St. Jude Medical Inc., Q3 2009 Earnings Call Transcript

 |  About: St. Jude Medical, Inc. (STJ)
by: SA Transcripts


Welcome to St. Jude Medical’s third quarter earnings conference call. Hosting the call today is Dan Starks, Chairman, President, and Chief Executive Officer of St. Jude Medical.

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

The statements made by the company are based upon management’s current expectations and are subject to certain risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. These risks and uncertainties include market conditions and other factors beyond the company’s control, and the risk factors and other cautionary statements described in the company’s filings with the SEC including those described in the risk factors and cautionary statement sections of the company’s quarterly report on Form 10-Q for the fiscal quarter ended April 4, 2009, and July 4, 2009. The company does not intend to update these statements and undertakes no duty to any person to provide any such updates under any circumstance.

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

Daniel J. Starks

Welcome to the St. Jude Medical third quarter 2009 earnings conference call. With me on the call today are John Heinmiller, Executive Vice President and Chief Financial Officer; Eric Fain, President of our Cardiac Rhythm Management Division; and Angie Craig, Vice President of Corporate Relations.

Before I ask John Heinmiller to conduct his normal review of our third quarter results, I would like to address the factors leading the preliminary announcement of third quarter results we issued on October 6th.

As we reported in our October 6th announcement, preliminary third quarter results were lower than expected. Final results for the quarter confirm that this was due primarily to sales dynamics in the United States which grew 5% compared with international sales for the quarter which grew 15% on a constant currency basis.

As we indicated in our October 6th press release, our initial assessment was that sales were affected by a change in purchasing behavior at the end of the quarter among some of our hospital customers. The analysis we have completed since October 6th confirms that our initial assessment was correct related to the purchasing behavior changes.

In terms of our own customer purchasing experience this quarter, we have identified approximately 50 US hospital customers who did no execute normal quarter end quantity purchases of cardiac rhythm management or CRM devices from us due to financial considerations. In some cases, these hospitals simply were not willing to commit capital to inventory for CRM products in this current economic environment. In other cases, these hospitals would do so only in exchange for price discounts that were steeper than what St. Jude Medical was willing to provide.

On the year-over-year basis, the math indicates that we may have lost some market share in CRM devices in the United States during the third quarter but our analysis supports the conclusion that CRM market share changes in the United States for the third quarter largely reflect dynamics related to inventory practices rather than changes in customer preference for St. Jude Medical’s brand of CRM device. This conclusion is supported by specific account by account analysis, and is consistent with the competitive strength of our CRM product lines, the high quality of our comprehensive field sales and support, people and programs in the United States, and with our ongoing double-digit constant currency revenue growth for CRM devices in global markets outside the United States.

Although we are encouraged by the sound fundamentals of our US CRM business during the third quarter, we are clearly disappointed that we did not have better visibility into predicting the dynamics that ultimately led to third quarter sales coming in below expectations.

We are committed to making all changes in process, personnel, and programs that we believe are appropriate to improve our visibility and execution with respect to US CRM sales. Until these changes have been fully implemented and validated, we will lower our guidance to increase our confidence that if we err with our guidance, we will err on the side of under-promising and over-delivering.

I’m now going to turn the call over to John Heinmiller to conduct his normal review of our third quarter results along with his typical update for the entire St. Jude Medical business. I will then make additional comments and open it up for your questions.

John C. Heinmiller

Sales for the quarter totaled $1.16 billion, up approximately 7% over the $1.84 billion reported in the third quarter of last year. On a constant currency basis, third quarter sales increased 10% versus last year. Unfavorable currency translations versus last year’s third quarter decreased this quarter’s sales by about $29 million.

During the third quarter, we recorded $49 million of special charges primarily reflecting severance cost associated with personnel reductions related to continuing efforts to improve our sales and sales support productivity as well as to streamline manufacturing operations. In addition, we recorded an $8 million write-down, reflecting a decline in the fair market value of a certain strategic cost investment.

Comments during this call referencing third quarter and full year 2009 results including EPS amounts will be exclusive of these items. Earnings per share were $0.59 for the third quarter of 2009, a 9% increase over EPS of $0.54 in the third quarter of 2008. On a constant currency basis, our earnings per share growth this quarter was approximately 15%. As a reminder, adjusted EPS in last year’s third quarter now includes the impact of retroactively adjusting our historical financial statements as required by GAAP to reflect the change in accounting related to convertible debentures which have the effect of increasing our non-cash expense.

Before we discuss our third quarter 2009 sales results by product category with guidance for the fourth quarter of 2009, let me comment on foreign currency. The two main currencies influencing St. Jude Medical’s operations are the euro and the yen. On our conference call one quarter ago, we assumed that for the second half of 2009, each euro would translate into about $1.35 to $1.40, and that each 93 to 98 yen would translate into $1 US. For the third quarter, the actual average exchange rates for the euro and the yen versus these assumptions did not result in a material difference in reported sales.

In preparing our sales and earnings guidance for the fourth quarter of 2009, we have updated the currency rates used in our model. We now assume that for the fourth quarter of 2009, each euro will translate into about $1.45 to $1.50 and that each 88 to 93 yen will translate into $1 US. This change in assumption regarding currency exchange rates for the fourth quarter has the impact of increasing total forecasted sales for the fourth quarter by about $15 to $20 million with $10 to $15 million of the benefit in our CRM product sales.

Additionally, please note as we give guidance for the fourth quarter of 2009, that due to our 52, 53-week convention this year, we have one less week of selling days in our 2009 fiscal fourth quarter compared to our 2008 fiscal fourth quarter and we have taken this into account as we prepared our guidance.

Now for the discussion of sales by product category; for the third quarter, total cardiac rhythm management or CRM sales which include revenue from both our ICD and pacemaker product lines were $690 million, up 2% from last year’s third quarter including $19 million of unfavorable currency translations. On a constant currency basis, third quarter CRM sales increased 5% versus last year. Our international CRM business grew 10% constant currency in the third quarter.

For the third quarter, ICD sales were $389 million, up 2% from last year’s third quarter. On a constant currency basis, third quarter ICD sales increased 5% versus last year. US ICD sales were $248 million, flat with last year’s third quarter. International ICD sales were $141 million, a 6% increase over the third quarter of 2008 including $11 million of unfavorable foreign currency translations. On a currency neutral basis, ICD sales in our international business grew 14% in the third quarter.

For low-voltage devices, sales for the third quarter totaled $301 million, up 1% from last year’s third quarter. On a constant currency basis, third quarter low-voltage device sales increased 4% versus last year.

