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St. Jude Medical (NYSE:STJ)

Q4 2010 Earnings Call

January 26, 2011 8:00 am ET

Executives

John Heinmiller - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Daniel Starks - Chairman of the Board, Chief Executive Officer and President

Analysts

Robert Hopkins - Lehman Brothers

Michael Weinstein - JP Morgan Chase & Co

Raj Denhoy - Jefferies & Company, Inc.

Larry Biegelsen - Wells Fargo Securities, LLC

Frederick Wise - Leerink Swann LLC

David Lewis - Morgan Stanley

Tao Levy - Collins Stewart LLC

Operator

Welcome to St. Jude Medical's Fourth Quarter and Full Year 2010 Earnings Conference Call. Hosting the call today is Dan Starks, Chairman, President and Chief Executive Officer of St. Jude Medical.

The remarks made during this conference call contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. Such forward-looking statements include the expectations, plans and prospects for the company, including potential clinical success, anticipated regulatory approvals and future product launches and projected revenues, margins, earnings and market shares.

The statements made by the company are based upon management's current expectations and are subject to certain risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. These risks and uncertainties include market conditions, and other factors beyond the company's control and the risk factors and other cautionary statements described in the company's filings with the SEC, including those described in the risk factors and cautionary statement sections of the company's quarterly report on Form 10-K for the fiscal quarter ended October 2, 2010. The company does not intend to update these statements and undertakes no duty to any person to provide any such updates under any circumstance. [Operator Instructions]

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

Daniel Starks

Thank you, Celeste. Welcome to the St. Jude Medical fourth quarter and full year 2010 earnings conference call. With me on the call today are John Heinmiller, Executive Vice President and Chief Financial Officer; Eric Fain, President of our Cardiac Rhythm Management division; Mike Rousseau, Group President; and Angie Craig, Vice President of Corporate Relations and Human Resources. Our plan this morning is for John Heinmiller to provide his normal review of our financial results for the fourth quarter and full year 2010 and to give sales and earnings guidance both for the first quarter and full year 2011. I will then address several topics and open it up for your questions. Go ahead, John.

John Heinmiller

Thank you, Dan. Sales for the quarter totaled $1,350,000,000, up approximately 12% over the $1,203,000,000 reported in the fourth quarter of last year. On a constant currency basis, fourth quarter sales increased 13% versus last year. Unfavorable foreign currency translations versus last year's fourth quarter decreased this quarter sales by about $14 million.

For the full year 2010, net sales were $5,165,000,000, up 10.3% over 2009. Favorable foreign currency translations versus those used in 2009 increased 2010's net sales by approximately $23 million, resulting in constant currency sales growth for the year of approximately 9.8%.

During the fourth quarter, we recorded several special items. In total, the net impact of all of these items reduced the fourth quarter EPS by $0.13. Each of these items is described in the footnotes to the condensed consolidated statements of earnings that accompanies our press release this morning. Let me take a moment here to briefly explain each item.

First, we recorded after-tax charges of $22 million or $0.07 per share, primarily related to closing and other costs associated with the acquisition of AGA Medical. Also in connection with the acquisition of AGA Medical, as required under Generally Accepted Accounting Principles, we increased the value of AGA Medical's inventory on hand at the date of the acquisition by approximately $30 million.

During the fourth quarter, approximately $7 million of this increase in inventory value was absorbed in cost of sales. This item reduced earnings per share in the fourth quarter by approximately one penny. We expect the remaining $23 million will be absorbed into cost of goods sold over the first six months of 2011.

During the fourth quarter, we reached a settlement with the U.S. Department of Justice and the U.S. Attorney's Office in Boston to resolve the previously disclosed 2005 industry-wide investigation of post-market clinical studies and registries. In connection with this settlement, we recorded after-tax charges of $15 million or $0.05 per share.

