St. Jude Medical's (STJ) CEO Dan Starks on Q2 2014 Results - Earnings Call Transcript

| About: St. Jude (STJ)

St. Jude Medical, Inc. (NYSE:STJ)

Q2 2014 Results Earnings Conference Call

July 16, 2014 8:00 AM ET


Dan Starks - Chief Executive Officer

John Heinmiller - Executive Vice President

Mike Rousseau - Chief Operating Officer

Eric Fain - Group President

Don Zurbay - Chief Financial Officer

Rachel Ellingson - Vice President, Global Communications


Mike Weinstein - JP Morgan

Bob Hopkins - Bank of America

David Lewis - Morgan Stanley

Kristen Stewart - Deutsche Bank

Joanne Wuensch - BMO Capital Markets

Brooks West - Piper Jaffray


Welcome to the St. Jude Medical Second Quarter 2014 Earnings Conference Call. Hosting the call today is Dan Starks, Chairman, President and Chief Executive Officer of St. Jude Medical.

Before we begin, let me remind you that some of the statements made during this conference call may be considered forward-looking statements. The company's 10-K for fiscal year 2013 and 10-Q for the fiscal quarter ended March 29, 2014, identify certain factors that could cause the company's actual results to differ materially from those projected in any forward-looking statements made this morning. The company does not undertake to update any forward-looking statements as a result of new information or future events or developments. The 10-K and 10-Q, as well as the company's other SEC filings, are available through the company or online.

During the call, non-GAAP financial measures may be used to provide information pertinent to ongoing business performance. Tables reconciling these measures to the most comparable GAAP measures are available in the company's press release issued earlier this morning, or on the St. Jude Medical's website at

At this time, all participants have been placed in a listen-only mode. And the floor will be opened for questions following management's prepared remarks.

It is now my pleasure to turn the floor over to Dan Starks.

Dan Starks

Thank you, Stephanie. Welcome to the St. Jude Medical second quarter 2014 earnings conference call. With me on the call today are John Heinmiller, Executive Vice President; Mike Rousseau, Chief Operating Officer; Eric Fain, Group President; Don Zurbay, Chief Financial Officer; and Rachel Ellingson, Vice President of Global Communications.

Our plan this morning is for Don Zurbay to provide a review of our financial results for the second quarter and to give sales and earnings guidance, both for the third quarter and full year 2014.

I will then address several topics and open it up for your questions. Go ahead, Don.

Don Zurbay

Thank you, Dan. Sales for the quarter totaled $1.448 billion, up 3% from the $1.403 billion reported in the second quarter of last year. Favorable foreign currency translations increased this quarter sales by approximately $4 million and were not significant to our overall sales results.

As a result, all comments during this call referencing second quarter sales growth will be made on an as reported basis. We will update our currency assumptions in a moment, but the actual average exchange rates during the second quarter were within our previous guidance range.

During the second quarter, we recognized $21 million or $0.08 per share in after-tax special items. For further information regarding these items, please refer to details provided in our press release. Comments during this call referencing second quarter and full year 2014 results, including EPS amounts, will be exclusive of these items.

Additionally, at the end of 2013, the federal research and development tax credit expired. It has not yet been extended for 2014. In this circumstance, GAAP requires us to estimate and record our effective income tax rate, assuming that the R&D tax credit is not extended.

For purposes of the conference call and our calculation of adjusted net earnings, however, we are assuming that the R&D tax credit will be extended for 2014 as in past years. As a result, comments referencing our second quarter results and guidance for 2014 including EPS amounts are presented based on an effective income tax rate that contemplates the extension of the tax credit retroactive to the beginning of 2014. Earnings per share were $1.02 for the second quarter of 2014, a 6% increase over adjusted EPS of $0.96 in the second quarter of 2013.

Before we discuss our second quarter 2014 sales results by product category, with guidance for the third quarter and the remainder of 2014, let me provide a few comments about currency exchange rates. As discussed on prior calls, the two main currencies influencing St. Jude Medical’s operations are the euro and the yen.

In preparing our sales and earnings guidance for the second quarter and full year 2014, we used exchange rates which assumed that each euro would translate into about $1.35 to $1.40 and for the yen, each 100 yen to 105 yen would translate into $1. For the second quarter, the actual average exchange rates for the euro and the yen were consistent with these assumptions.

In preparing our sales and earnings guidance for the third quarter and remainder of 2014, we are now assuming that each euro will translate into about $1.34 to $1.39. And we now expect each 99 yen to 104 yen to translate into $1. This change in assumptions regarding currency exchange rates did not significantly impact our total forecasted sales for the remainder of 2014.

During the second quarter, we announced FDA approval of the CardioMEMS heart failure system and completed the acquisition of the remaining shares of CardioMEMS that we did not previously own. Our sales guidance for 2014 continues to include sales of approximately $15 million to $20 million related to the CardioMEMS product line.

Additionally, earlier this week we announced the signing of a definitive agreement to acquire NeuroTherm. And we anticipate closing this transaction during the third quarter. We expect to add sales of approximately $10 million to $15 million related to the NeuroTherm product line to a neuromodulation business in 2014 and expect the transaction to be neutral to our 2014 earnings per share, excluding the impact of one-time transaction costs.

Finally, as we’ve previously mentioned due to our 52-53 week fiscal year convention, 2014 will include an additional calendar week of sales and operations in the fourth quarter. We estimate that this additional calendar week which includes New Year's Eve and New Year's Day will result in approximately three additional selling days.

For the purpose of helping refine financial models, we've analyzed prior experiences and expect these three additional selling days to positively impact our fourth quarter sales growth rate by approximately 3%. For the second quarter, total cardiac rhythm management sales which include revenue from both our ICD and pacemaker product lines, were 733 million, up 2% compared to last year’s second quarter.

For the second quarter, ICD sales were $462 million, up 2% from last year’s second quarter. U.S. ICD sales were $270 million also up 2% from last year’s second quarter and International ICD sales were $187 million, a 2% increase from the second quarter 2013. For low-voltage devices, sales for the second quarter totaled $271 million, up 3% from last year’s second quarter.

