St. Jude Medical Management Discusses Q4 2013 Results - Earnings Call Transcript

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

St. Jude Medical (NYSE:STJ)

Q4 2013 Earnings Call

January 22, 2014 8:00 am ET

Executives

Daniel J. Starks - Chairman, Chief Executive Officer and President

Donald J. Zurbay - Chief Financial Officer, Principal Accounting Officer and Vice President of Finance

Eric S. Fain - President of Implantable Electronic Systems Division

Analysts

Kristen M. Stewart - Deutsche Bank AG, Research Division

Michael N. Weinstein - JP Morgan Chase & Co, Research Division

Robert A. Hopkins - BofA Merrill Lynch, Research Division

David R. Lewis - Morgan Stanley, Research Division

Bruce M. Nudell - Crédit Suisse AG, Research Division

Brooks E. West - Piper Jaffray Companies, Research Division

Operator

Welcome to the St. Jude Medical Fourth Quarter and Full Year 2013 Earnings Conference Call. Hosting the call today is Dan Starks, Chairman, President and Chief Executive Officer of St. Jude Medical. Before we begin, let me remind you that some of the statements made during this conference call may be considered forward-looking statements. The company's 10-K for fiscal year 2012 and 10-Q for the fiscal quarter ended September 28, 2013, identify certain factors that could cause the company's actual results to differ materially from those projected in any forward-looking statements made this morning. The company does not undertake to update any forward-looking statements as a result of the new information or future events or developments. The 10-K and 10-Q, as well as the company's other SEC filings are available through the company or online.

During the call, non-GAAP financial measures may be used to provide information pertinent to ongoing business performance. Tables reconciling these measures to the most comparable GAAP measures are available in the company's press release issued earlier this morning or on the St. Jude Medical website at www.sjm.com. [Operator Instructions] It is now my pleasure to turn the floor over to Dan Starks.

Daniel J. Starks

Thank you, Tracy. Welcome to the St. Jude Medical fourth quarter and full year 2013 earnings conference call. With me on the call today are John Heinmiller, Executive Vice President; Mike Rousseau, Group President; Eric Fain, President of our Implantable Electronics Systems Division; Don Zurbay, Vice President and Chief Financial Officer; and Rachel Ellingson, Vice President of Corporate Relations. Our plan this morning is for Don Zurbay to provide a review of our financial results for the fourth quarter and full year 2013 and to give sales and earnings guidance, both for the first quarter and full year 2014. I will then address several topics and open it up for your questions. Go ahead, Don.

Donald J. Zurbay

Thank you, Dan. Sales for the quarter totaled $1,422,000,000, up approximately 4% from the $1,372,000,000 reported in fourth quarter of last year. Unfavorable foreign currency translations decreased this quarter's sales by approximately $27 million. On a constant currency basis, fourth quarter sales increased approximately 6% versus last year. We will update our currency assumptions in a moment, but the actual average exchange rates during the fourth quarter were within our previous guidance range. For the full year 2013, net sales were $5,501,000,000, flat with last year. Unfavorable foreign currency translations decreased 2013's net sales by approximately $101 million, resulting in constant currency sales growth for the year of approximately 2%.

During the fourth quarter, we recognized $171 million or $0.57 per share in after-tax special charges. For further information regarding these charges, please refer to details provided in our press release. Comments during this call referencing fourth quarter and full year 2013 results, including EPS amounts, will be exclusive of these items. At the end of 2013, the federal research and development tax credit expired and it has not yet been extended for 2014. In this circumstance, GAAP requires us to estimate and record our effective income tax rate, assuming that the R&D credit is not extended. For purposes of this conference call and our calculation of adjusted net earnings, however, we are assuming that the tax credit will be extended for 2014 as in past years. As a result, comments referencing our guidance for 2014, including EPS amounts, are presented based on effective income tax rate that contemplates the extension of the tax credit retroactive to January 1, 2014.

Earnings per share were $0.99 for the fourth quarter of 2013, an 8% increase over adjusted EPS of $0.92 in the fourth quarter of 2012 and above our guidance range of $0.95 to $0.97. For the full year 2013, adjusted earnings per share were $3.76, an 8% increase over adjusted EPS of $3.48 for the full year 2012. We estimate that on a constant currency basis, both fourth quarter and full year 2013 EPS increased 12%. Before we discuss our financial results for 2013 and offer our sales and earnings guidance for 2014, let me provide a few comments about currency exchange rates and the assumptions we are using in our outlook for this year. The 2 main currencies influencing St. Jude Medical operations are the euro and the yen. For the fourth quarter, the average actual exchange rates used for the euro and the yen versus the assumptions we used in providing our guidance for the fourth quarter, did not result in a material difference in reported sales. In preparing our sales and earnings guidance for the first quarter and full year 2014, we're assuming that each euro will translate into about $1.33 to $1.38 and, for the yen, each JPY 102 to JPY 107 will translate into $1. Using these exchange rate assumptions, we estimate that the foreign currency translations will reduce total reported sales for 2014 by approximately $40 million to $50 million versus 2013, with slightly more than half of this impact expected in the first quarter of 2014. In addition, we would point out that due to our 52-, 53-week fiscal year convention, 2014 will include an additional week of sales and operations. Given the holiday schedule, we estimate that this will result in approximately 3 additional selling days in the fourth quarter.

Finally, we would like to make a comment regarding our investment in CardioMEMS. For purposes of preparing our sales and earnings guidance, we have assumed the acquisition of CardioMEMS sometime before midyear and, based on this assumption, we estimate sales from CardioMEMS to be approximately $15 million to $20 million, which we have included in the cardiovascular sales category.

Now for the discussion of sales by product category. For the fourth quarter, total cardiac rhythm management sales were $705 million, up 3% from last year's fourth quarter, including $10 million of unfavorable foreign currency translations. On a constant currency basis, total CRM product sales for the fourth quarter increased 5%. Total CRM product sales for the full year were $2,783,000,000, down approximately 2% from last year. Unfavorable foreign currency translations decreased 2013 CRM sales by approximately $38 million. On a constant currency basis, total CRM product sales for the full year 2013 decreased 1%. For the fourth quarter, ICD sales were $442 million, up 5% from last year's fourth quarter. U.S. ICD sales were $249 million, up 6% from last year's fourth quarter; and international ICD sales were $193 million, up 4% from the fourth quarter of 2012, including $3 million of unfavorable foreign currency translations.