In the United States, pacemaker sales were $136 million, up 1% compared with last year’s third quarter. In our international markets, pacemaker sales were approximately $165 million, up 1% from the third quarter of 2008 including $8 million of unfavorable foreign currency translations. On a currency neutral basis, this translates into 6% sales growth in our international pacemaker business. For the fourth quarter of 2009, we expect total CRM product sales to be in the range of $680 million to $710 million.

Atrial fibrillation or AF product sales for the third quarter totaled $156 million, up 16% over the third quarter of last year including $4 million of unfavorable foreign currency translations. On a constant currency basis, third quarter AF sales increased 19% versus last year. For the fourth quarter of 2009, we expect AF product sales to be in the range of $150 million to $165 million.

Total sales of cardiovascular products for the third quarter of 2009 were $230 million, up 11% over the third quarter of 2008 including $4 million of unfavorable foreign currency translations. On a constant currency basis, third quarter cardiovascular products sales increased 13% versus last year. This product category includes sales of products that St. Jude Medical acquired from Radi Medical Systems in December 2008.

Within this category of products, sales of vascular closure products in the third quarter of 2009 were $91 million including $3 million of unfavorable foreign currency translations. Sales of heart valve products in the third quarter of 2009 were $80 million, impacted by $3 million of unfavorable foreign currency translations. For the fourth quarter of 2009, we expect cardiovascular product sales to be in the range of $230 million to $245 million.

Total sales of neuromodulation products in the third quarter of 2009 were $84 million, up 31% from the third quarter of 2008, including $2 million of unfavorable foreign currency translations. For the fourth quarter of 2009, we expect sales of neuromodulation products to be in the range of $82 to $87 million.

Now that we’ve provided our guidance for Q4 sales by product category, let me pause at this point and recap our full-year 2009 sales guidance.

For cardiac rhythm management devices, we expect sales for calendar 2009 in the range of $2.75 billion to $2.78 billion. Sales for our AF products for 2009 are expected to reach $607 million to $622 million. We expect sales of cardiovascular products to be $943 million to $958 million. For neuromodulation products, we expect 2009 sales in the range of $320 million to $325 million. If you add up the sales across all growth platforms, total sales in 2009 are expected to be $4.62 billion to $4.685 million.

Assuming our currency assumptions for the fourth quarter are reasonably close, we estimate that for 2009, we will have absorbed a currency head win of approximately $115 million to $125 million and the midpoint of our full-year guidance range represents approximately 10% constant currency growth for full year 2009 compared with 2008.

The geographic break-down of St. Jude Medical sales in the third quarter of 2009 are now included as part of our press release and we would refer you to this detail.

The gross profit margin this quarter was 74.2% representing a 50 basis point decline compared with the third quarter of 2008, due primarily to the negative impact of foreign currency. For the full year 2009, we continue to expect gross profit margins to be in the range of 73.9% to 74.4%.

Our third quarter SG&A expenses were 36.8% of net sales compared to 37.0% in the third quarter of 2008. For the full year 2009, SG&A as a percentage of net sales in expected to be in the range of 36.2% to 36.7%.

Research and development expense in the third quarter of 2009 was 12.3% of net sales compared with an expense of 12.1% of net sales in the third quarter of 2008. For the full year 2009, we continue to expect R&D expense to be in the range of 12.0% to 12.5% of net sales as we continue to balance delivering short-term results with the right investments and long-term growth drivers.

Other expense was $15 million in the third quarter. For the fourth quarter of 2009, we expect the other income and expense line item will be a net expense of approximately $18 million.

During the third quarter, we adjusted our year-to-date effective income tax rate from 26.8% to 26.5%. The impact of truing-up our year-to-date income tax provision did not change our adjusted earnings per share this quarter. We now expect our effective income tax rate for 2009 to be approximately 26.5%.

Moving on to the balance sheet, at the end of the third quarter 2009, we had $798 million in cash and cash equivalents and $1.972 billion in total debt. During the quarter, we closed on a $1.2 billion public offering of senior debt with $700 million due in 2014 and $500 due in 2019. We used a portion of these proceeds to complete a $500 million stock repurchase program that we announced last quarter.

The impact of the reduction in our outstanding shares related to the share repurchase is virtually offset by the additional interest expense on the outstanding senior notes and is essentially neutral to our 2009 earnings per share. In addition to the senior notes, the outstanding debt on our balance sheet primarily represents $459 million of borrowings under our domestic credit facilities which mature in 2011 and $320 million of notes issued in Japan which mature in 2010 and 2011.

Next, I want to offer some comments regarding our earnings per share outlook for the fourth quarter and full year 2009.

In preparing our EPS guidance, we have assumed that in the fourth quarter of 2009, the share count used in our fully diluted EPS calculation will be about 341 million to 343 million shares with the weighted average outstanding shares for the full year 2009 at 346 million to 348 million.

The company expects consolidated earnings per share for the fourth quarter to be in the range of $0.61 to $0.63, and for the full year 2009, we expect earnings per share to be in the range of $2.41 to $2.43 which would approximate 14% to 15% currency neutral EPS growth for the full year 2009.

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

Daniel J. Starks

St. Jude Medical’s corporate culture places high priority on making sure that as an organization we do what we say we’re going to do. I am confident that we either have made or are in the process of completing all of the adjustments we need to restore a sustainable and high level of operating discipline and success moving forward. We start with the conviction that operating discipline requires the right leadership. Where we have the right leadership in place, we continue to maintain a high level of operating discipline. Where we do not have the right leadership in place, we are making changes.

A second component of operating discipline is to make sure that our spending does not get ahead of our sales growth. St. Jude Medical maintains a decentralized operating environment that empowers the people closest to our customers to make things in a relatively entrepreneurial way. With empowerment, however, comes accountability. If spending does get ahead of sales growth inappropriately, we are committed to holding our leadership accountable and taking corrective actions such as those reflected in our special charge for the third quarter.

A third component of operating discipline at St. Jude Medical is the imperative of continuous improvement. This is one of our best protections against negative dynamics such as the threat of a $40 billion fee on medical devices or temporary slow-down in certain components of our sales growth.

Due to major initiatives we began in 2005, we believe we are well positioned long term to meet the challenges associated with healthcare reform, ongoing economic pressures or other challenges to our growth. As a reminder, we recently opened new and cost effective manufacturing centers in South Carolina and in Puerto Rico. We are about to open new and cost-effective manufacturing centers in Costa Rica and in Malaysia.

We have completed additional investments of approximately $200 million to strength our infrastructure capabilities in the form of implementing an enterprise software solution and other infrastructure expansion that will help us deliver cost reductions and achieve efficiencies across the company long-term in virtually all of our manufacturing and operating expense functions.

Before I move away from the topic of operating discipline, I would like to summarize my main points.