During the fourth quarter, we recorded an after-tax inventory obsolescence charge of approximately $18 million or $0.05 per share, primarily related to excess ICD [implantable cardioverter defibrillator] inventory. The overwhelming success of our 2010 launch of the Fortify and Unify high-voltage product line in the United States resulted in an unprecedented shift in customer preference from older models of ICDs, which necessitated the obsolescence charge. By the end of 2010, approximately 95% of our mix of ICD and CRT-D devices in the United States was Fortify and Unify.

During the fourth quarter, we recorded a write-down of $5 million or $0.01 per share, reflecting a decline in the fair market value of an investment. Also during the fourth quarter, the federal research and development tax credit was extended for both 2010 and 2011, retroactive to the beginning of 2010. As a result, during the fourth quarter, we recorded a $20 million benefit to income tax expense, which increased earnings per share by $0.06, representing the cumulative catch-up adjustment of this credit for the first three quarters of 2010.

The net impact of all of these items reduced the fourth quarter EPS by $0.13. Comments during this call referencing fourth quarter and full year 2010 results, including EPS amounts, will be exclusive of these items.

Earnings per share were $0.75 for the fourth quarter of 2010, a 17% increase over adjusted EPS of $0.64 in the fourth quarter of 2009 and above our guidance range of $0.72 to $0.74. For the full year 2010, adjusted earnings per share were $3.01, a 24% increase over adjusted EPS of $2.43 for the full year 2009.

Before we discuss our financial results for 2010 and offer our sales and earnings guidance for 2011, let me provide a few comments about currency exchange rates and the assumptions we are using in our outlook for this year. The two main currencies influencing St. Jude Medical operations are the euro and the yen. In preparing our sales and earnings guidance for the first quarter and full year 2011, we are assuming that each euro will translate into about $1.32 to $1.37. And for the yen, each JPY 80 to JPY 85 will translate into USD $1.

I will now turn our discussion to the sales by product category. For the fourth quarter, total Cardiac Rhythm Management sales, which include revenue from both our ICD and pacemaker product lines, were $762 million, up 9% from last year's fourth quarter, including $10 million of unfavorable foreign currency translations. On a constant currency basis, total CRM product sales for the fourth quarter increased 11%. Total CRM product sales for the full year 2010 were $3,040,000,000, representing a 10% increase over 2009. Favorable foreign currency translations increased 2009 CRM sales by approximately $6 million. On a constant currency basis, total CRM product sales for the full year 2010 increased 10%.

For the fourth quarter, ICD sales were $458 million, up 16% from last year's fourth quarter. U.S. ICD sales were $273 million, a 15% increase and international ICD sales were $185 million, a 17% increase over the fourth quarter of 2009, including $7 million of unfavorable foreign currency translations. On a constant currency basis, total ICD sales for the fourth quarter increased 18%. For the year 2010, ICD sales were $1,820,000,000, up 15% versus 2009. The impact of foreign currency translations on reported ICD sales for 2010 versus rates used for 2009 was not material.

For low-voltage devices, sales for the fourth quarter totaled $304 million, consistent with last year's fourth quarter. In the United States, pacemaker sales were $124 million. In our international markets, pacemaker sales were approximately $180 million, including $3 million of unfavorable foreign currency translations. For the year 2010, pacemaker sales were $1,220,000,000, up 2% over 2009. Favorable foreign currency translations versus those used in 2009 increased 2010's pacemaker sales by approximately $7 million. On a constant currency basis, total pacemaker product sales for the full year 2010 increased 2%.

For the first quarter of 2011, we expect total CRM sales to be in the range of $745 million to $775 million. For the full year 2011, we expect total CRM sales to be in the range of $3,170,000,000 to $3,250,000,000. As you are evaluating our guidance for the first quarter and full year 2011, keep in mind that during 2010, we reported additional CRM sales of approximately $40 million related to a competitor being off the ICD market in the U.S. We estimate approximately $25 million of these additional sales were included in our first quarter 2010 results. If you eliminate the one-time competitive sales windfall from the first quarter of 2010, the upper end of our first quarter 2011 CRM guidance range represents about 7% currency neutral growth over the prior-year period.

