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Medtronic (NYSE:MDT)

F3Q 2014 Results Earnings Conference Call

February 18, 2014, 8:00 a.m. ET

Executives

Jeff Warren - Vice President, Investor Relations

Omar Ishrak - Chairman and Chief Executive Officer

Gary Ellis - Chief Financial Officer

Mike Coyle - President, Cardiac and Vascular Group

Chris O’Connell - President, Restorative Therapies Group

Analysts

Mike Weinstein - JPMorgan

Matthew Dodd - Citigroup

David Roman - Goldman Sachs

Bob Hopkins - Bank of America

Kristen Stewart - Deutsche Bank

David Lewis - Morgan Stanley

Joann Wuensch - BMO Capital Markets

Derrick Sung - Sanford Bernstein

Operator

At this time, I would like to welcome everyone to the Medtronic third quarter earnings conference call. [Operator instructions.] I would now like to turn the conference over to Mr. Jeff Warren, vice president, investor relations. Please go ahead.

Jeff Warren

Thank you, operator. Good morning, and welcome to Medtronic’s third quarter conference call and webcast. During the next hour, Omar Ishrak, Medtronic chairman and chief executive officer; and Gary Ellis, Medtronic’s chief financial officer; will provide comments on the results of our fiscal year 2014 third quarter, which ended January 24, 2014. After our prepared remarks, we’ll be happy to take your questions.

First, a few logistical comments. Earlier this morning, we issued a press release containing our financial statements and a revenue by business summary. You should also note that some of the statements made during this call maybe considered forward-looking statements and that actual results might differ materially from those projected in any forward-looking statement.

Additional information concerning factors that could cause actual results to differ is contained in our periodic reports filed with the SEC. Therefore, we do not undertake to update any forward-looking statement. In addition, the reconciliations of any non-GAAP financial measures are available on the Investors portion of our website at medtronic.com.

Finally, unless we say otherwise, references to quarterly results increasing or decreasing are in comparison to the third quarter of fiscal year 2013, and all year-over-year revenue growth rates are given on a constant currency basis.

With that, I’m now pleased to turn the call over to Medtronic chairman and chief executive officer, Omar Ishrak.

Omar Ishrak

Good morning, and thank you, Jeff. And thank you to everyone for joining us today. This morning, we reported third quarter revenue of $4.2 billion, which represents growth of 4% and Q3 non-GAAP diluted earnings per share of $0.91. Our Q3 revenue growth was at the upper end of our full year revenue outlook, and was in line with our mid-single digit baseline executions.

We remain focused on building a track record of operational execution to deliver consistent and reliable results. In Q3, our overall organization once again delivered balanced growth, with strong performances in some areas more than offsetting challenges in the other parts of our business.

Looking ahead, we’re confident that our three primary strategies - therapy innovation, globalization, and economic value - will further strengthen, diversify, and expand our market leading competitive position. As we have recently discussed, we are actively translating these strategies into distinct growth vectors, which when combined with our disciplined capital allocation, position us well to create long term value in healthcare.

Looking more closely at our Q3 results, it is important to note that all eight of our primary businesses were stable or growing, with a trend of increasing stabilization in certain businesses continuing to play out.

This was particular evident in our spine business. Global spine results were flat this quarter, driven in part by improved BMP sales that were down 1%. While this result reflects sequential stability in underlying demand for BMP, it is worth noting that we did face a favorable year over year comparison, as Gary will discuss later.

Our diabetes grew 16%, driven by the strong launch in the U.S. of the MiniMed 530 G system with the Enlite sensor. In addition, surgical technologies delivered another outstanding performance in Q3, growing 11%. All three of these businesses, BMP, neurosurgery, and advanced energy, continued to execute and contribute solid growth.

At the same time, we continued to deal with some challenges this quarter. In renal denervation, we announced in January that our HTN-3 trial failed to meet its primary efficacy endpoint. The HTN-3 results will be presented at ATC on March 29, and we have convened an independent panel of experts to review the data and provide us additional insights of potential next steps for this business.

In our peripherals business, we suffered a setback in our below the knee drug eluting balloon program, where we had some unexpected clinical results. In light of these results, we’ve pulled our below the knee DEB from the market. We strongly believe the issues are unique to below the knee, and remain confident in our SFA program.

In fact, multiple studies, 14 presented and 6 published, support positive, consistent outcomes for our DEB in VSFA. Both the HTN-3 and below the knee clinical results did affect the Q3 revenue growth of their respective businesses, and also, when compared to our earlier expectations, have a combined, modest 15 basis point negative impact on our overall Q3 growth.

While these clinical trial outcomes are disappointing, it is important to realize that we still have a substantial number of exciting growth drivers in our upcoming product pipeline that can help us deliver on our mid-single digit revenue growth expectations.

In emerging markets, our overall Q3 growth was 12%, and now represents 13% of our total company sales. While this is respectable, and contributed a point and a half to our overall company growth, our Q3 results fell short of our targeted mid to high teens growth rate. As in Q2, we faced the most pressure in our central and eastern Europe region, which declined 2% this quarter.

This was primarily driven by Russia, where changes in fiscal funding mechanisms are negatively affecting healthcare budgets. We are, however, seeing definite signs of improvement in Russia, and expect our overall central and eastern Europe regions to return to strong double-digit growth in the upcoming quarters.

Despite the market challenges we have faced recently, we remain confident in our overall outlook for emerging markets. We’re working on a number of specific programs aimed at reaching our targeted levels of growth.

Turning to our P&L, our organization once again delivered on the bottom line. We generated 40 basis points of operating leverage on a year over year basis, after adjusting for the impact of foreign currency.

On our gross margin line, we had an 80 basis point sequential improvement in Q3, as we resolved the Q2 issue of higher scrap and obsolescence from the manufacturing ramp of new products. And foreign exchange had less of a negative impact.

At the same time, we continue to have elevated levels of spending to address quality system improvements, and expect this to continue for several quarters. While these efforts are costly, ensuring the highest level of quality and regulatory compliance has, and always will be, a personal priority for me and a central focus of everything that we do at Medtronic.

Turning to our cash flow, we have generated $3.3 billion of free cash flow fiscal year to date, and over the next five years, we expect to get over $25 billion of free cash flow. While revenue growth is the largest level we have for enhancing our cash flow, we also are driving operational efficiencies such as our working capital improvement program, which is targeting increasing our inventory turns by 50% by FY17.

We remain committed to returning 50% of our free cash flow to our shareholders through dividends and share repurchases, a commitment level we believe is appropriate given our current mix of U.S. and international free cash flow.

This mix continues to be constrained by U.S. tax policy, which creates a negative incentive for us to repatriate cash into the U.S. The remaining 50% gives us ample flexibility to make attractive investments to drive sustainable growth over the long term.

We remain disciplined in how we deploy our capital, with a strong focus on strategic alignment and high return metrics, while minimizing near-term shareholder dilution.

