St. Jude Medical (NYSE:STJ)
Q2 2010 Earnings Call
July 22, 2010 9:00 am ET
John Heinmiller - Chief Financial Officer, Principal Accounting Officer and Executive Vice President
Daniel Starks - Chairman of the Board, Chief Executive Officer and President
Michael Weinstein - JP Morgan Chase & Co
Larry Biegelsen - Wells Fargo Securities, LLC
David Lewis - Morgan Stanley
Frederick Wise - Leerink Swann LLC
Timothy Lee - Piper Jaffray Companies
Welcome to St. Jude Medical Second Quarter 2010 Earnings Conference Call. Hosting the call today is Dan Starks, Chairman, President and Chief Executive Officer of St. Jude Medical.
Remarks made during this conference call contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. Such forward-looking statements include the expectations, plans and prospects for the company, including potential clinical successes, anticipated regulatory approvals and future product launches and projected revenues, margins, earnings and market shares. The statements made by the company are based upon management's current expectations and are subject to certain risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. These risks and uncertainties include market conditions and other factors beyond the company's control and the risk factors and other cautionary statement described in the company's filings with the SEC, including those described in the risk factors and cautionary statement section of the company's quarterly report on Form 10-Q for the fiscal quarter ended April 3, 2010. The company does not intend to update these statements and undertakes no duty to any person to provide any such update under any circumstance.
[Operator Instructions] It is now my pleasure to turn the floor over to Dan Starks. Please go ahead.
Thank you, Carrie. Welcome to the St. Jude Medical Second Quarter 2010 Earnings Conference Call. With me on the call today are John Heinmiller, Executive Vice President and Chief Financial Officer; Mike Rousseau, Group President; Eric Fain, President of our Cardiac Rhythm Management Division; and Angie Craig, Vice President of Corporate Relations.
I want to first ask John Heinmiller to conduct his normal review of our second quarter results, along with his typical update for the entire St. Jude Medical business. I will then address several topics and open it up for your questions. Go ahead, John.
Thank you, Dan. Sales for the quarter totaled $1,313,000,000, up approximately 11% over the $1,184,000,000 million reported in the second quarter of last year. Favorable foreign currency translations versus last year's second quarter increased this quarter's sales by about $5 million. The impact of these foreign currency translations on any one product category is negligible. As a result, we will not call out our constant currency sales growth as it is approximately the same as the reported sales growth.
At the end of 2009, the federal research and development tax credit expired, and Congress has not yet extended the credit for 2010. 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 retroactively for 2010 as in past years. As a result, comments referencing second quarter results and our guidance for 2010, including earnings per share amounts, are presented based on an effective income tax rate that contemplates the extension of the tax credit retroactive to January 1, 2010. To the extent that the federal R&D tax credit is not enacted, our effective income tax rate for 2010 would be higher than what is being presented during this call.
Earnings per share were $0.79 for the second quarter of 2010, a 25% increase over EPS of $0.63 in the second quarter of 2009 and above our guidance range of $0.73 to $0.75. Before we discuss our second quarter 2010 sales results by product category, with guidance for the third quarter and the remainder of 2010, let me comment on foreign currency.
As discussed on prior calls, the two main currencies influencing St. Jude Medical's operations are the euro and the yen. In preparing our sales and earnings guidance in April 2010 covering the second quarter and the remainder of the year, we used exchange rates, which assumed that each euro would translate into about $1.33 to $1.38, and for the yen, each 90 to 95 yen would translate into USD $1. The actual average exchange rates used to translate our sales into U.S. dollars versus the midpoint of the exchange rate assumptions we provided in our April guidance reduced second quarter reported sales by approximately $12 million.
In preparing our sales and earnings guidance for the third quarter and the second half of 2010, we are now assuming that each euro will translate into about $1.23 to $1.28, and for the yen, each 86 to 91 yen will translate into USD $1. This change in assumption regarding currency exchange rates decreases total forecasted sales for the remainder of 2010 by about $25 million to $35 million, which we estimate will reduce EPS by approximately $0.03 to $0.04 over the remainder of the year.
Now for the sales by product category discussion. Total Cardiac Rhythm Management or CRM sales, which includes revenues from both our ICD and pacemaker product lines, were $788 million, up 12% from last year's second quarter. For the second quarter, ICD sales were $471 million, up 18% from last year's second quarter. U.S. ICD sales were $300 million, up 18% from last year's second quarter, and international ICD sales were $171 million, also representing an 18% increase over the second quarter of 2009.
As you know, for the first two selling weeks of the second quarter of 2010, a competitor had suspended all sales of their ICD products in the United States. As we mentioned during our April conference call, we took this situation into account when we provided our guidance for the second quarter's CRM product sales. We estimate that this dynamic provided a onetime benefit of approximately $15 million to our second quarter U.S. ICD sales.
For low-voltage devices, sales for the second quarter totaled $317 million, up 4% from last year's second quarter. In the United States, pacemaker sales were $140 million, up slightly over 6% from last year's second quarter. In our international markets, pacemaker sales were approximately $177 million, up 3% from the second quarter of 2009.
For the third quarter of 2010, we expect total CRM product sales to be in the range of $715 million to $745 million. The guidance range for the third quarter reflects the normal seasonal impact of the summer selling period, updated currency assumptions and a return to normal competitor dynamics.
