Boston Scientific CEO Discusses Q3 2010 Results - Earnings Call Transcript

| About: Boston Scientific (BSX)

Boston Scientific Corporation (NYSE:BSX)

Q3 2010 Earnings Call

October 19, 2010 5:30 pm ET


Larry Neumann - VP, IR

Jeff Capello - EVP and CFO

Ray Elliot - President and CEO

Joe Fitzgerald - SVP and President of the Endovascular Unit

John Pedersen - SVP and President of the Urology and Women's Health Division

Mike Phalen - SVP and President of the Endoscopy Division

Mike Onuscheck - SVP and President of the Neuromodulation Division

Hank Kucheman - EVP and President of the Cardiology, Rhythm and Vascular Group

Ken Stein - SVP and Associate CMO, CRM Group

Keith Dawkins - SVP and CMO, CRV Group


Michael Weinstein - JPMorgan

Rick Wise - Leerink Swann

Larry Biegelsen - Wells Fargo

David Lewis - Morgan Stanley

Glenn Novarro - RBC Capital Markets

David Roman - Goldman Sachs

Kristen Stewart - Deutsche Bank

Joanne Wuensch - BMO Capital Markets

Bruce Nudell - UBS

Matthew Dodds - Citigroup

Tim Lee - Piper Jaffray

Sarah Michelmore - Cowen


Ladies and gentlemen, thank you for standing by, and welcome to the Boston Scientific third quarter earnings call. (Operator Instructions) I would now like to turn the conference over to our host Mr. Larry Neumann. Please go ahead, sir.

Larry Neumann

Good afternoon everyone and thank you for joining us. With me on the call today are Ray Elliott, President and Chief Executive Officer; and Jeff Capello, Executive Vice President and Chief Financial Officer.

We issued a press release earlier today announcing our third quarter results. Key financials are attached to the release including the reconciliation of non-GAAP financial measures used in this presentation and we have also posted a copy of the press release as well as support schedules to our website under the Investor Relations tab.

The agenda for this call will include a review of the third quarter financial results as well as fourth quarter and updated full year 2010 guidance from Jeff. An update on our business performance in the quarter from Ray, followed by his perspective on the quarter overall. We will then open it up to questions.

We will be joined during the question-and-answer session today by Sam Leno, Executive Vice President and Chief Operations Officer; Hank Kucheman, Executive Vice President and Group President CRV; Mike Phalen, Senior Vice President and President of our Endoscopy Business; John Pedersen, Senior Vice President and President of our Urology and Women's Health business; Joe Fitzgerald, Senior Vice President, and President of our Endovascular Unit; Michael Onuscheck, Senior Vice President and President of our Neuromodulation Business; Dr. Ken Stein, Chief Medical Officer for CRM; and Dr. Keith Dawkins, Chief Medical Officer for the CRV Group.

In addition, I'd like to welcome Sean Wirtjes with us today who recently joined us Vice President of Investor Relation. Sean was most recently with Varian Inc. and is working with me to transition all IR responsibilities here at Boston Scientific. We expect this transition to be completed by year end.

Before we begin, I'd like to remind everyone of our Safe Harbor statement. This call contains forward-looking statements including statements regarding our expected market share and gross margin, growth projections, new product approvals, timing of product launches, acceptance and sales, our financial position, expected net sales, earnings and tax rates for 2010, the effect of our restructuring activities, the effect of our debt repayment and expected FDA approvals.

The company wishes to caution the listeners that actual results may differ from those discussed in forward-looking statements and maybe affected by among other things, risks associated with our financial performance, our restructuring plan, clinical trial results, our programs to increase shareholder value, new product development and launches, regulatory approvals, litigation, our tax position, our competitive position, our growth strategy, and the company's overall business strategy as well as other factors described in the company's filings with the Securities and Exchange Commission. Any forward-looking statement speaks only as of the date on which it is made and we undertake no obligations to update any forward-looking statements.

I'd now like to turn the call over to Jeff for a review of the financial results for the quarter.

Jeff Capello

Thanks, Larry. Let me start by providing you with a detailed review of the operating results for the quarter. Consolidated revenue for the third quarter was $1.916 billion versus our guidance range of $1.850 billion to $1.925 billion and represents a 5% decline on both the reported and constant currency basis from the third quarter of last year.

Compared to the headwind of $51 million assumed in our third quarter guidance range, foreign exchange had only a $4 million negative impact on our third quarter sales results, which positively affected our reported revenue by $47 million.

We estimate that defib ship hold and product removal actions lowered our revenue growth rate by approximately 140 basis points or $28 million in the quarter compared to our guidance estimates of $44 million due to continued strong execution of our stop shift recovery plan.

Ray will provide a broader overview of our businesses by major product category, but I'll address our sales results for all of our businesses at a high level here.

Worldwide DES came at $365 million, at the high end of our guidance range of $340 million to $365 million, but down 4% on a reported basis and 11% on a constant currency basis from the third quarter of 2009. Our worldwide DES revenue includes $111 million for TAXUS and TAXUS Element, $195 million for PROMUS and $59 million for PROMUS Element. Our worldwide TAXUS, PROMUS, PROMUS Element split for the quarter was 30-54-16.

We continue to sustain our worldwide DES leadership during the third quarter with an estimated global market share of 37%, which we estimate to be 8 percentage points higher than our nearest competitor and 4 percentage points lower than our share in Q3 '09, primarily impacted by the results of the Compare study which were released in September last year and the introduction of new stents principally in Japan.

U.S. DES revenue was $199 million, at the high end of our guidance range of $185 million to $200 million and 11% lower than the third quarter last year, driven primarily by TAXUS share loss and a decline in the overall market driven by pricing pressures. This includes $68 million of TAXUS and $131 million of PROMUS revenue. It represents a 34-66 mix of TAXUS and PROMUS in the U.S. compared to a 48-52 mix in Q3 of '09.

We estimate that our U.S. DES share was 45% for the quarter with 15 share points of TAXUS and 30 share points of PROMUS. This represents a reduction in total share of 4 points compared to the third quarter of last year. The decline in market share year-over-year is consistent with our expectations given the results of the Compare study.

On a sequential basis, our market share of 45% was down 1 point from the second quarter of this year, indicating that our share has further stabilized. We continue to maintain drug-eluting stent market share leadership in a competitive U.S. market with 16 more market share points than our nearest competitor.

Based on our estimates of the U.S. market for the third quarter, we believe that Abbott's share was approximately 29%, while J&J and Medtronic achieved approximately 14% and 12% respectively.

International DES sales of $166 million were at the high end of our guidance range of $155 to $165 million and represent a decrease from prior year of 13% on both a reported basis and constant currency basis. This includes $43 million in TAXUS, $64 million in PROMUS and $59 million in PROMUS Element sales. It represents a 26-39-35 mix of TAXUS, PROMUS and PROMUS Element.

The international contribution for PROMUS Element includes $43 million in EMEA and $16 million in the Americas and Asia-Pac combined. We estimate that Boston Scientific's DES market share in EMEA for the third quarter was 31%, which is down 3 points compared to the third quarter of 2009.

TAXUS market share was approximately 8% with revenue of $18 million. And PROMUS market share was approximately 3% with revenue of $6 million. PROMUS Element market share was approximately 20% for quarter with revenue of $43 million with an exit share close to the 24% despite not yet being available in all major markets and regions. Together this represents a TAXUS, PROMUS, PROMUS Element mix in EMEA of 27-9-64.

We continue to be very pleased with the market acceptance of PROMUS Element, which is running ahead of plan to the product's market leading alloy and stent design which improves ease of use.

In addition, the recently introduced TAXUS exited the quarter with 3% market share in EMEA. We expect that our unique ability to deliver two different drugs via multiple stent platforms will allow us to protect and expand our position in the market.

Through the success of PROMUS Element and the TAXUS platform, we have driven 90% of our DES product mix in EMEA back to the self-manufactured margins.

Our DES share in Japan was 35%, down 12% from the third quarter of 2009 and free falling sequentially with revenue of $48 million, driven by the number of accounts participating in the Abbott reset trial and a challenging pricing environment.

TAXUS market share was approximately 5% with revenue of $7 million. And PROMUS market share was approximately 30% with revenue of $41 million. Together, this represents a TAXUS-PROMUS mix in Japan of 15-85. During the quarter, we estimate Abbott's share at 42%, Medtronic at 8% and J&J at 15%.

The reset trial completed enrollment during the quarter, which now provides us with an opportunity to leverage our commercial strength and two drug platform to reenter these accounts as we look to regain some share.

We estimate our Asia-Pacific DES share to remain steady at about 17% during the third quarter, split 7% TAXUS with $8 million in revenue, 4% PROMUS with $6 million in revenue and 8% PROMUS Element with $12 million in revenue or a TAXUS, PROMUS, PROMUS Element mix of 31-24-45.

DES sales in our Americas international region were $25 million, representing approximately 54% market share with 21% or $10 million in TAXUS revenue, 22% or $10 million in PROMUS revenue and 10% or $5 million in PROMUS Element revenue. This represents a 40-42-18 mix of TAXUS, PROMUS and PROMUS Element.

With global DES market share of 37%, we maintained 8 full percentage points of share advantage over our nearest competitor. Our strong commercial team is focused on the only two drug platform in the industry, and when you couple that with the continued rollout of PROMUS Element and TAXUS element stents, we expect to increase our market share leadership going forward.

I would like now to provide you with a little bit more detail on the drug using stent market dynamics during the quarter.

We estimate the worldwide DES market in Q3 at approximately $992 million, which is down 1% on both a reported and constant currency basis versus Q3 '09. Our estimated worldwide market revenue in the quarter includes a worldwide unit volume increase of approximately 10% driven by an increase in both PCI volume and a 3 percentage point increase in penetration, offset by a worldwide market decline in average selling prices of approximately 10%.

The US DES market is estimated to be about $437 million for the quarter, representing a decrease of approximately 3% from the third quarter of last year. This consists of a unit volume increase of approximately 4%, which includes a slight decrease in PCI volume and an increase in penetration. This unit volume increase was offset by an approximately 7% decline in ASPs.

During the quarter, we saw our US DES ASP reductions slightly greater than the aggregate market declines with TAXUS and PROMUS both down about 8% compared to the third quarter of 2009.

US PCI volume in the quarter was approximately 250,000 procedures, down 1% compared to the third quarter of 2009. We estimate that the US DES penetration of 78% was up 3 percentage points over the third quarter of 2009. Combined with stent procedure rates and stents per procedure, we estimate that the total unit market of US stents in Q3 was approximately 335,000 units including 262,000 units of DES.