Atrial Fibrillation, or AF, product sales for the fourth quarter totaled $193 million, up 13% over the fourth quarter of last year, including $1 million of unfavorable foreign currency translations. For the year 2010, AF product sales were $708 million, an increase of 13% over 2009, including a $5 million increase due to favorable foreign currency translations. On a constant currency basis, AF product sales increased 12% in 2010. For the first quarter of 2011, we expect AF product sales to be in the range of $175 million to $190 million. We expect full year 2011 AF product sales to be in the range of $770 million to $800 million.

Total sales of Cardiovascular products for the fourth quarter of 2010 were $287 million, up 20% over the fourth quarter of 2009, including a $25 million contribution from the recently acquired AGA Medical. Total cardiovascular product sales for full year 2010 were $1,037,000,000, up 9% over 2009, including an $11 million increase due to favorable foreign currency translations. On a constant currency basis, Cardiovascular product sales increased 8% in 2010.

Within this category of products, sales of vascular closure products in the fourth quarter of 2010 were $92 million. Total vascular closure product sales for 2010 were $375 million. Sales of heart valve products in the fourth quarter of 2010 were $87 million. Total sales of heart valve products for 2010 were $337 million.

Please note that with the acquisition of AGA Medical, this is the last quarter that we will be breaking out vascular closure products and heart valve products sales separately. Going forward, we will be breaking out our sales of cardiovascular products into two categories, structural heart products and vascular products.

Sales of heart valve products, along with the AMPLATZER Occluder products and [ph] left atrial appendage plug will be incorporated into our structural heart category. Sales of vascular closure products will be incorporated into our vascular products category, which will also include the FFR pressure wire, OCT products, vascular plugs and other vascular accessories.

For the first quarter of 2011, we expect Cardiovascular product sales to be in the range of $310 million to $325 million. We expect full year 2011 Cardiovascular product sales to be in the range of $1,320,000,000 to $1,350,000,000.

St. Jude Medical closed on its acquisition of AGA Medical on November 18, 2010. AGA Medical sales for the 2010 period prior to the acquisition were approximately $185 million. The benefit of these acquired sales is incorporated into our full year guidance for Cardiovascular product sales.

Total sales of Neuromodulation products in the fourth quarter of 2010 were $108 million, up 15% from the fourth quarter of 2009. For the full year 2010, Neuromodulation products sales were $380 million, up 15% over 2009. For the first quarter of 2011, we expect sales of Neuromodulation products to be in the range of $90 million to $95 million. We expect full year 2011 Neuromodulation sales of $410 million to $435 million. Let me pause at this point and recap our 2011 sales guidance.

For Cardiac Rhythm Management devices, we expect sales for 2011 in the range of $3,170,000,000 to $3,250,000,000. Sales of our AF products for 2011 are expected to reach $770 million to $800 million. For Cardiovascular products, we expect 2011 sales in the range of $1,320,000,000 to $1,350,000,000, and we expect sales of Neuromodulation products to be $410 million to $435 million. If you add up the sales across all growth platforms, total sales in 2011 are expected to be $5,670,000,000 to $5,835,000,000. This guidance results in consolidated sales growth in the range of 10% to 13%.

The geographic breakdown of St. Jude Medical sales in the fourth quarter of 2010 is now part of our press release. We would refer you to this detail. In total, 49% of St. Jude Medical sales in the fourth quarter came from the United States, while 51% came from international markets.

The gross profit margin during the fourth quarter was 72.7%, consistent with the third quarter of 2010 and representing a decline as expected compared with the fourth quarter of 2009, due to the impact of absorbing costs associated with remote monitoring and wireless telemetry capabilities in our pacemaker product line. For the full year 2010, the gross profit margin was 73.4%. For the full year 2011, we expect gross profit margins to be in the range of 73.5% to 74.0%.