First, our commitment to maintain a high degree of operating discipline at St. Jude Medical is absolute. Although we do not control sales and can only influence them, we absolutely can control spending. Starting with me, our leadership team is accountable for making sure that spending does not get ahead of sales. Our corrective actions during the third quarter demonstrate that failure of operating discipline is not an option at St. Jude Medical. We are finalizing our review of operating discipline dynamics and are committed to completing in the fourth quarter any additional changes we need to ensure that we enter 2010 with spending aligned to sales and with a leadership team fully committed to strong operating discipline.

For the remainder of my prepared remarks, I would like to review for investors the strength of St. Jude Medical’s business and the basis for my conviction that our growth fundamentals are strong and that our long-term growth program is on track even though our third quarter results did not meet expectations.

First, I think it is important to highlight that St. Jude Medical standards are high and that a disappointing quarter for St. Jude Medical is better than a good quarter for many in our peer group. Measured on a constant currency basis, we just delivered 15% growth in earnings per share and 10% growth in revenue. We did this with 0% growth in revenue in our US ICD business, demonstrating significant diversity in our sales growth drivers. We are not yet prepared to give specific guidance for 2010, but we are confident that when we do so next quarter, the center point of our sales guidance will reflect total corporate double digit revenue growth measured in constant currency for 2010.

Second, our CRM product line is stronger relative to the competition than ever before in the history of St. Jude Medical. This includes our Accent and Anthem lines of pacemakers with wireless RF telemetry, our high-voltage devices with SJ4 headers and simplified lead connections, our multiple lines of 7-French high-voltage leads, our AnalyST XL high-voltage devices with ST segment monitoring in Europe, our, and Merlin@home remote monitoring capabilities with direct connections to numerous electronic health record systems, and a full pipeline of new products.

Revenue growth for our CRM products moving forward will be governed more by our marketing effectiveness and by our sales execution than by limitations with our product line. Although it is realistic to expect the sales environment to continue to be competitive and difficult, we are confident that we are fully capable of generating the level of sales we need with CRM products to support total corporate double digit sales growth measured on a constant currency basis. Our confidence is reinforced by the observation that our share of the de novo segment of the ICD market is a leading indicator for accelerated growth in our share of the replacement segment of the ICD market going forward.

Third, our international business is as strong as it has ever been and gives us meaningful competitive advantages in our long-term growth program. Here, I want to give credit to Joe McCullough and his leadership team for establishing our international division in 2002 and for expanding our international business to almost half of St. Jude Medical’s total sales. Today, St. Jude Medical is the benchmark for best competitive practice with respect to international sales as a percent of total compared with our most relevant peer group. This gives us significant competitive advantage long-term with respect to sales diversification, optimized cost structure, synergies we can acquire and acquisitions and ultimately our total corporate growth rate.

Fourth, St. Jude Medical has strong leadership positions in atrial fibrillation and in neuromodulation, two of the best growth opportunities in medical device technology. As a reminder, we estimate that the global market for AF and other procedures in the electrophysiology or EP cath lab is about $2 billion annually. Although already $2 billion in size, this market is still in its infancy and is expected to continue to grow at a double digit rate for the foreseeable future. We estimate that we have about a one-third share of this market and that we are continuing to gain share. To validate this, we just reported 19% constant currency organic growth in AF division revenue for the third quarter versus 9% growth reported last week by our biggest competitor.

Longer-term, we expect the CABANA trial to demonstrate that AF ablation procedures score highly both with respect to cost effectiveness and with respect to clinical effectiveness compared with medical therapy. This supports our expectation that the broad AF market will become at least as large as the global market for pacemakers over the next 5 to 7 years.

Our vision is that St. Jude Medical will solidify its long-term leadership in the EP cath lab during the next few years when we begin to offer an ablation system that integrates technology from our in-site platform, our MediGuide technology, our EP MedSystems acquisition and our proprietary catheter technology in a way that permits clinicians to conduct ablation procedures with minimal fluoroscopy with clarity of anatomic detail and catheter locations throughout the duration of the procedure and with continuous improvement of safety efficacy and cost effectiveness.

We are similarly enthusiastic about the increasingly important role our neuromodulation program is playing as a long-term growth driver. Our vision when we acquired ANS in 2005 was that we could afford the acquisition short-term in spite of significant dilution, but that the real value was the contribution ANS could make to our growth program longer term. Four years later, the value of our acquisition of ANS is becoming more visible. Although the neuromodulation market is still in its infancy, it already is over $2 billion in size.

The spinal cord stimulation segment where St. Jude Medical has established impressive growth in a solid #2 position, already exceeds $1 billion and expected to continue to grow at a double digit rate for the foreseeable future.

We have pivotal clinical trials underway to assess the value of our neuromodulation technologies for patients who suffer from migraine and for patients who suffer from treatment resistant depression. If either one of these trials has a positive outcome, St. Jude Medical expects to develop a leadership position and yet another major new long-term growth driver.

Nearer-term, we have recently received CE mark approval and reported first implant of our next generation Brio rechargeable deep brain stimulation or DBS system for patients who suffer from Parkinson’s disease. We look forward to limited launch of this best in class rechargeable neuro-stimulator in Europe during the first half of 2010.

Neuromodulation revenue already is 7% of total corporate sales for St. Jude Medical even though we are only beginning to capture the potential of this major growth platform.

As a final topic, I’d like to update you on the strength, depth, and breadth we have restored to our cardiovascular division or CVD franchise as a meaningful contributor to our long-term growth program.

First, our acquisition of Radi Medical Systems is giving us both acquisition sales growth and organic sales growth due to synergies with our global sales organizations. The 2-year data from the same trial reported that the recent TCT meeting confirmed that our pressure wire technology scores highly both in terms of cost effectiveness and in terms of clinical effectiveness when used to guide stenting in patients who suffer from multi-vessel disease. This reinforces our conviction that our fractional flow reserve or FFR technology can become a meaningful new growth driver on a stand-alone basis and that it will facilitate pull-through of our entire portfolio of cardiology products in the cardiology cath lab.

Moving on to the surgical side of our CVD franchise, we indicated at our annual investor conference earlier this year that we expected to receive CE mark for our Trifecta pericardial stented tissue valve toward the end of 2010. We are pleased to announce that our Trifecta stented tissue valve program has progressed faster than expected. We now are on track to begin launching our Trifecta pericardial stented tissue valve product line in Europe by the middle of 2010. This reinforces our confidence that our CVD franchise has been reinvigorated and is well positioned to deliver constant currency double digit sales growth on a sustainable basis in 2010 and beyond.