In the United States, pacemaker sales were $107 million. In our international markets, pacemaker sales were approximately $164 million. For the third quarter of 2014, we expect total CRM sales to be in the range of $660 million to $690 million. For the full year 2014, we now expect total CRM sales to be in the range of $2.810 billion to $2.850 billion.

The midpoint of this guidance for the year continues to assume that the global CRM market will be flat year-over-year on a reported basis. And that we will gain approximately 50 basis points of global market share.

Atrial fibrillation or AF product sales for the second quarter totaled $257 million, up 8% over the second quarter of last year. For the third quarter of 2014, we expect AF product sales to be in the range of $240 million to $260 million. We now expect full year 2014 AF product sales to be in the range of $1.030 billion to $1.060 billion.

Total sales of cardiovascular products for the second quarter of 2014 were $351 million, up 3% from the second quarter of 2013. For the second quarter of 2014, within the cardiovascular category, sales of structural heart products were $171 million, up 6% over the second quarter of 2014, sales of vascular products in the second quarter of 2014 were $180 million, up 1% versus the second quarter of 2013.

For the third quarter of 2014, we expect cardiovascular product sales to be in the range of $315 million to $335 million. We now expect full year 2014 cardiovascular sales -- product sales to be in the range of $1.360 billion to $1.390 billion. This guidance continues to include sales of approximately $15 million to $20 million related to the CardioMEMS product line.

Total sales of neuromodulation products in the second quarter of 2014 were $107 million, down 1% from the second quarter of 2013. For the third quarter of 2014, we expect sales of neuromodulation products to be in the range of $100 million to $110 million.

We now expect full year 2014 neuromodulation sales of $440 million to $460 million. This guidance includes sales of approximately $10 million to $15 million related to the recently announced NeuroTherm acquisition.

Let me pause at this point to recap our revised full year sales guidance. If you add up the sales guidance across all product platforms, we now expect total sales for 2014 to be approximately $5.640 billion to $5.760 billion. This guidance results in consolidated sales growth in the range of 3% to 5% on a constant currency basis.

The geographic breakdown of St. Jude Medical sales in the second quarter of 2014 is detailed in our press release. In total, 46% of St. Jude Medical sales in the second quarter came from the U.S., while 54% came from international markets. More than 14% of St. Jude Medical sales in the second quarter came from emerging markets.

The gross profit margin during the second quarter was 71.9%, down 100 basis points from the second quarter of 2014 -- '13, primarily due to the impact of excise taxes, which had a negative 70 basis point impact year-over-year.

For the first six months of 2014, the gross profit margin was 71.9%, 110 basis point decline from the same period in 2013 with 100 basis point decline related to the impact of excise taxes.

For the full year 2014, we remain on track to report gross profit margin in the range of 71.5% to 72.0%. As a reminder, this represents a decrease of 30 to 80 basis points versus the full year 2013 and this is principally driven by a 50 basis point decline related to excise taxes.

Our second quarter SG&A expenses were 34.0% of net sales, representing a 60 basis point improvement over the second quarter of 2013. For the full year 2014, we continue to expect SG&A as a percent of net sales to be in the range of 33.5% to 34.0%.

Research and development expenses in the second quarter of 2014 were 12.3% of net sales. For the full year 2014, we continue to expect R&D expenses to be in the range of 12.2% to 12.7% of net sales.

Other expense was $21 million in the second quarter. For the third quarter of 2014, we expect other expense will be approximately $18 million to $23 million. For the full year 2014, we expect other expense of approximately $75 million to $85 million, primarily driven by interest expense on our outstanding debt.

For the second quarter, our effective income tax rate was 18.0%. For 2014, we now expect the effective tax rate to be in the range of 18.0% to 18.5%.

During the second quarter of 2014, we continue to treat spinal modulation as a variable interest entity and consolidate their results. Additionally, we also treat CardioMEMS as a variable interest entity for the portion of the quarter prior to completing our purchase.

The portion of these variable interest entity net losses that are not attributable to St. Jude Medical has been added back to our net profit on the line net losses attributable to non-controlling interest and totaled $8 million in the second quarter of 2014.

For the third quarter, we estimate that this line item will total approximately $5 million to $10 million. For the full year, we now expect this line to total approximately $25 million to $35 million.

Moving on to the balance sheet, at the end of the second quarter, we had approximately $1.6 billion in cash and cash equivalents and $4.2 billion in total debt. There were no borrowings outstanding under our $1.5 billion revolving credit facility available with a group of banks.

Next, I want to offer some comments regarding our EPS outlook for the third quarter and full year 2014. In preparing our EPS guidance, we have assumed that in the third quarter of 2014, the weighted average outstanding shares used in our fully diluted EPS calculation will be about 290 million to 292 million shares and the weighted average outstanding shares for the full year 2014 will be about 290 million to 292 million shares.

The company expects adjusted EPS for the third quarter of 2014 to be in the range of $0.95 to $0.97. For the full year 2014, we now expect adjusted EPS to be in the range of $3.96 to $4.01. On a constant currency basis, our adjusted earnings per share guidance represent EPS growth of approximately 6% to 8%.

I will now turn it back to Dan.

Dan Starks

Thank you, Don. St. Jude Medical's progress during the second quarter supports our view that we are on track to enter 2015 capable of delivering both EPS leverage and mid to high single-digit sales growth.

We are especially encouraged that we completed our acquisition of CardioMEMS during the second quarter and are now beginning to pioneer an entirely new market with a breakthrough technology that has been proven to help reduce hospital readmission rates for heart failure patients.

This technology will be especially important to hospitals in the United States due to the reimbursement implications of Medicare's Hospital Readmissions Reduction or HRR Program.

The HRR Program penalizes hospitals that have above-average readmissions within 30 days following heart failure, acute MI or pneumonia discharge. In 2015 and beyond, this penalty will be up to 3% of all inpatient Medicare payments.

This 3% difference in Medicare reimbursement rate can be a factor in determining which healthcare provider succeed and which healthcare providers fail as the healthcare system in the United States continues to consolidate in today's environment of healthcare reform.

