins.

U.S. Health Care reform is still being intensely debated and if the medical device innovation tax is passed together with the utilization tax that is proposed to be levied on our customers, changes in the way health care is developed and delivered will place added strains on health care providers, technology investments and advancements as well as suppliers.

Despite these pressures we continue to invest in the growth of our businesses through increases in customer facing positions as well as in strategic R&D initiatives and acquisitions. We will however, need to be more selective and discriminating with our investment dollars than ever before. We’re also evaluating possible changes in several of our business models as a direct response to current market conditions and pending health care reform particularly in the U.S.

We recognize that these are challenging times, but our responsibility is to deliver long term profitable sales growth while responding to our changing environment.

Turning to the highlights of the quarter, we delivered top line growth on a constant currency basis excluding divestitures of 3% with U.S. growth of 4% and international growth of 3%. This results in year to date constant currency consolidated sales growth of 5% which is at the mid point of the 2009 full year guidance that we provided to you at the beginning of this year.

Excluding the impact of product recalls which will be discussed later as well as the revenue deferral associated with launching the Latitude remote patient monitoring system in Europe, constant currency growth for the third quarter would have been about 4%.

We continue to see solid growth in our CRM business in the quarter, although our growth is slower than we anticipated. We also delivered solid growth in our worldwide DES business as well as in our Endoscopy, Urology, Gynecology and Neuromodulation businesses.

Our Neurovascular division continued to hold a leadership share position despite a delay in our new product launches world wide, and our Peripheral Intervention business continued to strengthen with new product launches in the quarter. It is also noteworthy that 44% of our revenue for the third quarter came from new products that have been introduced in the last 24 months.

Our gross profit margin declined sequentially as a result of continued pricing pressures in several of our key markets together with product mix. Our ability to maintain and improve gross profit margin is directly related to the gross profit margin improvements expected in our CRM division, our value improvement programs throughout all of our manufacturing plants and our ability to manage price pressures and product mix around the world.

Over the next several years we will look to improve our gross profit margins through favorable product mix driven by new product launches, the continued implementation of our multi-year plant network optimization program as we reduce the number of our manufacturing plants from 17 down to 12, and the launch of our Promus element stent in Europe in the fourth quarter this year and in the U.S. and Japan in mid 2012.

Our expense and head count controls have been firmly in place for the past eight quarters and as a result of the success of these programs, we have continued to re-invest some of our savings into additional direct sales head count targeted to drive incremental profits and sales growth.

Now let’s turn to a more detailed review of the operating results for the quarter. Consolidated revenue for the third quarter was $2,025 million. That’s within our guidance range of $2 billion to $2.1 billion and represents a 2% reported increased in the third quarter of last year. Included in our reported results in a negative 1% contribution from divested businesses.

So excluding the impact of the divested businesses and the negative $11 million effect from foreign currency, third quarter revenue was up 3% in constant currency.

Compared to the contribution assumed in our third quarter guidance range, foreign exchange contributed an additional $21 million to our third quarter sales results. Without this additional currency tail wind our sales would have still been within the low end of our range.

Compared to the third quarter of last year, excluding divestitures, U.S. revenue increased 4% while international revenue increased 2% or up 3% 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 here at a higher level.

World wide drug-eluting stents came in at $411 million. That was at the mid point of our guidance range of $390 million to $430 million and up 4% from the third quarter of 2008 which represents a 5% constant currency increase. Our world wide DES revenue includes $245 million for Taxus and $166 million for Promus and this represents a 60/40 split between Taxus and Promus.

We continued to sustain our world wide DES leadership during the second quarter with an estimated global market share of 41% which continues to be about 20% higher than our nearest competitor.

Geographically, U.S. DES revenue was $222 million and that was within our guidance range of $220 million to $240 million and 6% higher than the third quarter last year. This includes $106 million of Taxus and $116 of Promus revenue and represents a 48/52 mix of Taxus and Promus in the U.S. compared to a 47/53 mix in Q2 of this year.

Recall that in Q3 of last year we recorded additional sales of Taxus as a result of adjusting our sales transition reserves related to the launch of Taxus Liberte. Excluding this impact, our U.S. DES revenues increased 9% over the third quarter of last year and during the third quarter we reached the anniversary of the launch of Promus in the U.S.

We estimate that our U.S. DES share was 49% for the quarter with 23 share points of Taxus and 26 share points of Promus. Our total share is up four points compared to the third quarter of last year and remains consistent with the share during the first half of this year.

The stability of our U.S. DES market share is driven by the fact that Boston Scientific is the only company in the industry with a true drug platform. Ray will discuss during his remarks, our thoughts regarding the data released at the PCT meeting last month in San Francisco.

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 U.S. drug-eluting stent market with 22 more market share points or almost twice the market share of our next nearest competitor.

Based on our estimate of the U.S. market for the third quarter we believe that Abbott had market share of approximately 27% while J&J and [Metratic] achieved approximately 12% each.

International drug-eluting stent sales of $189 million, we’re at the top end of our guidance range of $170 million to $190 million and represents an increase over prior year of 1% on a reported basis and 2% in constant currency. This includes $139 million in Taxus and $50 million in Promus sales and represents a 74/26 mix of Taxus and Promus internationally.

Boston Scientifics’ DES market share in Imia is estimated to be 34% which is up 1% sequentially from the second quarter and up 2% compared to the third quarter of 2008. Taxus market share was approximately 20% with revenue of $46 million and Promus market share was 14% with revenue of $32 million. Together this represents a Taxus/Promus mix in Imia of 60/40.

Our drug-eluting stent share in Japan was 47%, up 2% from the third quarter of 2008 with revenue of $62 million. Despite the competitive launch of Endeavor in May, we continue to hold nearly half of the Japanese market.

During the quarter we estimate that Endeavor’s share reached 19% in Japan, while J&J reached about 24%. While our sales in Japan today are 100% Taxus, we still anticipate approval of Promus during the fourth quarter with a first quarter 2010 launch expected.

We estimate that our Asia Pacific DDS share remains steady at about 19% during the third quarter split 10% Taxus with $13 million in revenue and 9% Promus with $11 million in revenue or Taxus/Promus mix of 54/46.

Drug-eluting stent sales in our America’s international regional were $25 million, representing approximately 48% market share with 35% or $18 million in Taxus revenue and 13% or $7 million in Promus revenue, and this represents a 74/26 mix of Taxus/Promus.

So in summary, with our 41% global DES market share we do remain the clear world wide drug-eluting stent leader.

Now let’s look at DES market dynamics during the third quarter. We estimate the world wide DES market in Q3 at approximately $1 billion and that’s down about 3% versus the third quarter of 2008 including a negative contribution from foreign currency of about 1%. This includes a world wide unit volume increase of approximately 9% offset by a world wide market decline in average selling prices including a shift in mix of DES brands to more Promus and less Taxus of approximately 11%.

Global penetration rates have stabilized however pricing pressure in our markets have not stabilized as quickly as we had anticipated. As a result, we are beginning to see negative market growth versus our previous assumptions that the DES market would remain flat.

The U.S. DES market is estimated to be about $453 million, representing a decrease of approximately 1% over the third quarter of last year. This consists of a unit volume increase of approximately 7% offset by market declines including a shift in the mix of DES platforms, and market price declines of about 8%.

During the quarter we saw our U.S. DES ASP reductions consistent with the market declines with Promus down 8% and Taxus down 9%. U.S. PCI volume in the quarter was approximately $252,000 procedures and that’s up 1% compared to the third quarter of 2008 but down 1.5% compared to last quarter.

We estimate that U.S. DES penetration remained at 75% in the quarter, representing a 5% increase over the third quarter of 2008 and this is the third quarter in a row with U.S. penetration rates stable at about 75%.

Combined with standard procedure rates and stents per procedure, we estimate that the total unit market share of U.S. stents in the third quarter was approximately 337,000 units including 252,000 units of drug-eluting stents.

The international drug-eluting stent market remained strong for the quarter with approximately 494,000 PCI procedures including 282,000 procedures in India, 53,000 procedures in Japan, 93,000 procedures in Asia pack and 65,000 procedures in the Americas.

Penetration rates in international markets trended up in the two largest markets with India up 3 points sequentially to 55% and Japan up one point sequentially to 68%. Asia pack was down two points to 75% while the international Americas remained flat at about 32%.

Turning to our CRM business, this quarter marks the anniversary of the launch of our Cognis and Telegin platforms in the U.S. The global launch is continuing and we expect to launch Cognis and Telegin in Japan in the fourth quarter of this year and once we’ve launched in Japan, we will be competing with Cognis and Telegin in all four of our major markets world wide.

World wide Q3 CRM revenue of $608 million represents a reported increase of 6% and a constant currency increase of 8% over the $572 million reported in the third quarter of 2008. This performance against more difficult comparables demonstrates the strength of our new products and their acceptance by both physicians and patients.

U.S. CRM revenue of $404 million represents a 7% increase over prior year and for the first nine months; we’re up 10% over 2008. International CRM sales of $204 million represent a reported increase of 5% from prior year and up 9% in constant currency.

World wide ICD sales are reported at $445 million. We’re at the low end of our guidance range of $445 million to $475 million. This represents a reported increase of 5% over the third quarter of last year and a constant currency increase of 7%. ICD in the U.S. were $314 million representing an 8% increase over last year and international ICD sales of $131 million represents a 1% reported decrease from last year but up 4% in constant currency.

During the quarter we managed a phased launch of Latitude in Europe and as we continue to ramp up this launch, we expect to improve our ability to grow our international revenues. As a reminder under the accounting rules for revenue recognition, we are required to defer recognition on a portion of our ICD sales and gross profit related to the patient monitoring services associated with Latitude, and as a result we amortize and recognize sales and gross profit over the expected life of the defibrillator battery which is about seven years.

Excluding sales from our five non core divested businesses, our non DES and non world wide revenues increased 1% compared to the third quarter of last year to $1.004 million and we’re flat in constant currency. This includes constant currency increases of 4% in neurology and gynecology, 10% endoscopy and 21% in neruomodulation.

