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Executives

Dan Starks - Chairman, President & Chief Executive Officer

John Heinmiller - Chief Financial Officer

Eric Fain - President, Cardiac Rhythm Management Division

Mike Rousseau - Group President

Angie Craig - Vice President of Corporate Relations

Analysts

Bob Hopkins - Bank of America

Fred Wise - Leerink Swann

Michael Weinstein - JP Morgan

David Lewis - Morgan Stanley

Kristen Stewart - Credit Suisse

Bruce Nudell - UBS

Tim Lee - Piper Jaffrey

Joanne Wuensch - BMO Capital Markets

St. Jude Medical Inc. (STJ) Q4 2009 Earnings Call January 27, 2010 8:00 AM ET

Operator

Welcome to St. Jude Medical fourth quarter and full year 2009 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 year ended April 4, 2009, July 4, 2009, and October 3, 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.

Dan Starks

Thanks you, Celez Welcome to the St. Jude Medical fourth quarter and full year 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; Mike Rousseau, Group President; and Angie Craig, Vice President of Corporate Relations.

Our plan this morning is for John Heinmiller to provide his normal review of our financial results for the fourth quarter and full year 2009 and give sales and earnings guidance both for the first quarter and full year of 2010. I will then address several topics and opened up for your questions; go ahead John.

John Heinmiller

Thank you, Dan. Sales for the quarter totaled $1.203 billion favorable foreign currency translations versus last years fourth quarter increased this quarter sales by about $50 million. We will turned to currency in a momentum, but the actual average rates during the fourth quarter where with in our previous guidance range.

For the full year 2009, net sales were $4.681 billion, up about 7% over 2008. Unfavorable foreign currency translations versus those in 2008 decreased 2009 net sales by approximately $99 million resulting in constant currency sales growth for the year of approximately 10%.

During the fourth quarter we recorded $6 million of in process research and development expenses related to the acquisition of certain predevelopment technology assets and $44 million of after tax special charges consisting of $33 million of employee termination and other cost related to restructuring actions announced in the third quarter and $11 million of inventory write-offs related to discontinued products.

Also during the fourth quarter, we recorded a $24 million after tax benefit related to certain annual discretionary compensation accruals that were reversed in the fourth quarter due to the fact that we do not intend to payout these awards. Comments during this call referencing fourth quarter and full year 2009 results, including EPS amounts will be exclusive of these items.

Earnings per share were $0.64 for the fourth quarter of 2009, a 10% increase over adjusted EPS of $0.58 in the fourth quarter of 2008 and above our guidance range of $0.61 to $0.63. For the full year 2009, adjusted earnings per share were $2.43, a 9% increase over adjusted EPS of $2.22 for the full year 2008. On a currency neutral basis we estimate our earnings per share growth for the full year was approximately 15%.

Before we discuss our financial results and offer our sales and earnings guidance for 2010. Let me provide a few comments about currency exchange rates and the assumptions we are using in our outlook for this year. The two main currencies influencing St. Jude Medical’s operations are the euro and the yen.

On our conference call one quarter ago, we stated that guidance assumed that for the fourth quarter of 2009, each euro would translate into about $1.45 to $1.50, and that each 88 to 93 yen would translate into US $1. For the fourth 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 first quarter and full year 2010, we assuming that each euro will translate into about $1.40 to $1.45 and for the yen each 88 to 93 yen will translate into US $1. Additionally, as you analyze our results please note that due to our 52, 53 week convention, we had one less week in 2009 fiscal fourth quarter compared to our 2008 fiscal fourth quarter.

I will now turn our discussion to the sales by product category. For the fourth quarter, total Cardiac Rhythm Management sales which include revenue from both our ICD and pacemaker product lines were $698 million, up 3% from last year’s fourth quarter including $28 million of favorable currency translations.

Total CRM product sales for the full year 2009 were $2.769 billion representing at 3% increase over 2008. Unfavorable foreign currency translations decreased 2009 CRM sales by approximately $64 million. On a constant currency basis, total CRM product sales for the full year 2009 increased 5%. For the fourth quarter, ICD sales were $395 million, up 2% from last year’s fourth quarter.

US ICD sales were $237 million; international ICD sales were $158 million, a 14% increase over the fourth quarter of 2008 including $13 million of favorable foreign currency translations. For the full year 2009 ICD sales were $1.578 billion, up 3% versus 2008. Unfavorable foreign currency translations versus those in 2008 decreased 2009 ICD sales by approximately $38 million. On a constant currency basis, total ICD product sales for the full year 2009 increased 5%.

For low-voltage devices, sales for the fourth quarter totaled $303 million, up 3% from last year’s fourth quarter. In the United States, pacemaker sales were $122 million, in our international markets, pacemaker sales were approximately $181 million, up 13% from the fourth quarter of 2008, including $15 million of favorable foreign currency translations.

For the year 2009 pacemaker sales were $1.191 billion, up 2% over 2008. Unfavorable foreign currency translations versus those in 2008 decreased 2009 pacemakers’ sales by approximately $26 million. On a constant currency basis total pacemaker product sales for the full year 2009 increased 4%.