On a constant currency basis, total ICD sales for the fourth quarter increased 5%. For the full year 2013, ICD sales were $1,741,000,000, flat with last year. Unfavorable foreign currency translations decreased 2013 ICD sales by approximately $16 million. On a constant currency basis, ICD sales for the full year 2013 increased 1%.

For low-voltage devices, sales for the fourth quarter totaled $263 million, up 1% from last year's fourth quarter. In the United States, pacemaker sales were $100 million. In our international markets, pacemaker sales were $163 million, including $7 million of unfavorable foreign currency translations. On a constant currency basis, total pacemaker sales for the fourth quarter increased 4%. For the full year 2013, pacemaker sales were $1,042,000,000, down 6% from last year. Unfavorable foreign currency translations versus those in 2012 decreased 2013's pacemaker sales by approximately $22 million. On a constant currency basis, pacemaker sales for the full year 2013 decreased 4%. For the first quarter of 2014, we expect total CRM sales to be in the range of $650 million to $680 million. For the full year 2014, we expect total CRM sales to be in the range of $2,790,000,000 to $2,840,000,000. The midpoint of our annual guidance, which represents 2% constant currency growth, assumes that the worldwide CRM market is flat in 2014 versus 2013 and that we take approximately 50 basis points of market share. Atrial fibrillation or AF product sales for the fourth quarter totaled $252 million, up 5% over the fourth quarter of last year, including $7 million of unfavorable foreign currency translations. On a constant currency basis, AF product sales for the quarter increased 8%. For the full year 2013, AF product sales were $957 million, an increase of 7% over 2012, including a $25 million decrease due to unfavorable foreign currency translations. On a constant currency basis, AF product sales increased 9% in 2013.

For the first quarter of 2014, we expect AF product sales to be in the range of $230 million to $250 million. We expect full year 2014 AF product sales to be in the range of $1,020,000,000 to $1,060,000,000. Our AF product sales guidance for 2014 assumes a constant currency increase over 2013 in the range of 8% to 12%. Total sales of cardiovascular products for the fourth quarter of 2013 were $350 million, up 4% over the fourth quarter of last year, including $10 million of unfavorable foreign currency translations.

On a constant currency basis, cardiovascular product sales for the quarter increased 7%. For the full year 2013, cardiovascular product sales were $1,335,000,000, up approximately 1% from 2012, including a $38 million decrease due to unfavorable foreign currency translations. On a constant currency basis, cardiovascular product sales increased 3% in 2013.

For the fourth quarter of 2013, within the cardiovascular category, sales of structural heart products were $167 million, up 12% over the fourth quarter of 2012 on a constant currency basis. For the full year 2013, sales of structural heart products were $631 million, an increase of 5% over 2012 on a constant currency basis. Sales of vascular products in the fourth quarter of 2013 were $183 million, up 2% from the fourth quarter of 2012 on a constant currency basis. For the full year 2013, sales of vascular products were $704 million, up 2% from 2012 on a constant currency basis.

For the first quarter of 2014, we expect cardiovascular product sales to be in the range of $310 million to $330 million. We expect full year 2014 cardiovascular product sales to be in the range of $1,365,000,000 to $1,405,000,000. Our cardiovascular product sales guidance for 2014 assumes a constant currency increase over 2013 in the range of 4% to 7%. Total sales of neuromodulation products in the fourth quarter of 2013 were $115 million, up 2% from the fourth quarter of 2012. For the full year 2013, neuromodulation product sales were $426 million, up 1% over 2012. For the first quarter of 2014, we expect sales of neuromodulation products to be in the range of $90 million to $100 million. We expect full year 2014 neuromodulation sales of $425 million to $445 million. At the midpoint, our neuromodulation product sales guidance for 2014 assumes a constant currency increase of 2% over 2013.

Let me pause at this point and recap our full year 2014 sales guidance. For cardiac rhythm management devices, we expect sales for 2014 in the range of $2,790,000,000 to $2,840,000,000. Sales of our AF products for 2014 are expected to reach $1,020,000,000 to $1,060,000,000. For cardiovascular products, we expect 2014 sales in the range of $1,365,000,000 to $1,405,000,000. And we expect sales of neuromodulation products to be $425 million to $445 million. If you add up the sales across all product platforms, total sales in 2014 are expected to be $5,600,000,000 to $5,750,000,000. This guidance results in consolidated sales growth in the range of 3% to 5% on a constant currency basis. The geographic breakdown of St. Jude Medical sales in the fourth quarter of 2013 is detailed in our press release. In total, 45% of St. Jude Medical's sales in the fourth quarter came from the U.S. while 55% came from international markets.

The gross profit margin during the fourth quarter was 71.5%, down 140 basis points from the fourth quarter of 2012, primarily due to the impact of excise taxes, which accounted for 130 basis points of the decline. Additionally, there was a 10% basis point decline related to currency.

For the full year 2013, the gross profit margin was 72.3%. For the full year 2014, we expect gross profit margin to be in the range of 71.5% to 72%, representing a decrease of 30 to 80 basis points versus 2013. This decrease reflects the combination of both positive and negative factors impacting our operations. As we have previously discussed, we began accounting for excise taxes, including the Medical Device Excise Tax, as an inventoriable cost in 2013. In 2014, this will provide a 50 basis point headwind to our gross margin, impacting primarily the first half of the year. The move to lower cost manufacturing sites will again contribute a benefit to our gross profit margin. In addition, we expect our gross profit margin will benefit from a number of continuous improvement initiatives targeting cost reductions and improvements to our supply chain. Offsetting these positive factors is the impact of geographic and product mix shifts, lower average selling prices and the expected negative currency environment.