Our peripheral interventions business remained flat versus last year due to continued pressure in our balloon and stent businesses world wide and the impact of a product recall in the quarter. We estimate the recall temporarily took away about 1% of our PI growth but should be re-established in the fourth quarter.

Our neurovascular business was down 2% versus last year as expected as a result of competitive launches and our softening coil business. The launch of project Phoenix, our new coil and neruoform EZ, our new stent delivery system will be launched in the U.S. and Europe by the end of the first quarter of 2010.

In our non-stent interventional cardiology business and in our electrophysiology business, we saw constant currency decreases of 8% and 3% respectively. As we continue to develop our new product pipelines for these businesses, we do 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 months or so and we expect our electrophysiology business to benefit from several new product launches including Blazer prime in the U.S. during the fourth quarter and Blazer DX-20, Blazer Prime and Blazer Open Irrigated Ablation Catheter in Europe in 2010. 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 68.9% and adjusted gross profit margin for the quarter excluding restructuring related charges was 69.6% which is 60 basis points lower than last quarter and 250 basis points higher than the third quarter of 2008.

Major contributors to the decline in gross margin from the second quarter include a negative $13 million or 43 basis points of gross profit associated with product recalls in the quarter in our CD and neurology/gynecology businesses. We expect these products to be back in the market in the fourth quarter of this year.

It also includes adverse product mix primarily driven by an increase in Promus sales and a smaller market in Imia due to seasonality and lower overall market share in Japan all contributed a negative 25 basis points of gross profit.

Major contributors to the 250 basis point improvement from last year include 175 basis points of improvement from fluctuations on foreign currency, 100 basis points of improvement as a result of the favorable sales mix in our CRM division between defib and pacers as well as Latitude Promus reserves that were reported in the third quarter of last year.

120 basis points of improvement as a result of $23 million one time write off of Taxus Liberte inventory last year related to a warning letter received by one of our third party sterilizers. 46 basis points of gross profit reduction is a result of product recalls in the quarter. 46 basis points of gross profit reduction relates to the mix of DES sales in the quarter and decreases in average selling pricing and few other minor differences make up the additional 50 basis points.

While we are seeing continued pressure on our gross profit margins, we expect a bit of relief when we launch Promus Element in Europe in the last quarter of this year. Additionally, we will realize cost reduction benefits from our continuing value improvement programs in all of our plants throughout 2010 and into 2011 and by the end of 2010 we will begin to see the reduced product cost benefits of our plant network optimization program.

Our reported SG&A expenses in the third quarter were $665 million. Adjusted SG&A expenses excluding restructuring related items were $660 million which was 1% lower than last quarter and 9% higher than the third quarter of 2008. The increase over prior year is primarily due to the addition of direct selling expenses and head counts including the previously discussed targeted increases to our world wide CRM field force. We also have elevated legal expenses associated with our ongoing negotiations.

Finally, we also had CEO transition costs of about $4 million in the quarter.

Reported research and development expenses were $258 million for the quarter. Adjusted R&D expenses of $257 million and 12.7% of sales were consistent with our last quarter and represent a 10 basis point increase over the third quarter of 2008.

Our annual R&D investments will remain consistent at about $1 billion to support our commitment to advancing medical technologies. We’re also continuing to pursue strategic acquisition opportunities.

Operating expenses in total continue to reflect the targeted investments in customer facing field force and R&D programs to drive profitable revenue growth. Our head count management and approval process provide us with the tools necessary to maintain control over expenses in the future and based upon our results through September combined with our internal forecast for the fourth quarter this year, we expect to spend approximately $3,650 million in a combination of SG&A and R&D expenses for the full year 2009.

We reported GAAP operating income of $187 million for the quarter and on an adjusted basis excluding restructuring related charges and amortization expense, adjusted operating income for the quarter was $441 million and 21.8% of sales. That’s down 30 basis points from last quarter and up 40 basis points from Q3 2008.

Our operating income margin in the quarter is lower than expected as a result of sales coming in at the low end of our guidance together with lower than expected gross profit margins driven mainly by lower ASP’s, adverse product mix and lower production volumes in several of our manufacturing plants.

Our investments in hiring and training additional CRM reps in the U.S., Europe and Japan should give us the ability to increase market share in the future as they complete their nine to 12 months of training. We did however, underestimate the length of time it would take these newly trained reps to become productive, build important relationships with prospective customers and win new business by gaining customer confidence.

As a result, in the short term our selling expenses are not getting the leverage from new sales and gross profit that we expected.

I would like to highlight the GAAP to adjusted operating reconciling items in more detail. First, total amortization expense was $126 million pre tax or $107 million after tax and this was $5 million lower than the third quarter of 2008. Going forward, our quarterly amortization expense should remain at this level.

We also recorded $28 million pre tax or $21 million after tax of restructuring related charges in the quarter which are primarily related to the production transfer costs as well as retention and certain other costs in connection with our previously announced plant network optimization program and our expanse in head count reduction initiatives as well as charges related to our 2007 restructuring. These charges are in line with our previous estimates.

Finally, we recorded a $58 million pre tax; $37 million after tax of credits associated with the reduction of recorded reserves associated with certain litigation related matters. The cumulative effect of all these items was $96 million in pre tax and $91 million of after tax.

Interest expense was $91 million recorded which was $21 million lower than the third quarter of 2008 primarily as a result of our $725 million in debt repayments during the last 12 months together with lower interest rates.

Interest expense in the third quarter was also $1 million lower than the second quarter of this year due to our $225 million debt pre-payment in July together with slightly lower interest rates.

Our Q3 2009 average interest expense rate was 5.5% compared to the 5.9% in the third quarter of 2008, 5.5% in the second quarter of 2009.

Other net expense was negative $4 million in the quarter and includes $1 million of interest income and $5 million of other expenses. Interest income was $10 million lower than Q3 2008 and slightly lower than the second quarter of this year primarily due to a lower rate of return on our cash investments.

As a reminder our other net expense in Q3 2008 included approximately $15 million of net gains related to the monetization of our non strategic investments process that was completed in the first quarter of 2009 as well as $10 million of other expenses.

Reported GAAP tax rate for the third quarter was 20% and on an adjusted basis our tax rate was 15.8% for the quarter. Operational tax rate at the end of the third quarter was 18.3% which is consistent with our previous guidance of 18% to 19% for the remainder of 2009. As a result, our adjusted tax rate for the quarter reflected a 250 basis point favorable impact or $8 million as we adjusted our operational tax liability from the previous two quarters down to the 18.3% level for the year.

We expect our full year operational tax rate will be approximately 18% and as a result we anticipate that our adjusted tax rate for the fourth quarter will be between 17% and 18% excluding any discrete tax items that may arise during the quarter.

Average earnings per share for the third quarter were $0.13 per share compared to a loss of $0.04 a share in the third quarter of last year. GAAP results for the quarter included the previously mentioned litigation credits, restructuring and restructure related charges and amortization.

Our adjusted earnings per share in the third quarter which excludes these items was $0.19 and was at the mid point of our guidance range of $0.l7 to $0.21 per share. This compares to $0.16 in the third quarter of last year.

As a reminder, the third quarter of 2008 adjusted earnings per share excluded $0.06 per share related to amortization, $0.02 per share of restructure related charges, $0.18 per share of litigation related charges and $0.09 of intangible asset impairment charges. These charges were offset by $0.13 per share of acquisition related charges and $0.02 per share of divestiture related gains.

Stock compensation was $33 million and all per share calculations were computed using 1.5 billion shares outstanding.

DSO, day sales outstanding were 65 days in the quarter. That’s a two day increase over last quarter as well as the third quarter of last year. Continued strong cash collections in Japan and the United States were partially offset by a deterioration related to slower collections in Europe which are being addressed operationally.

Our days payable outstanding for the quarter were 33 days which was a two day higher than second quarter of 2009 and one day higher than the third quarter of last year. This improvement is generally related to better performance in both the U.S. and India.

Days inventory on hand were 138 days. That’s up 11 days from the second quarter of this year and up 18 days from September 30, 2008. The increase in days over last year was mainly driven by the inventory builds in support of the launch of Taxus Liberte launches and product transfers related to our plant network optimization strategy.

The increase over last quarter is due to increased builds to support second half 2009 new product launches in the DES CRM and endosurgury franchises.

Reported operating cash flow in the quarter was $484 million which was $154 million lower than the third quarter of 2008. Q3 2008 included a $250 million milestone receipt related to the FDA approval of Abbot’s Zion’s drug-eluting stent and $22 million of restructuring payments while Q3 this year included $2 million in payments related to the MDL litigation and $16 million of restructuring payments.

Excluding these items, Q3 2009 adjusted operating cash flow was $502 million which was $92 million higher than the third quarter of last year primarily due to lower tax payments and higher adjusted operating income.

Capital expenditures were $91 million in the quarter which was $19 million higher than third quarter of last year and $17 million higher than the second quarter of this year. Capital expenditures for the full year are expected to be between $325 million and $350 million.

Reported free cash flow was $393 million in the quarter compared to $565 million in Q3 2008 and $345 million in the second quarter of this year.

We closed the quarter with $6 billion of total debt and $1.4 billion of cash on hand resulting in net debt of $4.6 billion. Total debt is $744 million lower than the third quarter of 2008 as a result of our debt pre-payments within the last 12 months including a $225 million pre-payment in the third quarter of this year. Net debt is approximately $391 million lower than the third quarter of 2008 reflecting positive net cash flow.

In early October this quarter, we pre-paid an additional $250 million of debt reducing total debt to $5.8 billion. In October we also paid from cash on hand, $716 million related to the previously settlement of patent disputes with Johnson & Johnson. We intend to continue using our strong free cash flow to pre-pay debt and we expect to refinance our 2011 debt maturities by approximately mid year 2010.