For the first quarter of 2010, we expect total CRM sales to be in the range of $700 million to $730 million and for the full year 2010, we expect total CRM sales to be in the range of $2.9 billion to $3.0 billion. Atrial Fibrillation or AF product sales for the third quarter totaled $171 million, up 10% over the fourth quarter of last year, including $8 million of favorable foreign currency translations.

For the full year 2009, AF product sales were $628 million and increase of 15% over 2008, including a $13 million decrease due to unfavorable foreign currency translations. On a constant currency basis, AF product sales increased 17% in 2009. For the first quarter of 2010, we expect AF product sales to be in the range of $155 million to $170 million. We expect full year 2010 AF product sales to be in the range of $705 million to $735 million.

Total sales of cardiovascular products for the fourth quarter of 2009 were $240 million, up 10% over the fourth quarter of 2008, including $12 million of favorable foreign currency translations. Total cardiovascular product sales for full year 2009 were $953 million, up 11% over 2008, including a $19 million decrease due to unfavorable foreign currency translations. On a constant currency basis, cardiovascular product sales increased 13% in 2009.

Within this category of products, sales of vascular closure products in the fourth quarter of 2009 were $94 million. Total vascular closure product sales for 2009 were $381 million. Sales of heart valve products in the fourth quarter of 2009 were $79 million and total sales of heart valve products for calendar year 2009 were $323 million. For the first quarter of 2010, we expect cardiovascular product sales to be in the range of $235 million to $250 million and we expect full year 2010 cardiovascular product sales to be in the range of $1.35 billion to $1.65 billion.

Total sales of neuromodulation products in the fourth quarter of 2009 were $94 million up 21% from the fourth quarter of 2008. For the full year 2009, neuromodulation product sales were $331 million, up 32% on a constant currency basis over 2008. For the first quarter of 2010, we expect sales of neuromodulation products to be in the range $85 million to $90 million and we expect full year 2010 neuromodulation sales of $375 million to $395 million.

Let me pause at this point and recap our 2010 sales guidance. For cardiac rhythm management devices, we expect sales for 2010 in the range of $2.9 billion to $3.0 billion. Sales of our AF products for 2010 are expected to reach $705 million to $735 million. For cardiovascular products, we expect 2010 sales in the range of $1.35 billion to $1.65 billion and we expect sales of neuromodulation products to be $375 million to $395 million.

If you add up the sales across of growth platforms, total sales in 2010 are expected to be $5.15 billion to $5.195 billion. This guidance range assumes consolidated sales growth in the range of 7% to 11%. The geographic breakdown of St. Jude Medical sales in the fourth quarter 2009 is now part of our press release. We would refer you to this detail. In total, 50% of St. Jude Medical sales in the fourth quarter came from the U.S. market, while 50% came from international markets.

The gross profit margin in this quarter was 73.2%, representing 100 basis point sequential decreases from the third quarter of 2009. Approximately, 70 basis points of the 100 basis points decline was the result of providing disposition of certain obsolete or slow moving inventory items.

For the full year 2009, the gross profit margin was 73.9%. For the full year 2010, we expect gross profit margins to be in the range of 73.2% to 73.8%. On factor influencing our gross profit margin this quarter and our 2010 gross profit margin guidance is the impact of absorbing the first full year of cost associated with the new remote monitoring and wireless telemetry capabilities in our pacemaker product line.

These costs include providing patients a free of charge wireless transmitter as well as a higher unit cost for pacemaker devices incorporating the wireless telemetry components. We first introduced our wireless functionality in the U.S. pacemaker product line during the third quarter of 2009. There was a significant increase in the mix of these products in the fourth quarter. We estimate that the increased mix of wireless ICDs and pacemaker products in 2010 will account for a 60 basis point reduction in gross profit margin in 2010 versus 2009.

We expect of the higher unit cost of these pacemakers to moderate as we gain production efficiencies and achieve planned cost reduction. We also expect the 2010 impact of remote monitoring to be partially offset by an increasing our gross profit margin related to our continuous improvement initiatives targeting other manufacturing cost reductions.

In addition during 2011 and 2012 we expect our gross profit margin to benefit from increasing manufacturing operations in Costa Rica and Malaysia. Our fourth quarter SG&A expenses were 35.3% of net sales representing a 150 basis point improvement over the fourth quarter of 2008. For the full year 2009 SG&A expenses were 36.3% of net sales compared with 36.7% in 2008.

For the full year 2010 we expect SG&A as a percent of net sales to be in the range of 35.2% to 35.8%. Research and development expense in the fourth quarter of 2009 were 12.1% of net sales consistent with the fourth quarter of 2008. For the full year 2009, R&D expenses were 12.2% of net sales consistent with 2008.

For the full year 2010 we expect R&D expenses to be in the range of 12.0% to 12.6% of net sales as we continue to balance delivering short term results with the right investment in long term growth drivers. Other expense was $20 million in the fourth quarter. For the first quarter of 2010, we expect the other income and expense line item will be a net expense of approximately $17 million.

For the full year 2010 we expect other expense of approximately $68 to $73 million primarily driven by interest expense on our outstanding debt. For 2009 our effective income tax rate was 26.5% for 2010 we expect to be effective tax rate to be in the range of 24.5% to 25%.