The international DES market is estimated to be 554 million for the quarter, representing an increase of approximately 2% from the third quarter of last year. This consists of a unit volume increase of approximately 14%, which includes a 9% increase in PCI volume and a four percentage point increase in penetration. This unit volume increase was largely offset by decline in ASPs.

Procedures were strong in the quarter with approximately 575,000 PCI procedures, including 328,000 procedures in EMEA, 56,000 procedures in Japan, 129,000 procedures in Asia-Pacific and 62,000 procedures in the Americas.

We estimate that international DES penetration of 61% was up 4 percentage points over the third quarter of 2009, including 57% EMEA, 73% Japan, 75% in Asia-Pacific and 38% in the Americas.

Worldwide Q3 CRM revenue of $550 million represents a reported decrease of 10% and a constant currency decrease of 8% versus the $608 million reported in the third quarter of 2009. For the third quarter, we estimate that the defib ship hold and product removal actions reduced our US CRM revenue by $28 million. This compares favorably with our previous estimate of $44 million lost sales for the quarter.

Our commercial organization led by a very strong sales team continued to do an excellent job executing the recovery plan. We were very pleased with the results of the third quarter.

US CRM revenue of $362 million represents a 10% decrease from the prior year, principally impacted by the defib ship hold. International CRM sales of $188 million in the quarter represent a reported increase of 8% from the prior year, and were down 4% in constant currency.

Excluding the impact of a large contract sale for Brady leads to Japan in the third quarter of 2009 international CRM sales were down 1% on a constant currency basis. Worldwide defibrillator sales of $406 million were near the high end of our guidance range of $385 million to $410 million. This represents a reported decrease of 9% from the third quarter of 2009 and a constant currency decrease to 7%. Defib sales in the US were $280 million, also near the high end of our guidance range of $265 million to $285 million representing an 11% decrease from last year.

International defib sales of $126 million were at the high end of our guidance range of $120 million to $125 million, representing a 3% reported decrease from last year, up 1% in constant currency. The growth in the international defib area continues to be driven by strong market acceptance of our COGNIS intelligence devices and our new Foresight leads, as we continue to roll out these products in other areas of the world.

Our non-DES and non-CRM worldwide revenue of the brand was $1 million. We're flat compared to third quarter of last year both on and as reported in constant currency basis. On a worldwide basis, our endoscopy business grew 4% in constant currency terms. Growth in the U.S. was 2% in the quarter despite downward pressure from a slow down in elective procedures. Internationally, endoscopy sales grew 6% with broad based strength across all geographic regions driven by new product introductions and strong sales execution.

Our urology/ Women's Health business grew 6% in constant currency terms. However, growth in Q3 2010 reflects a net benefit of approximately 100 basis points due to the 2009 Prolieve recall and the market withdrawal of our Biopsy parts last year. Excluding Prolieve and Biopsy, U.S. urology sales grew in the mid single digits largely due to an increase in procedures and strong sales execution.

While our Woman's Health business was basically flat due to slow down of elective procedures and competitive new product trial. Internationally, both Urology and Woman's Health experienced strong growth driven by new product introductions, increased sales investments and the penetration of new therapies into markets outside United States, resulting in an overall increase of 8% compared to Q309.

Excluding the impact Prolieve and Biopsy, international sales grew in the double digits. Our worldwide Neuromodulation business grew 9% year-over-year in Q3 2010 as implant and trial procedures volume increased noticeably. As we mentioned last quarter, growth in the second half of the year generally picks up as patients meet their out of pocket deductibles for the year. And increase healthcare utilization response.

Our growth in the quarter was also supportive of the successful launch of four new products in our SCS leads portfolio. Although off a small base, international growth was 29% compared to Q3 '09 as we began to really expand our presence outside the United States.

In constant currency terms, our worldwide peripheral interventions business was up 2% in Q3 including international growth of 5% on the strength of new product introductions. Neurovascular was down 8% largely due to the adverse impact of the sales returns reserve for the quarter in connection with the field action initiated at the end of this quarter and the delayed launch of a Target coil partially offset by growth in all other product franchises.

Non-stent Interventional Cardiology was down 5% and Electrophysiology was down 6%. We have seen a lag in some of these businesses in recent quarters as a result of procedural softness, increased pricing pressures and competitive product launches. I'll talk more about some of the new product launches and these businesses in a few minutes.

Reported gross profit margin for the quarter was 57.5%. Adjusted gross profit margin for the quarter excluding restructuring related charges was 68.1% which was 150 basis points lower than the third quarter 2009, but at the high end of our previously issued guidance range due primarily to the lower than expected impact of the defib ship hold and product removal actions in the quarter. The primary contributors to the 150 basis point reduction from last year include the shift in DES mix from TAXUS to PROMUS in the quarter, lower DES share and pricing pressures in both the U.S. and Japan. The impact of the defib ship hold brought removal actions, partially offset by the increase in PROMUS Element sales in Europe.

Our reported SG&A expense in the third quarter was $634 million. Adjusted SG&A expenses including restructuring related items was $633 million or 33.1% of sales. During the quarter, our SG&A as a percent of sales was favorably impacted by restructuring savings. The timing of certain expenditures and incremental revenue from a faster defib stop ship recovery.

That said, we do expect to see an increase in the local spending over the remainder of the year given both the delay of certain expenditures in the third quarter and a decision to make incremental investments in topline growth opportunities in both customers facing and market development related positions including specific initiatives in emerging markets, all of which are aimed at improving our growth at work.

Both reported and adjusted research and development expenses were $230 million for the quarter or 12% of sales. The reduction during the quarter is related to the timing of some of our restructuring efforts and the related reinvestment programs as well as a delay in some of our clinical trials. As we continue to execute our portfolio realignment, we expect future run rates to support our plans to invest up to approximately $1 billion in R&D on an annual basis.

Royalty expense was $39 million or 2.1% of sales for the quarter which is down from $51 million or 2.5% of sales in Q309. The reduction of royalties was due to strong PROMUS and PROMUS Element sales combined with our royalty structure which provides for lower royalty rates once volume milestones have been achieved.

We reported GAAP pretax operating income of $201 million for the quarter. On an adjusted basis, excluding intangible asset impairment charge, the structuring charges and amortization expense adjusted operating income for the quarter was $403 million and 21% of sales down 80 basis points from Q309. The decrease versus Q309 is primarily related to gross margin deterioration, somewhat offset by favorability in SG&A, R&D and royalty expense.

I'd like to highlight the GAAP to adjusted operating profit reconciling items in a little bit more detail for you. We recorded $5 million pretax or $4 million after-tax non-cash impairment charge in connection with the right down of certain intangible assets. We reported $18 million pretax or $14 million after-tax of restructuring related charges in the quarter, which are primarily related to product transfer expenses, certain other costs in connection with our previously announced Plant Network Optimization Program.

Total amortization expense was $129 million pre-tax or $109 million after-tax which is $3 million higher than the third second quarter of 2009. Amortization expense is expected to increase slightly in the fourth quarter of 2010 as we begin to amortize certain intangible assets related to our previously announced acquisition of Asthmatx. The cumulative effect of all these items was a $152 million pre-tax and $127 million after-tax.

Interest expense was $91 million in the third quarter, which was the same as Q3 '09. Our average interest expense rate in the third quarter was 5.5%, which is the same as Q3 '09. Other net income or expense was $3 million of income in the third quarter compared to $4 million of expense in Q3 '09. For the third quarter of 2010, Other Net included $4 million of interest income, driven primarily through the collection of interest on past due receivables in Spain. Interest income was only $1 million in Q3 '09.

In addition, Q3 2010 currency transaction gains and losses were favorable by $3 million and miscellaneous expense was $2 million lower compared to Q3 '09. Our reported GAAP tax rate for the third quarter was negative 16%, and on an adjusted basis our tax rate was 6%. Our adjusted tax rate for the third quarter reflected a $32 million benefit from discrete tax items.

The discrete benefit was primarily attributable to the release of tax reserves resulting from a favorable Court decision in a third party case for which we have similar facts. Excluding the discrete benefit, we had an operational tax rate in the third quarter of approximately 16%. This rate reflects revised expectations for all-year operational tax rate, as well as a true-up to the prior quarter results, but excludes U.S. R&D tax credit as it has not yet been reenacted for 2010.

We currently expect our full year operational tax rate to be approximately 18%, inclusive of the U.S. R&D tax credit or 1% lower than our previous guidance of 19%. This decrease from our prior guidance is due to revised expectations of our geographic mix of earnings. The R&D tax credit equates to 240 basis points on our operational effective tax rate for the full year.

We reported GAAP EPS for the third quarter of $0.12 per share compared to a loss of $0.06 per share in the third quarter of last year. GAAP results for the third quarter included the previously discussed intangible asset impairment, amortization and restructuring charges, as well as the discrete tax items. Our adjusted EPS in the third quarter which excludes these items was $0.19 and was above the high end of our guidance range of $0.10 to $0.13 per share, driven by favorable operating expenses due to operating discipline and timing of events, as well as the impact of the positive discrete tax items and the tax rate improvement.

Our adjusted EPS for the third quarter was in line with our adjusted EPS of $0.19 in the third quarter of 2009. As a reminder, the third quarter of 2009 adjusted EPS excluded $0.07 per share of amortization, $0.01 per share of restructuring related charges, and $0.17 per share of litigation related charges. Stock comp was $30 million, and all per share calculations were computed using 1.5 billion shares outstanding.

DSO was 63 days, a two-day improvement from the third quarter of 2009, driven by stronger cash collections in the U.S., EMEA and Asia-Pacific. Days inventory on hand were 137 days, down 1 day from Q3 '09 as we continue to work on reducing our inventory levels despite the required investments to support our new product introductions.

Reported operating cash flow in the quarter was an outflow of $126 million compared to an inflow of $484 million in Q3 '09. Q3 2010 cash flow included the prepayment of the remaining $725 million obligation due to J&J on January 3, 2011, and $32 million of restructuring payments. Q3 2009 cash flow included $2 million of legal settlement payments and $15 million of restructuring payments. Excluding these items, Q3 2010 operating cash flow was $631 million or $130 million higher than Q3 '09, primarily due to a tax refund.

Capital expenditures were $79 million in the quarter, which was $12 million lower than Q3 '09. Reported free cash flow was an outflow of $205 million in the quarter compared to inflows of $393 million in Q3 '09. At the end of the third quarter, we had about $600 million of cash on hand, $6 billion of total debt, and net debt of $5.4 million. The increase in net debt is primarily due to the prepayment of the J&J obligation, partially offset by our strong operating cash flow over the past 12 months.

In connection with the $725 million prepayment to J&J, we cancelled the related letter of credit under our revolving credit facility, which will save us approximately $17 million in fees in 2010. We now have full access to our $2 billion revolving credit facility to support operational needs. We currently have more than $2.9 billion of available liquidity, including cash on hand and our available credit facilities.