At the end of the third quarter our debt to EBITDA credit facility covenant ratio was 2.6 times which is well below the maximum committed level of 3.5 times, providing us with just under $600 million of EIBTDA cushion.

We currently have access to approximately $2.5 billion of liquidity consisting of $460 million of cash on hand and $2.1 billion under our revolving credit and accounts receivable accounts securitization facilities.

We also expect to receive a $250 million check from Abbot in the fourth quarter of this year when they receive approval CRM for Japan.

Now let’s turn to guidance. When we began 2009 we expected our sales and earnings in the last half of 2009 would be substantially higher than the first half. We performed well throughout the first six months of this year but the following issues, some of which began to show up in our third quarter will cause us to fall short of our original expectations in the last half of this year.

Beginning in the last half of 2008 and throughout 2009 we planned to add many CRM reps that we expected to drive significant incremental revenue in the back part of this year. We have indeed added these reps in the U.S., Europe and Japan and most have completed training but their effectiveness in the field will take longer than we had originally envisioned.

We’re very pleased and still are with our total U.S. DES market share position that we were able to carry into 2009 from 2008. Our market share has been stable throughout the year but we have a higher mix of Promus versus Taxus than we had expected. The rate of DES pricing declines has stabilized but at a more adverse reduction levels than we had anticipated.

New product delays in our global business such as our new neurovascular coil, neurovascular stent, new cardiovascular guide wires and balloons and additional international delays, Taxus element and Promus in Japan and the phased launch of Latitude and India are having a negative effect on our growth rates in the last half of this year compared to our expectations that we set coming into this year.

We expected more recovery in our non DES IC businesses than we are seeing. Non DES pricing pressures including pricing trends and CRM are also greater than forecasted. Health care reform discussions and agreements reached with hospitals are showing second order effects on our businesses. A rapidly changing FDA environment has increased the burden on our current products in the field as well as on approval times for bringing new products to the market.

We tried our best to incorporate all of these issues and trends into our fourth quarter sales and earnings guidance. Turning to sales guided for the fourth quarter 2009, reported consolidated revenues are expected to be in the range of $2,025 million to $2,125 million and that’s a range that would be an increase of 2% to 6% from the $1,995 million recorded in the fourth quarter in 2008 excluding divestitures.

If current foreign currency exchange rates hold constant throughout the fourth quarter, the positive contribution from FX should be approximately $80 million or roughly 4% relative to Q4 2008. On a constant currency basis, Q4 consolidated sales growth should be in a range of down 2% to up 2%.

For DES we are targeting world wide revenue to be in the range of $400 million to $440 million with U.S. revenue of $205 million to $225 million and OUS revenue of $195 million to $215 million.

For our defibrillator business we expect revenue of $445 million to $475 million world wide with $310 million to $330 million in the U.S. and $135 million to $145 million OUS.

For the fourth quarter, adjusted earnings per share excluding charges related to acquisitions, divestitures, restructuring and amortization expense are expected to be in the range of $0.17 to $0.21. This includes an effective tax rate on adjusted earnings of between 17% and 18% as I discussed earlier.

The company expects earnings per share on a GAAP basis in the fourth quarter of 2009 to be in r the range of $0.20 to $0.25. Included in our GAAP EPS is approximately $0.01 to $0.02 of restructuring related charges, $0.07 per share of amortization expense and a credit of $0.12 related to our planned receipt of $250 million from Abbot.

Our actual results through the third quarter and guidance for the fourth quarter, we are now expecting full year 2009 revenues to be in the range of $8,134 million to $8,234 million. We’re also now expecting to achieve adjusted earnings per share for the full year of $0.75 to $0.79 excluding litigation credits, the credit related to payments from Abbot acquisitions, divestitures, major litigation and restructure related charges as well as amortization expense and large discrete tax items.

Included in this estimate is an adjusted effective tax rate of approximately 17.3% for the full year including all discrete tax items previously mentioned?

The company now expects full year 2009 GAAP earnings per share to be between $0.43 and $0.48.

That’s it for guidance. Now let me turn it over the Ray for a more in depth review of our business.

Raymond Elliott

The last quarter taught me that Boston Scientific is the only institution where you don’t get to rest on the seventh day. This quarter has taught me that rest is completely over rated. I’ve said previously we remain very much an unfulfilled promise. These are challenging times admittedly but not without aggressive plans for redemption.

Let me begin with a more qualitative review of our businesses starting the CRM and then as usual, I’ll share some brief thought on likes, dislikes and hot topics for the quarter overall.

We delivered steady overall constant currency CRM product growth of 8% in third quarter revenues with U.S. defib sales up 8% driven by our Cognis and Telegin products. This marks nine straight quarters of CRM growth both U.S. and world wide.

We saw strong growth of 9% constant currency in international pacer revenues supported by the growing adoption of our [Altrua] platform and excluding a large contract from Japan that swelled the total growth to 19%.

International defib which was 4% constant currency over prior year slowed to a lower growth than we had anticipated for the quarter. However, as Sam mentioned earlier, the deferred revenue accounting associated with our Latitude patient monitoring system launched in Europe during the quarter had a negative impact of 4% on our growth which otherwise would have matched the domestic total of 8%.

We anticipate international defib performance to strengthen over time as we complete our rollout in Europe and continue new product introductions in Japan.

While all of our competitors have not formally reported results for the quarter, we believe we continue to take share in the U.S. market. Recent public comments have suggested a possible slowdown in market growth.

Our most recent estimates for overall growth rates in the 5% to 6% range and U.S. defib growth of about 3% should be considered too high at this point with likely rates at 4% in total and 2% domestically. We are confident we will continue our above market performance in the CRM market and therefore take share along the way albeit from a lower rate of market growth.

We’re looking forward to a steady cadence of product launches world wide. In Japan we recently launched Cognis and last month we received approval for Alturas, our most advanced pace maker. More importantly, we were granted the top tier or category four reimbursement level for Alturas which opens access to the vast majority of the pacer market in Japan.

As we continue to rebuild our Japanese distribution network, we believe that the ICD segment will accelerate once reimbursement for primary prevention is approved. We plan to launch Cognis Telegin in Japan by the end of the year and we expect that the world’s smallest devices will be well received.

In Europe we’re in the early phases of our Latitude launch and we are pleased with our progress to date. The international version of Latitude is compatible with both Telegin Cognis and builds on our experience with more than 130,000 domestic patients. In parts of Northern Europe, we are actually selling the hardware.

In the U.S. we are track to launch the Acuity break-away delivery system early next year which will add to our strong portfolio of lead delivery systems. Looking further ahead, we anticipate a phased U.S. launch of our new IS4 header and defibrillation sleeve system next year. The new lead system reduces the required implant area with the body making Cognis Telegin even smaller. This new lead system began a phased introducing in CE market countries last quarter.

Over the past 18 to 24 months we have clearly restored our CRM new product flow and we expect to strengthen it with investments in new innovations. Although devices like Cognis, Telegin and Ultra will be tough acts to follow we’re already gearing up to launch our next generational line of defibrillators by the end of next year. These devices will include new features designed to improve functionality, diagnostic capability and ease of use.

By early 2011 we expect to launch in the U.S. and Europe, a new wireless pacemaker built on the same platform as our high voltage devices.

Turning to clinical updates, final results from the landmark CRT trial were published in the New England Journal of Medicine and presented at the European Society of Cardiology and the Heart Failure Society of America meetings. The results provide the first indisputable clinical evidence that cardiac resynchronization therapy significantly slows heart failure progression in class one and two patients further delaying the onset of more severe and life limiting conditions.

We believe the strong CRT results will allows us to work with the FDA to expand Boston Scientifics’ CRTD indications creating additional opportunities for the market as a whole and for Boston Scientific specifically.

Our more immediate goal is to complete our FDA filing by the end of the year. With this time table we can reasonably expect approval as early as mid 2010. U.S. reimbursement for CRT DS in patients who fit the native CRT criteria is already in place which should allow a more straightforward path to expand penetration for this patient population.

A key area of focus following an indication expansion will be removing barriers among the current physicians to increase patient penetration. We estimate that over the next several years, a new indication could expand the defibrillator market by as much as $250 million in the United States and $400 million to $500 million world wide. Additional details were provided on the September 1 analyst call and we continue to support the incremental market benefits presented at that time.

To give you a quick update on our EP business, we launched our Blazer DX20 steerable diagnostic catheter in the U.S. in May and both revenue and market share are exceeding targets. Although we’re still in the roll out phase, we estimate that the product has achieved 20% market share for the third quarter with momentum building.

The Blazer Prime, the improved version of the Blazer ablation catheter received FDA approval two weeks ago. It is on target for launch in the U.S. in the fourth quarter. We anticipate a European launch of both the Blazer DX 20 and Blazer Prime in early 2010.

The Blazer open irrigated ablation catheter should be ready for European launch in mid 2010 with U.S. clinical trials beginning around the same time. Overall, EP market growth continues to be in the double digit range.

In short, our strong CRM product portfolio and sales and clinical support team expansion efforts position us well on a going forward basis. We’ve made significant investments in the size of CRM sales including the support team as noted but we must be able to execute better in terms of the speed with which they produce a viable return on that investment.

While the market growth rates are slower than we had expected coming into the year, we continue to out perform the market and take share.

Turning now to cardiovascular, we reported another solid quarter of DES results, up 5% in constant currency and with 41% world wide market share. Taxus drover 24% of the market share with Promus at 17%.

In the U.S. we saw stable market during the third quarter with U.S. PCI growth up approximately 1% and penetration holding steady at 75% for the third consecutive quarter and up 5% from the third quarter of 2008. We believe in the U.S. science had a 27% share for the quarter while Cipher and Endeavor were at 12% each and therefore maintaining our 22 point share lead over our nearest competitor with Boston Scientific at a 49% share.

Contributing to our Taxus position in the U.S. was the ongoing launch of our Taxus lubricant adam stent which started late in the second quarter. In addition, we very successfully managed through a change in labeling on our bare metal stent in the U.S. with virtually no lost revenue, changing the name of that product to Veriflex in response to feedback from the FDA regarding a possible confusion in labs amongst Taxus drug-eluting stent products.