We are not aware of any other new technology that has such a direct impact on the metric of heart failure readmission rates for hospitals and think that is hospital executives become educated on the value proposition that surrounds the CardioMEMS technology, CardioMEMS can become a must-have technology for every hospital that has a major heart failure program in the United States.

This value proposition includes not only the reimbursement implications of the Medicare HRR Program, but also reimbursement for the device implant under DRG 264, the robust safety profile for the technology and reimbursement for ongoing patient monitoring. We think this value proposition makes the CardioMEMS heart failure management system one of the most compelling new growth drivers in our portfolio.

Having said this, we caution that pioneering a new market always takes time. During the remainder of this year, our priorities will be to initiate our FDA mandated post-approval clinical trial, establish key reference centers in the United States, make sure we understand any challenges customers face incorporating the CardioMEMS technology into their existing heart failure program workflows, and refine the training and education we provide to the St. Jude Medical organization as well as to our customers. We simultaneously are beginning the process of establishing appropriate reimbursement for their CardioMEMS technology in key international markets.

As we roll out our CardioMEMS heart failure management system in the United States, we expect to see meaningful synergy between this technology and our entire portfolio of CRM products. CardioMEMS, our Allure Quadra CRT-P and our Quadripolar CRT-D product lines all are focused on reducing hospital readmission rates for heart failure patients.

Data presented at the recent HRS meeting during the second quarter reported that compared with standard bipolar leads, St. Jude Medical Quadripolar CRT devices delivered a 53% reduction in hospital readmissions for heart failure patients, which translated into a 62% reduction in overall cost of care. In addition, an analysis of 22,900 patients showed that the Quadripolar CRT system was associated with an 18% relative reduction in mortality compared with bipolar leads. We are optimistic that our unique MPP, or MultiPoint Pacing Quadripolar CRT system will show additional benefit on hospital readmission rates, healthcare economics, and patient outcomes.

We also think that customers will find value in using the St. Jude Medical Merlin Patient Care System to monitor both their CardioMEMS and their CRM patients as these will often be the same people. In this context, it is noteworthy that the St. Jude Medical Merlin Patient Care System is the only remote monitoring system that has been reported to help reduce mortality rates and by implication hospital readmission rates in a cohort of over 260,000 pacemaker and defibrillator patients. And data presented at the recent HRS Scientific Sessions, pacemaker and defibrillator patients who did not adhere to remote monitoring with St. Jude Medical’s Merlin Patient Care System had more than twice the risk of dying compared with patients who did use our remote monitoring system during the study period.

To summarize, our acquisition of CardioMEMS in the second quarter gives us both a significant new growth driver and is expected to help strengthen our CRM franchise. In every market where the products already are approved, our value proposition for centers with heart failure programs will include the clinical and economic benefit of CardioMEMS, our Quadripolar CRT-D, our MultiPoint Pacing, and our Quadripolar CRT-P products, as well as seamless integration of remote patient monitoring for all of these products through our Merlin Patient Care System, and the option of direct interface to the patient's electronic health records. This value proposition gives us a realistic opportunity to become the global leader in device-based solutions to help manage heart failure patients and help accelerate our rate of sales growth on a sustainable basis.

Next, we would like to transition from the topic of St. Jude Medical’s Heart Failure Program to the topic of our program to help manage the disease of atrial fibrillation and other cardiac arrhythmias. The transition is a smooth one because so many heart failure patients also suffer from electrophysiology issues. We expect significant synergy between the strength of our heart failure and electrophysiology programs as the market moves more toward population-based payment for healthcare. It, therefore, is especially important that during the second quarter our TOCCASTAR pivotal IDE clinical trial in the United States was reported to reach its primary safety and efficacy endpoints.

We expect FDA to approve our TactiCath line of contact force-sensing AF ablation catheters before the end of this year. It also is noteworthy that during the second quarter, we eliminated inventory constraints for our TactiCath line of contact force-sensing ablation catheters, and are now ready to fully launch this product line in CE Mark countries during the second half of this year. In every market where the products are approved, we now can offer healthcare providers who have an electrophysiology program, a product bundle that includes CRT low and high-voltage devices, diagnostic and therapeutic EP catheters and disposables, advanced mapping technology, MediGuide catheter navigation technology, and a fully integrated EP cath lab.

From the perspective of ability to impact a customer’s electrophysiology program, this makes us the largest player in a $14 billion segment of the global medical device market. Virtually, our entire EP product bundle in this $14 billion space includes key technologies that are available only from St. Jude Medical and that help improve patient outcomes and help reduce the cost of healthcare.

Next, we would like to touch briefly on the topic of hypertension and the priority we place on this disease state in our long-term growth program. Although renal denervation has suffered a setback due to the result of a competitor’s clinical trial, our due diligence including takeaways from the EuroPCR and input from our medical advisors convinces us that St. Jude Medical's renal denervation program can be successful and continues to deserve high priority. We will not say more at this time for competitive reasons, but investors should know that we are continuing to move forward with planning our confidential research and development and with clinical trials in the area of renal denervation for treatment resistant hypertension.

Hypertension is in the sweet spot of our strategic targeting, because it is such an expensive epidemic disease and is a significant comorbidity for patients who suffer from heart failure and from atrial fibrillation. Developing this market will take longer than expected due to competitor activity, but we continue to expect our renal denervation program to fuel meaningful growth longer-term. We think we have the technology and innovation needed to improve patient outcomes, reduce healthcare costs, and become the leader in this space on a sustainable basis.

Next, we would like to update investors regarding St. Jude Medical's program to help patients who suffer from risk of stroke. Medical device innovation that reduces the risk of stroke is in St. Jude Medical’s portfolio in part due to the comorbidity of stroke and atrial fibrillation. We're continuing to make good progress in Europe marketing our left atrial appendage, or LAA closure technologies for select patients who have high risk of stroke due to their history of AF. We expect this portion of our revenue to continue growing at a strong double-digit rate for the foreseeable future. The regulatory path for bringing this technology to market in the United States has been challenging, but we remain committed to doing so and continue to view our LAA closure technology to be a meaningful new growth driver long-term.