We expect to use a portion of our credit facility, together with existing cash on hand and cash from operations in 2011 to repay our $250 million notes to January 2011 and our $600 million of notes to June 2011. At the end of Q3 2010, our debt to EBITDA credit facility covenant ratio was 2.6 times, well below the maximum permitted level of 3.85 times, representing $738 million of EBITDA safety margin.

As we announced in February, we have initiated a restructuring plan, and among other things we'll combine our CB and CRM groups into a new CRV Group, eliminate the international and Endosurgery Headquarters Organizations, reorganize our clinical and R&D organizations and streamline our corporate staff functions and restructure our international operations to reduce our administrative costs and invest in commercial expansion opportunities, including significant investments in emerging markets.

The execution of these restructuring initiatives over the next 18 months will result in gross reduction of our operating expenses by an estimated $200 to $250 million. We will reinvest a portion of these savings into customer-facing and development related activities to help drive top-line growth in the future. We are on schedule with our planned restructuring at this point.

Let me now turn to guidance for the fourth quarter as well as revised guidance for the full year. From a US defib share perspective, and based on current market dynamics, we continue to expect to hold share in the second half of the year, exiting the year at approximately 26% share subject to the actual defib ship hold impact in Q4.

Given the impact of the first three quarters of 2010, we now estimate that the defib ship hold will have a negative impact of approximately $190 million for the full year, compared to last quarter's estimate of $225 million, with $72 million in Q1, $65 million in Q2 and $28 million in Q3, as well as $28 million in Q4.

Turning to sales guidance for the fourth quarter of 2010, reported consolidated revenues are expected to be in the range of $1.925 million to $2 billion which is down 4% to down 7% from the $2,079 million recorded in the fourth quarter 2009.

If current foreign exchange rates hold constant through the fourth quarter, the tailwind from FX should be approximately $11 million or less than 1% relative to Q4 '09. On a constant currency basis, Q4 consolidated sales should be in the range of down 4% to down 8%.

For DES, we are targeting worldwide revenue to be in the range of $355 million to $385 million, with U.S. revenue of $180 million to $195 million and OUS revenue of $175 million to $190 million. For our defibrillator business, we expect revenue of $400 million to $425 million worldwide with $265 million to $285 million in the U.S. and $135 million to $140 million OUS.

For the fourth quarter, adjusted EPS, excluding charges related to acquisitions, restructuring and amortization expense are expected to be in the range of $0.15 to $0.18 per share. This includes an operational effective tax rate for the quarter on adjusted earnings of approximately 10%, reflecting assumed approval of the R&D tax credit in Q4.

The company expects EPS on a GAAP basis in the fourth quarter of 2010 to be in the range of $0.05 to $0.09 per share. Included in our GAAP EPS estimate is approximately $0.01 to $0.02 per share of restructuring related costs and $0.08 per share of amortization expense.

For the full year, the company now expects sales will be between $7.73 billion and $7.8 billion versus our previous guidance of $7.6 billion to $7.9 billion. If current foreign exchange rates hold constant, we expect the FX impact to be minimal. Therefore, our revised guidance on both a reported and constant currency basis should be in the range of down 5% to down 6% for the full year.

To help you in adjusting your models for the full year, we expect gross margins to be within the range of 67% to 68%, reflecting gross margin improvement in the second half due to a full period of defibrillator revenue.

We expect annual SG&A to be in the range of 32.5% to 33.5% of sales, R&D to be roughly 12.6% of sales, royalties of approximately 2.5% of sales and interest and other expense of approximately $400 million. Adjusted EPS for the full year is now expected to be in the range of $0.63 to $0.66 per share versus our previous estimate of $0.54 to $0.62 per share.

On a GAAP basis, the company expects a loss for the full year in the range of $0.81 to $0.77 per share. Included in our GAAP loss per share estimate is a charge of $1.20 per share related to the Q1 goodwill impairment, a charge of $0.03 per share related to intangible asset impairments, acquisition related income of $0.14 per share, a charge of $0.07 to $0.08 per share related to restructuring related costs, a net benefit of $0.01 per share related to discrete tax items and a charge of $0.28 per share related to amortization expense.

Assuming the extension of the R&D tax credit for the full year during Q4, we now expect our operational tax rate to be approximately 10% for the fourth quarter and approximately 18% for the full year. Including the favorable and unfavorable discrete tax benefits and timing items recognized in the first three quarters, our full year adjusted tax rate is now expected to be approximately 13% for the year.

We have a number of tax authority examinations that we expect will conclude in the fourth quarter. The final resolution of these exams may result in additional discrete tax items during that period that are difficult to forecast but may impact our full year adjusted rate. That's it for guidance.

Now let me turn it over to Ray for an overview of the businesses in the quarter as well as his overall thoughts. Ray?

Ray Elliott

Let me begin with a more qualitative review of our businesses, and then as usual share some brief thoughts on likes, dislikes, and two hot topics for the quarter overall. During the quarter, we continued the integration of our CRM and CV businesses into our newly formed Cardiology, Rhythm and Vascular Group. The CRV group is an example of Boston Scientific anticipating changes in the delivery of healthcare, and we are a leading industry in responding to those changes.

CRV positions Boston Scientific as a company intensely focused on the care continuum for cardiovascular patients. This initiative has been well-received by our customers and has already produced wins in many key markets including the Southwest, the West and the Midwest. We currently have over 100 contracts in place with customers that recognize the unique value of our broad portfolio.

The CRV model allows us to explore novel go-to-market strategies that are effective in generating sales for new value proposition. However, we are not done and we too recognize that continued commercial innovation is important in this very dynamic time for healthcare in the U.S. We are making substantial investments in new technologies to build on our market-leading positions across the cardiovascular service line. We have begun to introduce some of the nearly 30 new CRV products we expect to launch in the U.S. by the end of 2011 alone.

Looking at CRM, we estimate our worldwide defib market share was down 3 percentage points compared to the third quarter of 2009, driven by the ship hold and product removal actions we initiated late in the first quarter.

In the U.S. we came in near the top end of our guidance with our three-quarter share estimated a 26%. These estimates are based entirely on our own models and do not reflect reporting of any of our competitors. Our technologies continue to prove their importance in the marketplace. COGNIS and TELIGEN are still the smallest, thinnest, high energy devices in the world and are being extremely well-received. We remain committed to advancing our technologies and strengthening our CRM franchise.

Worldwide, we continue to bring innovative new products to the market and they are being well-received. We recently launched our Acuity Break-Away Lead Delivery System in the U.S. with encouraging early results including an increase in price. Internationally, we've had a successful launch of our Foresight Defibrillator System in Europe. We continue to see strong defib results in Japan with COGNIS and TELIGEN and expect continued strength in the recent launches of our Foresight defib system.

In the first half of 2011 we plan to launch our next generation line of defibrillators in the U.S. and Europe, creating greater choices for our customers, including new features designed to improve functionality, diagnostic capability and ease of use. We plan to roll out our 4-SITE system in the U.S. in the first half of 2011.

Additionally, we expect to launch our new wireless pacemaker platform built on the same platform as our existing high voltage devices in Europe in the second half of 2011 and the U.S. in late 2011 or early 2012 depending upon final FDA requirements. This new platform is intended to be the first in the series of low voltage Brady launches over the next few years, and represents our first major technology introduction in this area in many years.

We recently received an expanded indication for Boston Scientific CRT-Ds based on the landmark MADIT-CRT trial for high risk NYHA Class I and II patients with Left Bundle Branch Block morphology. The opportunity to promote the use of our products in these patient populations is unique to Boston Scientific as the only company with CRT-Ds approved by the FDA for use in all NYHA classes of heart failure.

Our worldwide EP business was down 6% constant currency versus a year ago, due principally to product availability constraints with our Chilli II catheter line. We are working to alleviate the product supply issues. The expansion and the development of BSE's global EP sales force and increasing market share of Blazer-based products are expected to be the drivers in the growth in our EP business for the future.

We continue to see increased adoption of Blazer Prime in both the U.S. and Europe. Blazer Prime is an improved version of the market-leading Blazer Ablation Catheter and is designed to deliver enhanced performance, responsiveness and durability. We began the launch of the Blazer Dx-20 in Europe earlier this year, and feedback from physicians have been very similar to the positive responses we have received from U.S. doctors. We still anticipate that Blazer Open Irrigated Ablation Catheter approval in Europe, as well as the start of U.S. clinical trials in the fourth quarter.

Turning now to cardiovascular, worldwide DES revenue of $365 million was at the top end of our guidance range, and already included $59 million in revenue for PROMUS element. Outside the U.S., share continues to move from PROMUS to PROMUS Element in geographies where the Element product has been launched.

With the expected launch of PROMUS Element in the U.S. and Japan in mid-2012, we will improve our DES gross margin performance and potentially add some $0.10 of EPS to the bottom line on an annual basis. Our worldwide DES market share of 37% was slightly down from last quarter, and was of course down some four points versus the third quarter of 2009.

While our mix continued to shift from TAXUS to PROMUS on a year-to-year basis, that shift has continued to slow since the first quarter. The DES market was $992 million due to an increase in penetration rates from 63% to 66% and a 6% increase in PCIs, offset by weak ASPs compared to a year ago. U.S. penetration rates have been stable the last three quarters at 78%.

During the quarter, U.S. DES pricing declined by a little less than 7% versus prior year, and a slight improvement over previous trends. In the U.S., DES revenue of $199 million was at the top end of our guidance range, with share at 45% and mix having stabilized in the last few quarters as we continue to benefit on our two drug DES strategy. We continue to expect to launch TAXUS Element in the U.S. in mid-2011 and to launch PROMUS Element in mid-2012.

In EMEA, more than 90% of our revenue was in self-manufactured product, including more than 70% with our newest Element platform. Late in the third quarter we received PROMUS Element CE Mark indication approval for use in patients with diabetes and those experiencing an acute myocardial infarction. These additional approvals will contribute to positive momentum behind PROMUS Element in CE Mark countries.

We continue to be the European DES market share leader at 31%, including an estimated 20% share for PROMUS Element which has gained share in every quarter since its launch last year while facing the newest competitive technology entering the market. We have launched PROMUS Element in much of EMEA and are leveraging the Platinum QCA clinical program results that we presented at TCT.

Looking forward, we plan to aggressively promote PROMUS Element, as tenders arise in the fourth quarter and into next year and are hopeful that the Platinum primary end-point data to be presented at ACC next April will add to our market share story.

In Japan, while we lost market share through April and May, it appears that our DES market share has stabilized compared to the second quarter at 35%. The stabilization in pricing that we saw at the end of the second quarter has also contributed during the third quarter. The Abbott Reset Trial concluded early in the third quarter, and we expect this to open more of the Japanese market for PROMUS Element into the fourth quarter.