Another significant highlight in the quarter was the early completion of the workhorse portion of the enrollment of the platinum trial, a key milestone in our plan to launch Promus Element in the U.S. by mid 2012.

In Europe ES penetration was approximately 55%, the seventh quarter of stable earnings, increasing penetration and up six points from the third quarter 2008. Our DS share was 34%, split approximately 20% Taxus and 14% Promus.

In Japan, DS penetration was up to 68%, an increase of two points from the third quarter 2008 and we had a 47% DS share which was also up two points from the third quarter 2008 with J&J and Metronic at approximately 34% and 19% respectively.

To be up two share points over the year despite the entrance of a new competitor to the market speaks to the strength of both our Japanese sale force and the Taxus Liberte platform.

Next let me take a minute to address the studies we released in September starting with the two year Syntax data which we reinforced one year results, showing impressive outcomes for PCI and patients, complex and triple vessel disease, the majority of whom are normally treated with cabbage. The two year data built on the prior data and provide additional support to PCI as a viable treatment option for many of these patients.

We’re also very pleased with the performance of Promus stent as well as our first generation of Taxus express stent based on Spirit Three and Spirit Four results presented at the recent CTC conference. The strong results for both platforms reinforce what physicians already know through the results they see in their patients every day.

As we have all learned since DS was first introduced, no one can rely on the results of a single centered clinical trial, in this case the Compare trial. It is simply inappropriate to draw any definitive conclusions let alone instruct the practice of medicine. The Compare results are not consistent with the overall body of Taxus trial, scientific evidence involving more than 46,000 patients which clearly demonstrate the safety and efficacy of our product.

This type of situation has occurred several times during the last six years in the DS market place. This trial does not match the real world experience of interventional cardiologists who have used the Taxus products in more than 2.5 million patients with more than 4.6 million stents implanted world wide.

Compare results were driven by an unusually high rate of early acute stent thrombosis and you should know that that rate is approximately three times what is seen in other multi-center clinical trials and real world registries using either the Taxus Express or Taxus Liberte stents.

Unusually, Compare used a non higharchy based calculation to assess the frequency of secondary events which means that some events such as stent thrombosis would have been double or triple counted for the same lesion. These results were not seen in Spirit Two through Sprit Four, not in Taxus Four or Five, not in [Arride], not in Atlas, not in Atlas LL, not in Atlas SV and not in Atlas DS. We should all remember both the scar and syntax histories. Compare was not powered for stent thrombosis, period.

We would reasonably expect clinical behavior to be governed by the entire body of scientific evidence, associated competitive behavior.

Further our CV clinical, marketing and sales teams have effectively dealt with this marketing tactic before, and will do so again. We have a solid plan to ensure that the data coming our of TCT are understood by our customers within the proper clinical context.

For example, last week we completed a 23 site educational event with more that 300 physicians in attendance to provide our perspective on the TCT data and our DDS pipeline plans. The Taxus franchise may very well decline in the near term as a result of post TCT competitive practices. Our guidance in fact, assumes so.

But Taxus’ resiliency has surprised many over the years when data have been questioned, the product and have been successful in regaining our position time and time again. Many have been wrong before and the future market share ratings within the models. This time is no different. We will vigorously defend our share throughout 2010 and look to grow our position in 2011 with the launch of Taxus Element.

We are able to offer customers the choice between the two best DES stents that are on the market today from one supplier. This is a point of differentiation between us and our competition and it represents one of the key reasons we continue to be the world wide DES leader.

Looking ahead to the fourth quarter, we launched Taxus Liberte long stent earlier this month for which we expect to garner a price premium, and in Europe we remain on schedule to launch Promus Element later this quarter. Finally, we expect to launch Promus in Japan during the first quarter of 2010.

The European launch of Taxus Element stent, I repeat, Taxus Element, not Promus Element which has already been launched in unregulated markets with extremely positive feed back will take place in the second quarter 2010 based on current regulatory feed back. The European sales and marketing team has recently completed launch training on both Promus Element and Taxus Element.

The Promus Element in the U.S. and Japan launches remain on target for mid 2012. The Taxus Element U.S. launch on target for mid 2011 and a Japan launch late 2011 to early 2012. The Element platform which uses a new platinum chromium stent alloy will provide a noticeable improvement in deliverability including thinner, stronger struts, lower stent recoil and an enhanced radio capacity.

Perhaps most important, we are confident our Element launch cadence will be highly competitive to science prime on a world wide basis.

We are pleased with our progress on the integration of Labcoat Technology which we have decided to apply to our Element platform as our next generation DES biodegradable, technological offering.

Turning to our other CD product lines, our U.S. leadership in PTCA balloon catheters remains at 54% share. We continue the launch of our imaging catheter I-cross and are planning a number of new product launches over the next four quarters including the Apex Platinum pre-dilatation balloon catheter for improved ratio capacity, the NC Quantum Apex post dilatation balloon catheter and conetics guide wire.

Each of these products should over time be market share takers. In the meantime, we continue to struggle with non DES core product sales due to both the age of our offerings and persistent pricing threats.

Our peripheral interventions business we maintain a strong world wide position in a growing market. We hold the number one position in multiple product categories. U.S. launches of the Sterling ESPTA balloon catheter, the carotid wall stent and the express renal SD stent as well as the international launch of epic vascular stent continue to drive positive momentum for the business.

The epic stent launch also garnered momentum with increases in account penetration, reorder rates and market share gains. We have substantially completed all filings associated with our express LD, iliac indication PMA. We expect to receive PMA approval in the fourth quarter. This approval is one of the keys to our U.S. performance in 2010. With these launches we expect to expand our PI leadership.

Overall, our cardiovascular business continues to be very well positioned with a unique two drug offering, a long list of leading franchises, stable market fundamentals and a robust product launch cadence. We absolutely believe our overall leadership will be strong over the next two years but we are realistic enough to also recognize the post TCT and pricing head winds that we face near term.

Our neurovascular business continues to maintain its global leadership position recording another quarter of strong sales in spite of new competitive product offerings. We saw growth across nearly all franchises with the exception of coils and adjunctive stemming. New product launches, especially the Phoenix coil expected in the near future should allow us to turn this into a positive trend.

Our access business, catheters and guide wires continue to do well. Our guide wire segment grew 14% as our customer base continue to expand and defer to our guide wire technology. Our I-cad inter-cranial atherosclerotic stent business grew 14% world wide and of note, we’re experiencing a record 72% growth in China and 24% in Europe, largely in Germany and France.

Career received approval for both the wing span and gateway balloon and Japan kicked off new clinical trials for new PMDA approval for wing span. Despite softening as a result of competitive offerings of both coils and adjunctive stenting, we’ve maintained [audio break 53:52] growing 10% in neurology and gynecology growing 4% or up 10% excluding the recall. More on that in a minute.

Endoscopy division recorded 10% world wide constant currency growth and 11% in the U.S. market. Third quarter results were led by a 25% increase in endoscopy stent franchise. We continue to drive market adoption of the wall flex RX stent system designed to provide enhance endoscopically delivered luminal palliation to patients impacted by obstructions.

We drove solid growth across our therapeutic franchise on the strength of the exchange [billiary] devices. The combination of these devices provide important therapeutic options to patients with pancreatic and coronary disease.

Endoscopy saw excellent constant currency growth, 15% in it’s endoscopic homeostasis franchise through the market adoption of the resolution clip. The resolution clip provides patients with enhanced control through a variety of endoscopic procedures.

Our endoscopy business continues to lead the $1.89 billion global flexible GI and pulmonary endoscopy device market. Our intraventional catheters are used during endoscopic procedures like colonoscopies to diagnose, therapeutically treat and palliate patients impacted by GI and pulmonary diseases.

We continue to see good procedural growth in all areas of flexible endoscopy with increasing utilization of our therapeutic devices. During the fourth quarter we will continue the commercialization of our market leading wall flex stent line, dream wire and dream tone, new devices and expanded sizes of our radio [inaudible] for biopsy forceps.

Urology and gynecology delivered solid results for the quarter despite the recall in July of the catheters for the treatment of VPH. The recall lowered the division’s sales growth to 4%. As mentioned previously growth excluding the recall on the related products year over year was strong at 10%. The product has already been corrected and we expect to return to the market during the fourth quarter.

Several new product launches in the first half of the year continue to fuel growth in the women’s health side of the business which grew nearly 20% versus prior year. The sewing single incision sling system, the uphold vaginal support system, the pinnacle posterior pelvic floor repair kit and the second generation SGA procedure kit all performed better than expected in the third quarter.

Urology, gynecology continues to extend its leadership in the core stern management business with above market growth of 7%. The pipeline will continue to be productive in the fourth quarter as we commercialize the duet pelvic floor reconstruction kit and the next generational laser fiber for kidney stone removal.

Finally, our world wide modulation team delivered constant currency sales growth of 21% in the third quarter with the U.S. also growing 21%. Our growth accelerated in the third quarter over both the first and second quarters as a result of several changes. We added almost 50 new sales reps which increased our total territories in regions and allowed for better sales coverage. We expect to continue this strategy.

We piloted new programs targeted at competitive physicians that help differentiate the physician spinal cord stimulator and increase the awareness of spinal cord stimulation with non paying physicians.

This growth demonstrates that despite the competitive launches the market values are technological advantages. We continue to receive very positive patient stimulation feed back since the launch of our new lead adaptor the M1.

Finally, we’re optimistic about our ongoing growth based on third quarter trial growth which is a leading indicator of future permanent implants and on a number of new lead introductions planned for early 2010. The plan to increase the size and growth rates of our non DES and non CRM businesses is essential to our new strategic plan.

Let me share the next few minutes with some overall perspective on the following; first some thoughts on what we liked about the quarter, what we didn’t like, and then a few hot topics or take aways from the quarter.