Our fourth quarter SG&A expenses were 32.3% of net sales, representing a 50 basis point improvement over the fourth quarter of 2012. For the full year 2013, SG&A expenses were 33.9% of net sales compared with 34.4% in 2012. For the full year 2014, we expect SG&A as a percentage of net sales to be in the range of 33.5% to 34%. Research and development expenses in the fourth quarter of 2013 were 13.1% of net sales. And for the full year 2013, were 12.6% of net sales. For the full year 2014, we expect R&D expenses as a percent of net sales to be in the range of 12.2% to 12.7%, which includes the additional research and development spending related to Endosense, Nanostim, CardioMEMS and Spinal Modulation, as well as the continued funding of our growth drivers to accelerate long-term sales growth. Other expense was $18 million in the fourth quarter and $76 million for the full year 2013. For the first quarter of 2014, we expect the other income expense line item will be a net expense of approximately $18 million to $23 million. For the full year 2014, we expect other expense of approximately $75 million to $85 million, primarily driven by interest expense on our outstanding debt. For the full year 2013, our effective income tax rate was 20.9%. For 2014, we expect the effective tax rate to be in the range of 18% to 19%. The 2014 tax rate reflects the tax benefit of our long-term strategy to optimize our manufacturing locations.

Consistent with previous quarters, we are treating both CardioMEMS and Spinal Modulation as variable interest entities and consolidating their results. Our actual results for the fourth quarter of 2013 included their results on a gross basis. The portion of their net loss has been -- that is not attributable to St. Jude Medical has been added back to our net profit on the line "net losses attributable to noncontrolling interest," and totaled $12 million in the fourth quarter and $29 million for the full year 2013. For the first quarter of 2014, we estimate that this line item will total approximately $10 million to $15 million. For the full year 2014, we expect this line to total approximately $30 million to $40 million. This includes approximately $5 million to $10 million related to the period prior to our assumed acquisition of CardioMEMS during 2014.

Moving on to the balance sheet. At the end of 2013, we had $1.4 billion in cash and cash equivalents and $3.6 billion in total debt. There were no borrowings outstanding under our $1.5 billion revolving credit facility available with the group of banks.

Next, I want to offer some comments regarding our EPS outlook for the first quarter and the full year 2014. In preparing our EPS guidance, we have assumed that in the first quarter of 2014, the weighted average outstanding shares used in our fully diluted EPS calculation will be about 289 million to 291 million shares, and the weighted average outstanding shares for the full year 2014 will be about 291 million to 293 million shares. These share count assumptions take into account our recently completed $700 million common stock repurchase plan, which we announced in December. The company expects adjusted EPS for the first quarter of 2014 to be in the range of $0.94 to $0.96. For the full year 2014, we expect adjusted EPS to be in the range of $3.94 to $3.99. This expectation includes the impact from negative currency translations which we estimate, based on our current exchange rate assumptions, will reduce our reported consolidated sales by about $40 million to $55 million. On a constant currency basis, our adjusted earnings per share guidance represents EPS growth of approximately 6% to 8%. I will now turn it back to Dan.

Daniel J. Starks

Thank you, Don. At the beginning of 2013, we set a number of goals for ourselves, many of which we shared publicly as part of our guidance and comments at our annual Investor Day. Our achievement of these goals means that we are executing on our promise to deliver an innovation-based growth program that is delivering technologies to the market that reduce costs and improve patient outcomes. One of the major goals we set for ourselves was to improve our sales growth rate on a constant currency, year-over-year basis for each quarter of the year. We accomplished this goal. Our sales growth rate improved from a 3% decline in the first quarter of the year to a 6% increase for the fourth quarter. We attribute this improvement, in part, to delivering on our commitment to launch approximately 20 new products across our business during the year.

A second major goal we set at the beginning of 2013 was to grow adjusted earnings per share at a faster rate than sales. We accomplished this goal as well. On a constant currency, year-over-year basis, we grew adjusted earnings per share approximately 12% during 2013 on 2% growth in revenue. We demonstrated that superior growth is still possible in today's environment despite health care reform, increased regulation, average selling price pressure and global economic stress.

A third major goal we set at the beginning of 2013 was to continue to improve product quality and the robustness of our quality systems. We accomplished our goal of continuous improvement. We have reported to FDA that our remediation at our Sylmar facility is complete and that our Sylmar facility is ready for reinspection.

Next, we would like to offer additional comments about each of our businesses, starting with our cardiac rhythm management or CRM business. In our CRM business, we did what we said we were going to do and exceeded expectations in accelerating growth throughout 2013. We were encouraged by CRM market dynamics in the fourth quarter. We estimate that for the second quarter in a row, the global CRM market grew at a low single digit rate on a constant currency, year-over-year basis. Average selling price or ASP pressure were similar to what we have seen in recent prior quarters. As we look forward to 2014, we are increasingly optimistic that the global CRM market will be at least flat, and have incorporated this assumption into our guidance for the year. With respect to our own CRM business, we are pleased that our high voltage, lead-to-port ratio remains stable on a sequential quarter basis during the fourth quarter, and that customers continued to respond favorably to our new products. We estimate that St. Jude Medical gained approximately 50 basis points of global CRM market share during the quarter. As we look forward to 2014, we are optimistic that St. Jude Medical is well positioned to gain at least 50 basis points of additional global CRM market share as we continue to launch new products, such as our Nanostim retrievable leadless pacemaker in Europe and other new products we will discuss during our upcoming investor conference on February 7, 2014.

Next, I would like to comment on our atrial fibrillation or AF business. At the beginning of 2013, we said one of our goals for our AF business was to install 12 MediGuide systems during the year. During the fourth quarter, we installed 1 MediGuide system, giving us a total of 10 MediGuide system installations for the year. We have purchase orders to install 8 MediGuide systems in the current quarter, however, and consider the difference in timing of 2 systems from the fourth quarter to the first quarter to be immaterial to our long-term growth program. Customer feedback in 2013 reinforces our confidence that our MediGuide fluoroless catheter navigation technology has a credible opportunity to become a strong growth driver within our product portfolio. One of the most significant new growth drivers in our AF business for 2014 will be the launch of our TactiCath contact force sensing line of ablation catheters that became part of our portfolio through our acquisition of Endosense in August 2013. Our program to ramp up manufacturing and inventory to support full launch of this product line in Europe is on track. Those of you who were at the Boston AF conference earlier this month heard strong support from key opinion leaders that contact force sensing ablation catheters may help improve both the safety and efficacy of AF ablation procedures. Physician feedback leads us to believe that our TactiCath contact force sensing line of ablation catheters will contribute significant growth to our AF business in 2014 and beyond.