As we look into the future, we’re convinced that our three strategic priorities - therapy innovation, globalization, and economic value - will not only increase our competitive advantage in the evolving healthcare environment, but also offer real solutions, namely to improve clinical outcomes, expand access, and optimize cost and efficiency to healthcare systems around the world.

As I mentioned earlier, we’re translating these strategies into three growth vectors, each delivering independent revenue streams. Our first growth vector is our strong upcoming product launch cadence, fueled by our therapy innovation strategy, which represents our core strength and continued foundation for growth.

Over the coming quarters, we will bring a number of new products to market. In TIDM, we recently launched Reveal Linq in international markets and are expecting FDA approval any day. Reveal Linq is a significant advancement in device miniaturization, with a size nearly 90% smaller than the previous generation, which allows for a simple, minimally invasive insertion. We believe this discreet device will allow us to further expand our upstream footprint in cardiac diagnostics, especially in AF, syncope, cryptogenic stroke, and heart failure.

In Q3, we also initiated the global clinical trial for Micra, the world’s smallest leadless pacemaker. Data from this trial is expected to lead to CE mark by the end of FY15 and will also be submitted for FDA approval. In fact, our first U.S. Micra implant is scheduled for later this week.

Micra’s is a true innovation in pacing, and features a novel fixation specifically designed for this new approach to prevent dislodgement while supplementing repositioning and [unintelligible] retrieval.

In our structural heart business, we received early FDA approval in Q3 for our CoreValve transcatheter valve for three different access routes - transfemoral, subclavian, and direct aortic - in extreme risk patients, and we continue to expect CoreValve U.S. approval for high-risk patients by mid-FY15.

CoreValve is able to treat a much broader range of patients than our competitor’s U.S. offering, as it is suitable for nearly all patient valve sizes, and its low profile 18-French delivery system makes it possible to treat patients with difficult or small vasculature.

This is also a uniquely differentiated valve in terms of its self-expanding design, controlled delivery, hemodynamics that improve over time, and lower rates of major stroke and paravalvular leak.

In intravascular, we’re expecting clinical results for our Impact Admiral drug eluting balloon for the SFA to be presented at the Charing Cross Symposium in early April, and are targeting a U.S. launch in early FY16.

In spine, we expect to launch our Prestige LP next-generation cervical disc in the U.S. this summer. We’re also planning to enhance our interbody and cervical plate offerings with a series of launches in FY15.

In neuromodulation, we continue to see strong adoption of our SureScan MRI [pain stimulator] in the U.S. and we are now launching this product in Japan.

In surgical technologies, we are developing a full pipeline of new power imaging and navigation equipment focused on improving both clinical and economic value in demanding medical procedures involving Medtronic therapies.

In diabetes, in addition to the ongoing launch of the MiniMed 530 G system with the Enlite sensor in the U.S., we are demonstrating our innovation in CGM with our Enlite enhanced sensor, which is now launching in international markets.

This sensor will complement our MiniMed 640 G, which we intend to launch in international markets in the first half of FY15. The MiniMed 640 G is our next-generation insulin pump system, featuring a new look and feel and a simplified user interface and the predictive low glucose Suspend algorithm.

Looking across the portfolio, we feel that we’re positioned to deliver what is arguable one of the strongest launch cadences of innovative therapies in our industry. While innovative therapies remain central to our success and have fueled growth in our industry for decades, it will no longer be enough going forward.

In order to unlock the full potential of medtech, to serve more patients and deliver better value in the transforming healthcare environment, we are taking meaningful action to advance our globalization and economic value strategies.

We believe successful execution of both of these strategies will position us to win in the changing healthcare marketplace and will be instrumental in establishing durability in our long term performance while creating the potential for upside to our baseline expectations.

With globalization, we are committed to unlocking the large opportunity for our existing therapies in emerging markets, and this effort represents our second independent growth vector. We remain focused on the premium segment in emerging markets, where both the medical technology and the ability to pay already exist.

This segment of emerging markets represents a multibillion dollar annual opportunity alone, and these are markets where our margins are comparable to our developed markets. In these regions of the world, we are being creative and resourceful as we continue to pursue traditional local market development activities as well as engaging in new and unique business [unintelligible] innovations such as novel commercial collaborations, strategic channel management, and developing unique public-private partnerships. Each of these has the potential to drive upside to our emerging market growth.

Finally, we see a continued drive by many progressive payers, hospital systems, and governments to adopt new value-based systems for healthcare delivery and payment. The formation of new value-based healthcare systems and models requires us to think and act differently in terms of how we engage payers, providers, and governments, and the role of innovation within these models.

In the end, we believe this shift to value comes with significant opportunity, and our selective efforts to aim at this shift fall into our economic value strategy. Our response to this shift in models will undoubtedly include the continued focus on delivering proven core technologies, but at the same time, we’re also expanding our offerings to new services and solutions, which is our third independent growth vector.

These services and solutions may be combined with our technologies, or they may stand alone. They are focused on a broader set of decision makers, such as hospital administrators and payers, with the goal of delivering low cost, high quality, and better patient outcomes.

To begin with, we have targeted two important areas where we can immediately offer solutions for healthcare systems around the world: integrated care and hospital solutions. In integrated care, our Cardiocom acquisition is performing well and delivering strong growth. Cardiocom continues to enlarge contracts, and is a compelling value proposition for a number of different customers including government, hospital systems, and health plans.

In Q3, Cardiocom launched [unintelligible], a 30-day readmission reduction program focused on minimizing heart failure readmission penalties for U.S. hospitals. Cardiocom is a proven, cost-effective, noninvasive solution that can easily be applied to all healthcare systems’ heart failure patients.

In the area of hospital solutions, we are starting to see good early results from our new cath lab managed services business in Europe. This business provides a unique service offering, whereby we enter into long term contracts with hospitals to upgrade and more effectively manage their cath lab and hybrid operating rooms.

This is expected to result in wins for all stakeholders. The hospital sees an improvement in cath lab efficiency and profitability, and physicians get access to the latest technology they need for better patient outcomes. Medtronic benefits not only through the increased use of our technology, but also through incremental service revenue, reduced pricing pressure, better inventory management, and more efficient use of our service personnel.

While it is still early, we continue to sign up accounts for long term cath lab managed service contracts. Combined, these contracts now represent over $350 million in incremental revenue over a seven-year time horizon. We are particularly encouraged by the positive reaction in the market to our offering and have built a solid pipeline of potential deals.

Another solution that we are now offering hospital customers is TYRX, which we acquired in Q3. This proprietary technology dramatically reduces infections that can result from device implants, which not only improves patient outcomes and hospitals’ quality metrics, but also reduces the significant costs associated with these complications. We intend to leverage this technology initially in CRDM, but ultimately in other businesses such as neuromodulation.