In terms of likes, we liked the fact that we were able to product constant currency growth across most of our divisions and regions and we did like our year to date growth rate of 5% constant currency excluding divestitures. Against the head wind of a lingering recession, pricing pressures and unanticipated slower growth in our major markets, that’s not a bad number.

Secondly, we liked the CRT results and made it crystal clear that CRTD therapy slows the progression of heart failure. We’re expecting good results and they turned out even better than we had hoped. We’re in a strong position for an expanded indication which will create an opportunity to strengthen the market on a go forward basis.

Thirdly, we liked our continued DS leadership. On a 41% share in the world wide DS market which included strong share numbers in the U.S. and Japan of 49% and 47% respectively. Yes, we know we face some turbulence coming out of TCT and I will re-emphasize our view again in a moment.

Fourthly, we have to like our continued strong free cash flow at $393 million in the third quarter which allowed us to pre-pay all of our 2010 debt and make an early dent in our early 2011 debt.

Fifthly, we liked settling 15 patent suits with J&J and we like that we are continuing to work with them to resolve others. These levels of litigation although at times necessary, can clearly be a distraction.

In terms of dislikes, let’s take a look at what we didn’t like and areas where there’s room for improvement. First we didn’t like our gross margins which fell below 70%. They’re impacted by the same head winds I mentioned earlier.

We have programs in place to improve our margins and this is an ongoing area of intense focus with respect to price management and mix utilizing a corporate wide pricing improvement project and our new sophisticated pricing tool, Rainmaker.

Secondly, we didn’t like the fact that growth has slowed in our major markets. While it puts an additional burden on us, we must remain focused, and we are, on what we can do to impact our growth in these markets over the long term. It’s clearly a major factor in the development of our near term guidance.

I hated the fact the fourth quarter and full year 2009 bar and expectations lower for us than what had been previously implied in our third quarter update, but it would have been foolish not to reflect a more accurate reality.

Thirdly, we didn’t like our performance in Europe where we actually experienced negative growth. It was barely negative at 1% constant currency, but nonetheless, it was negative. I have said that through our 100 day plan, one of our top priorities is determining if we have the right business models around the world and this weakness highlights that priority.

In fairness, other parts of international were up. Intercontinental was up 9% and Japan was up 7% both on a constant currency basis.

And finally, what were the hot topics for the third quarter and what were the take aways? First is the state of our CRM market. So far this year, the growth of the overall market has not been as strong as we had expected coming into the year, but our business has continued to grow and we have not seen the slowdown hostile stalking described by St. Jude.

We need to turn the more than 150 newly graduated additions to the sales force in the past year into a productive, revenue producing team and we will. The quality of our execution is not now and has not been a market issue, but the overall CRM market growth will remain weak at only 4%.

Second is the initial Compare data which represented TCT, single center, double blinded unpowered studies are not considered optimal trial protocol. The Compare methodology clearly resulted in some double counting of events and the trial was empowered to objectively access the frequency of stent thrombosis.

The Compare data are inconsistent with the overall body of Taxus evidence and we expect the results of future multi-centered studies will be more consistent with those of other Taxus trials. Remember that those trials have studied more than 46,000 patients in clinical studies over the past nine years and include the implantation of almost five million Taxus stents.

You have to ask yourself the obvious question. In all these trials in use why has no one but a small single center trial funded by our primary competitor seen these results so conveniently released at TCT. I’ll the equally obvious surmising to you.

Third is the health care reform. I told you last quarter that I would hold off on saying anything until we knew more about what the legislation looked like. Unfortunately in the intervening months, it’s become all too apparent what the legislation looks like.

The Baucus bill which came out of the Senate Finance Committee last week makes absolutely no sense and would be very damaging to Boston Scientific and the medical device industry as a whole. In a nutshell, it would raise costs, stifle innovation and lead to significant job loss.

It does not address the quality of care, but rather the political score boarding of savings. It would have the effect of more than doubling our tax liability, adding $150 million to $200 million per year. The impact is probably even greater because of the double taxation aspect which would result in part $155 billion in hospital cuts as well as some others passed on to our industry as a second order effect.

This tax on innovation is currently non deductible in the Baucus bill. It would force us to make substantial cuts in R&D spending which in addition to harming patients would result in major job cuts. We estimate that the current legislation could result in between 1,000 and 2,000 jobs lost at Boston Scientific.

However, be clear, these discussions are not over and we are spending hours and hours talking to individual members of the Senate and Congress. This primarily U.S. based industry is the health care innovation engine to the world with 350,000 domestic jobs, a $22 billion payroll and annual exports totaling more than $120 billion.

Lastly, these hot topics are all problems and opportunities. What about solutions? A 100 day plan that I spoke to you about a few days after taking this role has been converted into 10 major projects with specific leadership and milestones. They are all underway. The ability to make Boston Scientific fly in the future will in part be based on the content of these projects.

In broad strokes they include; margin expansion pricing and productivity, leadership and talent assessment, structural change, an executable strategic plan, a global sales focus, a growth product portfolio, a global project development process, an integrated communications plan, a best in class professional health care compliance program, and the execution of a brand management strategy.

Leadership change, rationalization of our businesses, reduced layers in staff, the effective integration of CV and CRM, remodel incentives, re-prioritized R&D and zero based budgets are only a few of the many project work streams on the table right now. We will inform you of our final thinking.

As we make these changes over the next several months, you should reasonably expect to see a comparable positive change in the returns to our shareholders. Short term, we have our work cut out for us.

With that, I’ll turn it back to Larry, who will moderate the Q&A.

Larry Newman

In a minute we’re going to open it up for questions. In an effort for us to enable as many questions as possible, we ask that each participant ask only one question and a related follow-up. Again, I want to remind you that Ray will be joined during the question and answer period with Sam as well as several of the business Presidents and Dr. Keith Dawkins. With that, we’ll open it up to the first question.

Question-and-Answer Session

Operator

Your first question comes from Michael Weinstein – J. P. Morgan.

Michael Weinstein – J. P. Morgan

With your commentary on the call and with your guidance for the fourth quarter should we assume at this point that the prior commentary for 2010 and 2011 is no longer valid?

Sam Leno

You could assume that but I think the issue is we don’t want to get into providing any change confirmations or otherwise until we do our fourth quarter work. We’ve really put a lot of hours into seeing where we’re at right now and where the trends are, but we haven’t rolled that up completely into a finished product and would prefer not to comment on it at this time.

Raymond Elliott

We don’t even present operation plan presentations to the Board until December. We need to get through that process and complete our strategic plan as well.

Michael Weinstein – J. P. Morgan

If I think about what your guidance for the fourth quarter which is minus 2% to plus 2% constant currency top line, anything you could see that would drive that closer to your 5% to 7% top line that you had talked about earlier in the year for 2010 and 2011?

Sam Leno

I think there’s a number of things on the downside that could directionally move it that way if we were able to get some tremendous new productivity from the CR reps. The new reps would be an example because it’s a real expansion of the force.

The outcomes of the TCT battles, depending upon which they take can fluctuate things. So there’s some big chunky things there that could move it directionally favorable. The problem is we don’t know which of those and what’s going to happen with them.

Michael Weinstein – J. P. Morgan

The 30% operating margin target that you’ve put out there for 2012, at the end of 2012, how do you want us to think about that? Should we still consider that a valid target or is it too early to say?

Raymond Elliott

It’s too early to say in some ways, but aspirationally that’s where we want to be. So we will make every effort to structure the business and format in such a way to get there. But obviously, Sam just commented, we’ve got a good handle on where the business is at now. We’re just finishing up strategic plan redo if you will over the next months or so, and then we’ve got operating plans for the Board.

So I think we’d like to come back and talk to that. But aspirationally at this point, we haven’t made any decisions to change that goal.

Sam Leno

Some of the issues are still unfolding like I don’t think anybody knows truly the effect that health care reform either in the form of a tax. I don’t think anybody knows truly what the effect of the economy will bring in terms of job loss and lack of access to health care. So there are a number of things that will affect us and our competitors as well that are just not normal right now. Everybody has their own guesses, but we have ours, but we can’t really build them into a definitive forecast.

Operator

Your next question comes from Robert Hopkins – Bank of America.

Robert Hopkins – Bank of America

I wanted to focus in on your commentary around gross margins and pricing broadly speaking. First of all, can you comment specifically on pricing pressure that you’re seeing in cardiac rhythm management? Is that any worse than the negative 2% to 3% that you’ve seen historically? And then also related to the same sort of subject, your gross margin in the quarter seemed to be affected by a one time item related to recalls. If you add that back, you seem to be around 70% which is kind of inline with where your guidance was. So I guess my question is was the gross margin pressure that you’re referring to does that impact your ability to get above 70%? I’m just trying to clarify how that all falls out.

Raymond Elliott

On the first one, the answer is without getting into specifics at this point, we did see a little worse pricing on Serum. Serum has been pretty constant over several prior years and we did see that worsen a little bit. You’re correct on the recall comment so I won’t, unless Sam wants to expand on that.

And then on pricing, you’re right. It does get you back close to 70% but I think it’s what we foresee in a tougher pricing environment as we look things like contract renewals, negotiations and where that’s trending that I think gives us some pause.

Sam Leno

On the recall comment, I mentioned it had about a penny effect on gross profit, about $20 million worth of gross profit. But it also had about an $18 million effect on sales, a combination of lost sales by not having products available to sell as well as returns that we had to record, take product back that we had previously sold. So if you back both of those out, it doesn’t really move the needle on gross profit margin for the third quarter.

Robert Hopkins – Bank of America

I wanted to ask one quick question on stents. Are you willing to comment on any trends that you’re seeing in October post the TCT data impact as market share and then I think you delayed on Taxus Element approval but not Promus Element approval in Europe and I’m just wondering how one could be delayed and not the other?