Next, I would like to comment on our structural heart business. This morning, we reported that revenue for our structural heart business increased 12% on a constant currency, year-over-year basis. This growth came primarily from tissue heart valves and left atrial appendage or LAA closure devices, both of which grew at a double-digit rate. We are optimistic that in 2014, our tissue heart valve and LAA closure revenue will continue to grow at a high single digit or low-double-digit rate. The challenge for our structural heart business in 2014 will be to gain traction in Europe with our Portico line of TAVI products. The 23 millimeter size Portico valve we offered in 2013 addressed only approximately 7% of the available market opportunity. The 25 millimeter size Portico valve that received CE Mark mid-December would give us the ability to address approximately 20% of the available market opportunity. We expect to begin launching our 27 and 29 millimeter size Portico valve to the market in Europe later this year. This should put us in a good position to validate the competitiveness of our Portico product line and give us good insight into the role our Portico program will play as a growth driver in our structural heart portfolio in 2015 and beyond.

Next, I would like to comment on our vascular business. The progress we are making with growth drivers in our vascular business is clouded by the negative impact of low-margin, third-party vascular product sales in Japan. During 2013, third-party vascular product sales in Japan declined approximately $16 million on a constant currency, year-over-year basis. We estimate revenue from this same product category to decline an additional $14 million in 2014, and become less material thereafter to our vascular product sales category. As we continue to transition our sales mix from legacy products to growth drivers in our vascular business, we expect steady improvement to our sales growth rate. During 2013, vascular sales growth improved from 1% in the first half of the year to 3% in the second half of the year on a constant currency, year-over-year basis. We expect the sales growth rate to improve further in 2014. Our fractional flow reserve or FFR, our optical coherence tomography or OCT, and our renal denervation product revenue all grew at a double-digit rate in 2013. In addition, we expect the sales growth rate for our vascular products to accelerate in 2014, once we are in a position to add the CardioMEMS product line to our vascular product portfolio.

In our neuromodulation business, we expect to transition from headwinds to tailwinds before the end of 2014. We expect our FDA warning letter to be resolved during 2014. We expect to launch new next-generation products in Europe and in the United States during 2014. We also expect to continue to expand the rollout of the spinal modulation dorsal root ganglion or DRG stimulation technology in Europe throughout the year. While we expect weak revenue from neuromodulation products sales in the current quarter, we think we are well positioned to deliver stronger revenue growth, given the new product launches expected during the remainder of the year, and that we will enter 2015 with significantly improved momentum in our neuromodulation growth program.

In addition to the progress we have made in advancing our growth-driving product programs, we are also pleased with the progress we have made in our multiyear initiative to improve productivity and optimize our cost structure. This initiative has multiple components. One component dates back to the commitment we made in 2005 to expand manufacturing in cost-advantaged locations, including South Carolina, Puerto Rico, Costa Rica and Malaysia. The progress we have made executing on this goal is reflected partly in our gross margin and partly in our global income tax rate. Our progress executing on this manufacturing initiative contributed to our ability to leverage earnings per share in 2013, and is expected to do so again in 2014. The benefit of our improved income tax rate in 2014 largely offsets the negative incremental impact the Medical Device Excise Tax will have on our gross margin in 2014.

A second component of our initiative to improve productivity and optimize our cost structure is the decision we made in August 2012 to significantly redesign our organizational structure. Prior to 2012, St. Jude Medical operated in a highly decentralized environment, characterized by 6 divisions that each had its own focus and matched up with the priorities of different physician specialty groups. By 2012, it was clear that customer priorities were changing and that we needed to change with our customers to stay competitive. We, therefore, began transforming ourselves into a more centralized organization, characterized by company-wide standardization and shared services that could help improve quality, cost, customer service and overall execution of our long-term growth program. We estimate that we already have generated more than $100 million in incremental cost savings as a result of our restructuring. The changes we made in late 2012 and 2013 have laid the foundation for us to make additional improvements in 2014. With the changes we have implemented, we are confident that we can continue to leverage -- to deliver earnings per share leverage in 2014. At the same time, we continue to invest in innovative products that meet the evolving needs of our customers, who are balancing how to practice medicine in challenging economic conditions with continuously improving patient care.

We would like to conclude our prepared remarks by summarizing that for full year 2013, we delivered constant currency, year-over-year sales growth of 2%. The guidance we have issued this morning contemplates that we will accelerate the sales growth rate to the range of 3% to 5% for full year 2014, while continuing to leverage earnings per share. We are confident that our innovation-based growth strategy, supported by our mission to deliver cost effective medical device solutions that saves and improve lives, will enable us to achieve that goal.

With that, we are ready to open it up to questions and turn the Q&A over to Tracy.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is coming from Kristen Stewart with Deutsche Bank.

Kristen M. Stewart - Deutsche Bank AG, Research Division

Just to kick it off, I guess, just on the CardioMEMS reference to acquiring them, just wondering if there's anything that you can share. I'm assuming that given the fact that you intend to acquire them, it's your sense that -- and obviously, include revenues, it's your sense that the product should get approved. And maybe just talk about plans for any sort of launch. And then from an earnings impact, what was the associated, I guess, impact of acquiring the company through 2014, if that was dilutive to the overall results?