For the full year 2010, we now expect total CRM sales to be in the range of $2,975,000,000 to $3,050,000,000. Given the strength of our CRM business, we have raised the guidance range slightly from our April outlook despite the fact that our updated currency assumptions for the remainder of the year are expected to result in lower reported sales versus the currency assumptions we were using in April.
Atrial Fibrillation or AF product sales for the second quarter totaled $176 million, up 13% over the second quarter of last year. For the third quarter of 2010, we expect AF product sales to be in the range of $155 million to $170 million. We expect our full year 2010 AF product sales to be in the range of $680 million to $710 million. This 2010 outlook range is slightly less than the full year 2010 guidance range we provided last quarter, which primarily reflects the stronger U.S. dollar versus other euro.
Total sales of cardiovascular products for the second quarter of 2010 were $254 million, up 5% over the second quarter of 2009. Within this category of products, sales of vascular closure products in the second quarter of 2010 were $98 million, approximately the same as in the second quarter of 2009. Sales of heart valve products in the second quarter of 2010 were $87 million, a 4% increase over the second quarter of 2009.
For the third quarter of 2010, we expect cardiovascular product sales to be in the range of $235 million to $250 million. We expect full year 2010 cardiovascular product sales to be in the range of $1,005,000,000 to $1,030,000,000. This 2010 outlook range includes of the expected contributions of LightLab revenue in the second half of this year and also reflects our updated currency assumptions.
Total sales of neuromodulation products in the second quarter of 2010 were $95 million, up 17% from the second quarter of 2009. For the third quarter of 2010, we expect sales of neuromodulation products to be in the range of $90 million to $95 million, and we expect full year 2010 neuromodulation sales in the range of $375 million to $390 million. Let me pause at this point and recap our 2010 sales guidance.
For Cardiac Rhythm Management devices, we expect sales for 2010 in the range of $2,975,000,000 to $3,050,000,000, and sales of our AF product for 2010 are expected to be $680 million to $710 million. For cardiovascular products, we expect 2010 sales in the range of $1,005,000,000 to $1,030,000,000 and we expect sales of neuromodulation products to be $375 million to $390 million. If you add up the sales across all growth platforms, total sales in 2010 are expected to be $5,035,000,000, to $5,180,000,000. This guidance range provides for consolidated sales growth in the range of 8% to 11% on an as-reported basis and constant currency growth of 9% to 12% over 2009.
Looking to revenue by geography. In total, 53% of St. Jude Medical sales in the second quarter of 2010 came from the United States, while 47% came from our international markets. As with prior quarters, the specific geographic breakdown of St. Jude Medical sales for the second quarter of 2010 is available in our press release.
The gross profit margin this quarter was 73.7%, representing a 50 basis point decline compared with the second quarter of 2009. For the full year 2010, we continue to expect gross profit margins to be in the range of 73.2% to 73.8%. Our full year 2010 gross profit margin guidance continues to incorporate the impact of absorbing the costs associated with the remote monitoring and wireless telemetry capabilities in our pacemaker product line. We are providing for this impact to be slightly higher in the second half of this year. In addition, our gross profit margin guidance also reflects the revised currency assumptions for the remainder of 2010.
Our second quarter SG&A expenses were 34.1% of net sales, a 230 basis point improvement over the second quarter of 2009. For the full year 2010, we now forecast SG&A as a percentage of net sales in the range of 34.7% to 35.2%. R&D expenses in the second quarter of 2010 were 11.8% of net sales. For the full year 2010, we continue to expect R&D expense to be in the range of 12.0% to 12.6% of net sales, as we continue to balance delivering short-term results with the right investments in long-term growth drivers.
Net other expense was $20 million in the second quarter. And we note for the first half of 2010, the other expense category totaled $40 million and included the write-off of certain debt issuance costs, which were incurred in connection with our refinancing activities. Going into the second half of 2010, we now have the new debt structure in place and anticipate the other expense category to be in the range of $12 million to $16 million per quarter in Q3 and Q4.
For the second quarter, the company's effective income tax rate was 12.2%. For 2010, we now expect the tax rate to be in the range of 24.2% for the second quarter. And then now for 2010, we expect the tax rate to be in the range of 24.3% to 24.8%. As a reminder, these effective income tax rates contemplate the extension of the federal research and development tax credit in 2010 retroactive to the beginning of the year. As previously noted, to the extent the credit is not extended, our overall effective income tax rate would increase. We have also assumed the extension of the federal R&D tax credit in our EPS guidance for 2010.
Moving on to the balance sheet. At the end of the second quarter of 2010, we had $667 million in cash and cash equivalents, $1,962,000,000 in total debt and $1 billion available under a revolving credit facility with a group of banks. The debt on our balance sheet includes $1,653,000,000 of senior notes with maturities in 2013, 2014 and 2019. In addition, during the second quarter, we successfully refinanced the portion of our Japanese notes that were set to mature in May 2010, with 309 million of new fixed rate yen-based notes with maturities in 2017 and 2020.
Next, I want to offer some comments regarding our earnings per share outlook for the third quarter and the full year 2010. In preparing our EPS guidance, we have assumed that in the third quarter of 2010, the share count used in our fully diluted EPS calculation will be about 330 million to 332 million shares, with the weighted average outstanding shares for the full year 2010 at 329 million to 331 million. In addition, we have incorporated the dilution from the LightLab acquisition, which closed on July 6. However, we have not taken into account any non-recurring charges related to the LightLab acquisition, which we anticipate will be recorded in the third quarter.