Ultimately, medical technology has the potential to transform healthcare from being a cost burden for most societies to an economic driver. Nations can achieve better long term economic output by utilizing medical technology to more effectively and efficiently restore health to the sick and manage chronic disease to keep their populations healthy, allowing more people to be contributing members of society.

Furthermore, Medtronic is uniquely positioned to lead the shift in value-based healthcare, directing our products and solutions to help providers, payers, and governments achieve their goals and driving more value to healthcare systems around the world. The new services and solutions offerings that I have described earlier, in conjunction with many other efforts, are being well received and distinguishing Medtronic as a serious, credible partner to those who are committed to transforming healthcare systems.

We have a number of advantages to offer, including market-leading products in large, chronic disease spaces, clinical and healthcare economics expertise, Lean Sigma resources, as well as the financial strength that gives us the ability to make capital infusions into providers and enter into risk-sharing business models.

I’m pleased with the early work we have done to establish our leadership position and know that there are tremendous opportunities ahead as we transform Medtronic from being primarily a device provider today into the premier global medical technology solutions partner for tomorrow.

Gary will now take you through a more detailed look at our results, before we take your questions. Gary?

Gary Ellis

Thanks, Omar. Third quarter revenue of $4.153 billion increased 3.4% as reported, or 4.4% on a constant currency basis after adjusting for a $41 million unfavorable impact of foreign currency.

Q3 revenue results by region were as follows: growth in the Middle East and Africa was 20%, Latin America grew 16%, growth in greater China was 11%, south Asia grew 9%, growth in Japan was 7%, the U.S. grew 4%, growth in other Asia Pacific was 3%. The western Europe and Canada region was flat, although it’s worth noting that western Europe grew 1% and central and eastern Europe declined 2%

Q3 diluted earnings per share, on a non-GAAP basis, were $0.91, a decrease of 2%. This decline was primarily driven by a difficult comparison due to a prepaid tax benefit we received in Q3 last year associated with the extension of the U.S. R&D tax credit, which also has not yet been renewed this year.

Q3 GAAP diluted earnings per share were $0.75, a decrease of 23%. This quarter’s GAAP to non-GAAP pretax adjustments included a $15 million restructuring credit from the reversal of excess restructuring reserves related to our FY13 initiative and a $200 million in-acquisition related item consisting primarily of accounting impairment charge related to certain assets already in the acquisition, partially offset by a gain resulting from the elimination of the previously reported R&D and continued consideration payments.

It is important to note that while we are still in the process of evaluating potential next steps for our renal denervation business, an accounting impairment charge was deemed necessary as the majority of the value of the renal denervation intangible assets were tied to the timing of U.S. approval.

It is also worth noting that the goodwill related to the acquisition of Ardian is being evaluated at the overall coronary business reporting unit level. Based upon the results of the annual goodwill impairment review performed in Q3, no goodwill impairment existed at this level.

In our cardiac investor group, revenue of $2.119 billion grew 2%. Results were driven by growth in structural heart, endovascular, ICDs, and AF and others, which included growth from hospital solutions and Cardiocom, partially offset by declines in pacing.

CRDM revenue of $1.184 billion grew 2%, and included $12 million from our Q2 acquisition of Cardiocom. Worldwide ICD revenue of $655 million grew 1%. As we noted last quarter, we believe a better way to view the ICD and pacing markets is on a rolling two-quarter basis, given the variability and quarter to quarter dynamics.

Similar to last quarter, we estimate that both the U.S. and international ICD markets grew in the low single digits, reflecting continued stability. In addition, our global ICD share also remained stable, as we gained approximately 50 basis points of share internationally, offset by an approximately 50 basis points U.S. share loss.

In the U.S., our differentiated Viva XT CRTD and Evera ICD continued to increase as a percentage of our overall product mix and are helping our overall ICD pricing to remain relatively flat.

In international markets, we continue to see strong adoption of our Viva XT CRTD with its adaptive CRT algorithm and Attain Performa Quadripolar leads in Europe and Japan.

Pacing revenue of $439 million declined 2%. We estimate the U.S. market continues to decline in the low to mid-single digits, while the international market is growing in the low single digits on a rolling two-quarter basis.

In Japan, our share remains over 700 basis points above the level prior to our FY13 launch of the Advisa MRI pacemaker, despite new competitive MRI product launches. In Q3, we received expanded labelling for full-body MRI scans from the FDA, further extending our MR conditional device leadership in U.S. markets.

MINERVA data presented at AHA demonstrated our Advisa MRI pacemakers’ exclusive AF features, MVP and reactive ATP, are associated with a significant reduction in progression to permanent AF.

AF solutions grew over 20%, as we continue to gain share in the AF market, driven by robust growth from our Arctic Front cryoablation system, which grew over 30%. In Q3, we enrolled the first patient in our VICTORY AF clinical trial which we expect to use to seek FDA approval of our phased RF system. Upon approval, this would be the first product with an FDA indication for persistent and longstanding persistent AF. Looking ahead, we intend again to launch next-gen phased RF product, PVAC Gold, in Europe before the beginning of the fiscal year.

Coronary revenue of $436 million was flat. Worldwide DES revenue in the quarter was $280 million, including $97 million in the U.S. and $30 million in Japan. Our DES business grew 5%, outperforming the market as the strength of our Resolute Integrity drug eluting stent continues to drive broad market acceptance.

In renal denervation, targeted Q3 revenue had been modest, totaling under $30 million over the past four quarters. Based on our Q3 results, renal denervation revenue is now annualizing at less than $20 million.

In structural heart, revenue of $281 million increased 4%, driven by strong growth in our transcatheter valve franchise in international markets. We estimate that the international TAVI market is improving, growing nearly 20%, or over 20% if you normalize for the impact of Germany, where we returned to the market during the quarter.

In the U.S., the FDA granted early approval for our CoreValve transcatheter valve for extreme risk patients at the end of Q3. In Q4, we are now beginning a very safe and deliberate commercial rollout, building off our initial 60 U.S. [unintelligible] sites. We will support new sites [unintelligible] with an extensive training and education program that can last a few months per site. Looking ahead, data from our U.S. CoreValve trial for high-risk patients will be presented at ACC on March 29, and we continue to expect FDA approval in mid-FY15.

In international markets, we are targeting the launch of the 26 mm and 29 mm version of CoreValve Evolut R, our next-generation recapturable TAVI system with a 14-French equivalent delivery system next spring, and we’ll also start our U.S. [test of this] system in FY15.

In endovascular, revenue of $218 million grew 4%. Our [unintelligible] business had mid-single digit growth in the U.S. and Europe, despite the competitive pressure from new entrants. Our global and U.S. AAA shares were stable sequentially, as our Endurant II stent graft continues to lead the market.

In thoracic, our sales training efforts resulted in 300 basis points of U.S. share gain. We also just received FDA approval for an expanded initiation of our Valiant Captivia stent graft for treating aortic dissections.