Raymond Elliott

On the first one we wouldn’t comment. I know it would be nice information but we don’t do that. On the second one, there’s some separate regulatory issues relevant to the two, so where a Promus Element remains on track for this quarter, a couple of things came up on the regulatory side that may cause us some issues and I think we’re taking the conservative route in telling people it’s second quarter. If we do better than that, people will be happy. But there’s a couple of separate regulatory issues.

Operator

Your next question comes from [Larry Viegelson – Wells Fargo]

[Larry Viegelson – Wells Fargo]

The CRM market dynamics, could you talk a little bit more in addition to pricing, what are you seeing on new implants or placements? Any additional color on the ICD market would be helpful. And the OUS U.S. growth rates.

Fredericus Cohen

Yes, on the market dynamics, we have seen a little bit more pricing pressure. Ray alluded to that. We have also seen some weakness in the market during the quarter, but I have to say that the month of September showed us some recovery. So we are seeing the usual pattern as it relates to replacement that goes back to prior years of implants and the replacement cycle there. All that was very normal for us.

We have not really seen any changes on the stocking side, so hospitals continue to buy the similar amount that we have seen in the past. So it was a mixed quarter, some market weakness, some pricing pressures, a little bit more than usual.

Most importantly we have continued to take share. We believe that will be known when everybody has reported. We continue to see growth in our business in the U.S. as well as the international. International was offset a bit as Ray and Sam alluded to. So a lot of different factors, but I think the most important one is that we continue to take share.

We believe we have solid growth in our CRM business. And we have also added a number of people in the sales force on a global basis, and we believe we can make those folks even more productive moving forward. So the outlook is still positive, but mixed as it relates to market growth expectations.

[Larry Viegelson – Wells Fargo]

The pressure on the growth slow down is not pronounced international than the U.S.

Fredericus Cohen

No. I don’t believe that’s the case. Again we have seen some effect due to the economic crisis on a global basis. That does vary a bit more in different countries around the world as reflected in different pricing pressures in different countries around the world. But in general, I can’t say there is an overall different trend in certain geographies.

Raymond Elliott

Let me add to that. You have to probably separate two things; one is our aspirations and the other is relative to market growth. If you go back to the original acquisition and think about high single to double digit type of aspirations, we more recently looked at the market place as being kind of a five/six growth market with three in the U.S. as you know from conversations you’ve had with us.

We’re now looking at it and seeing a combination of price and other variables. It’s 4% overall, 2% domestic. So while we will continue to take share, which is a good thing that Fred alluded to, the ability to deliver good numbers and deliver to aspirations in previous spots and the under execution of the reps brings us right back down from where Fred lifted you up to. So it’s a tough go.

[Larry Viegelson – Wells Fargo]

TCI volume in the U.S., it sounds like we almost have three different data points from the three companies. J&J said it was down I think 6% year over year, Abbot up low single digits and you if I heard correctly plus 1% year over year in the third quarter. What’s the source and any idea why there may be discrepancy in what we’re hearing?

William Kucheman

I think TCI volume is very, very difficult to get your arms around. We have a process where we try to triangulate what we get from Millennium Research Group, through their analytics, with their own internal data. One of the things that we look at very carefully here as a key indicator, a bell weather indicator are inflation devices and how many of those are used in procedures.

So we are seeing year over year based upon the data sets that we look at about a 1% increase, but quarter over quarter a little bit of a decline.

Operator

Your next question comes from Tao Levy – Deutsche Bank.

Tao Levy – Deutsche Bank

On the CRM guidance that you put forth for the U.S. if I assume the low end of that guidance, that implies sequentially down in the U.S. for you. What would lead that to be sequentially down following the summer months?

Sam Leno

It’s really more flattish. It may be down in a very minor sense but essentially the low end of the guidance is flattish. So what we’re seeing as Ray pointed out is a much slower market growth over prior year and we’re seeing a little more pricing pressure than we have been seeing. So when you get within one or two points of difference, one or two points.

Tao Levy – Deutsche Bank

With that dynamic going on that you talked about in CRM, are you still somewhat on track to deliver. I think you talked about operating margins out of CRM in the 25% range. With this lower growth that becomes a little bit lower rate?

Raymond Elliott

Clearly with lower revenue than we had forecasted, it puts stress on those margins and that’s one of the contributors to the overall gross profit margin pressure that we’re seeing for the consolidated results of the company. So that’s under stress right now.

Operator

Your next question comes from David Lewis – Morgan Stanley.

David Lewis – Morgan Stanley

It looks in our math here in the fourth quarter the gross margin looks like something around 68% or 68.5%. Is that roughly in the ball park?

Sam Leno

We don’t give guidance as you know that definitively by line. We give you top and bottom guidance and you’re going to have to work it through your own models. But don’t forget we have things that are pushing and continue to put pressure on margins and some things that are helping our margins and depending on how all those shake out, you’re going to come up with whatever underlying assumptions you have.

David Lewis – Morgan Stanley

Historically DES has been probably the most powerful driver of gross margins. Is there any reason to believe DES is not the most powerful driver of gross margin pressure in the fourth quarter?

Sam Leno

Clearly one of the pressures in the fourth quarter, Ray alluded to it, if we at the low end of our range, if we lose a couple of share points to our competitors as a result of having to deal with the Compare and Spirit data, that’s pure Taxus. That’s not Promus. That would have a dampening effect on our margins in the fourth quarter.

David Lewis – Morgan Stanley

If you think about DES, is the issue in the fourth quarter, you talked about some large marketing DES price issues. The issue does appear in the fourth quarter more mix than global DES pricing issues?

Sam Leno

It’s both but mix for the first time is going to play a more significant impact.

David Lewis – Morgan Stanley

One interesting commentary you made during your prepared remarks was on new distribution models or consideration of distribution models. As you think about increased selling costs which has been responsible in driving kind of near term share in Serum, can you share what you’re thinking about in terms of other distribution models which would help manage the SG&A expense heading in ’10?

Raymond Elliott

I can give you some general; we’re looking at a lot of things, but obviously direct versus distributor in some locations. There’s a constant need to always look and confirm that we’re happy with that.

The relative mix between clinical support people and what I would call thoroughbred selling people, therefore face time and selling time becomes a real issue; the economic buyer, the CFO, the CEO’s of hospitals and influencers, how best to reach those people and using what type of model, the model we use for training to get more people rapidly out in the field and be effective.

There’s a list of probably 20 items in total that we could go through on our part of that project that we’ll take a look at. And obviously the other one that I mentioned is common call pointing and how to leverage our CRM and CD businesses together into a more effective unit as opposed to separate units as they are today. There’s a few. Obviously there’s a lot more.

David Lewis – Morgan Stanley

You talked about CRM margin expansion of perhaps 1200 basis points during the year. Can you give us an updated number about where that will shake out based on your comments this morning?

Sam Leno

Similar I had in the comment to the last caller. Given the fact that CRM is running below expectations, below our plan, at the low end of our guidance pretty routinely throughout the year, that’s going to be a tough number to deliver. So there’s some pressure on that.

Operator

Your next question comes from Bruce Nudell – UBS.

Bruce Nudell – UBS

It actually surprised us to see how much pressure the hospitals are under with bad debt and a tightened credit environment. Do you think that the pricing pressure you’re seeing now is transit phenomenon as the economy improves or do you think that coupled with health care reform on its heels that in fact this is just the new reality that companies will have to deal with? CRM and the ICD market in your own estimation is probably a little slower growing that you anticipated and drug-eluting stents are certainly seemed to have reached a new plateau. Does that have strategic implications for how you think about these businesses?

Raymond Elliott

Right now if you look at our receivable performance, it’s pretty good. In fact it’s very good really in the U.S. and our problems tend to be a few countries outside. So the economic pressures relative to hospital payments and the number of bankruptcies and so on, we’re not seeing.

However, I think that would be misguided to believe that represents the future. I think you had it right on the second piece. I think it is the new reality and I think new reality will come about driven by health care reform and driven by the deals made.

If for some reason health care reform gets squashed completely and the various taxes negotiated with hospitals, pharma and ourselves if we have one don’t come about, then I think that will obviously improve the situation. But I think that’s highly unlikely and I think it is a new reality.

In terms of your second question on slow growth CRM, and you combine that with CV you end up with a mix that flattish to slightly up. I think the answer to your question is yes. We’re not going to operate a business with long term mix where three quarters of the business is flat. So either the markets have to change or we have to change our mix. So very clearly that’s a yes answer strategically.

Bruce Nudell – UBS

Without the full benefit of detailed data in Compare and I agree it was a very kind of preliminary presentation, the overwhelming sense that people got sitting in the office is that Liberte and Taxus Express stacked up about the same against Zion. Is there a more formal adjudication of Compare that you could share with the street that would dispel that notion or do we have to wait for publication of that data?

Raymond Elliott

The answer to that is obviously we would like to have a very detailed comparison and do it on a firm basis. But I’m going to ask Dr. Dawkins to comment further on that.

Dr. Dawkins

Obviously at TCT we had the three year Atlas data which clearly show a delta, a significant delta between Express and Liberte and favoring Liberte. I think one of the issues about Compare is it was a single center study and we’ve seen the number of examples that single center studies that don’t reflect the overall picture.

In fact it’s TCT that Certac study, as you know showed this late side to Certac. So the five year data from Certac showed equivalency between Taxus Express and Cypher. And the other thing to remember is that none of these trials be they the individual Spirit trials or Compare are powered to look at stent thrombosis. So stent thrombosis had a lot of air time in TCT and we’ve very firm Taxus stent thrombosis in Spirit Two and 0% in Spirit Three and 0% in Spirit Four and 0.57%, and Compare 1.7%, so 3X was it was in Spirit Four, and this is just statistical noise.

None of these trials were powered for stent thrombosis. So I think we need some additional data to put Compare into perspective. It certainly doesn’t fit with the 46,000 patients over nine years in the Taxus program.

Operator

Your next question comes from Rick Wise – Leerink Swann.

Rick Wise – Leerink Swann

Turning to the product and launch delays versus expectations, how quickly can you fix that and maybe help us think a little bit about what impact we could see as a result.