This rate assumes that the R&D tax credit is extended for 2010. The decrease in our effective tax rate in 2010 reflects the expansion of manufacturing operations in more favorable tax jurisdictions. We expect this trend to continue as our new manufacturing facilities and Costa Rica and Malaysia come online.

Moving on to the balance sheet, at the end of the fourth quarter we had $393 million in cash and cash equivalents and $1.922 billion in total outstanding debt and $1 billion available under a revolving credit facility with a group of banks. The debt on our balance sheet consists of the $1.2 billion public offering of senior debt issued in the third quarter of 2009 with $700 million due in 2014 and $500 million due in 2019.

In addition to the senior notes the outstanding debt primarily represents $432 million of borrowings under our domestic credit facilities, which mature in 2011 and $297 million of notes issued in Japan, which mature in 2010 and 2011.

Next I want to offer some comments regarding our EPS outlook for the first quarter and full year 2010. In preparing our EPS guidance, we have assumed that in the first quarter of 2010, the share account used in our fully diluted EPS calculation will be about 326 million to 328 million shares with the weighted average outstanding shares for the full year 2010 estimated at 328 million to 330 million.

This guidance on outstanding shares takes into account that during the fourth quarter of 2009, we completed our $500 million share repurchase program that was announced that October, resulting in a reduction of 14.1 million shares of common stock. The company expects consolidated EPS for the first quarter of 2010 to be in the range of $0.66 to $0.68. For the full year 2010, we expect consolidated EPS to be in the range of $2.71 to $2.76. This expectation represents EPS growth of approximately 12% to 14% over the 2009 adjusted EPS of $2.43.

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

Dan Starks

Thank you, John. I’m pleased to confirm that here at St. Jude Medical, we did what we said; we would do during the fourth quarter of 2009. We delivered quarterly results that meet or exceed our guidance. We completed numerous organizational, leadership and program changes designed to improve operating discipline in overall organizational effectiveness leaving into 2010.

This included restructuring and flattening our marketing organization, strengthening our forecasting methodology, redirecting spending priorities where appropriate, and holding accountability for cost effective results. As a result of the restructuring, we started in the third quarter of 2009 and completed in the fourth quarter. We have now reduced our total global workforce by almost 5%.

SG&A spending as 1% of sales dropped a full 150 basis points in the fourth quarter versus the same quarter one year ago. We expect SG&A as a percent of sales to fluctuate from quarter-to-quarter moving forward, but for full year 2010, we expect SG&A to stay below 36% of sales, while we implement programs in 2010 that are designed to further improve productivity of SG&A spending in future years.

This includes investment to complete the implementation of our SAP enterprise software system and investment to bring online by the end of 2010, new manufacturing facilities in Brazil, Costa Rica and Malaysia to compliment the new manufacturing facilities we recently brought online in South Carolina and in Puerto Rico.

It is important to note that, although we have a strong commitment to optimizing our cost structure and generating operating leverage, we invested more in research and development on an absolute dollar basis during the fourth quarter than in any other single quarter in the history of our company.

We plan to continue to invest at least 12% of sales in R&D moving forward with a strong focus on continued investment in clinical trials to the benefit of our customers and the patients they serve. The benefits of our sustained commitment to R&D should be highly visible during 2010. We expect to launch over 15 new products within our Cardiac Rhythm Management franchise.

We will expand our entry into the deep brain stimulation market in Europe, the spinal cord stimulation market in Japan, and the pericardial segment of the tissue valve market as we continue to invest long term in transcatheter valve therapies, applications for MediGuide Technology, heart failure diagnostics, ischemia detection, our Atrial Fibrillation program, depression, and other long term growth programs.

We look forward to giving you an overview at our investor conference next week of our entire line up of new products scheduled for release in 2010 along with additional insides into a selection of our longer term growth drivers.

Next, I’d like to offer an update on the overall growth dynamics we see for our global Cardiac Rhythm Management or CRM franchise in 2010. We continued to expect the global CRM market to grow at a mid single digit rate, which we define as approximately 4% to 6% growth on a constant currency basis.

We estimate that St. Jude Medical’s international CRM business grew faster than the market in 2009 and is on track to do so again in 2010. The sales from St. Jude Medical’s U.S. CRM business were virtually flat in 2009, but we expect the return to growth in 2010 and our optimistic that the U.S. portion of our CRM business will get back on track to grow faster than the market in 2010.

Our optimism is based on ongoing improvements in sales force effectiveness, customer inventory destocking that occurred in the second half of 2009 that is not expected to recur 2010, replacement market dynamics that favorably impact St. Jude Medical’s position in this segment in the market and the strength of our flow of new products that we will review in more detail at our investor conference next week.

The mid point of our CRM sales guidance range for 2010 reflects growth of approximately 6.5% for CRM sales. We fully expect to meet or exceed this guidance range. In summary this morning, we place a high priority on meeting or exceeding our expectations with respect to St. Jude Medical as a whole, we expect to deliver high single digit or low double digit organic sales growth for full year 2010.