Our peripherals business declined 3% in Q3, as a result of the below the knee voluntary product recall. After adjusting for the divestiture of our Pioneer Plus re-entry catheter product line, as well as the impact of removing our below the knee drug eluting balloon in the market, our peripheral business grew 15%.

Now turning to our restorative therapies group, revenue of $1.608 billion grew 5%. Results were driven by growth in surgical technologies and neuromodulation. Spine revenue of $744 million was flat. Core spine revenue of $631 million was also flat.

Excluding VKP, our core spine business grew 2% globally and grew 1% in the United States. Both the global and the U.S. spine markets appear stable, growing slightly this quarter. Our spine business continues to differentiate itself from the competition through our leading technology, enhanced by our surgical synergy program, which integrated enabling technologies from our surgical technologies business, including intraoperative imaging, navigation, and powered surgical instruments.

Hospitals are investing in our capital equipment for spine surgery as they see clear value from improved surgical precision and more efficient procedures. This is resulting in solid growth of capital equipment sales in our surgical technologies business as well as increased spinal implant growth. In fact, in accounts that have adopted our surgical synergy program, core spine revenue growth is significantly higher.

Outside the United States, our Kanghui acquisition in China continues to deliver solid revenue growth in the value segments of orthopedics, which is offsetting the lost revenue from our former Weigao joint venture. Kanghui continues to grow its sales in the emerging markets outside of China, with strong growth in its trauma product lines.

BMP sales of $113 million declined 1%. While this is an improved performance on a year over year basis, it is important to note that we face a favorable comparison in Q3. Recall that in Q3 last year, our results were affected by the inability to fulfill hospital bulk orders due to a supply constraint of sterile water, which resulted in some sales shifting from Q3 to Q4. While we see signs of sequential stability in the underlying demand for BMP, we face a difficult comparison in Q4 because of this shift.

Turning to surgical technologies, revenue of $386 million grew 11%, with strong growth balanced across all three businesses. ENT grew in the high single-digits, with upgrades of the StealthStation S7 surgical navigation system and NIM ENT nerve monitoring capital equipment driving growth.

In neurosurgery, robust sales of OR imaging systems in the U.S. contributed to a solid quarter of double-digit growth. Advanced energy grew over 20% again this quarter, as we continue to see strong adoption of our proprietary Aquamantys tissue sealing and PEAK PlasmaBlade technologies in the orthopedic, spine, breast, and CRDM replacement markets.

In neuromodulation, revenue of $478 million increased 7% on double digit global growth in DBS and PAINSTIM. In DBS, our successful referral development program in the United States and the strength of the early stim data in international markets, which show us DBS provides superior benefits for patients with early motor complications from Parkinson’s disease, is driving new impact growth.

Our PAINSTIM business grew double digits, both globally and in the U.S., driven by the ongoing launch of our SureScan MRI spinal cord stimulation system. Our [gastro-uro] business had mid-single digit growth in Q3, as the business continues to face non-device competition. We are confident in the clinical benefits of InterStim therapy, and [unintelligible] to both implanters as well as referring primary care physicians.

In our diabetes business, revenue of $436 million grew 15%, a noticeable acceleration from prior quarters, driven by the U.S. launch of the MiniMed 530 G with Enlite CGM sensor. This is the first system in the U.S. that automatically stops insulin delivery if glucose levels fall below a predetermined threshold, an important step toward our goal of developing a fully automated artificial pancreas.

Multiple peer reviewed studies have demonstrated the value of our Threshold Suspend feature, including studies that have been published in the New England Journal of Medicine and JAMA. Every 530 G pump ships with Enlite sensors, which are smaller, more comfortable, and more accurate. In Q3, we estimate we gained over 400 basis points of pump share and NCGM share on a sequential basis in the U.S.

We were inventory challenged throughout the quarter, but these supply constraints are now resolved. During Q3, we recognized the majority of our deferred revenue, as we shipped systems to customers that had enrolled in our technology guarantee program. As of the end of Q3, we had $4 million of deferred revenue remaining from this program, which we expect to recognize in Q4.

Turning to the rest of the income statement, the Q3 gross margin was 74.8%. After adjusting for a 10 basis point negative impact from foreign exchange, the Q3 gross margin, on a non-GAAP operational basis, was 74.9%.

It is also worth noting that the gross margin continues to include significant spending related to resources diverted to address quality issues in neuromodulation and diabetes, which negatively affected the gross margin by 30 basis points. For Q4, we expect the gross margin to be approximately 75% on an operational basis, and before a negative FX impact of 20 basis points.

Third quarter R&D spending of $360 million was 8.6% of revenue. We continue to invest in new technologies and evidence creation to drive future growth. We would expect R&D expense in Q4 to be closer to 8%, given our typical Q4 leverage as well as the continued shifting of R&D resources to enhance our quality systems, which gets recognized in cost of goods sold and also the tradeoff we are making to partially offset the U.S. medical device tax.

Third quarter SG&A expenditures of $1.454 billion represented 34.9% of sales, and included a 10 basis point negative impact from foreign exchange. As expected, Q3 SG&A spending was modestly higher given the accelerated ramp of our U.S. CoreValve sales force ahead of U.S. approval, which occurred late in the quarter.

We continue to focus on several initiatives to leverage our expenses. In FY14, we would expect to drive 30 to 50 basis points of improvement, which would result in a full year SG&A in the range of 33.8% to 34% on an operational basis.

Amortization expense for the quarter was $89 million. For Q4, we would expect amortization expense to be approximately $90 million, with the addition of the TYRX amortization, slightly offset by the elimination of our Ardian annualization.

Net other expense for the quarter was $45 million, including net gains from our hedging program of $5 million. We hedge the majority of our operating results in developed market currencies to reduce volatility in our earnings from foreign exchange. Also included in net other expense is the impact from the U.S. medical device tax. Based on current exchange rates, we expect Q4 net other expense to be in the range of $55 million to $65 million.

Net interest expense for the quarter was $25 million. At the end of Q3, we had approximately $13.7 billion in cash and investments, and $12.2 billion in debt. Based on current rates, we would expect Q4 net interest expense to be in the range of $25 million to $30 million.

Our effective tax rate in the third quarter was 20.2%. Excluding the impact of one-time items, our non-GAAP nominal tax rate in Q3 was 19.6%. For FY14, we continue to expect a non-GAAP nominal tax rate in the range of 19% to 20%.

Our forecast does not assume the U.S. R&D tax credit, which expired on December 31, would be extended before the middle of our fiscal year. Prior to expiring, the R&D tax credit provided a benefit of approximately $8 million per quarter.

In Q3, we generated $1.5 billion in free cash flow. We remain committed to returning 50% of our free cash flow to shareholders. In Q3, we paid $279 million in dividends and repurchased $100 million of our common stock. As of the end of Q3, we had remaining authorization to repurchase approximately 66 million shares.