I would like to close my prepared remarks by summarizing the major components of St. Jude Medical’s long-term growth program that were not affected by the short-fall in US CRM sales during the third quarter. First, our CRM product line is stronger than ever relative to the competition. Challenges surrounding inventory and operating discipline are easier and quicker to fix than challenges surrounding core technology and product line.

Second, our international business is as strong as ever and delivered 15% growth in sales measured in constant currency. Our geographic and product line diversity was strong enough to deliver 10% constant currency growth on a total corporate basis during the third quarter in spite of no growth from our US ICD business.

Third, we have strong leadership positions in atrial fibrillation and neuromodulation, two of the best growth opportunities in all of medical device technology. Our programs in both of these opportunities are best in class as evidenced by our fastest growing market shares in AF and in neuromodulation, well supported by robust product development pipelines.

Fourth, our CVD business has been restored to double digit revenue growth on a sustainable basis on the strength of our FFR technology, our imminent entry into the pericardial stented tissue valve market, leading programs in vascular closure technology and ongoing investment in emerging transaction-catheter valve therapies.

Fifth, we are on the cusp of beginning the benefit from investments dating back to 2005 designed to help us optimize our cost structure long-term. Taken together with our strong cash flow and balance sheet, these components of our long-term growth program make it realistic for St. Jude Medical to continue to target a minimum 15% compound annual growth rate and earnings per share measured on a constant currency basis in 2010 and beyond.

With that, we’re ready to open it up for questions, and I’d like to turn it back to you, Regina, to moderate.

Question-and-Answer Session


(Operator Instructions). Our first question comes from the line of Kristen Stewart - Credit Suisse.

Kristen Stewart - Credit Suisse

I was just wondering, Dan, if you could just kind of go back to some of the hospital purchasing patterns and talk about why is it that some of these quarter end inventory purchases were not done in the quarter and why wouldn’t we expect them to kind of fill in in the fourth quarter? And then coupled with where currency is going, I just would have expected the EPS guidance to perhaps be a little higher.

Daniel J. Starks

Let me address generally the topic of quarter-end quantity purchases of cardiac rhythm management devices in the market as a starting point and then talk a little bit about our specific experience in the third quarter and what we are forecasting to accommodate in the fourth quarter; so, just as a bit of a background for those that are not as close to the business, quarter-end quantity purchases are a material part of the cardiac rhythm management market in the United States. We’re not going to start to break out quantity purchase amounts or other segments inside our US pacing and ICD numbers, but I do want to make some directional comments to help people understand the dynamics that we manage in our forecasting in closing-out quarters and some of the reasons that we encourage people to not make too much of any one-quarter end combined quarterly results and trend 6-month results over a longer period. So, first, the absolute details are different for high-voltage and low-voltage with respect to quarter-end quantity purchases, but if we were to blend the details with respect to high-voltage and low-voltage, in round numbers, the quantity purchase revenue in our CRM business is about 15% of our quarterly totals, and sometimes more and sometimes less, but on average over a period of time, the blended revenue quantity purchase is in that general ballpark. The size of specific quantity purchases where a customer can really vary quite a little bit, some customers would purchase as few as 5 units, other customers would literally purchase several hundred units in a single transaction; so, the quantity purchase amount, the amount of inventory that a customer takes, sometimes it will represent the volume that a customer expects to consume during the next quarter, sometimes it represents either more or less of that volume. So, there’s really just quite a bit of volatility in quarter end close in our CRM business in the United States, and it is one of the reasons why again we encourage everybody and in our own internal dynamics we tend not to make too much of any one quarter. You can see it in competitive numbers as well, you can see competition have unusual numbers either high or low in one quarter that seemed to be inconsistent with what a person sees over a longer period of time.

Coming back to our third quarter now and then leading into your followup question about why wouldn’t we see a reverse in the fourth quarter, when we look at our customer base here in the United States, we’re not going to break out exact numbers, but for directional comments and we were very diligent in compiling our data to make sure that we could adequately support the comments that we’re making. So, our cardiac rhythm management customer base in United States has over 1600 hospitals on the high-voltage side and about twice that on the low-voltage side, just to give you an idea of the denominator; so, we’re dealing with a total of several thousand customers.

Our comments about the third quarter change were limited to what we ran into with only 50 of those customers out of that total customer base. So, when we talk about those 50 customers, we’re not talking about customers who had too much inventory from a prior period and who are not ready to order again, we’re talking about 50 of the customers who normally would have ordered again, and really I think on some of these customers we’re counting on a normal re-order, but when we got down to re-order time, they didn’t do what they normally would do, and it was for one or two reasons, it was either that as they were managing their capital, they decided not to continue to maintain the level of inventory of pacers and ICDs or of either of the two that they historically have maintained and they had decided instead to lower their inventory for historic levels due to just their capital management, capital constraints, economic concerns, or they wanted an unusual price discount, and so a person could imagine the dynamics where at the end of the quarter customers know we’re counting on the business to the extent that in some customer instances, customers said, “we will do it, but we are only going to do it for an unusually low price” and those circumstances, the right thing for us to do for our business was to walk away from those quarter end purchases, and we did, and it obviously put us under a tremendous pressure and was a material contribution to our sales short-fall here on the CRM side, but long-term it is the right thing to do for the business; we did it, you can see it reflected in our stable gross margin Q3 versus Q2 even though the volume in Q3 was as much lower as it was versus Q2. From some of the comments that we heard yesterday, a person might surmise that not everybody in this space walked away from significant discounts in ASPs, and one might see that reflected in weaker gross margins on other company’s income statements as well as their comments on average selling prices. Our experience on average selling prices in the third quarter was that our average selling prices were very stable, in fact, it was partly a function of product mix, new product premiums, it was partly a function of our pricing discipline and it is partly a function of some shift in mix from non-CRTD to CRTD on the high voltage side. So, we had a very stable average selling price in our CRM business in the third quarter both in the United States and in global markets on average when you blend it all together. So, that’s a little bit of background, then as you ask us, so what about the fourth quarter, the experience we had in the third quarter was different, was limited to these 50 customers that we have identified. There are a lot more customers in the customer base, so as we look forward into the fourth quarter, we’re committed first; if we’re going to make a mistake in our guidance, we’re going to make a mistake on the side of being conservative where the guidance we’ve given is good faith, it’s not a ridiculously low guidance but it’s a good faith guidance at the same time, if we’re going to err, we’re going to err on the side of being conservative, that’s the first point. Second point is that if you think about the definition of insanity of doing the same thing over and over again and expecting a different result, we just experienced some change in behavior from a small portion of our customer base in the third quarter. It would be naïve for us to think that none of our other customers in our several-thousand customer base are going to behave that way coming in at the close of the fourth quarter. This may be the beginning of some change in inventory practice with respect to pacers and ICDs, maybe it is, maybe it isn’t, but our forecast contemplates the possibility that we come to close our fourth quarter will run into some of the same dynamics at the end of the fourth quarter that we ran into at the third quarter. That’s what you see reflected in our fourth quarter guidance for CRM revenue.