We are committed to and I am focused on St. Jude Medical maintaining strong operating discipline and delivering meaningful EPS leverage while we continue to invest in our diverse portfolio of long term growth drivers. In short, we believe we are well positioned to continue to deliver sales and earnings growth toward the top end of our peer group.

At our annual investor conference next week, we look forward to providing all of you with extensive information on our assessment of market dynamics, new product introductions, clinical trial programs, and our comprehensive growth program for 2010. We will be happy to touch on these topics briefly in this mornings call, but we would like to defer more complete discussion to our forum next week we look forward to seeing many of you there.

With that, I’d like to turn it back to the moderator and open it up for questions, Celez would you please host the questions?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Bob Hopkins - Bank of America.

Bob Hopkins - Bank of America

Just two quick questions, first on revenue growth I just wondering, was the impact of the one less selling week on Q4 constant currency growth roughly five points of growth in your opinion or was it closer to six to seven?

Dan Starks

Bob, as you appreciate it, it’s hard to quantify exactly. It’s in the range of what you’ve asked about. I would tend to here on the side of something closer to 5% in view of the impact of the holidays that the etc., week involve, but it’s really not a precise calculation.

Bob Hopkins - Bank of America

Yes, just curious as to what you guys were thinking on that, and then I wanted to ask a question on gross margin guidance for 2010 as well. I understand what you described in terms of the 60 basis point headwind, but even accounting for that, the gross margin guidance was perhaps just a little bit below what we were looking for.

So I was wondering if you could comment on the other things that could be impacting gross margin such as what’s going on in terms of pricing in the CRM market, could you give us an update there, are things stable, getting a little worse, getting a little better and also is there any impact on gross margin in terms of inventory position as a result of lower growth CRM year in 2009?

John Heinmiller

A lot of things impact gross margin, Bob, as I know you appreciate part of it is geographic mix. We had a higher percent of sales that were international in the fourth quarter and that’s continued to expand as a growth driver in our business so there’s a little bit of impact there. There’s some product mix impact victory, so it’s a number of factors, but and the key point is that although we expect to see some softness in gross margin during 2010.

We expect to bridge over and recover that in 2011 and 2012 partly as a function of volume increase in the low voltage RF telemetry portion of our product line and partly as a function of getting through the startup challenges of the RF telemetry and the low voltage portion of our product line and as well as just a number of other dynamics.

We expect to see some additional contribution from the U.S. portion of our ICD business moving forward as well, so there’s a number of factors it going to impact gross margin and continue to strengthen the gross margin longer term.

With respect to average selling prices, we found ASPs to be really we saw nothing unusual in ASP trends during the fourth quarter, so we indicate that we regularly see ASP pressure, that on an apples-to-apples basis overtime we expect to see ASP reductions somewhere in the range we generally say in the range of about 2% to 3% a year. In the fourth quarter itself, there was no special event or observations that we made regarding ASPs. The ASPs generally behaved as expected and as historically anticipated.

Bob Hopkins - Bank of America

Any impact on inventories that is worth calling out?

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Nothing worth calling out, there is a little bit of impact there again, but there are plenty of positive offsets as well so, there’s nothing that would be notable.

Operator

Your next question comes from Fred Wise - Leerink Swann.

Fred Wise - Leerink Swann

Let me come back to the soft results in the U.S. particularly on the ICD pacer and AF side. I think ICD and pacers were down sequentially, AF was flat. I appreciate part of that was one less week. Can you help us understand a little more clearly, was this in part due to some of the changes you were making in the organization? Was it competitive activity? If you could help us understand that a little better.

Dan Starks

Sure. Two things come to mind first. First, just to be clear on the number of selling days in the fourth quarter of 2009, in the U.S., so it’s different in different geographies, but U.S. selling days just on a kind of an objective calculated basis in the fourth quarter of 2009, where we had 60 selling days. In the third quarter of 2009 on the same basis in the United States there were 64 selling days and in the fourth quarter a year ago calculated on the same basis there were 64 selling days.

So that’s something that definitely has an impact as you look at the sequential quarter trends and as you look at the year-over-year trends, 60 days in Q4 of 2009 versus 64 days in both of the prior comparative periods. Then a second point on the CRM side of things in particular, we did see continued customer destocking of inventory in the fourth quarter.

One quarter ago, we were surprised by the level of customer destocking of inventory that we saw when we gave our guidance for the fourth quarter one quarter ago, we indicated that our guidance was taking into account the opportunity for inventory destocking to continue through the fourth quarter, and we did see more customer destocking of inventory in the fourth quarter. So that’s another factor that one ought to take into account in working to understand the impact of fourth quarter results and what it implies for our sales growth in 2010.

Fred Wise - Leerink Swann

Turning to new products, which I know we’ll hear more about on February 5, but there been several reports about the timing of an MRI compatible pacer from St. Jude. I know you all have said you’re working on it. Can you update us on that issue? Are we going to see it in 2010, and just give us some perspective there?

Dan Starks

Rick, I’m going to direct your question to Eric Fain and ask you, Eric, how much would you like to say about our MRI compatible pacemaker product?

Eric Fain

W

e expect to have our MRI compatible pacemaker on the market in Europe by the end of 2010, and we’ll have a complete solution with no scan restrictions in terms of either the location of the body or power and I think I’ll leave it there and I’ll give a more complete update when we get together next week at the Investor Meeting.