Our emerging stroke portfolio also includes our patent foramen ovale, or PFO closure product line for certain patients who are at high risk for cryptogenic stroke. Investors may recall that St. Jude Medical has a leading share of the small PFO closure market in Europe and that we submitted our PMA application for FDA approval following the results of our RESPECT PFO closure trial in 2012. Since the RESPECT trial results were reported, we've been continuing to analyse data, consult with our experts, and consult with FDA to clarify whether we have a viable path for bringing our PFO closure technology to market in the United States. This process is still ongoing. We expect to provide an additional update on the status of our PFO closure program in the United States later this year or on our fourth quarter earnings call. We are not suggesting that revenue for PFO closure in the United States should be incorporated into financial modeling for 2015. But from a strategic perspective, investors should know that our long-term growth program includes an emerging portfolio of cost-effective innovation for patients who are at high risk of stroke. Today, this portfolio consists of our products for LAA closure, PFO closure, implantable cardiac monitoring, and AF ablation.

Next we’d like to discuss St. Jude Medical program to treat chronic pain, another expensive epidemic diseases where we think we can become the leader on a sustainable basis through cost-effective innovation. Although our chronic pain program admittedly has stalled in the past due to quality issues of our own making, we are pleased to report that our Plano facility was reinspected by FDA and that the reinspection was successful.

We are in the process of rolling out next generation products both in United States and in CE Mark countries. Our new products in CE Mark countries include two technologies that are unique and potentially disruptive, Burst Technology for spinal cord stimulation, or SCS and SCS of the dorsal root ganglion or DRG for peripheral pain that cannot be treated with traditional SCS.

We think revenue in our chronic pain business will return to double-digit growth over the next few quarters on the strength of these new products. The announcement we made earlier this week that we're acquiring NeuroTherm should be seen in the context that we are now reinvigorating the growth of our chronic pain business.

NeuroTherm is a leader in the market for treating chronic pain through RF ablation of spinal nerves. Virtually every pain management physician, we already call on to market our implantable SCS and DRG stimulation devices also performs RF ablation of spinal nerves on a regular basis. Favorable reimbursement for this procedure already is in place in the United States.

The market for RF ablation of the spinal nerves is approximately $200 million in size and is expected to continue growing at a high single-digit or low double-digit rate for the foreseeable future. From a strategic perspective, our NeuroTherm acquisition will leverage our core competency and RF ablation and our existing global call point with pain management physicians, as well as help accelerate customer access and therefore market share gains for our new SCS and DRG stimulation products.

Before making closing remarks, we would like to confirm that a number of additional growth drivers in St. Jude Medical business that we have not selected for special discussion today continue to perform well. Revenue from our PCI optimization program and from our deep brain stimulation business continues to grow at a double-digit rate.

We've scaled up our production of Nanostim devices to support an expanded launch in CE Mark countries. Enrollment in our pivotal IDE trials in the United States, both for Nanostim and for our Portico product lines is moving forward.

We continue to expect to receive CE Mark for our 27 and 29 millimeter Portico TAVI products before the end of this year. We expect our revenue growth rate to accelerate the second half of 2014 and believe we are on track to deliver both EPS leverage and mid-to-high single-digit growth in 2015.

Now for closing remarks, before we open the call for questions. Our comments this morning have addressed strategic issues more than usual in appreciation of investor attention to the level of structural change and consolidation we are seeing in our market. We think this level of change creates significant opportunity for St. Jude Medical to win by being different.

We have completed our restructuring to become more centralized, better leverage our scale and speak to our customers with one voice as a company when appropriate. We already enjoy the global reach to which much of our peer group aspires as reflected in our sales mix where 54% of our revenue is generated in global markets outside the United States and more than 40% of our revenues is generated in emerging markets.

We are focused on delivering medical device innovation that is not available from other companies that improves patient outcomes and that reduces the cost of healthcare for some of the world's most expensive epidemic diseases. Examples of this innovation include CardioMEMS, quadripolar multipoint pacing, quadripolar CRT-P Nanostim MediGuide, contact force-sensing ablation catheters in a fully integrated EP cath lab, Burst spinal cord stimulation, DRG stimulation and our integrated OCT FFR system to name just a few of these unique innovations.

Our innovation-based growth strategy implies robust profit margins that will support a higher level of investment in R&D on a sustainable basis than will be possible for competitors that focus more on lower margin commodities and services and less profitable geographic markets.

In 2015, we expect to be the global leader bringing disruptive cost-effective innovation to help customer solve problems involving heart failure, atrial fibrillation, other cardiac arrhythmias and chronic pain as well as PCI optimization for coronary artery disease.

As we continue to expand our product portfolio, we expect to extend the same type of leadership to valvular disease, hypertension and stroke. We think this strategy will generate superior value for our shareholders for many years to come.

With that, we're ready to open the call for questions and we’ll put it back to you Stephanie to moderate the questions.

Question-and-Answer Session


(Operator Instructions) Thank you. And our first question comes from the line of Mike Weinstein with JP Morgan. Your line is open.

Mike Weinstein - JP Morgan

Thank you. Good morning. Dan, I wanted to start with maybe one or two businesses, maybe I’ll start with neuromodulation where -- congratulations on the Plano reinspection. I know it was long time coming and glad to hear it went well. You commented that you expect growth there to which has been lacking for the first half of the year, basically sales were flat to partly down, do you expect to get back to double digits in neuromodulation business over the next several quarters? Can you just walk us through that in your view what drives revenue growth from flat to down to double digits?

Daniel Starks

Sure. First thing, Mike, would be to appreciate the difference in sales growth rates in global markets outside the United States in our neuromodulation business versus the growth rate in the United States. So in the fourth quarter, revenue from neuromodulation -- in the second quarter here, revenue from neuromodulation products grew 28% in international markets and shrank 11% in the United States.

So we’re already doing very well on the international side and the challenge now is to pump up the U.S. market. And I think the progress on lifting the warning letter is an initial factor. It is important to customers to understand the level of progress that we are -- that we have made on that front and we’re looking forward to the -- to closing out the -- officially closing out the warning letter later this year.

The Protege product launch that we began to roll out last quarter is really significant. It’s the first new product in that area for quite a number of years. And it has features that are much appreciated by customers. We have very good feedback. We made some progress in converting competitive accounts. We think we have a good opportunity with our existing customer base to increase the usage of St. Jude Medical in the daily practice of number of physicians where we have a presence but not yet a leading presence.