The company expects consolidated earnings per share for the third quarter to be in the range of $0.67 to $0.69. And for the full year 2010, we now expect consolidated earnings per share to be in the range of $2.86 to $2.91, a $0.06 increase from the full year 2010 guidance we gave during our April 2010 conference call. This updated expectation represents EPS growth of approximately 18% to 20% over the 2009 adjusted EPS of $2.43.
To provide some insight into the basis for the increase in our annual EPS guidance, we start out with the results for the second quarter and note that we exceeded the midpoint of our prior guidance for this quarter by $0.05. As previously discussed, we estimate that the change in our assumptions regarding currency exchange rates will reduce our EPS for the remainder of the year by approximately $0.03 to $0.04, and we are factoring this negative change into our updated full year guidance. In addition, we have factored in the dilutive impact of incorporating the LightLab operations beginning July 6, 2010. However, we expect the strength of our business to continue, and we believe that we will more than offset the negative currency impact, as well as the LightLab dilution during the remainder of the year. And I would now like to turn it back to Dan Starks.
Thank you, John. Our solid performance in the second quarter answered a lot questions about the strength and sustainability of St. Jude Medical's growth program in current economic and competitive conditions. The first question answered was how long it would take for us to turn around our U.S. sales organization and restore a normal level of effectiveness and operating discipline. It now is clear that under the leadership of Michael Rousseau and his restructured organization, it took us approximately two quarters to convert from losing share with the strong product line in the United States in our CRM business to return to gaining share in the United States in the same way we continue to gain CRM share in international markets.
After adjusting for the estimated $15 million benefit we received during the second quarter from a competitor's temporary suspension of ICD sales in the United States, our U.S. CRM sales grew approximately 10% on a normalized basis during the second quarter, which was clearly faster than market growth.
A second question we answered relates to our growth platforms, which have proven robust enough to support high-single-digit or low-double-digit sales growth on a constant-currency basis even in the current economic and competitive conditions. We exceeded the high end of our cumulative sales guidance during Q2 for the second quarter in a row. Global revenue increased approximately 10% on a year-over-year basis during the second quarter even after adjusting for the onetime $15 million benefit in U.S. ICDs.
All four of our growth platforms showed continued strength, with three of them, namely, CRM, AF and neuromodulation, independently growing at double-digit rates. As we have guided this year, we expect sales for our cardiovascular platform to be stronger during the second half of 2010, with full launch of our Trifecta pericardial stented tissue valve program in Europe, the continued strong growth of our Fractional Flow Reserve or FFR business, the value and synergy of our new Optical Coherence Tomography or OCT technology platform and other new product launches that should accelerate Cardiovascular division sales during the second half of the year.
A third question we answered relates to profitability and our ability to protect profit margins in the face of increased pressure on average selling prices or ASPs due to macro economic factors such as volatility of the euro, healthcare reform and other challenging market dynamics. During the first half of 2010, St. Jude Medical's global ASPs for low-voltage and high-voltage systems were higher than our comparable ASPs during the first half of 2009. We attribute this primarily to the value of our technology, our flow of new products, improvements in operating discipline in the United States that I mentioned previously and the overall effectiveness of our global sales and marketing organizations. All of these attributes of St. Jude Medical's growth program are fundamental and sustainable and should continue to support our results in future period.
The challenge of protecting profit margins in the face of healthcare reform in today's economic and competitive market conditions goes well beyond a discussion of average selling prices and trends. Here again, second quarter results reflect how proactive, focused and effective St. Jude Medical is about optimizing its cost structure to support profit margins going forward. Our operating profit margin in the second quarter improved 210 basis points versus the second quarter one year ago. It may be an even greater achievement that we improved our operating profit margin 40 basis points on a sequential quarter basis during Q2, while we simultaneously reduced days inventory on hand by 13 days.
We expect our operating margin to come under pressure during the second half of this year due to our acquisition of LightLab and other factors John Heinmiller has discussed previously, but we are on track to benefit from numerous new initiatives in 2011 and beyond. As a reminder, these initiatives include manufacturing expansion in cost-advantaged locations and other supply chain improvements, as well as leveraging our SAP implementation and other initiatives targeted at continuing to improve productivity and help optimize our cost structure. We expect market conditions to be challenging moving forward, but we believe that we have positioned ourselves well to meet these challenges.
I would next like to offer additional insights into our Cardiac Rhythm Management or CRM business, starting with market growth. We recently updated our analysis regarding our growth expectations for the global CRM market. Based on this analysis, we continue to expect the global CRM market to grow between 4% and 6% on a constant-currency basis. This analysis has been remarkably stable and predictive on a multi-year basis. This market model takes into account differences in global geographies, the impact of new technologies, changes in model mix, pressure on ASPs, the impact of device replacement cycles and all other appropriate factors.