Daniel J. Starks

Kristen, I'm going to disappoint you by not answering your questions. I apologize. But with the topic of CardioMEMS, given that we do not own CardioMEMS, we have a discipline of leaving communications about the timing and opportunity for FDA approval to CardioMEMS. We think that the technology deserves to come to the market. We think that the clinical benefit and cost effectiveness benefit of the technology is extremely strong, but we won't offer any additional comment about the FDA process or timing and instead, we'll leave that communication to CardioMEMS. And with that as a starting point, we're not going to address yet our plans for the launch of CardioMEMS. We think it is appropriate for us to wait until such time that we have acquired the business and wait until such time that FDA approval has issued. And without predicting when that will be, we are optimistic that both of those things will happen. And once those things do happen, then it will be time for us to communicate more completely about the opportunity. So I appreciate that what you're asking about is a key focus for investors, and ask that you please just give us a little more time and be a little bit patient with us, and we'll answer information more fully at a later date.

Kristen M. Stewart - Deutsche Bank AG, Research Division

Okay. But just to be clear, your guidance does assume an around midyear acquisition with sales of $10 million to $15 million and then -- or sorry, sales of $15 million to $20 million, was that correct?

Daniel J. Starks

Yes, exactly.

Kristen M. Stewart - Deutsche Bank AG, Research Division

Okay. And then I guess just on a different topic, just more broadly, I guess, within the CRM markets. Any additional color you can have just on comfort that what we're seeing in the last couple of quarters is sustainable in terms of the underlying market growth.

Daniel J. Starks

Sure. It's a -- the prediction of ongoing market dynamics in the cardiac rhythm management space is a regular challenge. Our goal is to err on the side of being conservative, and so one might understand that our assumption that the market will be at least flat on a constant-currency revenue, year-over-year basis should be understood as a conservative estimate. The last 2 quarters, the market seems to have grown faster than that. So we're not taking for granted that the market dynamics of the last 2 quarters continue into 2014. It may be that they do, but we're not taking that for granted. We're instead assuming that the market, that currently is growing about 2% on a total global basis for pacemakers and ICDs together, that we're assuming that it will only be flat. So that's about the best I can do. It's not a science, it is an estimate only. And we undoubtedly will be wrong and, hopefully if we're wrong, we're wrong on the side of being conservative.

Operator

Your next question is coming from Mike Weinstein with JPMorgan.

Michael N. Weinstein - JP Morgan Chase & Co, Research Division

Maybe my first question is on the AF business. If I look at the guidance for 2014, it looks like you're basically assuming that you'll grow in line with the market or maybe slightly above that. That would seem to be a bit conservative to me. So could you just talk a little bit about the TactiCath launch in Europe and your expectations there? And then second, MediGuide, the transition from a limited rollout to a full launch, when you think that will occur and how we should think about the MediGuide opportunity from here.

Daniel J. Starks

Sure. Michael, first, with your comment that our guidance seems to be conservative, that just reinforces to us that we have accomplished our goal where we -- our goal here in setting forth guidance for 2014 and across the board is intended to be conservative and err on the side of being conservative to the extent we're going to err. So we hope that as we go through the year, we can point to points of guidance that we're overachieving, and it may very well be that AF revenue is one of those areas. With respect to the TactiCath contact force sensing ablation catheter systems, we are ramping up that technology. We are not yet in full launch phase, we have very limited supply. There was -- we had a very small amount of sales in the fourth quarter. We sold everything we could make. We are -- we have -- there's a lead time on the ramp-up, of course, and -- but as we ramp up here, continue to ramp up during the first quarter and during the second quarter, we expect to be in a position around the midyear where we are not talking about product supply constraints. So that would be the -- timing-wise, one should think in terms of a meaningful amount of additional contribution from our TactiCath program in the second half of 2014 as compared to the first half of 2014. And with respect to another thing that one might keep in mind is that we have a PMA submission already submitted to FDA. And when we come into the investor conference on February 7, we'll provide an update on the U.S. submission status. And it may very well be that we are able to add the U.S. launch effort here in the second half of 2014 with respect to TactiCath. We are -- we know that we're not able to predict the timing of FDA approvals, but that is at least a possibility and that's a potential additional upside to the growth profile. With respect to MediGuide, the MediGuide technology is absolutely on track. We continued to validate our -- encourage -- the encouragement we've had that this is a significant technology. The physician response to us from the clinical experience that is beginning to get traction with the -- either with the small number of units that already have been deployed in key centers around the world, is very encouraging to us. We are on track with our efforts to continue to integrate the MediGuide technology into our total EP cath lab systems, and we will be -- a significant focus will be to integrate the TactiCath product line as well into our EnSite system and into our MediGuide -- combination MediGuide/EnSite technology. So all of this will take time, but it's all on track and it all makes us optimistic that we will continue to deliver high single digit or low double digit growth from our AF program on a sustainable basis. We've mentioned in the past that our AF product portfolio is a little different from our competitors. There are some declining portions of that portfolio. We -- as people look at year-over-year growth rates, our growth rate is negatively impacted here in the fourth quarter, as well as for our full year 2013, by our unfavorable comparison to the surgical AF program, the Epicor program that we phased out. Our prior-year comparisons still have some surgical AF revenue in them, in contrast to current periods. And then we do have some low-margin third-party products that we distribute in Japan that are another declining part of our AF portfolio in the fourth quarter versus fourth quarter comparisons a year ago. So both of those factors will need to be taken into account as a person compares our growth rate and start -- with other companies' growth rates and starts to think about what are the details of our opportunity going forward. So we're feeling really good about the AF side of our business and the portfolio for 2014 and the growth trajectory that we anticipate for 2014.

Michael N. Weinstein - JP Morgan Chase & Co, Research Division

Dan, on the supply commentary for TactiCath, you may want to make a similar commentary on Nanostim per our discussion last week. And then can you just comment on the -- there was an article yesterday where you commented on the left atrial appendage program, the clinical trial there. Can you just share with us kind of what's going on with that program and the trial design?