Fred Wise - Leerink Swann

A

nyone have say about the U.S. timing possibly?

Eric Fain

I

think I’ll hold off until next week.

Operator

Y

our next question comes from Michael Weinstein - JP Morgan.

Michael Weinstein - JP Morgan

L

et me start with the inventory destocking that was pretty apparent in the fourth quarter, we saw it in the third quarter. Dan, how are you comfortable that that’s behind you, that we get into the first quarter you get a more normalized picture of your business?

Dan Starks

W

e’ll, it’s really account analysis, Mike, but the way we think about inventory is that we think that the customer, hospital management of capital, hospital management of inventory has tightened up during 2009.

We expect that management to continue, so we’re not expecting a rebound in inventory and our own internal modeling and our guidance anticipates that customers will continue to be very focused on managing inventory of CRM devises and so we’re assuming continued pressure on inventory during 2010, so we think this is a phenomenon that is really here to stay longer term and our guidance and our own internal expectations reflect that.

Michael Weinstein - JP Morgan

Let me turn to your own inventory and of course margins, it had been a concern on the street that you had same to build up too much inventory the last few quarters. You actually made some good progress this quarter and you commented it was part of what weighed on your gross margin this quarter and the fourth quarter and maybe some of what weighs on your gross margin in 2010.

John, can you quantify that or maybe better can you give us a sense of what your inventory targets are for the company and then Dan, you had commented or at least in your discussion made it seem like the gross margin pressures in 2010 from wireless telemetry, maybe inventory work down, are in your view transit that those will be mitigated and will be behind you as you move into 2011 so if you could help us a little bit more on that that would be great?

John Heinmiller

Yes, I think first of all on the build up of inventory, definitely we’re not at the optimal level of inventory as we measure it on days of inventory on hand. A couple of the dynamics that typically are going on include managing new product introductions and that’s definitely a dynamic that we’re constantly dealing with, and the other thing that happened is we turned on part of our SAP implementation.

We’ve talked about that activity that’s going on and we turned that on in a number of geographies and we really preloaded some inventory into our own sites to be prepared for that cutover and now that was very successful and is behind us here as we start the New Year. So we have a plan internally to really work down our inventory as we go through 2010 and it really will have a smooth effect on our costs as we absorb them in the manufacturing process and it is really not all that significant in the scheme of things.

So what we really tried to call out is the one item that we are absorbing in 2010 related to some of the higher costs associated with the wireless functionality in our pacemaker product line, but we have some other things going the other way and we’ve really factored all of that into our thinking as we’ve provided guidance this morning.

Mike Rousseau

With respect to 2011 and 2012, I’m going to start short of saying anything that would turn into partial guidance for 2011 and 2012, but we are well along with our new manufacturing facility construction and we’re already beginning to staff and so we’re in good shape to say that by the end of 2010, we expect to be able to begin production in some of our new cost advantaged manufacturing sites and the cost advantage is partly tax advantage, but it also is also very much a labor in other operating cost advantage.

So that will start to impact 2011 we’ll start to see it in 2011. We don’t get any of that benefit is in fact we get a little additional gross margin stress on that start up effort here in 2010, but that will start reverse into modest benefit in 2011 and then very full volume in 2012, so we’ve got a good program to have a stronger gross margin, all else equal going forward into 2012, but I don’t want to be anymore specific and I don’t want to give guidance beyond 2010.

Michael Weinstein - JP Morgan

Last quick question; the 7% to 11% top line guidance for 2010, the currency impact on that is about a 0.5, 2 points?

Dan Starks

Less than a point.

Michael Weinstein - JP Morgan

Less than a point is within your assumption?

Dan Starks

Yes.

Operator

Your next question comes from David Lewis - Morgan Stanley.

David Lewis - Morgan Stanley

Dan, just to give out revenue guidance here for a second, it’s a wider range and obviously a difficult operating environment, but a wider range than you’ve given historically. I wonder could you identify one, two or three things that you think are the key variables as you think about that wider range for 2010.

Dan Starks

David, you’d caught me just a little bit short. I don’t think our range is really wider to tell you the truth and you maybe able to correct me in an offline discussion, but I think this is the kind of range that we typically started out with for full year and the quarterly, the guidance we’ve given for Q1 are really very consistent with the scope of range that we’ve given previously.

So we start out the year with a little bit wider range traditionally, we tighten the range as we move through the year. So I think this is really very normal, but a couple of things that I could observe. If you thought about 2009 sales on an organic constant currency basis, 2009 sales growth was in round numbers about 8%. So our total constant currency sales growth in 2009 was 10%.

We had factored in there probably about $80 million of acquired sales from our acquisition of Radi Medical and about $10 million of acquired sales from our prior acquisition of EP MedSystems. So if you back out that $90 million of acquired sales and do the growth calculation and state it in constant currency you show about an 8% sales growth for our top line constant currency organic in 2009.

Another little tweak that just kind of for completeness a little tweak there’s that sales growth in 2009 versus prior year, they had another week, so just the math on that prior week is about a 1.9% impact. It’s not really that much impact given the interaction with the holiday, but it’s still about a point of impact on our percentage growth.