Third quarter average shares outstanding on a diluted basis were 1.01 billion shares. For full FY14, we would expect to diluted weighted shares outstanding to be approximately 1.013 billion shares, including 1.011 billion shares in Q4.

It is important to note that the cash we received from stock option redemptions, which was $239 million in Q3, will also continue to be used to repurchase shares on the open market, to partially offset the dilutive impact. These share repurchases are incremental to our commitment to return 50% of our free cash flow to shareholders.

Let me conclude by commenting on our FY14 revenue outlook and earnings per share guidance. We believe a constant currency revenue growth rate of 3% to 4% remains reasonable for both the full fiscal year 2014 and for Q4. While we cannot predict the impact of currency movements, to give you a sense of the FX impact, if exchange rates were to remain similar to yesterday, for the remainder of the fiscal year, our FY14 revenue would be negatively affected by approximately $170 million to $190 million, including a negative $35 million to $55 million impact in Q4.

Turning to guidance on the bottom line, at this point in the fiscal year, we are comfortable tightening our earnings per share guidance rage. We now expect FY14 earnings per share to be in the range of $3.81 to $3.83, which implies annual earnings per share growth of 6% on an operational basis after adjusting for certain tax benefits that we received in FY13, as well as the headwinds from the medical device tax and the incremental interest expense in FY14.

As in the past, my comments on guidance do not include any unusual charges or gains that might occur during the fiscal year. I will now turn it back over to Omar.

Omar Ishrak

Thanks, Gary. Before opening the lines for Q&A, let me briefly conclude by noting that over time we are striving to reliably deliver on our baseline expectations, which are consistent mid-single digit revenue growth, consistent EPS growth of 200 to 400 basis points [unintelligible] revenue, and returning 50% of our free cash flow to shareholders.

Our three independent growth rate vectors, new therapies, emerging markets, and our new services and solutions, will provide the fuel for mid-single digit revenue growth. We believe that our continued effort to deliver consistent and reliable performance, combined with disciplined capital allocation, will enable us to create long term, dependable value in healthcare.

With that, we will now open the phone lines for Q&A. In addition to Gary, I’ve asked Mike Coyle, president of our cardiac and vascular group, and Chris O’Connell, president of our restorative therapies group, to join us again. We are rarely able to get to everyone’s questions, so please limit yourself to only one question and only one follow up. If you have additional questions, please contact our investor relations team after the call.

Operator, first question please.

Question-and-Answer Session

Operator

Your first question comes from the line of Mike Weinstein of JPMorgan.

Mike Weinstein - JPMorgan

Let me just focus on the cardiovascular side of the business, and I think probably two topics people would like to hear on are, one, how we should think about the cadence of the U.S. CoreValve launch, and if you could just maybe give us the metrics to get our heads around how quickly you can train centers. I know that some of that [was said already], but talk a little bit about the different centers in the U.S. and the expectations for training.

And the second topic would be on the drug [critical link] program. You made some encouraging comments relative to your expectations on the program and SFA. Could you just spend a little bit more time on that? What drives your confidence on the SFA side, given [what happened in below the knee], and your expectations for just the timing of that launch in the U.S.

Omar Ishrak

I’ll let Mike answer these. I think both of these are interesting topics, and we’re making progress in both, but Mike, why don’t you give some color?

Mike Coyle

Sure, on the CoreValve ramp, I think it is pretty much just the way Rhonda Robb laid it out at the TCT meeting in terms of us basically ramping from the 60 centers that we currently have established a presence in. Roughly 20 to 30 centers a quarter for the next two quarters, and then probably adding at 40 per quarter after that.

So that basically is the ramp rate we are going to pursue. Obviously, the key here is to have the very effective training of the sites, as we bring out the technology. It has performed excellently in clinical trials, and we want to make sure that performance continues as we ramp through the larger number of centers.

On the SFA side, we’ve studied this application of the [unintelligible] product in multiple studies, and have had consistent results. And as you can imagine, we’re now at a stage where the presentation of the data is coming at the Charing Cross meeting, which is in the first week of April, so we’re very closely working with the centers who were involved in the study in preparing the data and are very confident that we’re going to have a good presentation at Charing Cross.

Mike Weinstein - JPMorgan

Can I just ask one quick follow up? The U.S. market, in aggregate, for procedure volumes, the expectation is that we saw some drop off in volumes in January, with not only the concerns that people had on the ACA going into the year, and then the [unintelligible] deductible, but also the weather we’ve seen in the U.S. Can you just give us any commentary on how your U.S. business has looked November/December versus January?

Omar Ishrak

I think you make good point. We do see softness in January, when the volumes were a little slower. And this is on top of a soft January in the past year. In fact, we’ve been discussing here that it looks like increasingly over time January appears to be under far greater pressure than November and December. We’ve seen this pattern, realizing actually over multiple years, it was not that different.

You know, there could be many reasons. The introduction of the ACA, obviously we don’t know the precise details of all the causes and effects. And certainly it brings a level of change that we haven’t experienced before. So we’re not really sure as to all the reasons, but we do know that January was a little softer than November and December, and in fact we’ve seen this pattern over the past couple of years.

Operator

Your next question comes from the line of Matthew Dodd with Citigroup.

Matthew Dodd - Citigroup

If you look at BRIC, it looks like only Brazil is really doing well. And I know there are some issues in Russia. Can you talk about maybe calendar ’14, how you see BRIC kind of rolling out? Do you think it will improve? Is there any reason why it should for some of these other countries?

Omar Ishrak

I think for us, especially as we look at central and eastern Europe in aggregate, and you’re right, Russia is a dominant part of that, and China, are the two biggest pressure points that we’ve had over the last year, both of those have been traditionally strong growth drivers and both of those have been under some pressure over the past several quarters. And that’s really driven our performance to below 15% in the last few quarters, those two being the main drivers.

We’re seeing, actually, you can’t see it for sure, but from the data that we’ve seen so far, a bottoming out in both of those regions. China in particular appears to be stabilizing a little bit. And you know, it still grew at 12%, which is double digits, and we expect to improve on that as the quarters go by here in calendar ’14.

And Russia too, we went through a very unique circumstance where the budgets were not allocated in January as they usually are. They’re now well in the process of allocating those budgets, and they’re moving ahead with that, and we expect to see some progress there. And they’re also changing the way in which they actually fund the budgets between the state and the central government.

But in any case, they’re beginning to release the money right now, so we expect that to bottom out as well. What it eventually settles to this calendar year is tough to say, but we do think that it will improve in the next few quarters.

As far as Brazil and India go, they’re smaller markets for us. The markets have a lot of room for growth. India, you know, we’ve had some issues to do with the coronary business. We also feel it’s stabilizing, although at a lower price than we’ve had in previous years. Brazil seems to be running okay, and running quite well in fact as we go forward.

Any other comments Gary?