So I think that the new product lines and the upgradable software, upgradable capabilities and small size and the fact that with the -- customers are aware that we already have put into the market in Europe the Burst Technology and the idea that down the road that it will be possible to upgrade the Protege with the Burst Technology once that -- once those clinical trials have been completed in the United States and once we receive the FDA approval.

All of that is an appealing bundle to customers and then to help further the -- this was a reason strategically that we were interested in approaching NeuroTherm and bringing NeuroTherm into our portfolio. Again it’s the point that virtually every single one of the pain management physicians in the United States who are doing SCS implants are also doing RF ablation of spinal nerves. And so instead of only going to the pain management physicians with our new Protege product line, we also can go to pain management physicians with the RF ablation of spinal nerves products for the first time.

And we think that this will help us get access to the practices where we have not previously had access. We got now two interesting technologies to bring to them supported by a very high level of customer service and clinical field support. And so all in all, it's a pretty good product bundle and the feedback we get from our field organization is encouraging to the idea that we're definitely on track here to improve our growth rate in the United States.

I think we have an opportunity on the international side to maintain. And we’ll do what we can to improve the growth rate there as well. So I think you put those two the positive dynamics in both broad geographies together and that tells us that we're on track to get back to growth in our global neuromodulation business.

Mike Weinstein - JP Morgan

I’ll limit myself to one follow-up here. But a couple of people asked about the third quarter revenue guidance and third quarter revenue guidance would pretty be conservative compared to last couple of quarters. You guided to what would have applied total down 2% to up 4% revenue growth range. If I look back at the first half of the year, you grew revenues 3% to 4% and in both cases, you ended up either beating the high end of the guidance range in the first quarter and in the second quarter you came very close to the high end of the guidance range. How should we view the minus 2% to plus 4%that you guided for the third quarter and is it your expectation that revenue growth actually accelerate in the second half of the year? Thanks.

Don Zurbay

Yes, it’s our expectation that revenue actually will accelerate in the second half of the year. We made a point to include that in our prepared remarks and we fully expect to deliver on that -- on that goal. When you ask how should one view the cumulative sales guidance range of minus 2% to positive 4%, we’re not expecting a minus 2%. I think the minus when you just cumulate all the guidance ranges and get a broad range, you got to put that in context. At that point, it's just math.

With the visibility of any one product line or of any single product grouping is, it was necessarily limited. And so we’re not expecting a downturn in business at all. We’re expecting acceleration in our business and the other comment that you made, Mike, about our history here of erring on the side of the conservative and in the first quarter, we exceeded the top end of the sales guidance and in this current quarter we’ve been up toward the top end of the sales guidance. We are -- our goal is to continue to deliver along those lines.

Mike Weinstein - JP Morgan

Perfect. I’ll let some others jump in. Thanks guys.

Donald Zurbay

You’re welcome.


Our next question comes from the line of Bob Hopkins with Bank of America. Your line is open.

Bob Hopkins - Bank of America

Thanks and good morning.

Dan Starks

Good morning.

Bob Hopkins - Bank of America

So two questions. One for, Eric, if he is on the call, and then, Dan, one for you if okay. First question for, Eric, regards the O-U.S. ICD business, and it seems to be doing relatively well in the face of a bunch of new competition, especially in Europe on the Quad-Pole side. So I was wondering, Eric, if you could give us a sense as to how you're doing in Europe, now that that's a fully competitive situation from a Quad-Pole perspective, or relatively fully competitive at this point. So if just some comments there would be helpful. And then, Dan, I have a question for CardioMEMS afterwards.

Dan Starks

Okay. Bob, Eric and I are looking at each other and let me start out answering your question here about the O-U.S. ICD business. And so, first, let me just start with the topic of the numbers. As everyone appreciate, our ICD business in global markets outside the United States grew at 2% in the second quarter and consistent with our 2% growth here in the U.S. market. So, that's really the answer is that we’re holding share or continuing to take share here in the second quarter with all -- against all competitive product offerings in global markets. So, that’s may be the best answer. I don't think it gets a lot more complicated than that.

Are you looking for more color, Bob, or really just for us to indicate that the 2% growth that we’re reporting really is solid, and is the best data point we could point to on the competitiveness of our ICD product line with other companies having Quadripolar devices in the market?

Bob Hopkins - Bank of America

Yeah. I just want to make sure that the good results weren’t something unique going on in Japan. Say I just want to make sure that we had some good context for what’s happening in Europe, where there are bunch of competitors in Quad-Pole in the market. And so in Europe, do you think you’re holding or gaining?

Dan Starks

Yeah. I think, and in fact, Bob, to your point in Japan on the high-voltage side, we’re losing market share currently because of not having an MRI compatible labeling for our ICD product line. So Japan is not providing some unusual tailwind that hides weakness in Europe, and in fact it's to the contrary. It’s our strength in Europe that is overcoming the weakness on the high-voltage side in Japan and still providing a net 2% gain in our total global -- in our total ICD business outside the United States. So, it’s strength in Europe.

Bob Hopkins - Bank of America

Great. That’s important as people think about 2015 an oncoming U.S. competition. So the second question was on CardioMEMS, and just, Dan, broadly, I wanted to make sure that we’re getting the message on CardioMEMS correct, and that we’re hearing what you’re saying correctly. Basically, has anything changed in your view in your outlook for CardioMEMS, either near-term or long-term relative to what you kind of previously commentated? I mean, obviously, we heard the guidance, which is the same, but just want to make sure that we understand the messages. Has kind of anything deferred in your view on either the near-term or long-term outlook for CardioMEMS now that you’re in the marketplace a little bit? And if you’ll be willing to give us a sense for how many centers you expect to be in this year that would be helpful too.