Next, I would like to talk about CRM market share. We estimate that we exited Q2 holding approximately a 25% share of the global ICD market on a normalized basis. Our internal analysis indicates that in the United States, we hold approximately a 29% share of the ICD market for de novo implants and a 19% share of the ICD market for replacement devices. The implications of this analysis should be clear. First, given the propensity of physicians to replace ICDs with a product on the same manufacturer, we expect to benefit from a tailwind, where our share of the replacement market for ICDs eventually matches our current share of the de novo market for ICDs. This implies a likely four-point gain in market share.
Second, our 29% share of the market for de novo ICD implants reflects the value of our technology and the impact our advantages in technology have on payers, physicians and patients. New technology clearly still counts if it is both cost effective and clinically effective and is supported by an effective field organization.
During the second quarter, we launched a number of new ICD products, including our Unify and Fortify lines of ICDs, which were launched in the United States at the HRS meeting in mid-May. These devices are smaller, deliver more energy and last longer. We do not usually break out product mix and will not do so in the future, but we will disclose that during June, the first full month of market release, our Unify and Fortify lines of ICDs comprised over 50% of our sales mix in the United States. This level of customer uptake is unprecedented and should be a good leading indicator for the continued success of our U.S. ICD sales through remainder of this year.
In Europe, during the second quarter, we launched our Unify and Fortify lines of ICDs, as well as our CorVue pulmonary edema monitoring technology, our Promote Quadra with Quartet quadripolar lead CRT-D system. These new product joined the existing product advantages we have with our SJ4 and DF4 simplified connector systems, our 7 French high-voltage lead line, our AnalyST line of ICDs with ST segment monitoring and our Quickflex micro 4 French bipolar left heart leads. A full discussion of the advantages these products provide to customers is beyond the scope of my comments this morning, but the impact of these technologies is reflected in our continued gain of international ICD market share during the second quarter. This gain in market share should be another leading indicator for the continued gain of ICD market share in the United States when all of these technologies are fully deployed in the United States market as well.
Next, I will touch briefly on highlights of our Cardiovascular, Atrial Fibrillation and Neuromodulation businesses. Our Cardiovascular or CVD business had a particularly productive quarter. The limited launch of our Trifecta pericardial stented tissue valve product line in Europe went well. We are now ramping up for a full launch of this product line in Europe before the end of this quarter, and we'll be ready to fully leverage the value of this technology during the fall tender season. We strengthened our leadership in the fast-growing Fractional Flow Reserve or FFR market by launching our next-generation PressureWire Aeris, a first of its kind wireless FFR measuring system that can be used with multiple recording systems to give physicians instant access to patient data.
We expanded our investment in FFR market development with our funding of FAME II trial and enrollment of first patients in that trial. FAME II will build on the results of the landmark FAME trial, which was published in the New England Journal of Medicine at the beginning of last year. As a reminder, the FAME trial was a 1,005-patient study, which demonstrated convincingly that the cost of medical care is lower and patient outcomes are better if FFR measurement is used to guide stenting in patients with multivessel coronary artery disease.
Our conviction that the FFR market will become a major new growth driver led to our acquisition of LightLab. This acquisition both provides synergy to strengthen our FFR franchise and potentially is itself another new growth driver. As a result of this acquisition, St. Jude Medical now is the global leader in Optical Coherence Tomography or OCT technology and products for cardiovascular applications. OCT technology competes with intravascular ultrasound technology to provide intravascular imaging to aid coronary stenting and other cath lab procedures. The difference in quality and detail between an OCT image and an IVUS image has been described as analogous to the difference between an analog black-and-white television with a rabbit-ear antenna and a digital colored television with a high-definition image.
We think OCT has the potential to obsolete IVUS imaging in the practices of many physicians. We are in the process of combining our OCT technology with our FFR technology into a single integrated system so that physicians can use the FFR feature to determine which lesions to stent and then use our OCT feature to help guide stent placement.
As a result of our acquisition of LightLab, St. Jude Medical not only has strengthened its FFR growth driver, but we also now have a credible opportunity to become the leader in the $500 million intravascular imaging market currently dominated by IVUS products.
Turning to the franchise of our Atrial Fibrillation or AF division, our AF growth program continue to make good progress during the second quarter. We are on track to have our first MediGuide-enabled cath labs online in Europe by the end of this year. During the second quarter, we also conducted a limited market release in Europe for four new families of ablation catheters. This limited market release was especially interesting in that it validated the value of our new Contact ablation technology and our new Cool Flex ablation technology. We now look forward to generating additional clinical evidence about these new technologies and then initiating full market launches.
Moving on to our Neuromodulation business. It is noteworthy that Neuromodulation revenue growth strengthened as expected after Q1 and confirms that our neuromodulation growth platform remains robust. The next major development in our Neuromodulation business will be full launch of our deep brain stimulation or DBS system in Europe during the second half of this year. This system will consist of our Brio rechargeable deep brain stimulator, our Athena DBS clinician programmer and a complete line of proprietary leads and accessories.
With respect to neuromodulation clinical trials, we are on track to complete follow-up this quarter of patients in our U.S. pivotal trial for Parkinson's disease indication. We expect the clinical data to be positive and anticipate submitting our PMA during the first half of 2011.
With respect to our U.S. pivotal trial for patients suffering from certain forms of migraine, we expect to complete follow-up by the end of next quarter and tentatively expect to announce the results of this clinical trail during the first half of 2011.