Gary Ellis

No, I think you hit what we’ve seen here recently, and as Omar said, we do expect it to continue to improve. And overall, we continue to expect that the emerging markets in general will get back up into that high teens growth as we go forward, to 20%. So each of the regions are laying out plans to achieve that, but we have seen a little bit of softness here in the last couple of quarters, but it does appear, basically just [unintelligible] data right now, but that seems to have bottomed. Still at double-digit growth, but it seems to have bottomed and then we’re starting to see the growth come back to what we would expect in those markets.

Operator

Your next question comes from the line of David Roman with Goldman Sachs.

David Roman - Goldman Sachs

I was hoping you could come back a little bit more to the hospital solutions and broader contracting opportunity. Omar, I think in your prepared remarks, you mentioned a number like $350 million over seven years. And given the size of the business, that doesn’t add that much on an annual basis. Could you maybe just go into a little bit more detail about, quantifiably, how you think we can start to see some of the benefits of the service or cross-selling model start to play out?

Omar Ishrak

You know, that particular aspect of our services and solutions, which is the hospital solutions part, recall that we only started this program in September of last year. So we’ve only had less than six months. And the traction that we’re getting, and the momentum that we’re building, is pretty good. We’ve already got on the order of 10 accounts signed up, and a pipeline for another 10-15, and so we’ve got a pretty solid pipeline driving this. So we expect this to become more and more important as we go forward.

The right way to think about it, though, is that this is revenue that’s, although small compared to our overall business, is still contracted revenue, with known pricing, fixed pricing in the sense that there are rules around the pricing, but essentially fixed, and there’s less uncertainty around it. With committed share as well. So the quality of the revenue here in this aspect of the business is actually quite good. And that’s the way we look at it. In addition, the contracts also deliver some incremental revenue from not only share, but the services business.

And so that’s the way we really think about it, that we’re only in the beginning period of this activity, and we expect a larger and larger percentage of our European business to come from this aspect. And remember that we also have integrated care in Cardiocom. This is also delivering revenue that is incremental to what we normally see from our core technologies.

David Roman - Goldman Sachs

And for my follow up, on the earnings line, looking to the midpoint of your guidance range, and what you’ve done over the past couple of years, that would imply flattish earnings for the past three years. And understandably, you have the device tax in there and some other one-time items. But maybe just conceptually, Gary, you could talk about what changes as we go forward, whereby we could start to see more leverage on a reported basis. And is that something we can expect in FY15?

Gary Ellis

We’re not obviously giving FY15 guidance about at this point in time. We’ll do that as we complete our fourth quarter. The guidance for the current year has been consistent all year as far as where we were expecting to be at, and [tightening it] obviously in the quarter here, based on the fact that we only have one quarter yet to go. We had some headwinds as far as some of the tax benefits that we received in prior years, and so in general from that standpoint, there’s some headwinds on the medical device tax and things that the entire industry has had to deal with in general.

And plus, interest component, depending on how you were looking at this previously, whether you were looking at it on a GAAP basis or non-GAAP basis with interest and general, the fact is, we think we are increasing the earnings, the earnings per share. We are getting leverage from the standpoint of where the revenue growth was at, from an operational perspective.

As we look into next year, we will provide guidance obviously at our fourth quarter earnings call, but in general, as we highlighted in our presentation, we do continue to expect, as Omar said in his comments, 200 to 400 basis points of leverage on the earnings per share line versus what we do on the revenue line. And we would expect that as we move ahead. I’m not going to get into any more detail at this point, but that’s just generally what you should expect as we move into next year.

Omar Ishrak

If I can add to that, from a strategy perspective, we’re trying to get some degree of operational leverage through SG&A, which you’ve seen us deliver quarter over quarter, whether [unintelligible] a little bit to R&D we delivered in the last several quarters and beyond. That, coupled with share buybacks, is the root of our earnings leverage strategy. Now, there are a whole bunch of other variables there, which kind of come and go here, to do with FX and tax and everything else.

But those, to a large degree, are somewhat beyond our control, although we can work it the best we can. The things we can control on an operating basis, on a day-to-day basis that our business is really geared around, are the SG&A leverage, holding our gross margins flat, and then driving share buybacks to get additional earnings leverage. That’s the basic recipe that we’re trying to follow, and that will continue into the coming years. And our business is focused around working that.

Operator

Your next question comes from Bob Hopkins from Bank of America.

Bob Hopkins - Bank of America

First, I wanted to ask about the strength in the TAVI market outside the United States. Just wanted to get your views on what’s driving that. Is this just an uptick in southern Europe? Just trying to get a sense for how much of this growth you think might be sustainable as we look forward.

Mike Coyle

I think basically the strength of the data that was shown at PCC, I think, has really given a shot in the arm to the overall growth profile of the business. And we also have, obviously, a number of other small competitors who are coming in [unintelligible].

Those things combined, I think, are helping to accelerate the market. And we think there’s plenty of headroom for more continued growth, as more data comes out on things like the high risk patients, and obviously as we continue to reenroll patients in the [unintelligible] risk patient population.

In addition, we’ve seen some favorable reimbursement moves, for example in France, and those things are helping us to see nice growth in the overall market.

Bob Hopkins - Bank of America

Do you think it can be a sustained double digit market?

Mike Coyle

I think we’ve provided kind of five-year guidance of somewhere in the 12% to 14% range, so I think we’re going to provide guidance for next year, I think when we have completed our planning activities, which are ongoing right now.

Bob Hopkins - Bank of America

And then Omar, a question for you, from a bigger picture perspective. A couple of things. Just wanted to see if you could comment on a few areas of potential value creation for Medtronic longer term. Obviously in the specialty pharmaceutical area, we’ve seen a lot of transactions that have created tremendous tax rate synergies for companies. And I was wondering if you could comment on the potential for tax rate synergies, transactions for medical technology. And then I was also wondering if you could comment on, is there any opportunity that you see over time for investors to realize some value creation from all your OUS cash? Just would love some overview comments on those two topics.

Omar Ishrak

That’s a good question. It’s something we wrestle with quite a bit. It’s true that a lot of our cash, in fact the majority of our cash, is being generated outside the U.S. And with the tax laws as they stand, we can’t bring them back.

Now, we’ve got a number of strategies. Operationally, we’re obviously trying to free up as much cash as we can in the U.S. through our inventory management programs and so on. And in the scheme of things, that’s still a relatively small number. We have certain programs ongoing with the government in the U.S. to see if we can get some favorable tax rulings. That will probably help us in the short term if they come our way.

And then in terms of the OUS cash, there are possibilities that we know that some companies have employed. We do look at that. But you’ve got to remember two things. First, we would never do something like that if it’s not in line with our core strategy. We’ve got certain market segments where we have defined that we will be in, which are cardiovascular, restorative therapy, which is potentially neuromusculoskeletal, if you like, and diabetes.

We aren’t going to go do some acquisition just for the sake of doing it, so that we can have a better tax bill. Now, if, within our defined inorganic growth strategy, we find that there’s a fit that is in line with where we want to go, then we’ll certainly look at that. So the main point I want to make here is that the strategy comes first, the tax consequences come second.