So if you kind of said normalized apples-to-apples organic constant currency growth 2009, what we deliver is probably closer to 9% than to 8%. So that’s the business as is and that’s the business with our U.S. pacer and ICD component comprising about 32% of our total sales mix and generating virtually no growth contribution in 2009 and so that’s our starting point looking forward into 2010.

The guidance we’ve given with that kind of base growth profile, the guidance we’ve given is a range of 7% to 11%. We are determined to be sure that we meet or exceed the guidance range that we have and so you might start to read between the lines and see that we have quite a bit of confidence in the top line growth range that we’ve articulated this morning.

To the extent that raises more questions, I’ll work to offer a good presentation on this topic next week at the investor conference. That will be one of the themes of my introductory overview to review; what are the markets that we’re in; what are the kind of the natural growth rates of the markets we’re in; what about the impact of some modest reasonable, credible continued share gain in portions of our business; what about the impact of continuing to enter new segments of markets. For example our entry into the pericardial stented tissue valve segment of the heart valve market the second half of 2010.

So I’ll put all of that together next week and work to give a good view of our optimism and confidence with respect to top line growth. I’m not going to impeach the guidance that we’ve given this morning. Our guidance is 7% to 11%. Our goal though is to accelerate top line growth in 2010, so we’re always working and if we can’t exceed the guidance that we give.

David Lewis - Morgan Stanley

Maybe just one quick follow-up for John; John, obviously SG&A leverage are offsetting some of gross margin pressure, maybe if you can. Can you talk just about the reductions in SG&A? What percent of those reductions do you think are in place today versus sort of what percent do you think will going to be more progressive across the year? You did a nice job of quantifying what the impact of telemetry was on GM. Could you talk about the impact of just workforce reductions on the SG&A leverage for ‘10?

Eric Fain

David, maybe I’ll take that. I’m not going to be able to give you a lot of help first, I’ll confess before I start to give you more of an answer, but we have reduced our total global workforce by about 5%. So take that as the starting point and you’ll see that the guidance we’ve given for SG&A for 2010 versus the SG&A that we delivered in 2009, gives us some room to continue to expand SG&A investment as a percentage of sales you want it in a modest level.

So we’re not suggesting that we’re going to maintain 35.3% of sales SG&A level through 2010. We continue to be very focused on growth in the same way that you see our continued expanded investment in R&D in the fourth quarter of 2009 and we expect to continue that in 2010. We also will invest and expand our investment as appropriate in SG&A to support our growth programs.

So our goal isn’t to squeeze out as much as we can. Our goal is just to have measured continuous improvement in SG&A productivity as we bring SG&A investment more in line to best competitive benchmarks that’s one thing, but on the other hand, where we are going to continue to expand SG&A investment to support our continued long term growth program in 2010, so we’re really trying to strike a balance and that’s about the best I could say to you.

Operator

Your next question comes from Kristen Stewart - Credit Suisse.

Kristen Stewart - Credit Suisse

Just wanted to go back on the extra selling week, because last year, I thought that we were kind of looking at numbers a year ago and basically saying that there was only an effective like one extra day even though there was 64, just given the timing of when the holidays fell and what not.

I guess going back, did you do another analysis to basically say that there may have been more of an impact a year ago, or I’m just having hard time coming up with a five percentage point impact this year?

Dan Starks

Yes, it’s not an exact calculation at all Kristen. So I think it’s a discussion that probably isn’t all that helpful and really isn’t all that predictive. This extra week is a problem for everybody. We’ve always said, whenever it comes up to us, we always start out saying that it’s difficult to calculate the impact and so I’m not backing off on that. It’s difficult to calculate the impact. We really aren’t very good at it. We don’t really know how to do it, and so it’s a very soft analysis.

It’s probably more helpful to look at 64 selling days in Q3 of 2009, and 60 selling days here in the U.S. in Q4 of 2009. To look at the current trends in the business and then the reason we’re talking about it at all, is just to calibrate growth expectations for 2010 and our growth expectation for 2010, really are not based on our assessment of impact of selling day difference Q4 ‘09 versus Q4 ‘08.

So it ends up really being kind of an interesting side bar discussion, but not something that really is Germain to our financial model or our growth expectations for 2010.

Kristen Stewart - Credit Suisse

Just looking at kind of your CapEx spending, can you just kind of share with us maybe how we should look at that on a go forward basis now that you have your Costa Rica facility and Malaysia up and running. Should we expect CapEx to decline, because it’s really ramped up over the last couple years?

Dan Starks

Kristen, I’m going to direct your question to John Heinmiller and ask John to comment.

John Heinmiller

Yes, I think that the trend definitely will be to have that work down. We won’t have those major projects within that, but keep in mind, we’re still working on bringing those sites up during 2010. So there may be a slight reduction in 2010 versus 2009, and then we wouldn’t predict 2011 and 2012 at this point, but we won’t have that component in the mix.

Kristen Stewart - Credit Suisse

Last question is, just in terms of the acquisition impact this quarter. Was it still around two percentage points from Radi and kind of exing out Radi. Can you comment on the kind of the performance of the vascular closure business, because that seems to be pretty weak?