We intend to leverage our two drug platform with expectations to gain share by the end of the year. We continue to expect the launch of TAXUS Element in Japan in late 2011 to early 2012, and PROMUS Element in mid-2012.

In late July we began patient enrolment in the EVOLVE clinical trial designed to assess the safety and performance of our fourth generation synergy coronary stent featuring a Bioabsorbable Polymer and an Everolimus Drug formulation to create a thin uniform coating on the abluminal or outer surface of a Platinum Chromium alloy stent. We are pleased that the trial is clearly enrolling ahead of schedule, demonstrating our commitment and the markets' enthusiasm for this next generation stent platform.

We are pleased with our DES pipeline, which was also well-represented at TCT. Our Element platform had a strong presence, highlighted by the Platinum QCA and PERSEUS study results. Platinum QCA showed great clinical angiographic and particularly stent apposition results 0 to 9 months for PROMUS Element, demonstrating our ability to transfer the leading drug polymer combination to our new Platinum Chromium stent platform.

The PERSEUS Diabetes subset once again highlighted Paclitaxel's proven consistent performance across all patients, regardless of diabetic status. That consistent performance has now been demonstrated on the new Element platform. Also in TCT, the TAXUS Atlas clinical program underscored long term TAXUS Liberté results, demonstrating significant TLr reductions in small vessels and MI reductions in long lesions up to four years.

TAXUS Atlas also demonstrated low overall event rates up to five years in workhorse lesions. The SYNTAX three-year data presented at TCT again demonstrated the favorable outcomes of PCI with TAXUS stents compared with coronary artery bypass graft surgery in the most complex patients, those with left main disease. Boston Scientific is proud to have funded the SYNTAX trial, which has resulted in the upgrading of PCI for the treatment of left main disease in both ACC/AHA and the ESC revascularization guidelines.

Finally, we are pleased that our PROMUS stent performed so well after two years in the Compare trial as well as the SPIRIT IV trial. Additionally, TAXUS Liberté and PROMUS performed consistently in the challenging diabetic population.

Turning to our other CV product lines, our worldwide non-stent IC Core business was down 5% in constant currency from the third quarter of 2009. This decline is attributed mostly to PTCA balloon price erosion. However, we maintained our U.S. and worldwide PTCA balloon leadership positions with 57% and 35% respectively.

The launch of the NC Quantum Apex post dilitation balloon catheter continues to receive outstanding reviews from our customers in the U.S., Europe and other CE Mark countries. We believe our new balloon products should result in year-end balloon market share gains in the mid-single digits. The phased launch of Kinetix Guidewire in the U.S., Europe and Japan is ongoing, and enthusiasm for this revolutionary technology has been very strong.

In our peripheral interventions business, we continue to be excited about our number one worldwide market position. Our ability to produce 2% constant currency revenue growth compared to the third quarter of 2009 is encouraging. We are particularly pleased with our international growth of 5% during the quarter. We will monitor the procedural and ASP trends in the U.S. and European markets and are confident in our ability to leverage new product launches into growth in both U.S. and international markets.

We continue to build on our global position with successful launches of our new technologies worldwide. Our international stent franchise is clearly gaining momentum with new product launches, and we are adding incremental share as a result to our new stent approvals earlier in the year.

We also solidified our number one position in balloon expandable stents in the U.S. We launched the Sterling SL Balloon in both the U.S. and Europe during the second quarter, filling a gap in our PTA portfolio and bolstering our PTA Balloon growth.

In the interventional oncology product segment, we launched our Renegade HI-FLO Kits last quarter, helping to stabilize our interventional oncology franchise. Lastly, we began a limited launch of our Journey 0.014 BTK Guidewire in September and announced the global launch just last week.

We are making excellent progress with our major new product initiatives. In particular, our next-generation SFA stent (Nova) and our next-generation PTA balloons are scheduled for launch in 2011. We expect these to be foundational to our PI growth story in 2011, and we'll provide status updates as appropriate during coming calls.

In a highly competitive environment, our neurovascular business reported softer results this quarter and declined 8% in constant currency compared to the third quarter of last year, while maintaining its global leadership in every franchise. Sales were negatively impacted by sales return reserve recorded in connection with the field action initiated at the end of the quarter with respect to some selective lots for the Matrix product.

The probability of patient injury is remote, the financial implications de minimis. And although there maybe a few bad quarters related to mix, we expect little disruption to service with more than eight months of good inventory available.

During the quarter, we continued the launch of our Neuroform EZ adjunctive Stent in both Europe and the U.S. and continue to receive positive feedback from physicians. In the third quarter, total Neuroform Stent System sales in U.S. and Europe were up 34% compared to the third quarter last year and 24% versus the second quarter of this year. We are looking forward to expanding our Neuroform EZ offering into other regions over the coming months.

Our guidewire business experienced softer results this quarter and was up only 3% compared to last year. This was largely the result of a continued backorder situation experienced at the end of the second quarter with our market leading Synchro wires. Production ramp-up will be completed shortly, and we expect to be at the backorder by the end of the fourth quarter.

Our catheter business, excluding flow-directed and guide catheters, grew 2%, driven by strong sales of our Excelsior SL-10 Microcatheter and our Renegade HI-FLO catheter using conjunction with Neuroform EZ stent delivery systems.

Our ICAD or intracranial atherosclerotic disease business posted another quarter of solid results with 6% worldwide growth, driven by strong sales in the U.S. and continued strong growth in Brazil, Korea and China. The NIH sponsored Wingspan Stent System and Gateway PTA Balloon Catheter SAMMPRIS trial continues to affectively enroll patients ahead of schedule.

Under significant pressure from our multiple competitive coil and stent launches, our detachable coil business was as expected down 11% compared to the third quarter of last year. However, we continue to maintain the coil market share leadership.

I'm very pleased to announce that just yesterday we received FDA approval for our new Target coil. This approval is in addition to our recently received CE Mark and Health Canada approvals. We will begin first human use in early November, followed by a phase launch of this exciting new product.

Our Endoscopy business continued to have solid growth in the third quarter, posting 12% worldwide growth with 2% growth in the U.S. and 6% growth internationally. The Endo business again saw a steady growth in its metal stent franchise, recording a 5% increase worldwide. This performance was led by our Biliary and esophageal stent product lines with continued market acceptance of the WallFlex product offering.

Worldwide growth of 4% was also recorded in our Biliary device franchise followed by our growth in Access products. The homeostasis franchise experienced significant growth at 12% on the continued adoption and utilization of the Resolution Clip technology.

During the quarter, the Endo business launched new products in support of our Biliary, enteral feeding and tissue acquisition franchises. We plan to commercialize additional devices in the Biliary franchise during the fourth quarter.

As previously announced, on September 20, we signed a definite merger agreement to acquire Asthmatx Inc. The Asthmatx business will come part of the Endoscopy business. The Asthmatx technology strengthens our current offering of pulmonary devices and will contribute to the overall growth and diversification of our Endoscopy division. This acquisition represents an important step in the execution of our strategy to realign Boston Scientific's portfolio.

The deal will close upon approvals from the necessary regulatory authorities and satisfaction of customary closing conditions. This process is expected to be completed in the fourth quarter. I'll comment further on the Asthmatx transaction shortly.

Urology and Women's Health delivered another good quarter with constant currency growth of 6%, including 1 percentage benefit from the Prolieve recall and the market withdrawal of our biopsy products last year. Total divisional growth excluding these two franchises was 8%. Our international business continued to gain momentum, growing double digits in both Japan and EMEA. Our Urology business expanded leadership position and delivered worldwide growth of 8%.

Our Women's Health business was essentially flat in the third quarter, mainly due to softness in elective procedures. Procedural volumes in the U.S. have been negatively impacted as a result of a high unemployment rate and a decrease in the number of unemployed covered under COBRA. Additionally, competitive new product launch activity in both slings and pelvic floor repair lowered our growth as hospitals initiated the normal new product evaluations.

Internationally, we enjoyed 24% growth in Women's Health, driven by new product introductions, increased sales investments and penetration into new markets.

In the fourth quarter of 2010, we will expand the global rollout of our recently approved next-generation Genesys HTA System for the treatment of abnormal uterine bleeding. We believe the significant enhances to the interface and ease-of-use of the Genesys System will enable the business to grow its share of the $400 million worldwide abnormal uterine bleeding market.

In our neuromodulation business, the third quarter marked the launch of two new widely spaced SCS percutaneous leads. Between the two new lead splitters launched last quarter and the two new widely spaced leads launched this quarter, we now offer our customers more lead spacing options than any other company in the SCS space. We are experiencing fast adoption of these new leads and splitters and have already seen them helping us gain market share within competitive customer accounts.

Permanent procedure volumes grew 11% in the quarter, due in part to the impact of our new product launches capturing market share, and the market itself catching up as procedures delayed in the first and second quarter are realized in the third and fourth quarters of the year.

Looking forward, our focus as always will be on continued excellent sales execution, making the most of our differentiated product technology, and now, a newly expanded lead portfolio. We are also excited about our (advantage) deep brain stimulation trial in Europe for Parkinson's disease. First patient enrolment is expected within the quarter, and we look forward to entering this new area of stimulation for Boston Scientific with our precise deep brain stimulation system.

I'll finish with some overall perspective on the quarter, what we liked, what we didn't like, and two hot topics. Let me start with what we liked. Number one, we liked our adjusted EPS of $0.19. It far exceeds the high end of our guidance range and we were very pleased with that result. I'm particularly pleased with our expense discipline. Although the timing of some expansions did play a role, we controlled spending very well throughout the organization and it was a major factor in turning in such a strong number.

We also got some help from our gross margins which were better than expected, and some help from the release of tax reserves as well as ongoing sustainable improvements to our ETR. We particularly like the $0.12 of GAAP earnings and the nearly $300 million favorable improvement to prior year third quarter GAAP net profit results.

We liked our leading US DES market share of 45%. It was further evidence of the remarkable durability and consistency of our DES franchise, which continued to hold the top position worldwide as well. We also like the ongoing strong performance of PROMUS element in EMEA, which continued to take share. PROMUS element gained share in EMEA every quarter since it was launched last year, while competing against the launches of competitors' newest stent technology.

We liked that PROMUS element received an expanded indication in CE Mark countries for the treatment of diabetic and heart attack patients. We also like the Platinum QCA clinical trial results presented at TCT supporting the performance of PROMUS element and the successful transfer of the Everolimus drug and polymer combination for a highly effective Platinum Chromium platform.