This full year 2011 gross profit margin guidance does not take into account the non-recurring cost of sales related to the inventory valuation adjustment recorded for GAAP purposes at the time of the AGA Medical acquisition. We expect this item will increase reported cost of sales by approximately $15 million in the first quarter of 2011 and $8 million in the second quarter. We expect gross profit margins to continue to improve in future years as we ramp-up manufacturing volumes in our new facilities in Costa Rica and in Malaysia.

Our fourth quarter SG&A expenses were 34.3% of net sales, representing a 100 basis point improvement over the fourth quarter of 2009. For the full year 2010, SG&A expenses were 34.5% of net sales compared with 36.3% in 2009. For 2011, exclusive of the impact related to AGA Medical, we plan to continue leveraging our core SG&A expenses as a percentage of net sales.

The AGA Medical operations, including the amortization expense related to intangible assets acquired, are expected to increase SG&A expenses as a percentage of net sales by approximately 70 basis points in 2011. However, given the fixed nature of a portion of these expenses, we expect to leverage these costs in future periods. As a result of all these factors, for the full year 2011, we expect SG&A as a percentage of net sales to be in the range of 34.5% to 35.0%.

Research and development expenses in the fourth quarter of 2010 were 12.9% of net sales, representing an 80 basis point increase over the fourth quarter of 2009, due to the AGA acquisition and timing of certain development activities. For the full year 2010, R&D expenses were 12.2% of net sales consistent with 2009. For the full year of 2011, we expect R&D expenses to be in the range of 12.5% to 13.5% of net sales as we expand funding for our new initiatives to accelerate sales growth long term.

Other expense was $12 million in the fourth quarter, and for the first quarter of 2011, we expect the other income and expense line item will be a net expense of approximately $20 million. For the full year 2011, we expect other expense of approximately $70 million to $75 million, primarily driven by interest expense on our outstanding debt. For 2010, our effective income tax rate was 24.5%. For 2011, we expect the effective tax rate to be in the range of 24.0% to 24.5%.

Moving on to the balance sheet. At the end of the fourth quarter, we had $500 million in cash and cash equivalents and $2,512,000,000 in total debt. During the fourth quarter, we entered into a new revolving credit facility with a group of banks. The new agreement provides $1.5 billion of unsecured credit with the maturity in 2015. There were no borrowings outstanding under this credit facility at year end.

Next, I want to offer some comments regarding our EPS outlook for the first quarter and full year 2011. In preparing our EPS guidance, we have assumed that in the first quarter of 2011, the share count used in our fully diluted EPS calculation will be about 326 million to 328 million shares, with a weighted-average outstanding shares for the full year 2011 estimated at 329 million to 331 million. This guidance on outstanding shares takes into account that during the fourth quarter and through mid-January 2011, we completed a $900 million share repurchase, which was designed to offset the 13.6 million shares of common stock issued in connection with the acquisition of AGA Medical and shares expected to be issued under the company's stock compensation plans.

The company expects consolidated EPS for the first quarter of 2011 to be in the range of $0.77 to $0.79, and for the full year 2011, we expect consolidated EPS to be in the range of $3.25 to $3.30. This expectation represents EPS growth of approximately 8% to 10% over the 2010 adjusted EPS of $3.01. Keep in mind that we expect to expand investment in R&D during 2011 to between 12.5% and 13.5% of sales compared with the full year investment in 2010 of 12.2% of sales. This effectively reallocates approximately 300 basis points of potential EPS growth to expand investment in R&D during 2011.

And I would now like to turn it back to Dan Starks.

Daniel Starks

Thank you, John. St. Jude Medical places high priority on returning to a position where we can deliver double-digit constant currency organic sales growth on a sustainable basis. We are making good progress delivering on this goal as reflected by sales growth in the fourth quarter based on a strong cycle of new products.

During our earnings call one quarter ago, I outlined more than 14 initiatives that either had been completed or are underway to increase our sales growth longer term. We will talk about all of these growth initiatives in more detail at our annual investors meeting next week, but I would like to briefly review the list on this call.