Dan Starks

There's no change in our view or in our commentary surrounding CardioMEMS versus our prior messages earlier this year, Bob. Now that may change as we gain experience. And so one of the points that a person always wants to keep in mind is that, is the comments we made in the past about pioneering a new market always takes time and there are always unknowns. Now whether those unknowns are on the -- give us upside, or whether those unknowns lead us to come back at a future point and say well everything is on tract, but start-up time, selling cycle and stuff is longer than we’re previously hypothesizing, I can't say. But -- and it’s just still too early, the level of customer interest is as high as we expected it to be and our view is that the priority here is to move in a high quality -- we will move forward to begin developing this market in a high-quality way, focused on long-term program benefit and rather than try to adjust kind of do something quick.

And so we’re not interested in quick and cutting any corners. We’re interested in approaching customers with comprehensive messaging, with the complete approach to this, with a complete discussion of what can we do to help them achieve their goals with their heart failure patients. And virtually in my own experience each significant customer that I talked with on this front is very focused on their heart failure program and the metrics surrounding their heart failure program. And so if the company and St. Jude Medical can, if the company can come to them with really a very credible, concrete, not waving our arms and talking fluff but really talking clinical evidence, hard economic evidence, talking specific experience, specifically how can we help them reduce their heart failure readmissions. This is a very welcome discussion in the eyes of customers.

So we're on to something here and we're very enthusiastic. We think that the CardioMEMS program and not just the program standalone, but the program as a bit of a leading discussion point for our more comprehensive heart failure program. And again all of the clinical evidence and economic evidence that we have on the benefits of our unique CRT capabilities and then add to it the benefit of the work we've done here now over quite a number of years showing the -- showing mortality benefit with our remote monitoring system as well as significant economic benefit and then the idea that all of this -- all of this is integrated into a St. Jude Medical system and that we don’t have a standalone CardioMEMS with one way of following the CardioMEMS component that’s in a patient and now use a different system to follow the pacemaker or ICD that that same patient has. This is a real formulary and the way that our organization is talking about it is, we now have a St. Jude Medical formulary for a device-based benefit for a comprehensive heart failure program. And nobody else does.

So this is the real deal and exact timing of how many new accounts win and what the rate of uptake is and what the learning curve will be for different customers and what generalizations we can make about, general rate of uptake over what period of time. Those are things we don't really know yet and we will figure that out quite a little bit over the next couple of quarters and then it will put us in a position to be really very confident about the guidance we gave for this part of our business in 2015. Whatever the details are we think they are going to be good.

Bob Hopkins - Bank of America

Great, Dan. Thanks very much.

Dan Starks

You are welcome.


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

David Lewis - Morgan Stanley

Good morning. Dan, maybe a strategic question for you and then maybe a follow-up for Eric. But, Dan, you mentioned specifically in this call that you wanted to address the changing environment in your remarks. And I wonder if you could comment a couple questions that are all related. I mean, do you feel increased pressure to augment your size and scale? Others are suggesting it’s a priority for them, maybe St Jude a little less so? And I just wonder can you continue to win by being smaller but more innovative and are you confident that you can grow faster than some of these larger players or these conglomerates that are emerging? I want you to get your commentary on some of those things and a quick follow-up.

Dan Starks

David, the one thing that always comes to my mind when people talk about just size and itself, you think about the largest bureaucratic organizations, I mean, I think about something like some portions of the U.S. government. I mean the level of efficiency, the level of effectiveness is suboptimal and sometimes the larger an organization is the harder is to that organization to be effective.

So it isn’t about just size and itself. One attributes of just size in a relatively inefficient large organization is that there's a lot of share to take. So we use to be a heck of a lot smaller, use to be that the rest of the market, almost seemed like most of the market was bigger than us and we were very comfortable competing against larger companies with the idea that very often the largest companies were the easiest to take share from.

And now as you, that just those are background general comment. Now as we talk about what counts the customers in the environment healthcare reform and with the level of consolidation going on. The point is to be big enough to really deserve a seat at the table in customer discussions at the most senior level with customers and to have and so that big enough focuses more on how much can we impact the program. It’s not a question of just how big is our company, it’s a question of how much can we impact the program.

And so you can see that, we’ve got an absolute focus and a laser focus, and this is something that we've been working on for a long time. This is not something where we're now scrambling to reposition the company.

We chose these areas in past years with the idea that a winning formula for St. Jude Medical will be targeting large diseases that where people are spending a lot of money suboptimally, where into us the beauty of medical device innovation has always been the possibility of coming to customers and offering them a solution for the patients that’s going to improve the quality of care, but just as importantly, significantly reduce the cost of care.

So that's why we went after atrial fibrillation. That’s why we gone after heart failure. That’s why we’re going after hypertension. And so -- and part of the purpose of our prepared comments this morning were just to make sure that everybody who is focused on these kinds of issues understands how our portfolio hangs together and that it’s not, our portfolio was not a collection of random product lines.

Our portfolio is organized around selected disease state that fit our strategic criteria where to the extent we execute well and we’ll never execute perfectly, but we usually execute better than the competition. Where we execute well, we will earn ourselves a seat at the table of the largest healthcare providers at the most senior executive level.

And so again as you go to the larger systems and talked them about what -- so what are the areas of your organization where that you are most concerned about where someone comes in and offers a solution you're going to -- it’s exactly the kind of thing you’re looking for heart failures right at the top of that list.

And then as you -- then the point of it is that it isn’t just about heart failure, it’s about the heart failure patients and so look at that comorbidity of atrial fibrillation alone with those heart failure patients not to mention other electrophysiology issues with those heart failure patient.

So we come in with the most competitive, broadest, deepest heart failure solutions program, number one. And then as we’re having that discussion, that transitions into a discussion of, well, the part of the solution here for the heart failure patients in CRT and so that naturally then now we’re talking about remote monitoring of CRT and remote monitoring of CardioMEMS, and why wouldn’t that naturally lead to a helpful tailwind for the rest of our low and high-voltage product line.

And to the extent we’re talking about the atrial fibrillation with the heart failure patients and then we’ve got such a strong comprehensive broader than anybody else atrial fibrillation program. You can just see how all of this makes us a very interesting key partner who has earned the seat of the table in an environment of healthcare reform.

So, to the extent other companies are just kind of more diluted and don't have the same level of focus that we have, but overall they’re larger than us. We think that there is plenty of opportunity for us to take share from those kinds of large organization.