Raymond Elliott

I don’t think we’re going to fix the ones that are currently delayed other than just catch up on them and essentially be late. One of those ten projects I went over that I could think could make a big change in the company is the product development process in its entirety and that would take it through ideation through launch.

We are pretty effective launchers when we have the product. Our issues seem to be with budget and timing in the process itself and we have somewhat of a checkered history frankly on that in terms of time. So I’m looking to change.

We have great ideas and great launches generally speaking. It’s what’s in the middle that causes problems. One aside I would make to that is, it is a tougher regulatory environment particularly on iterative product in 510-K, but tougher in general.

So to the extent that regulatory is a part of that, we may not be able to control that and we just have to give a better guidance to the street on the timing of things if in fact it’s going to take longer. But much of this is our own fault. It’s executional and it’s things that can be fixed.

Rick Wise – Leerink Swann

On the 150 or so reps that you underestimated the time to get them productive, when is that resolved and how do we think about the possible timing for starting to see the positive leverage at least from that one element?

Raymond Elliott

It’s obviously well into next year because they just came out of school if you will. The other thing you have to remember, those people are better to find at customer facing, they’re not all pure reps. Some of this is to give us a better balance of clinical and post surgical coverage versus just selling. So the mix factor is part of that too.

But very clearly if they are good performers, if we get the mix right and if we can get them performing well as we get later out into 2010, that obviously can give us a positive hand.

Rick Wise – Leerink Swann

I’d be curious to hear whatever it is, 14, 16 weeks into the job, are you feeling less optimistic about your ability to have a significant positive impact on the company given the market and price challenges and maybe just as part of that, does it feel like the business is likely to be stable at these kinds of challenged third and fourth quarter levels into the first half and maybe we start to see the impact of your initiatives in the second half. Is that how you’re thinking about it? Any perspective would be welcome.

Raymond Elliott

After all our years together you ask me that question. I live for this stuff. This is a great company. It hasn’t changed anything. We’re getting a realistic expectation and setting the appropriate bar for the company and we’re going to have a great team. We’re going to go to work and fix it. How dare you ask me a question like that? I’m shocked at you.

Operator

Your next question comes from Kristen Stewart – Credit Suisse.

Kristen Stewart – Credit Suisse

I was wondering if you could talk a little bit more specifically about the gains in your long terms guidance. I assume it’s long term guidance for this year, or for the ICD business specifically. Are you looking more now I guess the last couple of quarters under your belt at difference assumptions in mix? It sounds like it may be more in price but just kind of curious on your thoughts on mix and volume on a go forward basis.

Raymond Elliott

We mentioned it’s 4% now and some of that is somewhat increase in price pressure but I think you have to take into consideration in trying to figure out the [denoval] versus replacement can ratios over several years. We need to give some thought to will CRTV truly outperform and expand the pie in the market for all of us, but particularly for us if we can get a new indication.

So there’s a bunch of variables there that we don’t understand and I didn’t mention all of them, but there’s a bunch of variables that we don’t understand fully yet.

Fredericus Cohen

I think you mentioned the most important ones Ray. Again we’ve added a few personnel. Some of that is needed for additional burden that we have with the increased sales that we have seen and hopefully we’ll continue to see share taking in the future as well so we have to cover that aspect.

We have to also make the reps more productive. Those are important things. We have programs in place to drive productivity. Other than that we are focused on the submission for CRT with the FDA and if and when we get that approved by the FDA which we are hoping will happen around the summer or so next year, we can be much more active on that front.

In the meantime the market expectations are lowered as Sam and Ray alluded to and we see some additional pricing pressure. I think those are the key elements that we face. We have a good strong competitive offering in particular on the techno cardio side and we are continuing to work on meaningful innovation and moving forward.

Kristen Stewart – Credit Suisse

Can you quantify the pricing declines? I know you said it was greater than the 2% to 3% historically but are we talking more like 5%? What are we talking in terms on ICD pricing if you look at it U.S. and then in the key international markets?

Raymond Elliott

We don’t quantify additional amounts on pricing so I would prefer not to do that.

Kristen Stewart – Credit Suisse

But it was worse than the 2% to 3% I said earlier?

Raymond Elliott

Slightly worse was my reporting.

Kristen Stewart – Credit Suisse

In terms of adding new people, are you going to continue to add people next year within the Serum sales force? How should we think about balancing sales additions or potential restructuring efforts on a barter level?

Raymond Elliott

Traditionally Serum and Boston Scientific have not provided sales numbers. I provided them this time in order to give you an order of magnitude of the impact. First of all, the strength of the investment in size being more than $150 million and then the order of magnitude it presents in our operating expenses when you’re paying all the bills and they’re not bringing in substantial additional sales at this point. So that was the reason to do it, to give you perspective on it. In terms of ongoing additions, we would prefer not to do that unless necessary.

Kristen Stewart – Credit Suisse

In terms of your revised market assumptions does it make you more or less likely to think about doing acquisitions in the near term to further diversify and maybe position the company for stronger growth?

Raymond Elliott

I don’t think it changes anything particularly. We’re still, until the middle of next year when the balance sheet is a little different; we’re still looking at $100 million to $200 million acquisitions. We could do pretty much what we want in that area. And the diversification belief and work that we’re doing is really unrelated to whether the grown in CRM is 4% or 5% to 6%. It wouldn’t change the outcome of the strategy.

Sam Leno

In incorporated in my comments as well the fact that we will continue to invest in the longer term profitable growth of the company to include acquisition.

Operator

Your next question comes from Joanne Wuensch – BMO Capital Markets.

Joanne Wuensch – BMO Capital Markets

We’ve talked a lot about DES and Sierra and pricing pressures. Could you please expand that a bit to what we may be looking at in terms of some of your other divisions?

Raymond Elliott

I think generally in the core products and CD non DES there’s certainly some pressure there in part because in some cases our offerings are getting a little bit dated and we’ve got some folks coming in that are trying to gain some volume, so I think in some of those areas there’s certainly similar pricing pressure and of course in many cases, they come out of the same or adjacent departments in the hospitals or similar types of cardiac centers, centralized hospitals and so on.

So that is real. I think in the other areas in general we’re less concerned. Not that it’s completely rosy, but it’s consistent with historical patterns. There doesn’t seem to be anything new there.

Joanne Wuensch – BMO Capital Markets

That leads me to the question of is the hospital pushing back or is this just competitors in your DES and CRM business that are making it more difficult to continue at the current prices?

Raymond Elliott

I think it’s both. I don’t think it’s one or the other. It may vary by area and even by country but the general answer to that is it’s both.

Sam Leno

It’s really hard to separate them out. Originally it was with the hospital pushing back at all its suppliers and suppliers have to respond to that as well as each other. You really can’t separate the two.

Operator

Your next question comes from [Derrick Thong – Sanford Bernstein]

[Derrick Thong – Sanford Bernstein]

I wanted to go back to the U.S. drug-eluting market dynamics. It looks like the price pressure that you say this quarter 8% down was similar to what you saw the previous quarter but the total unit volumes for drug-eluting stents in the broad market were down substantially more. I think you reported 17% growth last quarter and this quarter I think you said up something like 7%. Can you speak to what we’re seeing there in terms of pressure on unit volumes this quarter versus last quarter?

William Kucheman

We are seeing some procedural volume softness which I think is in relationship the general economic conditions, number one. Number two, in terms of ASP pressure, you hit it right on the head. It’s pretty consistent with what we experienced in second quarter, so those two things are kind of in play.

And then you also have to look at back to procedural volume. Procedural volume second quarter to third quarter we estimate was down low single digits. So it’s a combination of those three factors that I think are in play.

Sam Leno

What I would add to that is even though we had 49% total market share in the U.S. in both the second and third quarter, we had a couple of points of movement away from Taxus toward Promus and we’ve been very clear that Taxus is a premium priced product as compared to all others.

So we had both a gross profit affect from that share shift between those two as well as an ASP effect which comes largely from mix.

[Derrick Thong – Sanford Bernstein]

On that procedural volume softness due to the economic softness, any insight as to why you’re just starting to see that now versus earlier in the year and any sense on really what exactly you’re seeing? Are patients not coming in with testing to the hospital? Any color there would be helpful.

Raymond Elliott

One of the speculations we have that we’re taking a look at is there seems to be a correlation between the timing of, if you go back to early stages of unemployment, the early stages of the recession if you will, there seems to be some sort of correlation between the timing of the unemployment and therefore the point at which Cobra would run out for many people.

And I don’t know whether that’s real or not. We’re looking into that. But there may be a pattern here where yes, we understand people are sick and would go if necessary, but if they absolutely have lost coverage and have not regained employment, it becomes a very difficult situation. Whether that’s real and it’s a market moving factor, I don’t think we know at this point, but I think it has some possibilities just correlation wise.

[Derrick Thong – Sanford Bernstein]

On the U.S. CRM market, it looked like the CRM market or ICD market had been growing at a nice double digit clip up until last quarter and then suddenly we’ve been seeing a real decline in LUS growth rates. Should we no longer assume that the same underlying dynamics that were previously I think generally that were driving LUS growth rate basically under penetration versus the U.S. Are those no longer going to be driving double digit growth or is this kind of temporary economic slowdown that you think will be temporary and will pick up later on.

Fredericus Cohen

I do believe that the markets internationally continue to grow at a higher rate than the U.S. We’ve always said that, and that’s still the case. As Ray indicated in the U.S. we are looking at a market growth of around 2% and globally around 4% so that obviously indicates there’s more market growth in international.

I also believe that it’s fair to say that in certain markets internationally there is also more pricing pressure now than there has been historically. So I think those are the key factors that you have to take into account. I think that’s the best way I can describe it.

Sam Leno

I’ll just mention the accounting aspect so it doesn’t get lost in the shuffle here and then you can talk to the markets. Keep in mind that we do do deferral on latitude and latitude has just been launched in Europe and the effect of that I think was about four points and essentially had we not deferred latitude as a normal accounting policy our growth internationally would have matched that of domestically, I think about 8% growth. So we need to keep in mind the accounting aspect of this.