Dan Starks

The impact of Radi was less than two percentage points as I recall from calculating it previously, so the two percentage points total was a combination of Radi and mostly Radi and EP Med dropped off as an impact in the middle after the second quarter of 2009.

So for the fourth quarter it would only be Radi impact and it would be less than two points and then otherwise on the cardiovascular side of our business, we Frank Callahan, the President of our cardiovascular business, Frank Callahan is going to offer a good update of our growth expectations for our CVD business next week.

We’ve got some new products coming online that we are optimistic will have a favorable impact on the top line trend in CVD. So that’s really what we’re looking forward to here on CVD side of things and the fraction of flow reserve side of the vascular businesses, it was very robust and we expect continued strong growth, although it’s a small percent of the total sales mix.

We think the vascular closure side of business is we think of it is more of the maintenance business. We do get some growth out of it, but we think of it more as a maintenance business. Longer term there’s an opportunity to continue to expand that franchise with technology to close additional sized holes, but we really don’t look to that portion of our cardiovascular business as being a significant growth driver for us. We look more to new products.

Operator

Your next question comes from Bruce Nudell - UBS.

Bruce Nudell - UBS

Maybe this is best for Eric and maybe Dan, you could time in on this. One of the things that reflects the perception of risk, reward and ICDs or ball shocks and shocks for non-life threatening arrhythmia, Medtronic apparently is making progress in that regard with their protect. How important do you think that issue is in terms of making it a more appealing technology generally? Does St. Jude kind of have an answer to that? Then I have a follow-up.

Dan Starks

Eric, what would you comment on that?

Eric Fain

I think there are a number of different factors that I think people can talk about in terms of what really drives the rate of referral and inappropriate shocks is one. I think the long term evidence for benefit is another and so as you know we’ve seen new study data come out in the last year that they really points to that long term benefit.

We absolutely have an interest and programs on going focused on inappropriate shocks and also, Bruce, as you know there’s a number of different root causes for inappropriate shocks and we have internal programs that are focused on those different elements and again, I’ll give you an update on some of the short term versions of those at the investor conference.

Bruce Nudell - UBS

Dan, could you just comment on the AF franchise, I mean it is ex-U.S. centric, and is there anything going on in the ex-U.S. markets or it has the competitive dynamics stiffened appreciably? Just any view to what’s happened today and what your expectations for the St. Jude franchise going forward might be?

Dan Starks

For a personal comment and maybe that’s a good way for me to start. I’m gratified I think as a group here, we’re gratified at the trends in continued development of the technology and of clinical practice relating to patients with Atrial Fibrillation. So in our expectations have been the market has obviously a huge potential of relatively under penetrated.

So we expect that it takes time, that it takes Landmark Clinical Trials, that it takes a reimbursement changes that tie to Landmark Clinical Trials, that it takes continued advancement of the state-of-the-art clinical basis as well as on a technology basis to really get this growth opportunity to primetime and we’re know where near being in primetime. We’re still in the relative infancy of the development of the AF opportunity.

We’ve gone past the point where it’s really controversial about whether the AF opportunity in fact is real and whether it’s going to develop. I think we now have a consensus that this growth opportunity is real and developing and on track. So I think if we looked at how long did it take for the ICD market to really go from first clinical experience and first successes to coming into its prime. That was probably about it was 15 or 20 year development program.

So we have to be patient and our expectations are really calibrated to the idea that this takes time, but we’re now at the level where there is a lot of clinical data coming from a lot of centers in the United States and outside the United States. To me, the most interesting new event in the AF space is the initiation of this CABANA trial. We’ve indicated in the past that, we think of the CABANA trial as being analogues scud have for the ICD market.

So we are looking forward to Dr. Packers’ presentation of the feasibility data from the CABANA trial. My understanding is that those data have been submitted for late breaking clinical trial at presentation at the ACC. I don’t know if the data will be part of the late breaking clinical trials, if it’s not it will subsequently be published elsewhere, but so that would be one thing to look for is the feasibility data the CABANA trial and in the CABANA trial, enrollment is now either under way or about to start.

So the trial is, there have been several meetings of the investigators for the CABANA trial and it’s all systems go and I’m not close enough to the details of it to talk about exactly what the state of enrollment is although it’s either about to get underway or it’s just gotten under way. So that’s what I think of as being the biggest deal. Now it will take obviously the thinking there it’s 3,000 patients, the thinking is that maybe about a three year enrollment period.

It’s a two year follow-up period and it will be just pristine great data everybody on the real world of Atrial Fibrillation ablation, and what the economic impact of it is, what the cost effectiveness of it is, and what the clinical effectiveness of it is? So in between here and there, I expect to see the market just continue to develop in the way that these markets do and we’re gratified that it seems like it’s all systems go.

Bruce Nudell - UBS

I guess in Europe right now, are you seeing what you’re seeing in hips and knees? Like just basically like hips and knees basically have no unit growth now, because nationals are constrained. Is that going on in Europe now for AF?

Eric Fain

No, I wouldn’t say so. I mean, first of all, when you ask me if I’m seeing like I see in hips and knees, I don’t see anything in hips and knees from my perspective just to confess, but no, we see continued growth. Our expectation here, again, now I’m not going to carve out Europe especially.