Finally, with respect to our broadened U.S. pivotal trial studying the benefits of DBS and a targeted area of the brain for patients suffering from treatment-resistant depression, we have received approval from FDA to expand enrollment from 30 to 50 patients. It is too soon to know whether either the migraine trial or the depression trial will lead to new growth drivers for St. Jude Medical, but we are committed to continue pursuing potential new indications in the field of neuromodulation and are optimistic that neuromodulation will develop into a multi-indication multi-billion dollar growth platform for St. Jude Medical over time.
In conclusion, our second quarter was another highly successful quarter by every major measure. For the second quarter in a row, we exceeded the high end of our sales guidance. We improved our operating margin on a year-over-year basis by 210 basis points. We delivered a 25% increase in earnings per share. We became the leaders in next-generation technology for intravascular imaging and are now prepared to attack a new $500 million market. We competed over 10 new product launches, the impact of which will not fully influence our results until the second half of this year. We entered the third quarter with good momentum and with multiple additional new product launches scheduled for the remainder of the year. Last but not least, St. Jude Medical was named to the Fortune 500 list of companies for the first time, entering the list at number 445.
At this point, we have concluded our prepared remarks. John Heinmiller, Mark Rousseau, Eric Fain and I now all are ready to take you questions. Operator, would you please moderate the questions?
Your next question comes from the line of Rick Wise of Leerink Swann.
Frederick Wise - Leerink Swann LLC
On the ICD front, maybe you could talk a little bit about the share gain and give us whatever color you can on the ship hold opportunities that you got to go into new accounts and sort of permanently enter new accounts, and pertain to the caths. Can you give us any flavor for those opportunities and sort of the permanent share gain?
Sure, Rick. And really, that's not what our ICD growth is about. We look at the competitive ship hold as being an event that now is quickly fading into the past. I think the better way to think about our ICD strength and our ICD share gain would be to look at what happened in Europe, where there was no ship hold and it really was a cleaner quarter. You saw 18% growth in our international ICD sales, and it's really driven by our new technology and the significant advantages with all of the technologies. I mean, I don't think we've ever had such an era of rich new technology and technology advantage at St. Jude Medical as we now have beginning with the second quarter and with everything that we begun to put into the United States market and with even more technology that we already have put into the European market. So I think that's really a focus. I think the competitors' ship hold just really ends up being a distraction and a little bit of a red herring. To us, our growth is about our core growth program. It's about our technology advantage. It's about the value of the technology that our technology advantages clearly have for customers. You'll see that with the data that we offered that our global ASPs, average selling prices in our CRM business were actually higher in the first half of 2010 than they were in the first half of 2008. So all of that is very much about St. Jude Medical's independent growth program and the value of that program and the impact it's having on customers.
Frederick Wise - Leerink Swann LLC
To follow up, we've heard a lot this week from other companies broadly about a slowdown in procedures that generally not seeing it so much in your numbers. Boston specifically noted on the Neuro side listings office, your numbers were great. Are you seeing anything unusual? Are you concerned about that going forward?
It makes sense to me, Rick, that you would hear different reports from different companies. Our view is that anytime there is a crisis, there are going to be winners and losers. The key to us is to be realistic about what the crisis is or what are the macroeconomic conditions and to assess whether we've done a good job being proactive enough to position ourselves to be a winner in the face of those economic and competitive conditions. I think you see from our second quarter a lot of positive indicators to say that we have been proactive. We have positioned ourselves to be a winner in this current economic environment. Then, what I look at -- what I think about more along that line is, first, every company's positioned differently, so I think it would really be a mistake for investors to do a one-size-fits-all view of the sector. Inside the sector, what distinguishes St. Jude Medical, first, is we focus primarily on the life-saving devices. So life-saving devices versus elective procedures is one significant differentiator, which is a favorable to our outlook. Second, where we have devices that are not life saving, they are cost saving. And again, that's not the case with every competitors' portfolio. So we think about our FFR technology, we think about our vascular closure technology, we think about the value of our patient-managed left atrial pressure technology that we're beginning to work with in Europe and more. On the pain side, the cost effectiveness of spinal cord stimulation versus alternative therapies. So either we are focused on life saving or we're focused on money saving or we're focused both on life saving and higher quality in a cost effective way. So all of that advantages us to be a winner in distressed macroeconomic conditions. There's more than. I would move after life saving and money saving. It would be a company whose devices are becoming commoditized, is going to be a loser in this kind of a crisis. A company whose technology is differentiated and differentiated in a way that is valuable to customers and the customers are willing to pay more for, obviously, is going to have a competitive advantage. And you saw it from the data that we provided here in our prepared remarks that we clearly have differentiated technologies that customers are willing to pay a premium for that is an advantage to us versus companies who have been less successful in offering innovative technology and whose portfolio is becoming more commoditized. The next point I would move on to, the advantage of St. Jude Medical to be a winner in this kind of a crisis is the efforts that we've made over the last five years and coming to be six years to optimize our cost structure. So companies that don't have a way to gain an advantage in the state of their costs to address the level of pressure that people expect on budgets and average selling prices are again going to be in a very different reactive mode than a company like St. Jude Medical, where five years ago, we began the investments to really improve our gross margin with manufacturing and cost-advantage locations, which had just becoming online now in 2011. And more on the topic of optimizing our cost structure. So that's an advantage and differentiates us from others in the space. Another advantage we have is as you think about budget pressures, the pressure generally tends to come sooner and stronger to capital budgets than to non-capital budgets. We do have a small component of our portfolio that's a capital budget item, but most of it is not capital budget items. And so that again, there's another advantage to us. And so the market's not monolithic at all, either on the MedTech side or on the customer side. There's the private pay, public pay on the customer side. Our global reach, the extent of our presence in global markets, gives us a lot more diversification than some, which is an advantage to us. So I think you put it all down, there are a lot of things that we worry about and are in everybody else's minds. But in that environment, there will be winners and losers, and we've offered some good evidence among the list of winners and losers at St. Jude Medical, and the second quarter clearly has been an outstanding winner. And going forward, we expect that we're going to continue to focus on doing everything we can to stay in that winner column.