Kristen Stewart - Credit Suisse

Then just quickly on FX, should we expect to see a positive FX contribution outside of line in the fourth quarter?

Daniel J. Starks

As a standalone item, as John Heinmiller mentioned, we do expect to see some positive FX influence. There are a lot of moving parts. The positive impact of FX anticipated in our forecast is reflected in the EPS guidance that we gave to the fourth quarter.


Our next question comes from the line of Michael Weinstein - J.P. Morgan.

Michael Weinstein - J.P. Morgan

The commentary that you had provided that customers either feel like they had enough ICD inventory at the end of the quarter, basically that they had enough inventory to manage their procedure volumes, or the other scenario was that they were looking for price concessions while you wouldn’t give, perhaps a competitor of yours would give, and the latter suggestion implies that the competitors are getting more aggressive on price and the former implies that procedure volumes are slower than they have been, and neither one is really that great. Give your thoughts relative competitively and the help in terms of procedure volumes in ICDs in the US.

Daniel J. Starks

I think you’re right Michael that the dynamics you have described are tough dynamics and the market right now is, on the one hand we joke a little bit, sometimes we talk about things being particularly difficult right now, at the same time as we look back over the last 20 years of being in the business, it seems like they are always particularly difficult, but on the average selling price side, there is a lot of pressure on average selling prices. Ultimately we have to follow the market to remain competitive ultimately; at the same time we are getting some price premiums for our new technology, and that’s always the saving grace in an environment of increased cost pressures besides taking costs out of our own cost structure which we’ve been doing very proactively on a focused basis dating back to 2005. We continue to bring new technology, meaningful new technology that does provide more value to the patient that supports an opportunity to reset the level of average selling prices, all in an environment of increased pressure on reducing average selling prices. The ASP pressure has always been tough. It is very difficult right now. At the same time we’ve got a number of tools to help us manage through it. On the topic of procedure volumes, we are reluctant to make too much out of procedure volumes. I think you’re probably right that in the third quarter procedure volumes in the United States here were a little softer; I think you’re probably right about that. We want to hear more from the hospital companies on what their experience was during the third quarter. We saw some survey data with respect to pacer and ICD procedure volumes, they may have been a little bit soft in the third quarter in the United States, we’re not sure of the extent to which; that’s anecdotal to the extent to which that’s systematic. As we talk to our customers, we really do get a variety of feedback ranging the entire spectrum. But our sense a quarter ago, we thought we were seeing some indications that the market was a little softer than it had been, and we indicated that on our conference call a quarter ago. I don’t think our comments were particularly well received, but I think we’re vindicated here with the additional experience of the third quarter, we were right. We did see some early signs and we were responding to it. I think we saw some more signs of softness in the market for really most of our devices here in the third quarter, but we don’t make too much of it for this timeframe. If you go back a quarter ago, remember that there were some who were saying that market growth for CRM devices now was looking like it was going to be stronger than mid single digits, we didn’t say that, but there were some who said that; now we’ve got some of those same folks saying that now they think it’s going to be lower than the mid single digits; we’re not saying that. We continue to think of the CRM market, pacers and ICDs on a global basis, constant currency, as a mid single-digit market. We need to see the remaining numbers; the other half of the market needs to reports its numbers here for this third quarter, but we think that although there’s a little bit of transient softness, we still think that the global market, constant currency, is a mid single-digit growth market, and that’s still reflected in our numbers here. We just grew 5% on a constant currency basis in our CRM business globally and that would be consistent with holding market share, maybe gaining a little bit of market share, but our big picture outlook or view of the market growth has not changed taking into account ASP changes, taking into account transient procedure softness.

Michael Weinstein - J.P. Morgan

If you take the fourth quarter out of the picture, the fourth quarter is going to confuse everybody because of the difference in selling rates last year versus this year; if we look beyond the fourth quarter and think about the next couple of year and if you think about the company’s growth profile, the question would be; one, what do you think is the right range at this point with all the moving parts top line growth for St. Jude Medical for the next few years, and then two, relative to that how are you managing your expenses; are you managing your expenses built for the double-digit top line growth which has been your long-term goal or you managing your expenses now to a lower level?

Daniel J. Starks

On the top line, as you indicated, you’re exactly right. We continue to fight for double-digit constant currency top line growth. To help with that from time to time; this year we’re getting a little bit of benefit from the Radi acquisition; admittedly on the other hand we’re paying for, we’re absorbing all of that expense in our EPS growth and we’re delivering robust constant-currency EPS growth even after absorbing the dilution of getting a little bit of help here to the top line, but we’re continuing to focus on fighting for sustainable double-digit constant-currency top line growth, and we think that although we may not always get it, we really think that we’ve got a better-than-even chance of continuing to deliver double-digit top line growth on a sustainable basis. Our business mix really is unique and both in the markets that we’re in, the markets that we’ve avoided, the level of investment we’ve made in the markets we’re in, the level of growth in those markets, the relative competitive dynamics in these markets; in neuromodulation, atrial fibrillation, high barriers to entry, few competitors; we have strong positions. We have strong and fastest growing positions. We have got strong and fastest growing positions with robust product development pipelines. We’ve got new indications under development where we will be first and really have a very credible opportunity to start as the leader and continue to be the leader in potentially huge new areas. All of that put together with the areas that we have avoided that we tend to be a drag on our growth make us optimistic that we’re well positioned to continue to deliver double-digit sales growth. On the topic of spending, we know that our sales are unpredictable. Sometimes the sales are better than expected, sometimes they’re lower than expected. We know we can only influence our sales, we never can control them. We’re going to keep ourselves in a position where we’re able to manage the business for the long term. We’re not going to place undue expectation on our top line. Our commitment is no matter where we end up on top line growth, we’re going to keep our spending in line, and I’ll let you know that sometimes that spending has included disproportionate expansion of spending to invest for purposes of future growth, and you’re seeing some of that in our establishing multiple manufacturing facilities, you’re seeing some of that in our otherwise investing to expand our infrastructure capability in a way that we can leverage going forward. We have timed all of that out pretty well. It hasn’t been perfect obviously and we have had some stumbles along the way, but on an average we’ve timed all of that out pretty well. So moving forward, if we got 10% growth in the top line, I would have a good confidence and you would gather that confidence from my focus on operating discipline and the focus that all of us here in the leadership team at St. Jude Medical have on operating discipline; we’re determined that we’re going to keep our spending in line no matter where those sales fall, and if we get particular volatility in sales in a particular quarter, we may be out of step for a particular quarter, but not for more than that. So we’re going to stay diligent on being conservative in our spending; we’ve made the level of investment in past periods that we can do that sensibly and support a robust long-term growth program. I am hoping that a year from now or in three years from now we can demonstrate that in 2010 and in the next several years you have same old same old from St. Jude Medical in a way that we are proud to have delivered in the past.