The other point I’d like to make is that in that whole area there is a considerable degree of uncertainty regarding interpretation and what has been passed back, since it’s not necessarily what future practice is going to be. So we just are very careful before we venture into that. Again, we’re certainly looking at it very carefully, but there’s not something that is an obvious solution to our OUS cash problem.

Gary Ellis

You’ve explained it well. Obviously the ultimate answer is that we need corporate tax reform in the U.S. to kind of address the issue and move on. But until that happens, we’re putting other strategies, assuming that we’ll still have the same issue. As Omar said, there are things that can be done, but for a company of Medtronic’s size, they’re relatively limited.

Operator

Your next question comes from the line of Kristen Stewart from Deutsche Bank.

Kristen Stewart - Deutsche Bank

Just on the CoreValve program, I was just wondering if you guys have submitted the clinical data in the PMA filings yet, for high risk?

Omar Ishrak

Mike, have you submitted, on the CoreValve, the data for the PMA for the high risk?

Mike Coyle

Yes, we have submitted the data for the high risk. And those will be presented at the ACA meeting here at the end of March.

Kristen Stewart - Deutsche Bank

And then I guess just kind of bigger picture topic, you guys tightened the EPS range. I’m just curious, why not tighten the revenue range for the full fiscal year? Maybe if you can just talk through some of the puts and takes for the fourth quarter? I know you mentioned BMP has a particularly difficult comp, but just surprised why there isn’t a little bit more confidence in revenue coming in at the higher end.

Gary Ellis

The reality is the 3% to 4% that we’ve been consistently saying all quarter, and for Q4, so we said 3% to 4% for the full year and 3% to 4% for the fourth quarter. And so that’s consistent with where we’ve been. We’re at 3.7% or something like that at this point in time year to date, so I think we’re still consistently in that range. And you have to remember, last year in our fourth quarter, we had a very, very strong fourth quarter, and so we have a tough comparison that, on the one hand, we’re looking at here in Q4.

So we think 3% to 4% is reasonable. Obviously we can exceed that. We always will, but based on what we’ve done so far this year, where our markets are at, the 3% to 4% seems reasonable, both for the full fiscal year and for the fourth quarter.

Omar Ishrak

There’s no implication here that there’s something strange or anything like that. Other than the point that Gary made, that it’s a little bit of a tough comp versus last year. Other than that, like we’ve stated, it’s within the guidance range that we’ve been talking about, and we reiterated that although we’re above the midpoint of that guidance range year to date, we’re keeping the same for Q4.

Kristen Stewart - Deutsche Bank

And then just Gary, to clarify, the diabetes deferred recognized in the quarter, was that about $23 million? Is that right?

Gary Ellis

That’s correct. We recognized about $23 million of it, and there’s $4 million left to go.

Kristen Stewart - Deutsche Bank

And then CoreValve, as that rolls out, are you guys going to do that on a consignment basis? Or will that be stocking? How should we think about that, because I believe your 3% to 4% total revenue growth had always excluded the launch of that product?

Gary Ellis

We haven’t discussed the [unintelligible] strategy for that launch. But any revenue is recognized on implant, so we’re not planning on doing a big bulk launch. We’ve actually been inventory constrained, so [unintelligible] right now would be based on implant.

Operator

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

David Lewis - Morgan Stanley

Mike, just to kind of review comments made on the call, we read your comments on U.S. ICDs to reflect more inventory timing than share. Is that the right way to think about it? And can you give us your share outlook in the United States high power market over the next several quarters?

Mike Coyle

The way I would characterize it is we really have to look at this over the two quarters, because of the volatility and what happens at the end of the quarters. So on a global basis, we think our share was relatively stable, if you look at that six-month kind of window. We saw share capture, I think, in international, where we basically have the full product set of offerings with the Evera product lines and the Viva XT product lines, including the [unintelligible], the Attain Performa product available in Europe and Japan.

We’re obviously still waiting for that product approval in the U.S., so we have seen a little bit of share loss in the U.S., but we would expect there are a number of obviously significant catalysts now that are coming into the market to help us on the share side, including the [adapta] CRT data, which basically is the first clinical feature to show reduced AF and reduced heart failure burden in patients who get LV-only CRT pacing.

We also obviously will get the Performa product into the U.S. after the approval cycle has gone through. And as Omar mentioned, the TYRX product is a very exciting one for us in terms of its use in device implants. There’s a 2% to 4% rate of infection, especially in replacements and in high risk patients, that we think we can make a meaningful impact on using these technologies. And that would obviously be added to our over product offerings.

So that, in addition to the lead integrity alert that we’ve now gotten approval to use on not only our own, but on competitive product lines, we think is a very valuable feature that is going to help us move share in the market. So all these are new dynamics that we’ll have for us going forward.

David Lewis - Morgan Stanley

And then Omar, we talked to investors about your services strategy, which you talked a lot about on this call. There seems to be a sense that to win long term, you’re going to need to go at risk to gain the share, to continue to execute the strategy the way that you like. Is going at risk, is that an accurate view? And if it’s true, when’s the earliest we could see at risk contracts in the U.S.?

Omar Ishrak

You know, certainly our Cardiocom business has a services component that is already at risk. We charge on an appropriation basis, and in fact we are at risk with the certain hospital metrics, readmission metrics, with Cardiocom. So to some degree we’ve already started that.

I think the longer term at risk propositions will involve bigger pieces of value to do with our technology. I think the TYRX one is one that we will probably go after pretty quickly, because we have good data around its value in infection prevention, and we’ve got other capabilities within the company that add to it, especially in replacing market in CRDM. And combined, there’s a program that we could probably come up with that has a certain degree of risk associated with it.

You’ve got to remember that when we say at risk, we are taking risk, usually, that we think that we have data for. So in our mind, it’s really no risk, because we know these things work, through actual clinical data.

Now, the system is such that there’s no organized way in which credit is given for that improvement, and so that’s why the best way to kind of [unintelligible] the system into giving credit for that improvement is by going at risk, saying look, we really believe in our data, and we’re prepared to put some money down on it. We’re not going to just take risk on an ad hoc basis on stuff that we don’t have any data on.

So I think we have very targeted strategies that we’re developing, and as I said, the Cardiocom and TYRX are probably the two first instances that you’ve already seen and will begin to see come out in some level of scale in the next six to 12 months.

Operator

Your next question comes from the line of Joann Wuensch with BMO Capital Markets.

Joann Wuensch - BMO Capital Markets

If I heard you correctly, you talked about sort of a longer term goal of holding gross margin close to the 75% level. Can you talk about what things can be done to sort of expand that over time?