David

That’s exactly what I was going to point out was the fact that the deferred latitude component certainly makes a difference when you look at the net numbers. From a gross perspective certainly I believe we’re keeping pace internationally, and to Fred’s point there are some isolated marks where pricing pressure as a result of the economic conditions is probably creating some downturn. But overall I think that we’re running pretty much about the same.

Operator

Your next question comes from Tim Lee – Piper Jaffray.

Tim Lee – Piper Jaffray

A couple on the drug-eluting stent side. First on Promus Element with European approval expected this quarter, it is expected this quarter, but are there any contingency plans just in case. Are you increasing your Promus inventory? And also once Promus Element gets approved can European Promus inventory be shipped into other geographies or will it be written off?

Raymond Elliott

There are contingencies and the contingencies are to have just the right amount of additional Promus inventory through additional inventory building courtesy of Abbot but not have so much that when the approval does come through it has financial impact so there’s a fine line to walk there. But clearly that is an insurance policy.

The other insurance policy is the European commission itself giving an extension of some period of time to cover this soft; they have a history of not wanting single vendor plays like this in the European market place so there is historical precedent for that. Those are the two primary insurance policies.

Sam Leno

As it relates to the inventory, one of the balancing acts we have is to make sure that we have enough inventory to last us even if it had to last us beyond November 15 for a bit. But also not so much inventory that we end up with stale inventory that we have to write off.

So we go through the evaluation process every week on how much inventory we have and how much exposure might we have. One of the big differences is because we have a number of different countries in Europe, unlike the U.S. we can have a more staged launched of Promus Element and give us a change to burn down the Promus inventory as we replace sales with Promus Element.

The other big difference is in the international markets we do not take back the Promus inventory from our customers so they use that to depletion then we convert that as they deplete that inventory to Promus Element. So the big exposures that we saw in the U.S. are not typically present in OUS markets.

Tim Lee – Piper Jaffray

In terms of your use of cash, you’ve done another fantastic job in taking your debt levels down here but are there any other thoughts, is continued debt pay down or with the stock off a little bit here today, any thought of share buy backs or any thoughts on that front please.

Raymond Elliott

We’re still going to use our cash to pay down debt and also use cash as a source of capital for acquisitions. It has been our priority. It will continue to be our priority. We’re focused at refinancing the 2011 maturities. If plans go as expected we should be able to get that done by mid year next year.

Once we get that refinancing behind us, then we can take a step back and re-evaluate both the use of cash and the deployment of cash towards perhaps larger targeted acquisitions. But for now we’re going to stick to the strategy that we’ve had for the last two years.

Operator

Your next question comes from [Adam Finestein – Barclays Capital]

[Adam Finestein – Barclays Capital]

Just wanted to get your sense, you spoke about those pricing numbers, very helpful, but how do you think about the pricing numbers you’re giving relative to the overall industry and I guess the second part of the question would be how aggressive are you going to be in order to keep market share to the extent there is more push back from hospitals? Are you willing to be aggressive to keep market share or in some cases are you walking away from things?

Raymond Elliott

I think it depends on the level of sophistication. One of the things I commented on the script is we put a new system into play that’s been worked on here for a long time that allows us to have visibility and sophistication around pricing. Part of it is to not leak profit loss on the current policies you have and that you’re maximizing profitability’s. So that system which is called Wind Maker is allowing us to have some huge opportunities analytically to try and protect against that.

But the key to it is profitable sales. That’s the business we’re in. The question that comes up, and then I’ll let Hank comment on this as well, but the other question that comes up is pricing is one facet of this. We need to look at our entire model and say how do we want to deliver product to the market place that optimized operating income and moves us towards our aspirations as opposed to solely focusing on just the pricing aspect of it.

William Kucheman

To answer one of your questions specifically, we have walked away from business when we felt the combination of factors that Ray just alluded to were unacceptable to us. But I’d say overall our sales management team is managing competitive bids very, very responsibly and I’m very pleased with what they are executing out in the field in that regard.

[Adam Finestein – Barclays Capital]

On those competitive bids, have you seen a lot more in recent months or is the impact from some of those already in the numbers here so you’re not looking for it to get worse but maybe not necessarily to get better, but do you think it’s fully factored in some of these more aggressive actions in terms our putting competitive bids out there?

William Kucheman

I think the competitive bid flow ebbs and flows throughout the year obviously. There’s a certain number that come up each month that are on an annual or six month basis, so what we are aware of we have cranked in and then obviously whatever unfolds over the course of fourth quarter, we’ll deal with it at that time.

Raymond Elliott

The other thing I would add is that drug-eluting stent market is an expensive market to enter, to the cost of launching a new drug-eluting stent depending on what it is and how much design energy goes into it is $400 million to $500 million. It’s in nobody’s best interest to keep on driving the price down.

So we all walk a good line of being competitive was we have to be with making sure that we don’t take on business that we shouldn’t be taking on.

Operator

Your next question comes from Matthew Dodds – Citigroup.

Matthew Dodds – Citigroup

I know you’re sick of pricing questions but I just want to make sure drug-eluting stents internationally, was that down in the mid teens and if that’s right is that mostly in the EMEA and Asia Pack?

Raymond Elliott

I’m not sure the mid teens came from international DS pricing. As of right now it’s down 9.8%.

Matthew Dodds – Citigroup

And that includes currency so that’s an organic number?

Raymond Elliott

That’s pricing.

Matthew Dodds – Citigroup

On CMR where do you think you are in Japan in distribution change? I know you said over 150 people total. Can you say how much of that has gone to changing dynamics in Japan and when you think you’ll be back on track to where you were a little over a year ago?

Raymond Elliott

I wouldn’t want to get into that level of information on Japan. The vast majority that I was referring to was domestic in Europe. I don’t even know the answer to your question off the top of my head, but a lot of it was associated with work we’re doing in the U.S. and Europe.

Sam Leno

The adds that we had in Japan were a result as you recall in April of last year having lost JLL as a distributor and therefore we lost the sales reps that we had. We spent the next 12 months or so rebuilding a direct sales force in Japan. We have done that. Those reps are trained and as we’re seeing in the U.S. and in Europe, once trained, even with all the effort of training them well it does take awhile for those reps with their new training and technical skills to go out and win business over. So what’s taking longer is the transition from fully trained to actually seeing points on the scoreboard.

Raymond Elliott

The only think I’ll add to that is you have to remember that the Japan lifeline sales force that we actually lost was largely the pacer sales force. We’ve now introduced in the quarter Altura which will make a difference for our Japan sales team as well and that was given Type Four reimbursement as well, so that will have an impact as well.

Operator

Your next question comes from Sara Michelmore – Cowan and Company.

Sara Michelmore – Cowan and Company

I’ll ask a non CRM non DES question. I think you mentioned in your prepared comments that the other businesses are going to be key here in terms of the company’s growth trajectory going forward and I know it’s early. I know you’ve got this operating plan that you’re working through now, but are there specific product areas or product lines that we should be focused on in terms of the ones where you think you’ve got the most growth potential near term and what kinds of investments are you going to need to make to get the growth out of the non DES non CRM businesses that you think you may need?

Raymond Elliott

I think there’s a number that I’ve commented on. There’s a very long list. We’re actually doing an R&D portfolio re-do right now to rethink the directions we’re taking and particularly the order of priority of investment level we’re willing to put in both internal and external. But I would highlight it with things such as women’s health which I mentioned.

There’s a substantial number of areas in women’s health that we are not in today that are adjacent to what we’re doing. We’ve done and will continue to do a lot of work on obesity and diabetes both from internal work we’re doing on platforms we have available here as well as external work.

We certainly will continue to look at structural heart which is still cardio I realize, but an area different from what we’re in today and then there’s several other ones. But when we’re done this priority work which is due to be finished in the next 30 days, we ought to be able at some point to communicate a strategic plan both to our employees and public that will outline these areas in a little more detail.

Sara Michelmore – Cowan and Company

The other think I know you’re working through and I think Sam had mentioned it was the head count management process and just was hoping you could spend a minute and talk to us about how you’re dealing with that and if we should expect any changes going forward in terms of how that process is run.

Sam Leno

We’ve had a pretty tight head count management process in place for two years now. That’s what’s at the core of our what we call internally Moving Mountain restructuring program back in late 2007. That hasn’t changed. Each of our businesses, each of our staff functions, each of our departments as part of their operating plan have plan head counts as well and we don’t allow anybody to put a requisition out that isn’t planned.

And we’re also pretty stingy about approving those in our plan, and that will just continue forever in the company.

Sara Michelmore – Cowan and Company

Assuming that there are some commercial areas that you feel like you need to invest in, how do you balance that against keeping head count at a level that’s manageable for the company.

Sam Leno

As you know we started in the middle of last year adding some head counts in the U.S. as well as in Europe in Serum because we saw that as an opportunity. Those are on top of the normal head count plans that we have but even with head count plans being X, there’s always a number of open requisitions, so none of our departments, none of our businesses are ever at planned head count levels.

So while we don’t have a lot of turnover, it’s modest. The turnover allows us to both manage head count to below plan levels and still take advantage when they present themselves of strategic investments in direct selling efforts.

Raymond Elliott

Just to add quickly to that, you know let’s be crystal clear. We will become a much more sales force company globally and that in addition to training in tools and tracking and all the other things we need to do better, it does require us to add customer facing positions. Now they may be not necessarily pure sales. They could be clinical support too.

But we will add to our focus on sales and we will add to the sales force our customer facing positions over the next couple of years. That’s pretty much a certainty.

Larry Newman

We’re coming up on the top of the hour and so in a minute I’m going to have you give instructions for the replay information. I would like to thank everybody for joining us today on the call and remind you that I will be available following the call in the event there are questions we were unable to get to on the call. Thank you everybody.

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