Our next question comes from the line of Robert Hopkins - Bank of America - Merrill Lynch.

Robert Hopkins - Bank of America - Merrill Lynch

Dan, just curious on the ICD front; when you talked about your confidence in being able to grow, the total company, at 10%; what kind of ICD share gains do you need to get the 10% growth for the company in an environment where the CRM market is growing mid single digit as you anticipate?

Daniel J. Starks

Bob, it’s a fair question. We have a lot of ‘what if’ scenarios. I say this a little bit tongue-in-cheek which is partly fair and partly not fair. In the third quarter, the growth we needed was zero, and you might come back and say, yes, but we got a little bit of help out of the Radi acquisition and we did, but if we could deliver 10% growth on a constant-currency basis in the third quarter with no contribution from US ICD sales, that’s the baseline and you start to say, okay, but Q3 was really an anomaly, and for some of the reasons that I have indicated, and moving forward, you can start to plug in, what if we grow at 1%, what if we grow at 5%, what if we grow at ‘fill in the blank’; what does that mean, we need to get from the other components of our business, and if we’re delivering 10% constant currency growth without any help out of US ICDs, then with very little help from US ICDs even just growing at the market rate, that more than compensates for the acquisition benefit from Radi, and all else equal, continues to keep us in a 10% range. The concluding statement down on the bottom line and on the top line is we have plenty of diversity, geographic diversity, and technology platform diversity to have a lot of ways to get that 10% top line growth.

Robert Hopkins - Bank of America - Merrill Lynch

A lot in there, but I guess if I wanted to follow up on that, maybe a different way of asking the same question; can you grow EPS 15% at St. Jude Medical if the top line growth is more like 7% or 8% versus 10% plus?

Daniel J. Starks

I suspect we would choose not to do that. Yes, we could do that with the spending cuts, we could do that for some period of time, but we would choose not to do that. If the top line growth was at 7% or 8% range, I suspect that as we balanced which investments are we committed to continuing and to expanding, I suspect that that would not give us, we’re going to be well positioned, leveraging the middle of the income statement, and we would certainly leverage 7% or 8% top line growth to meaningful more growth on the bottom line; I suspect it wouldn’t stretch to 15% in a way that makes sense long term with 7% or 8% top line.

Robert Hopkins - Bank of America - Merrill Lynch

Just on ICDs, or CRM or ICDs, whatever you’re willing to comment on in the quarter from a pricing perspective; I think you mentioned you didn’t see anything outside the ordinary, it may be a little more disciplined, but what specifically was pricing in the quarter; was it down negative 2% to 3% you usually refer to or was it slightly worse, slightly better; what was it specifically?

Daniel J. Starks

As you appreciate, specifically I won’t say, but I will offer to that our average selling prices in the third quarter for US ICDs were actually higher than they were either in our first quarter or second quarter.

Robert Hopkins - Bank of America - Merrill Lynch

So bottomline from your opinion, no major change in that trend; it’s a tough environment, but you don’t see things getting incrementally worse from where they were?

Daniel J. Starks

I think that pressure is increasing, but again, our average selling prices were actually remarkably strong in the third quarter, that’s the good news. The flipside is we walked away from some business, over time maybe we need to be more flexible, but in the third quarter, our average selling prices were surprisingly strong; there was a lot of pressure to drop prices, we didn’t do it. It was a level where we actually had stronger ASPs on our US ICD business in the third quarter than we did in either the first quarter or the second quarter, but all in the context of the tough environment and nobody has enough money in the budget and everybody wants to cut costs.

Robert Hopkins - Bank of America - Merrill Lynch

John, what was the negative impact from the five fewer selling days in the fourth quarter from a growth perspective?

John C. Heinmiller

I don’t think we break out the specific detail on any one of these components. I think Dan has mentioned that we have a lot of dynamics that we’re thinking about as we provide guidance for the fourth quarter; currency, selling days, and some of the customer dynamics; all factoring into our thinking as we prepared our guidance.

Robert Hopkins - Bank of America - Merrill Lynch

I was just curious if there was a specific, it would be down 3 or 4 points from normal because of the five fewer selling days or is it down 6 or 7; we can follow up offline on that.


Our next question comes from the line of Frederick Wise - Leerink Swann.

Frederick Wise - Leerink Swann

Two areas that I would touch on; first, you talked about the internal adjustments and the third quarter restructuring; can you talk about in a little more detail on the kind of adjustments you’re making and what are you doing and when is it going to be complete; is that all going to be wrapped up this year; on the restructuring side, when do you expect to see the impact on margins and more needed, just those two topics.

Daniel J. Starks

Any additional adjustments that we need to make we’re committed to making with a high degree of urgency, and yes, we will wrap them up here in the fourth quarter. Having said that, the thereafter, I don’t doubt that the business will continue to change and we won’t hesitate to continue to be flexible and continue to make any additional changes moving forward that might be appropriate for new conditions that we encounter, but anything that we think is appropriate to make sure that we enter 2010 on track and in good position, we’re absolutely going to finish executing on here in the fourth quarter, a fair amount of it we’ve already executed on, but any remaining improvements that we need to make we’re absolutely are committed to making with a high degree of urgency here in the fourth quarter. On the topic of gross margin, that lures us into starting to talk about gross margin expectations for 2010 and we’re not prepared to do it. We will give gross margin expectations for 2010 on our call next quarter.

Frederick Wise - Leerink Swann

With that restructuring, all things equal, should help 2010 gross margins; all things equal?

Daniel J. Starks

All things equal, yes.

Frederick Wise - Leerink Swann

Following up on the 50 hospitals, were third quarter procedure rates normal in the quarter, if you have any idea what those were, and I assume they didn’t take on extraordinary inventory at the end of the third quarter, but they’re probably reordering normally, if procedure rates were normal?

Daniel J. Starks

Most customers did reorder normally. So, the delta was small.

Frederick Wise - Leerink Swann

So, it’s not like procedure were down in those hospitals and therefore they didn’t order; it’s like the market environment was stable?