Another point I’d make is that, although, we all realize that consolidation is ongoing and that there are significant implication for competitive dynamics in a consolidated environment. There is a lot of -- there still continues to be significant head-to-head competition in product category areas.

If we were to use for example, atrial fibrillation, everyone knows, everyone close to the business knows that the, our main competition in the area of our atrial fibrillation program is Johnson & Johnson.

Our discussions with customers are not about do we have sutures. Our discussion with customers is about the therapeutic areas. So that would be -- that’s the best I can do here in a short period of time to address your question, David.

David Lewis - Morgan Stanley

Very helpful, Dan. And maybe just a quick follow-up for, Eric, that was extremely helpful. Eric, you did mention stock manager. Dan talked about stock management and all the things the company is going on. Specifically as it relates to left atrial appendage, are you in a position now that this talk about whether you can move forward with the U.S. ID without Watchman approval and is there a kind of Watchman comparative path and then a non-Watchman comparative path and when can we expect an update from St. Jude on that topic?

Eric Fain

Sure. Well, there is certainly a path both ways. We’re going to be watching and listening to the upcoming panel meeting that we’re expecting in the fall to help guide our thinking. The comparative type of trial design that we’ve talked about before, which would be a non-inferiority type of design will be a more efficient path for us for FDA approval. So we’re again looking to see the outcome of the panel meeting and then we’ll finalize our own plan.

David Lewis - Morgan Stanley

Okay. Thank you very much.

Dan Starks

You’re welcome.


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

Kristen Stewart - Deutsche Bank

Hey. Thanks for taking the question. I just wanted to return again, I guess, the topic of just this acceleration in growth and just kind of balancing that with CardioMEMS, because you definitely anticipate your earlier comments still seems to be some concerns about your view on the opportunity there? Can you maybe just help us understand what you see as the key components that are going to drive the acceleration as we are exiting out of 2014 and whether that’s primarily CardioMEMS or Portico or Nanostim or TactiCath or balance of both? Maybe just help us appreciate how important CardioMEMS is relative to the rest?

Dan Starks

Sure. CardioMEMS is only a component for our total growth profile. And we are -- so we’re not -- and so let me reorganize my thoughts first, Kristen, rather than stumble with my words here.

What we’re accounting on for growth acceleration in the second half of this year is TactiCath in international markets and as we then think about 2015, TactiCath for the U.S., we think that TactiCath in the U.S. will have limited impact because of the uncertainty of when we will receive FDA approval. Usually, we find that the timing of product approvals tends to be on the long side rather than on the short side here in recent -- in the current environment.

So it maybe that we receive TactiCath approval for the United States only for the end of this year, too late to impact 2014, but definitely giving us good visibility for TactiCath benefit in the U.S. in 2015 and we will be just further ahead with TactiCath benefit in CE Mark countries for 2015.

So I would say, TactiCath, CardioMEMS, the uptake in neuromodulation as we get the benefit of the prodigy launch, the Protege launch and now add to that in a smaller way, add to that the benefit of our NeuroTherm acquisition.

So those three product categories are all -- I’m saying the chronic pain, TactiCath and CardioMEMS, those three broad product categories all are headed toward acceleration here in -- partly in the second half of this year and then even more so in 2015.

As we think about 2015, we will be -- we have good confidence that we will enter 2015 with our full portfolio of sizes in Portico on the market where the regulatory path is to receive a CE Mark.

So that we’ll see a little bit of benefit -- building benefit here in the second half of this year from continued uptake of Portico. But really, the main goal here for Portico is to give us good visibility that we have a path toward meaningful additional growth with our Portico line in 2015.

So we've got that and then there another point would be the progress that we make with Nanostim. So the -- what we’re doing with Nanostim is we’re focused on doing it right, going slow, working to make sure that as many centers as possible have a very comfortable, confident, high quality, satisfactory clinical experience with their first implants with the Nanostim.

So it’s -- that would be very different than seeing how many customers can we provide Nanostim too. We want these to be high quality satisfactory initial experiences for the benefit of the market long-term. So we're going slow with Nanostim but we’re making steady progress with Nanostim.

So we’ll see more benefit from Nanostim in the second half of this year than in the first half of this year and then, but again the benefit we see in the second half of this year will be important, not because of the total dollar value of that benefit, but because of the transparency it gives us for additional growth in 2015 coming from the Nanostim product line.

So, I think, I'm not taking notes here as I am talking to you, but that's at least five significant growth drivers that are all coming together here, where investors should be able to see the progress in the second half of the year to really gain confidence that those five categories or growth drivers are all coming together to give us the acceleration in 2015.

And then having said that, we are talking modest acceleration, we’re not overreaching here in setting expect -- beginning to set expectations for 2015. And it wouldn’t surprise us at all to have the progression here be that after delivering 2% growth in 2013, we deliver something like about 4% or 5% growth in 2014.

Setting up as we’ve said that we think we’ll be delivering mid to high single -- we think will be well-positioned to deliver mid to high single-digit growth in 2015 even though it's too early for us to give guidance for 2015 and between here and there it maybe that our information has changed. So those are the things that we look to. Those are the major items that come to mind as you ask.

Kristen Stewart - Deutsche Bank

And then just with respect to the U.S., I guess ICD market and even peacemakers. How comfortable do you feel, I guess looking out to 2015 given that there will be or at least your competitors are talking about having new products on the market potentially in MRI safe ICD, more quadrapolar technology that you'll be able to still deliver that mid to high single-digit growth rate, despite what maybe a more challenging CRM marketplace?

Dan Starks

We have good confidence that we will achieve our growth goals in the CRM side of our business. You’re asking the question, Kristin, motivates me to offer some additional commentary on the CRM market.

And we didn’t realize during our call last quarter, what the other companies would report in this area and now that the other companies have reported their CRM numbers for the first quarter, we can go back to Q1 and say that the CRM market in the first quarter was softer than we realized at the time of our call a quarter ago.

Now that has two implications, one is that it made us -- we’re taking that information to heart in thinking about market growth for the remainder of this year. We -- the data shows that in the first quarter of 2014 the global CRM market shrank about 2.5% and you recall that we modeled our growth at a flat CRM market. In fact in the first quarter the global market shrank about 2.5%.