Your next question comes from the line of Mike Weinstein of JPMorgan.
Michael Weinstein - JP Morgan Chase & Co
Your numbers look very good. We heard a lot of cautious commentary from companies this week about the health of various end markets. We heard commentary from companies outside the direct space talking about lower physician office. And so that the numbers you put [ph] to be worried about various markets. It's hard to see that today in your results. Is there anything you're seeing? You're clearly taking share in a bunch of your markets. But is there anything you're seeing where you think the health of any of your end markets got weaker over the course of the last six months?
Well, the way I'd like to think about that, Mike, is that a direct answer to your question. I'd like to talk about it in terms of St. Jude Medical's outlook being stronger or weaker as compared with the end markets for kind of other companies purposes or just kind of for some generic purpose. I'm sure with you and with others like you who have to make an assessment about a whole basket of companies, the question about the market itself maybe has a greater weight. The question of St. Jude Medical's unique prospects, our growth prospects stronger or weaker today than they were two quarters ago. They're clearly stronger. And it's reflected in the increase in our guidance one quarter ago, and then increase in our guidance again this quarter and meaningful increases in our guidance, both at the end of this first quarter and at the end of the second quarter. So I can't speak for other companies and for the peculiarities of their market positions. But for St. Jude Medical, with respect to our markets, it seems to us that our growth outlook is stronger today than it was at the beginning of this year.
Michael Weinstein - JP Morgan Chase & Co
Dan, there was a comment earlier about pricing in your CRM business being up year-over-year. That was CRM not just ICDs?
That was CRM.
Michael Weinstein - JP Morgan Chase & Co
Could you just comment a little bit about that and give us a little more insights as to what's driving that? Obviously, you're seeing some mixed upgrade within your ICD portfolio, but maybe you can just give us a little better insight into what's driving that NIM in terms of the difference between pricing on products and comparable -- the base called same-store pricing on the same products. It's obviously a mixed upgrade for you guys relative to the rest of the industry.
Well, there's a lot of factors. Let me clarify that. In fact, for the first half of 2010 versus the first half of 2009, on a global basis, our system ASPs for ICDs were up this year versus last. And our system ASPs for low-voltage devices were up this year versus last. So a fairly stunning versus what one might think from a distance. And as you were suggesting, Mike, there a lot of factors that bear on that. It does include, it all includes changes in geographic mix, changes in product mix. It includes ASP premiums on new product launches. It includes operating discipline and leadership changes, restructured leadership, organizations that we put into place in the United States in the second half of 2009 that's now benefiting us in the first half of 2010. And so there really are a lot of factors. There is an increasing trend toward more CRT-D, generally speaking, on the high-voltage side, and so there are a lot of factors. But when you net it all out, those are the results that we have. Having said all of that, we expect continued pressure on average selling prices. And in the past, we've said regularly that our experiences that generally speaking on a kind of an apples-to-apples basis, there is a low-single-digit decreases in ASPs. But we've already said that, that's really not the story, that the story is the big picture in all of these other dynamics and the impact of all of these dynamics together and how they net out to bear on ASPs. So that's what we think about it.
Michael Weinstein - JP Morgan Chase & Co
The quadripolar lead in Europe, can you tell us where that is on the adoption curve and the feedback you're getting?
Feedback is very positive. I'm not going to break out a number specifically. But it's a no-brainer that if one is going to put in a Left-Heart Lead to support a CRT system that having four electrodes on it to help optimize the performance of that lead is preferable. So that's a winner, and it would not surprise us at all to have the quadripolar Left-Heart Lead just become the standard lead for the whole industry going forward. And we're first with it, and between now and the time that others come on board with it, we expect to leverage that to continue to gain share.
Your next question comes from the line of Bob Hopkins of Bank of America.
I appreciate the update in the CRM analysis that you provided, Dan, that was interesting. And I'm curious on the replacement side for St. Jude Medical and the ICD business. When do you think that replacement cycle really starts to take in for St. Jude, is it the end of this year or is it really more a 2011 event?
I think it will be gradual, Bob. I don't really expect. We're not modeling an abrupt spike. So we think that just over time, here, if you think about between now and over the next few years, it will just be a tailwind. It's going to support our continued share gain. I mean, that's the way to think about it. And then, I think specifically, as you think about, okay, so how much of that do we expect in the second half of 2010 and then when we get to 2011, which we haven't yet in our guidance, how much do we expect to see in 2011? You'll just see that blended in to our guidance. You see it already blended in to our guidance for the rest of 2010. And when we gave our guidance for 2011, the benefit of the tailwind will just be blended in with all of the other dynamics that we're taking into account. So I don't expect to see a step-up.