Daniel J. Starks

Now you’re pinning me down a little bit more than I am willing to commit. We have anecdotal data from customers. It ranges the spectrum. We’ve got customers who tell us their procedure volume is stable, up; we’ve got other customers telling us their procedure volume is down. So we’ve got anecdotes that span the spectrum, number one. Number two, we have seen some survey data to suggest that when you accumulate all those anecdotes, that pacer and ICD procedure volumes may have been down. We’re not sure if they were or not. So, we’re looking for more information. Our sense is that if anything, procedure volumes may have been down a little bit; it seemed like July and August were particularly, we particularly say that with respect to July and August, but we really are waiting to see the other companies’ results and we’re waiting to see hospital reported results and we’re looking for more data to help us confirm the procedure volumes in the third quarter. They might have been a little soft; nothing to an alarming rate, but our sense is that they may have been a little soft.

Frederick Wise - Leerink Swann

You’re clearly sticking with your long-term growth goals of 10% and 15%, top and bottom line; given the short-term challenging market environment, does this incline you more to adding new technology or businesses through acquisitions; you’ve done it successfully in the past; should we expect an intensified push to add to the portfolio given what’s going on?

Daniel J. Starks

Rick, you can’t see this from outside, but our attention to the possibility of supporting our growth program with an acquisition is actually almost always really very high. We pay a lot of attention to it and you saw the steps that John Heinmiller led us into to help our balance sheet and make sure that we would maintain the capability of taking advantage of any acquisitions that might make a lot of sense for us. We have a really good number of people in the organization who pay a lot of attention to what are the opportunities and if anything make sense to us. I would call that an ongoing intense level of attention to the possibility of helping our growth with an acquisition. On the other hand, we’re never counting on it, and any acquisition possibility we find, they’re almost all flawed. Anytime an acquisition is available, it’s usually because of some problem, and usually it’s a story that looks pretty good and it’s almost all good, but there is a disconnect here or there that really makes it a luring mistake to avoid, and we’ve made our own share of mistakes and you’re certainly seeing plenty of other companies make huge mistakes on acquisitions. So we have our guard up, although we’re capable and have the appetite for an accretive, sensible acquisition, we have our guard up that they’re very hard to find and very hard to identify, and even if we do identify them and have the right level of discussion, it’s hard to have the stars align on both sides of the transaction. So, we’re never counting on it. Any acquisition opportunity we see, it’s got to compete against all our internal growth opportunities. We’ve got huge additional internal growth opportunities. Most of our internal growth opportunities want more funds; when we look at an acquisition possibility we look at it terms of, ‘okay, how much of, partly how much capital, but a big part of it is how much of our income statement would we have to commit to support the acquisition,’ both to cover the imputed dilution, but then we’re not into it to see if we can cover dilution; we’d be into it to see if we could expand the level of investment needed to accelerate the growth of that technology or business that we acquired. So, the tradeoff is always, ‘is it better for us to allocate resources into this external opportunity or is it better for us to increase the resources allocated to this wide range of internal opportunities’ and we really have so many of them, it helps us stay very disciplined on acquisition opportunities. We know we have a lot of good things to invest in internally; we’re not in the position, we’ve been able to keep ourselves out of the position where we have to say we got to do something and this is better than anything else we can find; we’re not going to do the latter; we’ve got the luxury of saying, ‘boy, we’ve got more on the comorbidities, on cardiac rhythm management, there is so much more we can do on atrial fibrillation, on neuromodulation, it’s almost ridiculous the number of opportunities’; really very sensible opportunities that we’d love to have resources, almost if we made additional resources available on the cardiovascular side, there is so much more there we can do and if we doubt we talk to anybody working on our transcatheter valve program, they would love to double their budget, and I don’t doubt that we would get good returns from the work everybody is doing based on what they’ve delivered so far. So, that’s how we look at acquisitions.


Our next question comes from the line of Bruce Nudell - UBS.

Bruce Nudell - UBS

Dan, just looking at your share, ICDs; US and ex-US from 1Q ’08 onwards, it looks like US is settling in around 24% and ex-US is 25% to 26%, and you do have a replacement cycle at your back; could you just explain whether have you guys watched your momentum or are we just on a new equilibrium in terms of share, and if you think you could continue to break out, what’s going to be the driver of that?

Daniel J. Starks

A good way to start to answer your question, Bruce, would be to offer some insight into the encouraging data that we see in our analysis of our US ICD sales for the third quarter. You can’t see it in the numbers we reported, but behind the scenes, we gained more new ICD customers in the United States in Q3 than we did in either Q1 or Q2, that’s one thing. Another data point is in the third quarter we had a larger number of US hospitals order ICDs from us in the third quarter than was the case either in Q1 or in Q2. Then add to it that our ASPs were stronger in Q3 than they were in either Q1 or Q2 and then add to it that our third quarter and the very encouraging metrics and leadings indicators that I have just run through was without our yet getting the full impact of the new technology that we began to roll out during the third quarter, and then add to that then the impact of the replacement volume dynamics that you alluded to where even if we were to stop gaining share of the de novo market we would still gain share in our total US ICD business as our participation in the replacement segment of the market caught up to our participation in the de novo segment of the market. Right there without doing anything heroic and without anything changing, that’s a list of meaningful dynamics that are encouraging to our expectation that we will continue to gain share in the US ICD market. If we add to that the ongoing product development pipeline, add to that the role that our pacing business plays as a leading indicator to our opportunities to continue to gain share in the ICD market, add to that the beneficial impact that we have had and expect to continue to have on the device side of our business with electrophysiologists from the strength of the AF side of our business with electrophysiologists, all of that is a pretty strong program. Another point is if procedure volumes in the third quarter were a little soft when you accumulate everybody’s experience, if they were a little soft that softness probably disproportionately fell on the de novo segment of the ICD market. That’s where we have the larger share. So, it would make sense that if procedure volumes were down a little bit that you would see that in our experience in a way that would be a little bit different than how you would see that in the other players’ experience. Another point that I would make would be that if you see the momentum in our international CRM business and that’s an objective indicator that we’re right about our competitor’s strength, that we are continuing to gain market share, and that we’re working through some lumpiness and working through some customer changes and working through some operating discipline in the United States, but that our growth program is, although it’s not working perfectly, it’s all there, and we expect it to execute for us to help us continue to gain share across the board here in the US on the CRM side. So we don’t think we’re stalled, we think it’s very tough, but we’re working to be as objective as we can about what’s the whole picture here. We like our position, we like our position better than anybody else’s position, and now we’ve got to deliver.

Bruce Nudell - UBS

Just one followup, on the ex-US market, maybe Mike could speak to this, it looks like for the second quarter rolling, we don’t know what Medtronics is actually going to print, but it looks like for the two quarters now we’re below 10% constant currency growth on ICDs; is that anything secular or are we seeing what we see in ortho; namely, basically budgets are tight, procedures are being pushed off, any commentary there would be helpful.