Number three, we are very pleased to receive an expanded indication for our CRT-Ds, based on the landmark made at CRT trials for high-risk NYHA Class I and II patients with Left Bundle Branch Block morphology. The opportunities promote the use of our products in this patient population is unique to Boston Scientific as the only company with CRT-Ds approved by the FDA for use in all NYHA classes of heart failure.

While we are only about a month into having this indication, there has been a lot of momentum in the field with MADIT-CRTs. And customers have been enthusiastic about the indication and updated data from the trial. We believe we have the ideal solution for NYHA Class I and II patients, because physicians intervene earlier with CRT-Ds to slow the progression of heart failure.

We also believe that the small size and battery longevity may become more important in device selection.

Based on the patient populations approved, we believe the market impact estimates for the narrower LBBB MADIT-CRT population are 150 million to 175 million in the U.S. and 250 million to 350 million worldwide over the next few years. We believe there's possible upside to the investment since. Left Bundle Branch Block is a strong objective discriminator that can be used to reliably identify patients who are most likely to benefit from CRT-D therapy.

MADIT-CRT has simplified the screening process, enabling permissions to easily identify these patients using an ECG analysis to screen for wide QRS and LBBB. Women received a greater benefit than men in MADIT-CRT which could lead to greater use among female patients who have historically been underrepresented in receiving CRT-D therapy.

Number four, we liked how we continue to recover from the ICD ship hold driven by the superb execution of our commercial team. With our third quarter share estimated at 26%, we are doing better than we had originally hoped. And while our share was down year-over-year, we were encouraged by the continued positive response from our customers this quarter.

Fifth, we like that we have now resolved all issues cited in our Corporate Warning Letter. This represents a major milestone in our quality journey. It also completes our journey from remediation to innovation, allowing us to focus our full attention and resources on developing new products for our customers and their patients.

Our current quality systems may prove to be a substantial competitive advantage in the coming years.

Let me switch now to what we didn't like. We didn't like our lack of growth, and we didn't like the ongoing pricing pressure we are seeing in virtually all our markets. Pricing pressure has been a persistent problem recently, and it was exacerbated this quarter by a reimbursement decision in a number of countries that led to even greater pressure on prices.

Number two, we didn't like the effect of the weak economy on elective procedures. Volumes were down again this quarter, and there's no doubt the economy played a role. We are just completing a major internal study of elective versus non-elective served market procedural change.

Number three, we didn't like our non-DES Interventional Cardiology, PI; and these three business performed below our expectations. We have initiated corrective actions, but at this point they are painfully slow in coming.

Let me switch now to hot topics. I'll close with a couple of hot topics. Hot topic number one, is our commitment to emerging market. Emerging markets, particularly China and India are driving global growth and offer considerable opportunities for Boston Scientific. We're well positioned to take advantage of these opportunities in a number of ways. For example, by increasing the size of global markets and reaching new patients.

By increasing market share to feel possible growth and gaining access to global talent, technology and resources. To take advantage of these opportunities we've implemented an emerging markets initiative as part of our corporate strategy. Our emerging market initiative has four key areas of focus: commercial, business development, manufacturing and productivity. Each area provides us with significant unique opportunities to expand and accelerate profitable growth while at the same time improving the scope and quality of global patient care.

We're excited about the potential that emerging markets present and are investing some $30 million to $40 million in planning and people to execute our initiatives. In recent weeks, we have had more than BSC staff on the ground in India working on our plan. During the quarter, India sales increased 34% to prior year. We look forward to discussing emerging markets with you in more detail at our investor day next month.

Hot topic number two is our plan to acquire Asthmatx and it's FDA approved Bronchial Thermoplasty technology. The first device based asthma treatment approved by the FDA. This acquisition is right in line with the type of acquisition that previously described as critical to our strategic plan. The deal is the right size, the right product and the right market all at the right time.

The Asthmatx business will report into our endoscopy business which already culls in pulmonologist and as a leader of the shift position in bronchoscopic devices includes stents, balloons and biopsy tools. This acquisition expands our footprint for managing lung cancer and to a large new potential market that of sever drug refractory asthma treatment.

The unmet need is immense with more that 2 million potential patients in the U.S. and 8 million worldwide. The economic story is compelling, in the pivotal trial, treated patients saw an 84% and hospitalizations post treatment and the technology of basket catheter and RF energy is familiar to us and sold another forms within endoscopy today. The acquisition of Asthmatx represents and important first step in realigning our portfolio to pursue growth opportunities in new areas of less invasive devices and therapies that address unmet patient needs.

We will continue to purse additional priority growth initiatives to strengthen the company by buying or building products we understand to be sold through sales forces we already have. The products from these acquisitions and internal developments will be leased (inaudible) basis cost and comparably effective and will possibly reduce or eliminate refractory drug use.

In this one simple paragraph, we've provided a clear pathway for the delivery of our strategic plan.

With that, I'll turn it back over to Larry who will moderate Q&A.

Larry Neumann

Thank you, Ray. At this time, we'd like to open it up to questions. And I'd like to remind everybody that in an effort to enable us to field as many questions as possible, we'd ask that you limit yourself to one question and a follow-up. And then if you have additional questions, please get back in line. Again, I remind you that Ray and Jeff will be joined during the Q&A session by Sam and Dr. Dawkins and Dr. Stein.

Question-and-Answer Session


(Operator Instructions) And our first question comes from the line of Michael Weinstein of JPMorgan.

Michael Weinstein - JPMorgan

Let me start, Ray, with the non-CRM, non-DES businesses. I think what I appreciate is the challenge of getting this businesses growing again. And right now you're facing with some of those markets with slower procedure growth. But those businesses haven't been going for the company for quite some time. And I was wondering if you could just give us a minute or two here on what you see in the near to immediate term pipeline or in the outlook for those markets that might actually return you to position to growth regardless of whatever happens in CRM and DES driving acceleration for the company.

Ray Elliott

I would argue that it's really two things. It's new products, which we have a substantial number in the pipeline, although we've been slow at getting some of those urban terms of our own target dates. And it's targeted acquisition similar to Asthmatx. And that's true.

If I look at PI non-core or certainly if I look at Women's Health and Urology, there's a number of opportunities there. But the fundamental basis for that is to offset somewhat softened elective procedures with new products and targeted acquisitions. So I'll ask and I'll do them by name just to bring up a few new products. Joe, if you want to give a little talking on PI for just not too long here, we'll keep it brief.

Joe Fitzgerald

Mike, in the PI franchise, we've had several new product launches. We have approximately five modular or heavy product launches in 2011, a new line of PTA balloons, our SFA stent in the U.S. markets in midyear next year. Those will really help us grow in the PI franchise.

In the EP space, we plan to launch our Open Irrigated Catheter outside the United States and begin a clinical trial in the United States. That is a long-awaited project that is essentially complete and just need to push some things across the goal line from a regulatory standpoint. And in our Neuromod business, as you know, the launch of our Target detachable coil was delayed this year. As Ray mentioned, we have 510(k) approval recently, I believe yesterday. And we'll begin a limited market release and then get into full launch by the end of Q1 2011.

So each of those three businesses have suffered from the lack of new products, and we're pretty satisfied with the lineup that we have in the next 15 months.

Ray Elliott

Okay. I'll ask John to do the same on Urology and Women's Health and then Mike on Endoscopy.

John Pedersen

Yes, just remember in Urology and Women's Health Business, we are growing at 6% constant currency, and we look forward to the continued rollout of our Genesys HTA technology. This technology addresses the $400 million abnormal uterine bleeding market, of which we have about 9%, 10%.

The Genesys HTA technology represents a five-year investment and completely changing the ease of user interaction with the system, and we believe this represents a significant opportunity for us to gain share over the next 18 to 24 months.

Mike Phalen

Mike, similar to both Joe and John, in the Endoscopy division, obviously we're looking forward to the Asthmatx opportunity. We think that's a big market compelling, and everything that was mentioned on the call fits our strategic plan beautifully. But we're also going to be introducing a number of new products in areas of our product portfolio that we do not compete.

Endoscopy business enjoys about 50% worldwide share of the device business and greater than 70% share in the U.S. So we're going to be entering into some segments that we do not have technology in, and we expect to take significant share from the competitors. So we really like our portfolio lineup going into 2011.

Ray Elliott

And then lastly, Michael, I think I covered yours, but if you want to chip in at the end of this, please do so.

Mike Onuscheck

The Neuromod business, obviously we just released four new products. So we're excited about actually opening up our portfolio, which we've been held back a bit on because of quality issues that we were trying to resolve here. All of that is behind us, and we've got a pipeline that's fairly impressive, and we're really excited about getting out there and starting the clinical trial in deep brain stimulation with Versa system and getting into some new indications that enable this business to start to stand on its own two feet and drive valuation for Boston Scientific.

Ray Elliott

Lastly, Mike, before we go to the next caller, the other thing you will all see on 19 is a very strong description of how we're shifting R&D, spending pretty dramatically. And I had commented on this publicly before where the things we believe in for the future will only be invested or are being invested about 6% of total R&D spending. And we have a planned shift which has been taking place as we speak. That's going to move that ultimately to about $250 million to $300 million year in growth initiatives.

So if we combine ongoing shift of R&D to growth initiatives, new product lineup we have right now, which in excess of 50 new products corporately, 30 of them in CRV and then a commitment to make intelligent acquisitions. I think that does a lot to get us there.

Michael Weinstein - JPMorgan

I just wanted to focus on cash flow for a second. Jeff, could you give us just an update and your thoughts on some of the potential outstanding cash outflow items such as the government investigations and the tax reserve dispute on guidance trends for pricing?

Jeff Capello

If you look at the remainder this year, we have two medium-sized obligations. One is the Minnesota DoJ payment that we fully accrued for. That's about $296 million. We anticipate that we will pay that in the fourth quarter. The second of the obligations is the upfront payment related to the Asthmatx acquisition of about $183 million. We anticipate that will close in the next week or two and we will fund that.

So we'll need roughly $500 million of cash for both of those items. We finished the quarter with $600 million, and we expect to have a very strong cash flow quarter in the fourth quarter. So we expect that cash flow to more than cover those obligations.

Then as you look into next year, there really only are two obligations. One is a $250 million bond that's due in January 2011. The other is a $600 million bond due in June 2011. So we expect to use the remainder of the cash on hand plus the free cash flow from the business as well as potentially a piece of the revolver to retire that debt. And I think that will put us in a pretty good position as we look forward.


Our next question comes from the line of Rick Wise with Leerink Swann.

Rick Wise - Leerink Swann

First, you talked about portfolio realignment and obviously starting off I think in a very exciting way with Asthmatx. Can you just expand your comments or your latest thoughts on both the coming in and going outside? There's been a lot of speculation about what you might divest? And on the coming inside, are we likely to see an accelerated flow of similar Asthmatx like transactions?