Our expectation is that the global AF market, we think that the growth, in the past we’ve talked about growth at the range of 15% to 20%. We think growth with the impact of the global economic pressures is more in the 10% to 15% range, so that’s how we think about it moving into 2010.

Operator

Your next question comes from Tim Lee - Piper Jaffrey.

Tim Lee - Piper Jaffrey

Just looking at the 2010 outlook, how are you thinking about healthcare reform? Is this healthcare reform a non-issue at this point? How’s that translating into your guidance?

Eric Fain

We prepared our 2010 operating plan assuming that healthcare reform would impact 2010, and our guidance ties both to our 2010 operating plan and to our experience in the fourth quarter. We really have not made adjustments for the events of the last two or three weeks, so in our mind the impact of healthcare reform is an uncertain and evolving factor, but we really in the same position as you and as everybody else are waiting to see.

What happens next in the events for the last couple of weeks are really too new for us to have absorbed them and we have no special insight into what will happen next in healthcare reform to change our expectations.

Tim Lee - Piper Jaffrey

Then just second here, I know recently you talked about kind of more tempered outlook in terms of your longer term growth profile from 15% to double digits. In light of that, I mean, how should we think about your P&L profile going forward? I mean is that less SG&A investment? Is that more tempered R&D investment, just any commentary on that front?

Eric Fain

For those who didn’t hear my complete remarks a couple weeks ago, people are to be awfully careful about just taking a SoundBite or two away from my complete remarks. The point I made a couple weeks ago was that, although in the past we’ve organized our business to deliver a minimum 15% growth in EPS.

Two things, one is that there are new factors and I particularly said that there’s a new factor of medical device fee, which can impact EPS growth somewhere in the range of four to five points and there are other factors as well, but there are new factors that we need to be realistic about number one.

Number two, in view of these new factors while we seek clarification, I indicated these are new factors that are revolving and as they continue to evolve, we’re just going to be more flexible about minimum EPS growth. That was my point and you’ll see that in the transcript and you’ll see it in the slides that I presented that takeaway was that we’re not going to be locked into 15% growth no matter, what on EPS that we’re going to be more flexible.

We’re always balancing, how committed the are we to what level of short term EPS result versus what level of continued investment in our long term growth and success, and so we’re not going to be backed in a corner of saying well, in the past we said 15%. So we just need to make whatever cuts in long term investment, we have to deliver 15% growth. That’s an option.

I know a CEO’s of our peer companies indicated that if the medical device fee came in that his organization was going to be making severe cuts and my point was that’s not what we’re going to do. We’re here for the long term. If we need to be more flexible about short term results from time-to-time in favor of continuing to maintain robust investment in long term growth and success, we’ll do it, so that was my point.

I’ll stand by that and you see too then that the guidance we’ve given here for 2010 is EPS growth, if you bring it down to the decimal point it’s about 11.5% to 13.6%, we’ve rounded it to 12% to14%, so we just offered guidance this morning of 12% to 14% growth, and as we completed our operating plan here since the last call and got ourselves comfortable with just what’s our expectation here for 2010, what’s the level of guidance we’re going to give in 2010.

You’re not going to find me, speaking out of both sides of my mouth saying we’re going to organize ourselves to a minimum 15% growth and by the way our guidance is 12% to 14%, so it’s easy to take SoundBites and jump to the wrong conclusion and start to extrapolate things I didn’t say at all.

But in context, my point was that there maybe lumpiness, there’s new stresses, we’re going to be flexible, we’re going to have an appropriate balance of focus on short term results and continued investment in our long term success and you’ll see it reflected in the guidance that we’ve given for 2010.

Operator

Your final question comes from Joanne Wuensch - BMO Capital Markets.

Joanne Wuensch - BMO Capital Markets

Two parts, the first one, it sounds like you have something in your guidance for healthcare reform. Is there anyway to tease out what that amount maybe? Then the second is, when should we think about, MediGuide starting to contribute to the revenue line? Thank you.

Dan Starks

There’s not a way to tease out, the impact of healthcare reform, Joanne. It just generally adds to our sense that we should be careful and we should be realistic about the possibility of new stresses. That’s about as much as I can say and I appreciate that’s not very crisp, but that’s the best I can do.

With respect to MediGuide, let me just defer that to next week. It’s just a little bit of a longer answer and we’ll give a good update on our continued development of our MediGuide technology and it’s got good application to a number of our technology platforms and so we’re busy working to develop the applications of MediGuide into our AF business, into our CVD business into our cardiac rhythm management business and we’ll offer a good update on that next week.

With that our time really is up, let me turn it back to you, Celez for your concluding comments, thank you. Thank you, everybody for joining us today.

Operator

Ladies and gentlemen, today’s call is being recorded and will be available for replay beginning at 12 p.m. Eastern Time. The dial-in numbers are U.S.:1-800-642-1687 and international number is: 706-645-9291 and enter pin number 50080814. Thank you. This does conclude today’s teleconference. Please disconnect your lines at this time.

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Source: St. Jude Medical Inc. Q4 2009 Earnings Call Transcript
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