Daniel J. Starks

With Nanostim, we are -- the product ramp-up with Nanostim is very parallel to the product manufacturing ramp-up with the TactiCath program. So we had immaterial sales from Nanostim in the fourth quarter. There were a few implants, but the revenue rounded to 0. We will get -- we're opening some new centers with very limited product supply here in the first quarter. We will continue to expand the rollout in the second quarter. We expect to be -- to work ourselves out of the product supply constraints by about the middle of this year. So similar to the revenue contribution from the ablation component of our AF program, we expect to see a meaningful ramp-up and impact to our low-voltage growth profile in Europe from Nanostim in the second half of the year more than in the first half of this year. And with respect to the LAA closure program, maybe I'll just -- rather than offer anecdotal comments, maybe I'll just leave that for the -- for our presentation at the investor conference on February 7. We can provide a good update on the LAA program and the clinical trial status. What I will say is that what -- when -- we're always looking at where we're going to get the best return on investment with each of our -- with every significant component of all of our growth driver programs. And sometimes it makes more sense to focus in European markets than in U.S. markets for a particular window of time, and sometimes it actually gets us into the market quicker if we are patient and a little more disciplined in starting clinical trials in the United States than if we just do things as -- kind of just move full speed ahead. So with LAA closure, our strategy for getting to the U.S. market is an exciting part of our program. And the fact that we are -- have revisited the clinical trial design actually is an effort to get us -- is part of an effort to get into the market quicker and should not, in any way, be seen as a delay to our opportunity to bring this technology to the U.S. market.

Operator

Our next question is coming from Bob Hopkins from Bank of America.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

So first, I was wondering on the warning letters that you guys have outstanding in the U.S., and does your guidance contemplate that those are lifted? And can you just remind us of what kind of product flow we might see post the lifting of those warning letters?

Daniel J. Starks

Eric, you are closest to the -- to all of these issues, and I'm not sure exactly what the sensitivities are and what you're comfortable commenting on and what you would prefer to defer to a later communication. What would you say about the status of the FDA warning letters and related product flow?

Eric S. Fain

So Bob, as Dan mentioned, we notified FDA that we have completed our remediation activities with regards to the observations in the warning letter and that we're ready for reinspection. And so, from our side, we're ready. I don't want to really give any estimates and speak for FDA in terms of when those reinspection activities will take place. And as we've said before, we're dependent on the reinspection to clear the warning letter. And that will also allow us to return to the normal flow of new products into the marketplace. So we don't want to give any specific timing, but we're obviously focused on being prepared for the reinspection and look forward to having that event happen.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

So -- but are there major product categories that we would expect to have an impact potentially in 2014, if those launches or if those letters are lifted?

Eric S. Fain

Well, as Dan had mentioned at the recent conference, we do have new products on our low-voltage side. In particular, the Allure CRT-P Quadra device that we think will have a significant impact in the marketplace in that field, and really to follow on with our success with the Quadra product lines on the CRT-D side.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

And then one just big -- bigger picture question for Dan. From a top line growth perspective, as you mentioned, you exited the year at a very nice 6% growth rate. You mentioned that you have, I think, 3 extra selling days in the fourth quarter and your guidance is 3% to 5%, and so maybe a little bit less than that excluding the extra days. So I just want to make sure, Dan, I've got the message right here, that this guidance you consider to be conservative or are there a couple of product areas where you're a little less optimistic relative to your comments previously on the Q3 call and earlier?

Daniel J. Starks

The way -- I think a good way to look at it, Bob, is to not take -- first, I'm going to give you a little bit of a roundabout answer, I apologize, but hopefully most of what I say is of some interest, that I think it's most helpful to look at the sales growth rate not on a single quarter basis but by combining the growth rates of a couple of quarters. And so that when we do that with an analysis of 2013, we see that in the first half of 2013 compared with the second half of 2013, virtually every one of our product categories, and the only exception is atrial fibrillation, was -- just stayed at a high rate. But every other product category that we report had a material increase in growth rate from the first half of 2013 to the second half of 2013 on a constant currency, year-over-year comparison. The -- although we have delivered 6% growth here on a constant currency basis in the fourth quarter, if we combine the fourth quarter and the third quarter growth rates of the second half of the year, we grew sales 4% on a constant currency, year-over-year basis. So we think that a good way to view our sales growth rate baseline here, as we come into 2014, is that we're operating at about a 4% growth rate. The -- and then we look at were there any unusual events in the -- were there headwinds or tailwinds in the 4% growth rate for the second half of 2014. And as we look forward to what to expect in -- in 2013, as we look forward to what to expect in 2014, we think that, really, we have a number of favorable new dynamics impacting growth here in 2014. We think that we have some benefit to the sales opportunity on the CRM side as the FDA warning letter lifts, that will be number one. Number two, we've got the 25 millimeter Portico that is now available to start to help us. In the second half of the year, we'll have additional sizes, so a person can understand that as being favorable to this 4% baseline. The Endosense TactiCath program did not help us in any meaningful way in the 4% growth rate we showed here in the second half of 2013. We think it's an upward influence going forward here into 2014 and, particularly, that the growth in the second half of the year will be stronger than the first half of the year, same with Nanostim. On the neuromodulation side, we're looking forward to updating everyone on February 7 about the new product flow on the neuromodulation side. We -- so really -- so as you look at each of our major product categories, we really see the opportunity to at least deliver to the same level as the second half of 2014 on a year-over-year comparison and we -- and again, we see a number of upward number of tailwinds that gives us a good opportunity to increase that growth rate. So what we're hoping and what we're working toward is having the same kind of improvement to our business in 2014 that we have now delivered for 2013. And what I mean by that is we -- for our full year 2013, we delivered 2% growth, but that was 4% growth in the second half of the year and gave us a good run rate coming into 2014. We have a reasonable opportunity if we execute well, and if we don't have any significant negative surprises, we have a good opportunity to have the second half of 2014 again be a little bit stronger growth than full year 2014 and give us a good start to the possibility of a higher full year growth rate for 2015. So we think of a low-single digit in 2013, but a good opportunity here now for mid-single digit in 2014. And if everything falls into place and we execute well and we're not surprised with negative developments, that starts to tee up the potential for something that would be in a higher growth rate for 2015, something that might be in the upper-single digits. So as you asked more specifically, well, is there -- as you would want to go through each product line, there are pluses and minuses. But in the big picture and in the way that we think is most helpful for investors to look at the business and in the way that we look at the business ourselves, we really are pretty -- we're coming into the year here with the confidence of having delivered in 2013 and thinking that we have delivered in a really solid way and that we're well positioned to have another good year here in 2014. And if we have a good year in 2014, that implies that we've created the conditions to have even a higher rate of growth in 2015. So that's the way to think about us.