Daniel J. Starks

Bruce, I think that your sense is correct and my sense is the same as yours; I’ve got to say that here I don’t think we’ve got the objective data to not just lay it out and tell you; my sense is exactly as you’ve suggested. The feedback that I get in the reports that I see from our organization and in the discussions I have with our leadership team is that everybody has got budget problems, everybody is stressed by economic pressures; to get to year end here we’ve got budgets that have run out or are going to run out, but I think these are transient. I think as we look at it internationally, the example I use when people ask me to offer insight into the remaining growth opportunity for ICDs in international side of the business, the example I like to start with because it is just so stunning is to talk about what the total number of ICD implants were in China in 2008; the data our organization there provides to us is that it was fewer than 700 units. So, if that’s even approximately right, look at just that one market as we think about the next 5 or 10 years, and there are a lot of other markets, maybe not that under-penetrated, but significantly under-penetrated with technology that no matter what your analysis of a mature penetration level, one would agree that in these international markets that are severely under-penetrated, the value of the technology has been highly demonstrated, and we expect these markets to continue to generate significant contributions to total global growth of the ICD markets.


Our next question comes from the line of Joanne Wuensch - BMO Capital Markets.

Joanne Wuensch - BMO Capital Markets

I would like to shift off the CRM markets for a moment; one of the things that struck us when we went through the numbers, your neuromodulation sales actually was one area that beat; can you comment please on why that might be versus the others, is there a different dynamic that’s going on there, a new product cycle that we need to be looking at?

Daniel J. Starks

Yes, it’s a new product cycle; and having said that I am sure I have immediately unintentionally offended people who are executing at a very high degree of excellence and who have put great educational and customer value programs in place that are also significant contributors to that growth rate, but what really changed the trajectory on our neuromodulation growth was our launch of Eon Mini. It’s an absolute best-in-class spinal cord stimulator. It’s the smallest, longest-lasting, and it can be implanted deeper, it’s more programmable, we’ve got a broader lead-line, we’ve got a very experienced, very professional, very effective organization not only in the United States, but in an expanding number of international markets as well, and that’s what you’re seeing. You’re seeing the impact of our Eon Mini product line.

Joanne Wuensch - BMO Capital Markets

The second question if I may is that you talked about putting a variety of products or programs or people in place that’s going to tax, if you will, the shortfall at the end of the quarter which happened in the fourth quarter, and at the same time gave fairly robust positive guidance for 2010; can you give us an idea what these programs are and how long will they take to implement.

Daniel J. Starks

None of it is rocket science; that’s both the bad news and the good news. The bad news is as we go and do our analysis and how we get blind-sighted, it’s frustrating to us to look at what should we have caught, why didn’t we catch it is the frustration; the good news is that none of it is all that hard. So, this comes back to my point of operating discipline and saying that where we have the right leadership in place, business is far more comfortable and where we don’t have the right leadership in place, we either have made changes or are in the process of making changes. Really, there’s nothing that is that difficult, it’s just a matter of execution. I won’t be more specific except I would tell you that we’re all over it and it’s all reasonably straightforward. It takes a lot of work, but it’s reasonably straightforward. It’s a little cryptic, but it’s just not the kind of things I would want to go into more specifically.


Our last question comes from the line of Tao Levy - Deutsche Bank.

Tao Levy - Deutsche Bank

You mentioned that you may have lost some business due to competitor pricing; did this stem from one versus another competitor or is it across the board competitors?

Daniel J. Starks

We’ve seen Boston Scientific be particularly aggressively on prices in a number of markets, but I didn’t actually say that we lost business due to competitive pricing, and let me just clarify; I said a lot of things in my comments may have suggested that, but what I want to make sure there is no misunderstanding about is that my comments about the quarter-end quantity purchases that we walked away from. We did not lose that business due to competitive pricing. That’s the point I want to make sure nobody misunderstands. Those are St. Jude Medical customers before quarter end, they are St. Jude Medical customers after quarter end; it’s just that there in those instances where we walked away due to our being unwilling to implement unusual price discounts, we’ve kept that business there, it’s timing of orders, not a matter of loss of market share.

Tao Levy - Deutsche Bank

So then why wouldn’t you see that business return here in the fourth quarter; I think someone else asked that.

Daniel J. Starks

I think we will see that business return over a period of time, probably some good amount in the fourth quarter and maybe some beyond, but then the point is if everything else was going to be steady state, then seeing that business captured in the fourth quarter would be visible, but we’re being a little more conservative than that because we’re saying that the same behavior we saw from only 50 customers out of our whole customer base over 1600 ICD and about double that on the pacing side, it would be naïve for us to think that it is only 50 and now we won’t see it again from anybody else. Our guidance for the fourth quarter leaves room for us to encounter this same set of dynamics with different customers in the fourth quarter, and so we don’t have the crystal ball and we know that we don’t know exactly what’s going to happen with respect to timing of orders from the customers where we didn’t get the sales here in the third quarter and how much of that will be visible, how much of that will be offset by similar change in timing and negative change in timing from other customers in our whole customer base. So, we’re just going to net all that out and that drove our reduced forecast for Q4.

Tao Levy - Deutsche Bank

In my followup, you talked about restructuring of some sales reps after your second quarter results; do you think in retrospect, did that have any periphery impact on what happened in the third quarter have you replaced those people that you restructured after the second quarter?

Daniel J. Starks

We don’t think it had any impact. We’ve investigated that the information that we have, the people that are closest to it tell us that that really didn’t impact sales in the third quarter, and we did not replace the people that we eliminated. Again, this comes back to operating discipline. It’s critical, as we add more productive people; we’ve got to make sure that where we have other people who are less productive, we’re holding accountability and keeping the whole business in balance and not just adding people, we’ve got to eliminate people where appropriate, and where we add people who turn out not to be as productive as everybody hoped at the time that we add them, we have the option of just ignoring that disconnect or deploying operating discipline and holding accountability and taking corrective action. So we’re talking about corrective action that is designed to improve productivity, we’re not talking about cutting people because we can’t afford it and losing sales in the process.

We’ve gone a little bit longer than usual. Thank you everybody for sticking with us. With that I would like to conclude and turn the call over to Regina for typical closing comments. Thank you Regina.


Today’s call was being recorded and will be available for replay beginning at 12 p.m. Eastern Standard Time. The dial-in numbers are for the US 1-800-642-1687 and for international 706-645-9291 and enter pin number 30549405. Thank you. This does conclude today’s teleconference. Please disconnect your lines at this time.

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