Ray Elliott

Obviously, I won't comment on outflow obviously. But on the inflow side, it's going to be how I describe it. While we're sitting here doing this, we got a lot of BSC folks working on deals, deal assessment, product, technology assessment, due diligence in various forms and so on. And that's going to be in the areas that we've described in the past of hypertension, obesity, diabetes and in a couple of different segments of structured heart, just to name a few. There is a longer list. There's actually 12 initiatives, and we're going to take it through this in as greater detail as we possibly can on November 19.

And they're going to follow that. I hate repeating my paragraphs, because I am driving everybody here crazy with that I am sure. But it is going to follow that pattern of that paragraph I described at the end of my formal comments in terms of staying with stuff we know. We need to leverage existing sales forces, because that's how we're going to get leverage on the top and leverage in earnings.

We're pretty good at doing things less invasively. We're going to put a lot more effort into cost effectiveness and comparative effectiveness. And we have a real interesting intensity as you look at those targeted areas around the ability to reduce or perhaps even in some case eliminate refractory drug use.

If you think of those in combination and marry that into device solutions, much of which we hope will at times at least be outpatient, not necessary all impatient, gives you a pretty good look at the areas we're going into. And then the other things that Jeff and I have commented before are of course emerging markets and OUS distribution expansion. We are not in as many places and not as big in many places as we should be.

If we execute all that really well this will be a very, very different company than it is today. And as you can tell, we're starting the process today.

Rick Wise - Leerink Swann

If I can follow up on the DES, that share is clearly stabilizing in DES as you said, making a lot of progress internationally. Seems like a lot of pipeline products. I am assuming your expectation is for building on that share over the next six, 12 months we'll hear more later. How big a risk do you think is the price pressure? You're talking about down 8% ASPs. Can you talk just a little bit about your assumptions and how concerned you are that that price pressure accelerates sort of offsetting possibly benefits of the share gains.

Ray Elliott

I'll Hank jump in at the end of this as well. But I think, again, I'll go to the strap plant. We view continuing DES price decline as inevitable, not necessarily at the rates it is at today. As you have more players in place although the quallifer earn that Rick. And as you know, we've done a good pipeline, we're going to assure more about that. We're hugely excited about synergy and how it plays out.

The qualifier I'll put on before Hank jumps in is, we may not see as many competitors in the U.S. as perhaps we've anticipated in our strategic plan because of the regulatory dollars and technical challenges that some of the companies are facing. And some cases, that a couple of real big companies that are very capable.

So I don't want to see lower prices, I think we will. But his is the kind of business that if you got enough share in it, it sure is profitable.

Hank, did you want to add some comments?

Hank Kucheman

I would agree with that obviously. Rick, as you know, the worldwide market is roughly about $4 billion a day. And as we project out into the future, if you factor in ASP decline which we think will be pleasant at prevailing rates let's say, for the most part. But if you offset that with what we predict to be volume increases and penetration, we're basically forecasting a flat market.

And with the pipeline that we have lined up here for the next several years, obviously our plans are to increase and solidify our current worldwide share positions within that market.


Our next question comes from the line of Larry Biegelsen with Wells Fargo.

Larry Biegelsen - Wells Fargo

First, let me just start on the pacemaker market. The growth rate there seems to be softening. Can you talk a little bit about what's going on in that market?

Ray Elliott

I'll let Ken Stein and Hank jump in as well. But I think our view on that market at this point in time is it's a pretty flat marketplace. In our specific case, we haven't had substantial new technology in years and years and years. So I think it's one of those views. We're already in it. There aren't a lot of people in it by large numbers. We've got new technology coming including wireless and some of the size and designing capabilities that you saw on the high voltage. And I think our view is, is it a great fast growing marketplace in the broad context. No.

Is it an opportunity for us to take share and very profitable share with new technology? I would say yes absolutely if deliver and execute on the plan.

Keith, did you want to make a few comments?

Ken Stein

I would say I'm following. The pacemaker market is a mature market. We're not expecting any novel changes in indication. So the growth that you see in the market will be primarily driven by demographic changes. As Ray said, we have some new technology, we have a plan for an RF telemetry pacemaker that is on track. We do expect to launch that in the next year.

But fundamentally, I don't expect any growth in this other than what you get just from a generally aging population.

Larry Biegelsen - Wells Fargo

And then on the ITD side, if add back the $28 million for the ship hold in the third quarter, gives you about $308 million; that's down about 2% year-over-year. But what does that say about the market? Am I looking at that wrong? Were there other reason why you would have expected to be down 2%?

Ray Elliott

I haven't done the numbers that way, but I'll take your word on the math, Larry. I think you got to look at a couple of different things. First of all, we think that U.S. market is pretty flat, even slightly down. I'm talking about dollar market not unit market. And in our specific case as you pointed out, you add back the ship hold with that slightly higher price pressure than we've seen in the past, although not different than what we've been seeing for a few months now. So I don't want it being perceived as being incremental.

And then keep in mind, we took substantial losses at our own discretion because of our decision around the HCP ethics issues and the number of people we let go. So we have reduced our own share willingly and knowingly by making those decisions, and we're happy with them. I mean we'd like to be growing, sure, but we're not going to change the decisions we've made.


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

David Lewis - Morgan Stanley

Jeff, real quick modeling question for the fourth quarter. The R&D guidance for the year implies a pretty substantial step-up in R&D spending above first quarter levels. Is there something we're missing? Is that conservatism or there is specific spending plan in the forth quarter that are going to flow through the P&L?

Jeff Capello

Well, David, I think you'll see a couple of things. One, part of the under-run in the third quarter was due to the timing of certain programs being closed down and a bit of a time gap between other programs being started up. They were clinical trials that started a little bit slower than we thought. And of course we assume the Asthmatx acquisition is going to close here in the next week or two, and we'll have some R&D associated with that. So there will be a step-up in the R&D sequentially from the third to the forth quarter that'll get us close to kind of where the guidance currently exists.

David Lewis - Morgan Stanley

And then, Ray, you talked about procedural pressure as have all of your peers. Do you have a sense of sort of on a corporate basis what do you think the impact from procedure weakness has been on Boston, which particular areas do you think you will be more economically affected than others?

Ray Elliott

I don't have that yet, but actually that's why we initiated the internal study that was started several weeks ago. We're going to be getting those data points back. I forgot what the target data is are now, but I think it's coming up in October when we're going to get a first look at that. And we're subdividing it by product type. We're subdividing by elective versus non-elective and all of that. So I don't have a dollar comment to make to you.

I would say that PI and Neuromod seem to be most affected by that. And of course, when the government puts through legislation for extension of unemployment benefits, they did not extend the COBRA coverage portion of that. So we saw sort of this inability to recover quickly from that as well.

So I think I'll make the commitment now under the assumption we can get all the work done by the time we do our next report to you. And we'll either report that on November 19 if we can get it together in time for investors or certainly at our next earnings call. We'll give a glimpse into the actual work we've done here on the study and see what the answers are.

David Lewis - Morgan Stanley

Is it safe to assume that you feel pricing sequentially was relatively same across the corporation, or is there a sequential weakness as a total corporation?

Ray Elliott

I would say that the answer is the same. I think what happened is we tried to get out information early on price as a communication, and people either love you or hate you for that. But if we see it, we try to get information out there. I think we got out there a long time ago now saying here's what we're seeing. It hasn't changed from what we saw some months ago. It has not got mores, but I think what's happening is as more companies come out and confirm that, it makes it sound worse than it is when in reality for us it's a confirmation of what we already saw.


Our next question comes from the line of Glenn Novarro with RBC Capital Markets.

Glenn Novarro - RBC Capital Markets

Ray, you guys were one of the first to see ICD pricing was getting worse, and I believe that was either on the 1Q or 2Q call. I think you said you are seeing globally ICD pricing was down more in the 3% to 5% versus the 2% to 3%? Is that still accurate?

It sounds like your sales force on the ICD side is stable. Any plans to increase that sales force? When you look back to the Guidant days, the big recalls all hit in 2005. Should we be assuming that starting next year we see the beginning of a replacement cycle for you?

Ray Elliott

Let me take those Glenn one at a time. No change; you're pretty close from the pricing. This is a marketplace that has had a long history of sort of in that $2 to $3 range. And you're right, quarter one, quarter two, we've been saying for some time we see that going to $3 to $4 and not $3 to $5. And we haven't seen that worsening or different from when we first said that. So we don't see any degeneration in it.

We have a substantial number of sales force openings in Europe particularly where we will expand the sales force. We have some related to the steps we took on HCP ethics and various other things or people being unhappy with putting (inaudible) together or unhappy with the ship hold, the things we've talked about in the past. There's nothing new there. There's no extended turnover. And we plan to at a minimum fill those backup and in the case of Europe probably do some expansion.

I think from our viewpoint, as you look at those really difficult times in the Guidant days when those situations did occur and you recognized the fact that replacement cycle now is highly dedicated to those who put in the de novo, I don't see any change in that. I think that's the history of the marketplace.

So we look at it from the dollar point of view and saying are we stung a little by that as we go through this period, yes, because you're not going to get that came from the recall. Do we end with a new replacement cycle now post recall? The answer is yes, to the extent of the cycle fills in from a replacement point of view and other things.

But the other thing we look at is if there is any downside risk to it, I think it's far offset upside by MADIT-CRT and the opportunity to market those products at a substantially higher price. So from a dollar point of view, might we be heading into a bit better replacement? I think so. But if we're not, I'll take the $5,000 or $6,000 or $7,000 of mark-up dollar value to offset it through MADIT.


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

David Roman - Goldman Sachs

Jeff, in your prepared remarks on Neuromodulation, you talked a little bit about increased utilization associated with people using up their deductible toward the end of the year. I think in last quarter's call, you talked a little bit about reimbursement pressures and increased scrutiny from payers in that therapeutic category, but we did see a very nice bounce back in that business for you up against where we're actually tougher comps in Q3 United States. Could you just may be talk about whether you're seeing any change on the payer front there and what the positive impact of new products was in that business?

Jeff Capello

As we look at how the quarter transpired, we're pleased with what happened from a demand perspective. In fact, if you looked at the transition between the months, we actually finished September even stronger from a trialing perspective. And I think historically, it's not unusual to see a patter where the back half of the year as people's deductibles and the like expire if there is a pick up in the business, and we're seeing that in a pretty strong way.

David Roman - Goldman Sachs

Michael, obviously you don't give line items sales information on new products. Could you give some commentary of a qualitative nature on the new products and a comment on regulatory as well if you like?

Michael Onuscheck

I think the first part of that goes to the regulatory path where we actually got an approval of this product a little earlier than what we had anticipated in our plan. The devices put us nicely up against both St. Jude and Medtronic in terms of competitive portfolio. We now have the largest percutaneous lead portfolio in the marketplace, and it allow us to go directly and compete with those folks.