The another takeaway from having more complete data now for the first quarter is we gained 100 basis points of share in global CRM market in the first quarter. So now as we look at the second quarter, we’re not -- we again -- we’re being cautious because we need to see the other companies report their numbers for their CRM results to firm up our market model for the second quarter and so, it maybe that our current estimates are mistaken.

But we currently estimate that in the second quarter, the global CRM market shrank a little bit more, not as much as in the first quarter, but that the market was not flat, that the market declined a little bit more here in the second quarter.

That’s our estimate, we maybe right, we maybe wrong. And but if we’re right that the global market shrank a little bit more here in the second quarter, that means that we again gained additional market share in the second quarter.

So, and so that holds both on the international side and on the U.S. side, we like our competitive position. We like the way that we’re succeeding against the competitive product offerings.

As you mention the other companies will have new products well so will we. So we haven't talked about new products in the CRM space for 2015 yet, but we will have and we expect to continue to be successful in the CRM space.

And then remember, our earlier comments about the synergy, we expect to see from CardioMEMS for our CRM franchise. And we think, we like our portfolio, we like our strategic positioning, we like the way our whole growth program holds together and deliver synergy across multiple parts of our portfolio.

Kristen Stewart - Deutsche Bank

Thanks very much.

Dan Starks

You’re welcome. Maybe two more questions.


Your next question comes from the line of Joanne Wuensch with BMO Capital Markets. Your line is open.

Joanne Wuensch - BMO Capital Markets

Hi. Thank you for taking the question and good morning.

Dan Starks

Good morning.

Joanne Wuensch - BMO Capital Markets

On NeuroTherm acquisition, which you announced, could you talk a little bit about what made you pull the trigger on that particular acquisition. I mean how you’re viewing future ones as you look out across for things that are available to you?

Dan Starks

We pulled the trigger on the NeuroTherm acquisition because we found good people, good technology, good opportunity for -- to leverage our technology portfolio together with NeuroTherm. We see -- significant opportunity for sales synergy with a readymade leading portfolio in RF Ablation of spinal nerve space where we have more comprehensive global reach than the NeuroTherm organization does standalone. So we see sales synergy, cost synergy, good customer call point synergy.

We see enhanced access to key customers as result of that acquisition to help introduce other new technology we have in our neuromodulation portfolio that I've commented on previously. And we also found the price to be fair. So all of those things motivated us to pull the trigger.

Joanne Wuensch - BMO Capital Markets

Just as a follow-up with everybody doing a lot of things to get access to OUS cash and to manage their tax rate. Is there any thing that you can give us or thoughts of how you're approaching those two items on your income and balance sheet? Thank you.

Dan Starks

Joanne, I'm going to refer your question to our Chief Financial Officer, Don Zurbay, and ask you, Don, if you have any comment.

Don Zurbay

I don’t have any thing other than what we've previously commented on…

Dan Starks

Maybe remind people that do we have any plans to get at OUS catch -- cash in 2015.

Don Zurbay

Yeah. We do have a structure in place that will allow us to repatriate a significant amount cash as we get into the early part of 2015 but as I mentioned before.

Dan Starks

Yeah. So we’re not going to offer details Joanne but we've given you positive answer.

Joanne Wuensch - BMO Capital Markets

Thank you very much

Dan Starks

You’re welcome. And this will be our last question.


And your last question comes from the line of Brooks West with Piper Jaffray. Your line is open.

Brooks West - Piper Jaffray

Thank you. Dan, two quick questions for you. One just another follow-up on AF, you talked a lot about TactiCath. You haven't mentioned as much the flexibility catheter which our position checks has actually pointed to at least equally important. Can you talk a little bit about that launch in the second half within the next year and then we’re constantly trying to compare you to Biosense?

Obviously, this is the first time you’re going to have really competitive -- the family of competitive ablation catheters. Can you talk similar, how you talked about the potential inflection in neuro growth. What -- how we can look at the area of growth rate over the neuro longer term here with the addition of these ablation catheter and then I had just one quick follow-up on cardiovascular?

Dan Starks

Sure. Well, Brooks, it's a great question and there were some suggestion as we're preparing for the call that we might volunteer and update on the flexibility catheter because the program has made some good progress. And the only reason we didn’t’ volunteer it in our prepared comments was we're just thinking that most people weren’t kind of really be tuned into it. And so let’s live it a little bit -- let’s live it little clean and simple for the broader audience. But flexibility is all good news and you're exactly right that this is a great technology, great product line of the -- for those on the call who don't know we’re talking about it. It’s very innovative, flexible metal tip on our ablation catheter with good intellectual property protection and a great data to support the benefits of this kind of -- very innovative tip electrode. For any specific update, Eric, are we in a position to offer any specific update on flexibility?

Eric Fain

Sure. Brooks, just as Dan said it's the timing. So we actually just received our CE Mark for flexibility and so we’re just in the process of preparing to roll that out in Europe. And as we've been projecting, we were expecting to have approval in the United States sometime towards the end of the year.

As Dan said, we’re very enthusiastic about flexibility and then if you think about flexibility and TactiCath with force-sensing, the combination of the two really get us in a meaningful way to have leading technology in the ablation catheter space where we haven't been strong in the past. Flexibility, really you can think of as a work force ablation catheter we've had over 50 KOLs that have worked with us throughout the development process to provide their input in terms of the handling characteristics and we’ve gotten consistent strong feedback and we’re really excited now to get started in patients.

Brooks West - Piper Jaffray

And then, Dan, just any commentary on where that growth rate can go for your A-fib business, it’s been at about 8%. Obviously, the ablation catheter market has been faster growth than that. Can we expect that to pick up a couple of points over time?

Dan Starks


Brooks West - Piper Jaffray

Thanks I’ll leave with that.

Dan Starks

Okay. And, so we’ve run out of time. I apologize that we didn't get to more questioners but hopefully with the questions that we did get to, we provided a lot of information that others wanted to know about. So I’ll turn it back to you Stephanie to offer your closing remarks. And thank you everybody for joining us on the call this morning.


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