And do you forecast for the market growth in de novo implants in the United States?
We do, but we don't communicate it. We actually model an excruciating detail. And our discussions have modeling are extensive and sometimes painful. And so we look at absolutely every aspect of it. But we do keep those market modeling details
proprietary. The details are always going to be long, anyway. But we keep our insights proprietary. We think that what's really helpful is take as many details as we look at. Many of which are going to be long and blend them together to predict at what level -- Where is the model truly predictive versus just detailed, and we've got every bit of detail. But where we think it's truly predictive is our experience here has been that when we talk about the individual segments, it's only a question of how long are we going to be. But now that we talk about it in terms of 4% to 6% global growth of the combined low-voltage and high-voltage market, that has been remarkably predictive. And so the rest of the discussion about this detail and that detail ends up being relatively non-productive and certainly non-predictive.
Obviously, business has really picked up and your performance has really picked up in the first half of 2010. You've done some small deals. I'm just wondering how you think about the topic of St. Jude Medical potentially adding a new leg of growth to the business? In other words, can you give us some updated thoughts on M&A? Is it more of a focus for you right now, so you're taking up more of your time? Just an update on the thought process there.
Our thinking is to maintain our M&A activities in a relatively steady-state mode. So we work not to put too much energy into it, on the one hand, with the idea that we liked our current growth platforms and we've got a lot of opportunity to expand our internal investment into emerging growth drivers that we already own. On the other hand, we're always opportunistic in working to keep our balance sheet capable and working to identify any good M&A fit that may come along with the stars might align, that it's a good win-win for us and for the organization that we'd be interested in. And so we continue in that mode. We have the capability to do more than we've done -- to do more in 2010 than we've already done. Our M&A programs remain active and we'll continue to remain active during 2010. Every possibility we approach, we approach with the idea that we don't have to do anything. Our current growth program is intact and adequate. On the other hand, if we can advantage ourselves by doing something, we will do it if all of the stars align. So that's our thinking, and we work to keep ourselves disciplined and constant in that kind of thinking.
Your next question comes from the line of Larry Biegelsen of Wells Fargo.
Larry Biegelsen - Wells Fargo Securities, LLC
Dan, I think we all appreciate the fact that your de novo share is much higher than your replacement share and that should help you gain share. Do you think investors should be prepared for the U.S. ICD market, the overall market, to reflect that de novo growth over the past five years going forward, in other words, to be turned slightly negative at some point for the market?
You asked a good question, Larry, but I'm going to stick to my answer. I'm going to stick to this mantra, that we do have our view of the answer to your question. But what we find again, we're going to keep our discipline that what is most predictive is the conclusion that we have had and expect to continue to have global constant currency revenue growth for the CRM market in the range of 4% to 6%. So I don't really want to -- it's not helpful in my mind. I realize it has its place. But for purposes of communicating what are the right expectations we think investors ought to have about market growth, we think everyone ought to expect the details to vary quite a little bit. There can be volatility in the details and plenty of surprise in the details, but it regularly continues to net out that we get global growth of 4% to 6%.
Larry Biegelsen - Wells Fargo Securities, LLC
And Neuromodulation, you touched upon that earlier. But the first quarter seemed to be a slowdown and you talked about the timing issues in the first quarter. Was there any catch-up this quarter from revenues that didn't materialize in the first quarter? And do you still see that as a 15% annual growth market?
We do see it as still a 15% annual growth market. Now having said that, and to the earlier question from Mike Weinstein, do we see any changes in end markets. I mean, in tough economic conditions and in a tough budget austerity conditions, inevitably, these markets are -- our markets are generally in the same way we said a year ago about recession. I think our markets are austerity resistant, but clearly not austerity proof. So we don't expect our markets to strengthen. I don't expect the Neuromodulation market to accelerate when there is as much budget and economic concern as there is. On the other hand, we're not the first ones to show weakness and if the austerity measures stay in place long enough, it wouldn't surprise any of us to see the growth ranges that we've previously described, drift more toward the lower end of some of the ranges. On the other hand, to the extent that we are able to continue to be successful with technology that saves the healthcare budget money, as we do in Neuromodulation, we think that it will continue to be a healthy double-digit growth market. On the topic of a catch-up, that's inevitable and there were some of that when we said that we thought that results in Q1 reflected some differences and timing of orders. So orders, so yes, I think we've got some of those orders in the second quarter instead of the first quarter. But the market itself continues to be a double-digit growth market. You see that reflected in our guidance through the rest of the year.
Larry Biegelsen - Wells Fargo Securities, LLC
Lastly, Dan, at your investor meeting earlier this year, you said you would start your first advanced study for your transcatheter valve program. Is that still on track? And when do you expect transcatheter valves to start cannibalizing surgical valves in Europe?
To the second of your two questions, I don't really have a special insight I care to offer on that. We're still on track, first, I mean, by the end of the year and the same way the program described in our Annual Investor Conference in February this year with respect our transcatheter valve program continues on track, yes.
Your next question comes from the line of David Lewis of Morgan Stanley.