Operator

Our next question is coming from David Lewis from Morgan Stanley.

David R. Lewis - Morgan Stanley, Research Division

Coming back to cost, you spent a lot of time talking about SG&A in this call, and the company, historically, has done a very good job controlling SG&A cost and, once again, again this year. But '14 is going to be another year where underlying GMs are flat to down. And some of your peers have gotten more aggressive on product cost reduction. And I wonder are there opportunities for St. Jude in '14 and '15 to get more aggressive on product cost? And could we hear about some of that in February?

Daniel J. Starks

Well, David, first, on the -- we've got some semantics with respect to more aggressive. We have a very strong focus and continue to have a very strong focus on improving our cost structure and including taking costs in an appropriate way out of a -- in a way that's going to help support the gross margin. And I -- it's not clear to me, you're mentioning some other companies being more aggressive. I'm not sure what you're thinking of. But our level of focus and intensity and aggressiveness in improving our cost structure is just -- I'm not sure how we would be compared to other companies. But I can tell you, inside St. Jude Medical, people are doing as much as we reasonably think that we can. And the -- and we will talk about this more on February 7 as a clear answer to that part of your question. The things that a person would think about is you would think about the rate at which we are able to continue to scale up manufacturing in cost-advantaged locations. And you can see from the guidance, the midpoint of the guidance, with respect to the income tax rate here for 2014, is 18.5% tax rate. That compares with a 20.9% tax rate for full year 2013. That benefit is directly tied to the manufacturing strategy and the amount of volume that we have ramped up in these cost-advantaged locations, particularly Costa Rica, Puerto Rico and Malaysia. So you don't see our product cost benefit entirely in the gross margin line, some of it you see in the income tax line. And it's really very significant and reflects a very aggressive program on our part to continue to improve our cost structure. The second thing I would say is that the redesign of our organizational structure that we announced in August of 2012, I'm not really sure, as you compare us to the aggressiveness of other companies, I'm not sure that any other companies were able to consolidate multiple divisions and so radically execute on a program of shared services, all of which took significant cost out of our income statement already here for 2013. And that really created a condition so that we can continue to do quite a bit more in 2014. We are going do more in 2014 and we will talk about it to an extent on February 7. So -- and there are then -- another thing I would mention is that keep in mind that -- as you look at our income statement line items, keep in mind that there is -- we've got the consolidated results in those line items and then a portion of it is taken out in a separate line item down in other expenses, so that tends to overstate at the -- when you're looking at the line items in the income statement, there are expenses that are then just taken out on a single line item down -- lower in the income statement. So factor that into thinking about cost structure. And another point I would make is that the -- a lot of our portfolio includes products where we have still very modest revenue and even do not yet have revenue. And we think about TactiCath, think about the Nanostim and our whole Portico program and other parts of our program as well. And so, these are a drag on our financial ratios. But they will -- we think that during -- that there was -- there will be improvement in 2014 and there will be additional improvement in 2015, partly as a matter of scale and partly as a matter of intense focus on improving the manufacturability of these new products that have been created in a different company environment and are now part of the St. Jude Medical environment. So this is really -- this whole topic of cost structure and productivity gains and opportunity to continue to leverage the middle of the income statement and continue to deliver EPS leverage is a very -- it's a bright spot in our total growth program.

Operator

Our next question is coming from Bruce Nudell with Crédit Suisse.

Bruce M. Nudell - Crédit Suisse AG, Research Division

Just 3 real quick ones, like does the neuromodulation guidance in 2014 assume any new U.S. product launches? Secondly, TAVI is kind of a fast-moving field. Edwards is on its third generation in Europe or very shortly will be. Where does TAVI fit strategically? And are you guys working on your next-generation products? And thirdly, what's the state of the FFR market, and are there any trials upcoming that could kind of goose that market along, that are indication expanding?

Daniel J. Starks

Okay. Let's see. On the FFR side -- or neuromodulation, okay. Pardon me, Bruce, I just was catching up by making notes so that I didn't forget any of your 3 questions. On the FFR side of our business first, our FFR business is performing well as a growth driver on -- both in the fourth quarter and in the full year. Our FFR business grew at about a 20% level. So we're encouraged by the market dynamics and we're encouraged by the strength and momentum of our product line within that market. And on the topic of ongoing clinical trial program, let me just ask you to wait for our February 7 conference to provide an update there. I'm not sure that I have the -- all of the right thoughts in mind, first of all. And secondly, we'll do a better job of communicating it if you give us an opportunity to do so on February 7. On the topic of the TAVI market, I think -- we think that -- we will spend a significant amount of time talking about this on February 7, so we'll really have a good update, good discussion, and we'll give you a good color commentary and you'll see that we have a lot of organizational confidence in the competitiveness and opportunity for our Portico line. And I think that we'll validate that during -- I think we'll validate our confidence during 2014. I think now that we've got a second -- the 25 millimeter size and we'll update you on the rollout of the 27 and 29 millimeter size. But that will really put us in a position where we -- rather than talk about confidence, we'll be able to start talking about revenue and measure ourselves with that scorecard. So we think that we'll come out of 2014 with good data to demonstrate the competitiveness and upside for that part of our structural heart program. And yes, we are working on next-generation products.

Bruce M. Nudell - Crédit Suisse AG, Research Division

Okay. And then just guidance, with regards to neuromodulation, are there any new products baked in 2014 in the U.S. in the guidance?

Daniel J. Starks

Let me ask Eric Fain, if you want to comment on that at all, Eric. Would you -- do you want to -- do you have any comments?

Eric S. Fain

Yes, I think, Bruce, we'll give a good overview of the program for 2014 on the 7th as well.

Operator

Our next question is coming from Brooks West with Piper Jaffray.