When we look at how the breakdown comes in, about 47% of those customers who have used this product are our customers. That means a 53% are either splitting business with us and a competitor or a direct competitive customer. So we believe that this was a really smart move on our part to get these products into the marketplace. And it's given us a great deal tailwind going into the fourth quarter.

David Roman - Goldman Sachs

Ray, maybe you can talk a little bit more about the CRV strategy. You specifically noted a 100 contracts that you've won as a result of this new approach to selling. One of your competitors is certainly pursuing something similar, although it doesn't appear to have had the same degree of success that you have had to take.

Can you just talk about what you think you're doing differently and then what their response has been on the other side from the customer perspective in working with you on sort of a more coordinated effort across therapeutic categories?

Ray Elliott

Hank just did that for over 5,000 people, the Minneapolis Convention Center. So I did the plan. He did CRV value propitiation. I'm going to let him talk to that, because I think it's a great story and I think the only thing I'll preface it with before Hank takes over is I told people many, many times when I joined the company, I run our products across the top of the piece of legal paper in the CD, CRM, PI, et cetera, areas, and I ran our name and our competitors' down the right hand side, and I started putting checkmarks in.

And one of the reasons that Hank and I arrived at the strategy is we simply have more checkmarks of stuff that has number one and number two positions worldwide than anybody else. Hank, why don't you jump in and talk successes recently, why that's happening, how we might compare a bit value propitiation just for a minute or so here?

Hank Kucheman

David, I think it boils down to basically breadth and quality of our cardiovascular service offering coupled with execution. Ray mentioned the number one and number two share position point. If you put yourself in the shoes of a cardiovascular administrator in a health care system in IDN, they want to make sure that in terms of physician choice they have physician preference items.

So if you look along and across the breadth of our entire line, we enjoy a very strong either number one or number two position in most of the product franchisees that we offer. And that at the end of the day, you don't have those share positions. You don't earn those share positions unless you have physician trust. So that I think is point number one.

Point number two, if you look at the execution side, and I know I am biased but I think we have a very, very strong sales execution and marketing team, commercial team. And I think when you couple the strength of the breadth of our offering with a potential to be a "one-stop shop" type concept for a primary vendor on type of relationship, plus the execution strength of our distribution channel, I think that's why we are seeing the success that we're seeing today.

I can't speculate on what our competition is doing and their success or lack of, but I can and feel very strongly about the execution success of our commercial team.

Ray Elliott

Let me just add quickly, David, to that, because it's in the script anyway. We won't disclose the names or places, but our hit ratio is about 4-to-1 right now. So every time we go after this value proposition, we win four and lose one. And that's a hit rate we're excited about.

The other part I would add is, coming in somewhat over a year ago as an outsider, one of the biggest mistakes that I honestly believe this corporation made was in not immediately integrating Guidant into the organization and putting together CRV three or four years ago, because I think the powerhouse capability it has, as Hank pointed out, on cardiovascular service line and continuum of care for the patient and in the world we're going into of consolidated hospitals, physicians as employees, profit sharing and gain sharing, all these kind of things, I think we line up so nicely into servicing that it's terrific.

But we're doing the Guidant integration now. We're doing it well, but we should we have done it really honestly three to four years ago.


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

Kristen Stewart - Deutsche Bank

When you're going in the value proposition that you're offering, is it just simply a matter of price across the whole portfolio? Are you unbundling maybe some of the service components? How are the conversations involving in terms of price versus service and what not?

Jeff Capello

Since I'm sure we have a lot of our competition on the line, I'm not going get too specific in terms of how we address that. But it's just not a product bundle. Think of it as also a service, educational, therapeutic, educational coupled with full line of cardiovascular products that we're bringing to a healthcare system and working with them in a collaborative way to help them address some of their operating margin pressure with the services and products that we are able to bring to them.

Ray Elliott

I think too, Kristen, one of the things is this has been tried a case really in the past during different periods in medical device world over the last 25 to 30 years. The reason it hasn't worked amongst other things is that a lot of the companies had some star products, but they had some dog products. They were in number one, number two shares. And in some five and six years, they kept trying to drag the five and six shares institutions along with ones and twos. And it didn't work, because physicians said, "I'm not going to buy into that."

As Hank has pointed out and as we've said many times, if you look at the number of one and two share positions we have worldwide breadth of offering, all of a sudden you're bringing in a lot of stars combined together with, as Hank pointed out, a combination of services and additional value propositions. It's a very different approach than we have ever seen in the past.

Kristen Stewart - Deutsche Bank

And then just to clarify just on the comment you're making earlier about ICD ASPs, are those sure selling price or does that also include the mixed component of switching CRT? If it's peer price, I just want to make sure we're talking kind of peer price here too.

Ray Elliott

I'm just so glad you asked that question, because my favorite report that my prior employer, which I insist on Mr. (Leno) putting together for me was very, very sophisticated and well-defined price, peer price, volume, peer volume and mix. And unfortunately, Mr. Capello has had it used for a year, although he has delivered on the report in more recent times and we now have exactly that. And I really believe, at least in some cases, what you're hearing out there is volume and then people that are combining price and mix because their systems are not sufficiently sophisticated to separate it.

Kristen Stewart - Deutsche Bank

So yours just again is peer price?

Ray Elliott

Peer price.

Kristen Stewart - Deutsche Bank

For PROMUS Element, just in terms of the trial, I know it's going to be presented in April, do you have to have with the FDA a minimum of 1,000 patients with two-year data? Is that a requirement and when will you meet that kind of timeline?

Ray Elliott

I think the answer is no, but I'll let Dr. Dawkins answer that.

Keith Dawkins

No, it isn't. But I don't think we'll go into details of what we have to do with the FDA.

Kristen Stewart - Deutsche Bank

You don't have to have that requirement of the two year and 1,000.

Ray Elliott

The answer is no, but he's unwilling to give you more. Well, I'm sitting here with him, so I can watch his facial expression. You're not going to get anything more out of him, trust me.


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

Joanne Wuensch - BMO Capital Markets

Specifically in the last quarter, Neuromodulation sales were weaker. And at that stage were you thinking you maybe selling the business and therefore it might be a tougher sale versus your competitors. This quarter it seems to have bounced back. Some new products might seem to be there. Is that the right read or should we read something else into that sequential bounce?

Ray Elliott

I think as Jeff commented, there's some COBRA elective fee related things early in the year and the movement to the second part. In terms of divestures, while I wouldn't comment obviously on any division, the rumor that was out there does affect our viewpoint of physicians, and it doesn't help you. Whether it's true or not, it's a different subject.

But the fact of the matter is that existence of the rumor can help deter, because keep in mind unlike a stent or some of the products we sell and similar to ICD, this is where we're with patients for a lifetime. So therefore the stability in where you're going and who you're with and all that stuff is meaningful. Michael, do you want to comment on the marketplace and the improvement in it and what's going on?

Michael Onuscheck

You got to remember the patient population that we're serving is not a financially stable population. They always believe that they're going to escape their copay throughout the year and they're not going to experience a large out-of-pocket cost. The reality is, is that this is a chronic disease. It's managed by pharmaceuticals. And at some point, they meet their copay deductible and they make the decision.

Well, if I've already gotten this far, I might as well finish out the year. And that's why we always see this very steep tailend at the back half of the year. We're experiencing that again. We predicted that before. That doesn't account for what we saw in the second quarter, which was softness.

And I think, Ray, you pretty eloquently described anytime there's a rumor in the marketplace, especially in an active implantable business where the company, the physician and the patient are going to have a long-term relationship, the physician wants to know who they're going be working with.

The reality of our market is that we've just told the marketplace we're going to be here, it's irrelevant. We're going to support your patients. We're going to continue to do the things that we've done since the day we started in this industry. We're going to deliver world-class service with world-class products. And with the introduction of these new things, people have confidence that we're going to continue to innovate as well.

So that's why we think we've seen this uptick. We are happy with where we've finished though. And we think it will continue.


And our next question comes from the line of Bruce Nudell with UBS.

Bruce Nudell - UBS

Ray, you sounded far optimistic tonight with regards to the trajectory of the ICD market based on MADIT-CRT. Has your thinking changed? Where do you see U.S. and ex-U.S. market growth over the next couple of years?

Ray Elliott

I think its two things, Bruce. I don't know if we're more optimistic, but I think, and it was asked in an earlier question, we sort of had this strange period of time connected to the old Guidant recalls, so you get into this whole De Novo versus replacement scenario. We are increasingly excited about MADIT-CRT potential. It's actually been played down a bit lately, as people sort of say, well, it can't have that much effect. We actually see it quite differently, and I think we accounted for that in the script as having substantial potential even though the indication is a little bit narrow than we originally expected. The millions of dollars of potential still exist there.

We had some very unique data points that we have control of. I guess you could say in the research related to cost competitiveness and comparative effectiveness that we have not fully utilized yet, and of course we comment on the women portion of it. So there is some substantial opportunities to make that into a better place for all of us.

So I think all you are hearing is the reality of us beginning the process now are being able to actually market that, having the indication, having the on label, starting to take a look at what our target markets are and how we do it. But the history we can't change; you know, the recalls and the timing of them and replacement versus De Novo.

Last part would be, I think most people believe there'd be a little more crossover in 2011 between the De Novo value contribution to the market growth versus replacement. In other words, de novos, the negative replacement has been pretty high, when does that turn around? I don't know that anybody has seen that yet, I don't think they have; but I think on a dollar basis MADIT can help that, and certainly on a patient penetration basis.

Bruce Nudell - UBS

So like flat EOS for a couple of years; flattish and high single digits ex-U.S. Is that something you could kind of endorse?

Jeff Capello

I think we concur with you.

Bruce Nudell - UBS

And the second question I have pertains to stents. And one of the things we grappled with is, what's the role long term of biodegradable stents? And given the importance of the drug eluting stent market to you and your position and your increasingly self-made position in it, how do you view bioerodible stents as a potentially disruptive force and how's Boston Scientific positioned in that regard?

Ray Elliot

We just went thorough an exercise; we went through a huge synergy exercise review of several hours. And one of the questions we've asked Keith Dawkins to answer in the past is, on the left side here is Abbott DBA, here's us on the right side, what are the pros and kinds of DBA and where are we positioned relevant to that? Maybe Keith, you could share a bit of that with him?

Keith Dawkins

We have an internal, as you know bioerodible stent program, but our present thinking is that completely bioerodible stents would be a niche play. As you know, there's very limited matrix at the moment, two sizes. They take two to three years to disburse, no major effect on (inaudible) requirement. They can't be post dilated.