Omar Ishrak

You know, our strategy has been that first of all holding it in this environment is quite a challenge, which you can appreciate, because there’s a considerable amount of pricing pressure. And until we get to a value-based system, where people give us real value for the incremental features that we provide, today there’s no mechanism for that, so we’re in a negotiating arrangement, and so there’s continual pressure on price.

So the two main ways in which we will, in this case, hold that gross margin, first, is a cost reduction program which we’ve got in place, which we’re using to offset most of that pricing pressure. And second is our means through which we will demonstrate that we’ve got real value for the features that we have, and therefore get some extra pricing results from that.

If that second strategy is successful, and we’re able to show the system a financial benefit for the incremental features that we’re adding, we will get some degree of improvement in the long term. But our real strategy here is, we think that the 75% is a pretty good number, and any extra margin that we get, we would much rather [unintelligible] in volume, in a variety of different ways, by [unintelligible] our products and driving growth. That would be our strategy.

Joann Wuensch - BMO Capital Markets

My second question is, there are a number of new CRM products which are coming out, some of which I know you’re working on also, subcutaneous ICDs and leadless pacemakers. I’d love your impression on how those products will be changing those markets.

Omar Ishrak

You know, the one that we’re most excited about is obviously the leadless pacemaker, and obviously I’ll let Mike comment on it. And you know, the key about that product is that its insertion mechanism is much easier and it’s much more targeted as a therapy. And we think that, from an overall procedure basis, this will lead to greater efficiency in the system and probably expand access, because especially outside the U.S., where a greater number of physicians can probably do the procedure, where there’s an issue of the availability of such solutions.

So we see that as a fairly fundamental change in the way pacing will be done in the future over the long term. So we think that that’s a big area of change, driven by technology. The other one you didn’t mention, but we just launched the Linq product, which is also minimally invasive, and I mentioned in the commentary about the specific clinical areas where it will make a difference.

But in terms of diagnostics, the ease of use with which this thing can be implanted will make a significant difference to the workflow of cardiology and management of certain chronic diseases. So those are the areas where we think there will be the biggest changes. But Mike, can you give more color to that?

Mike Coyle

I think you said it well. The ability with the leadless pacemaker to basically eliminate the [unintelligible], you know, pacing is a very safe invention, most of the complications are due to the creation of the pocket and the running of the leads. So the availability to be able to do a very quick procedure with a [unintelligible] delivery is, we think, very exciting. And especially as Omar mentioned, in emerging markets, there are just many more physicians with those skill sets. So the combination, we think, is very exciting for that market.

And I think the Linq product, the ability to actually just do a subcutaneous placement of the device, with especially an injection of a device that’s now 90% smaller than the Reveal product that it’s replacing, really is a major advance technologically. But it’s also coupled with some very impressive data we just released at the International Stroke Society on Friday, the CRYSTAL-AF study, that we showed that cryptogenic stroke patients, patients with unexplained prior strokes, who we know are at very high risks of repeat stroke, but it’s difficult to determine how to treat them, that using standard care you’re only going to find AF in 3% of those patients over three years.

If you use one of these Reveal devices, though, the Linq device, we’ll be in a position to, as our data showed, identify 30% of those patients as ultimately having asymptomatic AF, who need therapy that they otherwise would not get, who would then have a second stroke. So these things, we think, are really fundamentally new opportunities for growth in that segment.

Operator

Your final question comes from Derrick Sung with Sanford C. Bernstein.

Derrick Sung - Sanford Bernstein

Just to start with a couple of quick follow ups on CoreValve, do your sales this quarter reflect a full return to the German market? Or is there any further opportunity there? And then on your mid-FY15 timeline for high risk CoreValve approval, does that assume a full panel review by the FDA? And can you remind us why the FDA was able to bypass the panel review for the extreme risk data, and maybe the differences between extreme risk and high risk that might or might not lead the FDA to think about things differently?

Gary Ellis

On the German market, as we mentioned last quarter, we were still working off of the loads that had been done during Q1 when we knew the injunction was imminent and customers were very much demanding our product. So, as we’ve said, we expected that to normalize by the end of the third quarter. It pretty much has normalized by the end of the third quarter, so we would expect, going into the fourth quarter, we should be back at run rates to implants driving our overall revenue.

On the difference between the timing for the high risk data, obviously we continue to expect a mid-FY15 approval. That does assume a panel review. We didn’t have the panel review for the extreme risk data because simply the data was so compelling that the FDA saw no reason to go back for a secondary review.

There has been no determination from the FDA on whether or not a panel would be required for the high risk data, and obviously it all depends on the quality of the data. We will be showing those data at the ACC meeting in a late breaking clinical trial session, and then we’ll be working with the FDA to schedule approval of the product.

Derrick Sung - Sanford Bernstein

And just a quick follow up on drug eluting stents. I think your sales there have been holding up a lot better than we and most investors have been expecting. How much of that is bundling with CoreValve? And looking forward, how much opportunity do you have to try further stent sales through any bundling with CoreValve now that you’re on the market there?

Omar Ishrak

I’ll let Mike comment on the bundling, but I’ll say that from what I know, the success of the product itself, the Resolute Integrity and its feature set, is also getting some level of traction. So you know, you’ve got to give that a little bit of credit. But I think on top of that, our [CVG] strategy has clearly demonstrated the success with the drug eluting stent. Maybe Mike, I’m sure you can add some color.

Mike Coyle

Obviously the CoreValve approval for the extreme risk came very late in the last week, so it really had no impact in terms of any kind of bundling activities with our OR [DES] product. We did gain about a point and a half of global share year over year with Resolute Integrity, which is very impressive given that it’s been out seven, eight quarters into the market now.

First, it’s a great product, and the deliverability of the product has really been very well received by the physician community. The labeling they have for diabetes, its performance in bifurcation, we continue to supplement the data set at every major meeting, and basically that factor is probably the single most important factor in driving the overall share growth.

But I would also say that, as I’ve mentioned in the past, we have somewhere north of 12% of our total, for example, U.S. CVG revenue in multi product line bundles for CVG, and the Resolute Integrity product is in 98% of those [unintelligible], so it is probably the one that benefits more than any from that overall strategy. So it’s just a great product, and it’s being presented to the marketplace in the right way. And as we get these new catalysts, like the CoreValve, into the market, we expect the power of that story should only increase.

Omar Ishrak

I think actually Mike makes a great point, that the bundling strategies, and all of the strategies that we’ve talked about in terms of services solutions, rest on our ability to have market leading technologies in each area. Without that, the other strategies do not work. And so we’ve got to make sure that we have market-leading strategies in our core areas. That, coupled with our breadth and scale, provides us with truly differentiated positioning in the marketplace.

So with that, let me conclude the session here. But I’d like to remind you, before concluding, that we do plan to host our initial institutional investor and analyst meeting on June 5 in New York City. And with that, on behalf of our entire management team, I would like to thank you again for your continued support and interest in Medtronic. We look forward to updating you on our continued progress in our Q4 call, which we anticipate holding on May 20. Thank you.

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