David Lewis - Morgan Stanley
Dan, I appreciate your comments about reducing costs and broader medical devices. Could you share with us, you mentioned 2011, when you think is the inflection year for when those cost initiatives you're putting in place back at this year is going to be? Is that '11, '12 or '13 event. I wonder, just providing more granularity is this more about reducing costs and what could that level of costs reduction be o U.S. versus U.S.? Or is this more about reducing tax rates over time?
To your latter question, it's both. So when we think of a cost advantage manufacturing location, we define that as global costs including tax costs. But clearly, not only tax costs. We look at the -- really the first and we look at is which alternative location have the quality of workforce that would meet our standards and expectations. So that's the first thing. And so we're looking for a level of education, level of experience of the workforce, the history that, that workforce has working with our kind of technology, generally and even then specifically, in our type of regulated industry and with the medical devices in particular. So that's the very first thing, and I appreciate that doesn't address your question exactly, but that's the first thing we look at. Then we look at now where can we access that quality of workforce in a way that is cost advantage, both with respect to overhead rates, with respect to labor rates and with respect to tax rates. And so all of that and to the extent that they're obviously a lot of places at different companies manufacture, there's a lot of places that we do manufacturing, we'll continue to manufacture, but we take all those factors into account. We took all those factors into account in 2005 and making our site selections and then beginning a level of investments that are really just going to start to impact our gross margin here in 2011. So I'm not going to offer -- we haven't given guidance for 2011 yet, and we aren't going to give guidance for kind of years beyond. So I don't want to be exact about kind of degree of impact on gross margin. But clearly, what you will see is you'll start to see first shipments. We're going to open both our new facility in Malaysia and our new facility in Costa Rica by the end of this year. And so everything is on track that way. We will begin first shipment by the end of this year, on or about by the end of this year, don't hold me too exactly. But then you'll see the manufacturing volumes. Our goal is not to manufacture as much as we can, as quick as we can. Our goal is first, to make sure that we keep control in the quality sense. And that means start small, expand our experience on a pilot basis, make sure that we already have the workforce working side-by-side with our California group, for example and with other groups, so that we have very experienced, and very experienced St. Jude Medical people in our initial production in these new locations. And so you will see us gradually increase our volumes with highest attention to quality and secondary attention to leveraging the cost advantages of the site. And then beyond that, all I can say is that with gross margin and with cost structure as with average selling prices, there's so many factors that bear on it that really you're going to have to wait for our 2011 guidance to make more sense of my comments.
David Lewis - Morgan Stanley
You're seeing limited capital pressures across your broader business. Why are we seeing some capital pressures in AF? Have we begin to see some of those capital pressures, in that particular started to begin to ease?
I would not say that. I think that in the way that you're suggesting with your question, I think capital budgets will get pressure sooner and perhaps a little bit stronger in an environment of austerity measures and budget crisis. And so we expect to see some headwind in the capital components of our business on the one hand. On the other hand, we have a lot of ways to be very competitive in meeting those headwinds, number one. And number two, the capital components of our business are really in the big picture, a very small part of our business. But I would not say that we're seeing capital pressures ease. And I think we may see capital pressures kind of renewed and reinvigorated a little bit in the European austerity environment.
Your final question will come from the line of Tim Lee of Piper Jaffray.
Timothy Lee - Piper Jaffray Companies
First, on the ICD side and the role that are Unify and Fortify, where do we stand on that? Are we in all accounts here at this point and what type of pricing premium are you receiving on that?
I won't tell you our pricing premium. I would tell you that we're getting one. I won't say more about our customer uptake other than what we typically don't break out model mix. But I did disclose that the level of customer uptake here has been literally unprecedented at St. Jude Medical experience. The idea that we're over 50% of our mix in the United States in the first full calendar month of release is just absolutely awesome. Your takeaway from that ought to be that this product really meets customer needs, and it's going to be a very successful product line.
Timothy Lee - Piper Jaffray Companies
Then let me just ask it in another way. Given the fact that this was rolled out in mid-May, would it be fair to assume that it's not in all accounts yet?
I can't be more specific, Tim. I mean, the truth is, I don't know. I mean, on the one hand, all accounts I don't get that kind of granularity and I'm not smart enough to keep in mind if I had it. But mid-May, remember, we've got approval. I think it was a day or two before HRS, so everybody's at HRS. Then you have to come out HRS, everybody gets back into the field, and so it really -- I think, don't make too much of May. It's really about June.
Timothy Lee - Piper Jaffray Companies
On the AF side, it looks like U.S. AF sales were up 3%, which is a little light relative to our thinking. And I know AF includes a bunch of different product categories, but was there any one specific line item? Was it in Diagnostic Catheter, Ablation Catheter, hardware or any color on that would be appreciated.
I'm sorry, I'm not willing to offer color on components of our AF portfolio. The color, that I've offered in the past and I realized it's not what you're asking me, but it's the color that I'm going to offer is that the starting point for our competitive position in the AF EP space is that we've got more to offer to every procedure. We work to engage our customers on a comprehensive basis. It's a heck of a competitive advantage for us to be able to do it, different customers are interested in different details of our portfolio. But for us, our competitive advantage is that we've got such a deep and broad portfolio and technology and support that's of interest to everybody. All right, so we've gone just a little bit long. I apologize for keeping people on the line. But thank you very much for joining us. And I'll turn the call over to Carrie -- I'll turn the call back to Carrie for concluding comments, and we look forward to next quarter's call.
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