We've gone a long way with 20 years of metallic stents or the handling of metallic stent and complex anatomy appears superior. We have no randomized data for BVS and we don't really have experience in the field with what you might call workhorse lesions.

So we are very excited about our synergy stent and are investigating that in the EVOLVE trail. That's recruiting very well. Two doses of Everolimus, the PROMUS dose in half, and this has a very low abluminal bioerodible polymer load and is on what we feel is the most deliverable platform, the Element platform.

So we think in terms of workhorse lesions that our approach is appropriate and that fully bioerodible stent will remain a niche.

Bruce Nudell - UBS

Just one quick follow-up. Your Asthmatx purchase was interesting to us. Could you just give us a brief overview of where the reimbursement status for that is right now, and is it inpatient? I presume its outpatient, and is the reimbursement status established and sufficient?

Ray Elliott

Let me add a quick economics point to the prior question, and then I'll ask Mike Phalen to answer your second question. The other thing we don't know and we're not capable of predicting, competitor pricing at five years. But it's fair to assume we got a pretty good idea of what DES stent pricing may look like on the global U.S. basis five years from now. And if we take a look at the cost of producing a stent today and the cost of producing a BVS stent and we take a look at how you might want to price that in order to get a reasonable return on your invested capital return on your R&D program, I think one of the reasons in addition to the good clinical points that Keith made is, we struggle with this being much more than the niche, given where we feel it may have to priced to have a sensible return on it. So that would be an additional point.

And then Mike, would you make some comments on Asthmatx?

Mike Phalen

Sure. First of all, I think we really liked, when we did our due diligence on Asthmatx, their overall coating coverage and payment strategy, we found it to be right on the money and we offered a little bit of Boston Scientific perspective on it as well.

One of the things that they have going for them is two major societies, the American Thoracic Society and the American College of Chest Physicians are both endorsing and they've already submitted for a category one CPT code. And once that CPT code gets established, that will then help us in the coverage decisions by mapping to a new Tech APC code and an ICD-9 code.

So we really feel pretty good about the strategy. It's really coupled by a very robust dataset, and in this particular patient population just presents with tremendous cost to the system. So we like to compare the effectiveness angle, and I think the overall coding coverage and payment strategy is on track for an estimated sometime in late 2011, 2012.


Our next question comes from the line of Matthew Dodds with Citigroup.

Matthew Dodds - Citigroup

The royalty with Abbott you discussed earlier, potentially changing our milestones, can you say that you've already hit some of those milestones and it's coming down, and any color on sort of how long that could last?

Jeff Capello

So the royalty is not with Abbott; the royalty is with Novartis on the Everolimus drug. So I just want to be clear on that. And yes, for the balance of the year, we'll enjoy a slightly lower royalty rate by virtue of the fact that we've hit these lower tiers, at which point you start the New Year back at kind of the base level.

So two things have happened; one is, the mix between TAXUS and PROMUS has changed and we've sold more PROMUS Element than we anticipated which is good news. Both of those things drive up the amount of Novartis royalty we pay and create additional volume that allows us to hit some of these tiers where the actual rate goes down.

Matthew Dodds - Citigroup

And then one more question on the tax rate and the reserves. The tax rate has been running it looks like at about 10% pro forma for three or four years now. At what point does it get back to kind of a more normal (mid-tax) rate? Is this something that can continue to go on, or is this kind of the end of the road? And some of these decisions I guess coming up with the IRS could change the rate to a more normal rate?

Jeff Capello

I think not unlike a lot of other sophisticated organizations from a tax perspective, you're going to have challenges to the positions you've taken. We're no different than some of our competitors within the sector and outside the sector. And I think the IRS is taking a fresh look at a lot of the different tax structures.

So we have $1.3 billion reserve on our balance sheet. What's happening now though is, we are now reaching the point where a lot of those years for which we have reserves established are now coming through review at the IRS which is why you're seeing acceleration of items coming through the rate.

Having said that, we are very comfortable with our tax structure; we are very comfortable with our reserve levels. We've had obviously extensive reviews, both internally and with external advisors. But we will see an acceleration of the conclusion of these discussions with the IRS. And that could provide some upside or downside through the rate.

What we have attempt to do is, show you what the true operational ongoing rate is and try to identify these one-off items, because these are one-off items that will not affect the rate going forward. But there really is no guarantee to say that we will not have next quarter for example, some other discrete one-time items. And the best we can do is just isolate those for you and explain to you what they are and give you guidance in terms of what the ongoing rate could be.


Our next question comes from the line of Tim Lee with Piper Jaffray.

Tim Lee - Piper Jaffray

Just wanted to follow up on some of the questions earlier regarding pricing. Ray, you cited pricing pressure is your number one dislike. But what changes the pricing dynamics in these markets and in particular the US DES market?

Ray Elliott

Well, I think some of the dynamics that are changing are leverage of hospitals, as is consolidation as there are more competitors coming into the marketplace in some product categories, not necessarily just DES obviously. I think outside the U.S. its reimbursement, governmental changes. I think its changes in ultimately where PCIs are going to be done. So there is going to be a combative pressure of inside-outside, and increasing number of PCIs done on the outpatient marketplace.

The thing that's most obvious to me that has really kind of shocked me is the rapid pace with which physicians are becoming employees of hospitals or had singular contracts, and the potential through the government of making compensational alignment and decisional alignment between hospitals and physicians that I don't think has been there in the past.

I think when you put all that together, it's negative to price. If I clip it around the other way, and I won't repeat all Hank's comments, I think though a lot of the things that are going on, although negative on a pure price basis play into our hands around our cardiovascular service line, value proposition, our ability to get to less invasive, our ability to shift gears and service out patient populations as we look at new strategies. So if it's pure price, is it negative free industry for a while? I would say yes. Do I see it as negative for us in terms of overall strategy? I would say no. Because I think we have counterpunches that are perhaps I think more effective in that environment than some other people.

Tim Lee - Piper Jaffray

Then just one last one on the DES side. You mentioned synergy as next generation Everolimus platform. But is there a next generation Paclitaxel program in development as well?

Keith Dawkins

We're going to launch in the U.S. TAXUS Element and PROMUS Element. And we at that point will make a decision around what we do next with Paclitaxel. TAXUS Element and PROMUS Element both have been launched out of the U.S.

Tim Lee - Piper Jaffray

A workhorse platform, should we be thinking about that as a Everolimus, and maybe the Paclitaxel becomes a niche, maybe a diabetic program, should we think about in that sense going forward.

Keith Dawkins

We're setting up trial now to look specifically at the diabetic question. As you know, the results of Paclitaxel and diabetes are impressive. We had to CE Mark first in that area, specifically for diabetes. We will, at the back end of this year or quarter one next year have head-to-head comparison of Everolimus and Paclitaxel in diabetics in a trial in India. And obviously for the first time with the element platform, we'll be able to compare the same platform with the results in diabetics and non-diabetics for Paclitaxel and Everolimus.

So we will be able to make a direct comparison of the PERSEUS and the Platinum trials in diabetic patients using the same stent platform; that's never been done before. The stent platform is nearly always different when making that comparison. So the diabetic area is important for us. And obviously it's an epidemic and it's increasing dramatically worldwide.


And your last question will come from the line of Sarah Michelmore with Cowen.

Sarah Michelmore - Cowen

Just a quick one on DES and a big picture question for Ray. Ray, you kind of tucked around it, but where are we in terms of gross margin trajectory for the DES franchise and prior to the PROMUS transition in 2012 in the U.S. and Japan, what are the key dynamics that we should be thinking about in terms of that business and the profitability standpoint?

Ray Elliott

There is a bunch of different things starting with P&L work and optimization and cost reduction and all that kind of work that DES doesn't get a free ride. Any more than anything else, we strive to get a 5% basis out of it each year is one answer. But the major driver is our ability to take the Element platform, internalize into Irish production and take share in all the marketplaces we're in while bringing it to the U.S. and Japan. And the latter point alone, forgetting everything else is about $200 million annual run rate starting in the middle of 2012. And we continue to be on schedule for that.

There is a lot of other tweaks and efforts and scrap reductions and less returns and lower shelf life and a whole pile of other programs that hit that COGS line and therefore helped you people, but the big killer is bringing TAXUS and PROMUS Element to the U.S. and to Japan on schedule with our on target cost structure in Ireland, that's the killer.

And in the interim 18 months or so should we think about you doing you best to offset some margin decreases or what's kind of the situation in between?

Ray Elliott

I think if you look at real unit growth in DES as Hank and others have commented, the unit growth continues to be attractive with penetration through PI rates. Pricing continues to be negative and we continue to work on our cost and distribution structure taking market share. It's great having Element because obviously we can take that platform and distinguish ourselves.

And as I mentioned, I'm not so sure, I don't know if this really answers your question too much. But I'm not so convinced this is, maybe I was when I first joined, but we're going to be bombarded with U.S. DES competition because as I look at the regulatory programs now. And some of the technical problems some of our competitors maybe having; I don't know if that's as big an issue as I thought it was. So I think for the next 18 we're fine. And I think the company is excited about synergy. And I think the $200 million is very, very real. So I get good comfort. I don't loose any sleep at night about DES at this point.

Sarah Michelmore - Cowen

And then just a big picture question for you, and I assume you're going to address some of this on 19. But you've been in the saddle I guess a year plus at this point. And how do you feel in terms of your visibility or your confidence in the companies ability to really drive some improvements in sales momentum and see the rewards from these operating margins, just give us a depth check in terms of where do you think you are in that process?

Ray Elliott

Well, I good other than the saddle sores, it's been an interesting ride after the first year, but I don't see anything different. I was a lot more concerned when I joined the company and didn't sense the focus on sales and I don't mean this every individual, it's been a broad sense. I was very disturbed by the lack of integration of guidance. And for the life of me I couldn't figure out what the corporate strategic plan was. We now have all those things in hand underway and in motion, great management team. We put together a strategic plan. We know the places we need to be in.

It's still a turnaround and we lost a few months here and there of time. I would have like to have been where we are today three, four, five months ago. But ship holds and things like that happen in this business if you are in it long enough. I feel very, very good and very confident in the ability of the company to do this. I think we're going to have a very unique story. But it's significantly been a bit of a tough ride, but that's the way things go sometimes.

Sarah Michelmore - Cowen

And are you going to be able to communicate some 2011 targets when we see you November or is it still premature for that?

Ray Elliott

Unless you can figure out how to get our Board to improve them before that which is impossible, it would be impossible for us to communicate because we'd be communicating something publicly that our Board has neither approved nor reviewed. So the technical ability to do that is essentially zero.

Larry Neumann

I'd like to thank everybody for joining us this evening. Before you disconnect, the operator will give you instructions for the replay.


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