Brooks E. West - Piper Jaffray Companies, Research Division

Dan, I wonder if I could get you to comment on the growth rates in the low-voltage versus the high-voltage markets. And then, secondly, you've had a nice trend in your pacer business, you've got a couple more quarters of o U.S. launch benefit, you've got Nanostim, maybe you get some benefit from some U.S. product flow post the warning letter resolution. Could we continue to see your pacer business kind of inflect on the trajectory that it's been on over the past year? Then I've got one follow-up.

Daniel J. Starks

Okay. I'm just thinking, Brooks, that I need to be very careful. I'm not sure exactly what inflect means, and I don't know that I want to say yes or no here. And so, I -- and we don't want to give guidance separately for the pacing side of our CRM business as compared with just the total ICD and pacer combined. But you can see from the numbers that we have -- that the -- on a constant currency basis, the pacing revenue in the fourth quarter grew 4%, and we did guide to this and we did predict this. We thought this was achievable at the beginning of 2013. So as people would ask at the beginning of 2013, and as we had such a significant decline in pacer sales in the first quarter of 2013, people -- and we were talking about product flow and people would ask, "Well, when do you think you're going to return to positive growth rather than ongoing declines?" and we thought we had a credible chance to return to positive growth in the fourth quarter of 2013, and sure enough we did. And we pointed to, as I recall, it was something like 6 new product lines on the pacer side that were behind our expectations. And as you look at the breakdown -- breakout of pacer growth dynamics here in the fourth quarter, you can see that the -- in the U.S., pacer revenue is still declining, but that the growth in international pacer revenue was enough to overcome the decline in the U.S. and put us in a position where we're delivering full growth on a year-over-year basis for the full business. So there are products in the international markets that are not yet in the U.S. And so that would include the -- not only the quadripolar CRT-P product line that Eric mentioned, but also the ENDURITY and ASSURITY products that we began to launch in the European markets in the second quarter of 2013. We haven't been able to launch those yet into the U.S. market due to our focus on remediating the warning letters. So a person can really start thinking about 3 product lines here on the low-voltage side that we will be bringing into the U.S. market that will give us a reasonable opportunity to start delivering growth in the U.S. side of our pacing business that is closer to the amount of growth that we're already delivering on the international side of our business. So I'm thinking that, that is what you're asking about when you talk about inflection, and we have a chance to have that kind of inflection.

Brooks E. West - Piper Jaffray Companies, Research Division

And then just 2 quick ones, if I could. Do you feel like the pacer market has stabilized versus the ICD market in kind of over the last year here and maybe going into next year? And then just one quick one on renal denervation. You mentioned that you had double-digit growth in Europe in Q4, I realize that's on small numbers. Since the result of your competitor's trial in the U.S., everybody's put their U.S. franchises on hold. Do you think that revenue starts to go away in Europe or how do you feel about that?

Daniel J. Starks

We actually are very optimistic about the opportunity for renal denervation. And the innovation is very often messy. We think that innovation takes patience and persistence. And we're really looking forward to learning what we can from the Simplicity 3 trial data and using that to help advance our program. But the Simplicity 3 announcement doesn't change the fundamental reasons that we have invested in the renal denervation space and it doesn't change the algorithm for our decision. So the things that we -- that made us focus on renal denervation start with the fact that there is such a huge unmet patient need here. So when we keep in mind just how expensive, how epidemic and, sometimes, how deadly hypertension is, and then we keep in mind the fact that there are millions of patients who do not respond to drug therapy, so that's our target population. And that meets all our criteria for where we think we can really help patients and where we think we can make a difference and create value for our investors. We look at expensive epidemic diseases that represent unmet needs, where we think we can improve patient care at the same time we reduce the cost of caring for patients that have that kind of -- that suffer from that epidemic disease. So that's intact here with renal denervation. And one of the points that -- one of the things we'll be looking for when the Simplicity 3 data are presented is whether the patients in the medical control arm benefited from the medical therapy. And maybe they did not, but we don't have any idea what the data will be. But if the patients in the control arm benefited from the medical therapy, they were not treatment-resistant, and that's not the same population that we're targeting here. So that -- we have a lot of questions on what we'll find out from this Simplicity 3 data and we don't doubt that we'll get a lot smarter from whatever data are presented as a result of the Simplicity 3 trial, and we'll fully incorporate any of those lessons learned into our own program. But we're still -- we're confident that we're investing in a very promising productive area, number one. Number two, we also know that the renal denervation procedure not only addresses such a large unmet patient need, but also that it's a safe procedure. So that's critical to our ongoing assessment. We know it's safe. And then third, we know from the surgical sympathectomy data in the 1940s and the 1950s, as well as from our early EnligHTN data, that we have an opportunity that it's -- there is -- this is a warm trail, that we have an opportunity to help a portion of these patients. And we have a significant synergy and technology base to use to figure out exactly how to best help these patients. So our -- we know a lot about RF ablation. We know a lot about the variability of ablation procedures from one patient to another, from one physician to another, with that same physician delivering RF lesions. We've been collaborating with the clinical community for 20 years to consistently deliver effective lesions in the AF market, and it's still a challenge. Again, the update that we all got from the state-of-the-art at the Boston AF conference a couple of weeks back here, the focus was what lesions are you creating and versus what you thought you were creating. So there's a lot of refinement and a lot of detail that's really critical to the therapy in ablation. And again, this is an area we know quite a bit about. And we think, again, that a company needs to be patient and very persistent. We already [ph] expect surprises in innovation, that's the nature of the innovation process. But we think we are on a warm trail and we are -- other companies make decisions for different reasons, everybody has different circumstances. And one of the benefits for us is that it's less expensive for us to pursue our investment in renal denervation than with some other companies. We don't have any acquisition expense that we run into the income statement. We don't have the developed technology amortization that we need to cover in our income statement. This is a homegrown, internal, very cost-effective program that leverages a tremendous amount of synergy from our 20 years of investment in the electrophysiology ablation space. So we're all about it and looking forward to -- we think this is an area where we can really help patients.

I apologize we didn't get to that many questioners. I will work to shorten up answers -- next time, I'll work to shorten up answers and hope to get to more questioners. But we have gone past our normal time. And so, Tracy, would you please wrap it up for us.

Operator

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