Funding for these initiatives is reflected in our guidance, that we expect to increase R&D as a percent of sales in 2011. First, with respect to our CRM business, we have focused on two initiatives designed to accelerate CRM sales growth. The first one is complete. We have made all of the leadership and other changes we needed to restore competitive effectiveness to our U.S. CRM sales organization and return to gaining CRM's share in our U.S. business in the same way we continue to gain CRM share in our International business.

We are supporting our restored competitive effectiveness with a strong pipeline of new ICD products scheduled to launch in the United States in 2011, which includes our quadripolar CRT systems. As a leading indicator for our likely success with these new products, international ICD sales that included these products were up 21% constant currency during the fourth quarter.

In addition to continuing to gain share with de novo implants of ICDs based on the strength of our new products and our overall competitive effectiveness, we are on track to gain approximately four points of ICD market share in the United States over the next four to six years, due to the tailwind created by replacement product market dynamics as set forth in more detail on prior calls.

The second new growth initiative in our CRM business is that we are in the process of adding a major new growth driver in the form of CardioMEMS technology. The champion trial already has demonstrated that heart failure patients, whose medical therapy is guided by an implanted CardioMEMS device, are hospitalized for heart failure 39% less in the first 15 months following device implant than heart failure patients who are managed conventionally.

This is exactly the kind of technology that will be a high-profile winner in an environment of health care reform and increased attention to the comparative effectiveness of available technology for the millions of patients who suffer from heart failure. This target patient population includes heart failure patients who already are indicated for an ICD or CRT therapy, as well as heart failure patients who are not currently indicated for a St. Jude Medical device.

In addition to becoming an independent new growth driver for St. Jude Medical, we expect CardioMEMS technology to help St. Jude Medical develop the CRM market and influence CRM market share gains. CardioMEMS technology is scheduled for a limited launch in Europe in 2011 and is scheduled for full launch in the United States in 2012.

With respect to our Cardiovascular business, we have begun the year with seven new growth initiatives that are expected to impact sales in 2011. First is our entry into the $500 million market for pericardial stented tissue valves with our Trifecta product line.

As a reminder, we just began full commercial launch of our Trifecta line of pericardial stented tissue valves in Europe during the fourth quarter. Clinical response continues to be favorable and consistent with our expectation that our Trifecta line of stented tissue valves can become a major new growth driver for our Cardiovascular business. We expect full commercial launch in the United States by the middle of 2011.

Our second new growth initiative within our Cardiovascular business is our leadership in the emerging market for fractional flow reserve, or FFR-guided therapy for stenting patients who have multivessel coronary artery disease. Our landmark FAME trial demonstrated that FFR-guided therapy reduces the cost of medical care by 14%, while at the same time reducing patient mortality and morbidity by at least 30%.

Like CardioMEMS, this is another example of the kind of technology that will be a high-profile winner in an environment of health care reform and increased attention to the comparative effectiveness of technology for the millions of patients who suffer from coronary artery disease. We have approximately 60% share of the FFR market and expect FFR therapy to become standard of care as we continue to develop the market.

Our third new growth initiative within our Cardiovascular business is our entry into the $500 million market for intravascular imaging, with the first and only Optical Coherence Tomography, or OCT, product line already on the market in the United States, Europe and Japan. Since we are first to market with OCT, we have a 100% share and are focused on developing this market in the right way for the long term.

During 2011, we are investing significantly in new clinical trials, education and in integrating our FFR technology into our OCT hardware platform. OCT technology will be a critical component of every clinical trial studying absorbable stents. We think OCT technology has a credible opportunity to become standard of care or at least the leading technology for intravascular imaging as we continue to develop the market.

A fourth new growth driver within our Cardiovascular business is our left atrial appendage, or LAA, closure technology designed to protect Atrial Fibrillation patients from stroke, due to emboli that tend to form or collect in the left atrial appendage. The National Institute for Clinical Excellence in the U.K. issued guidance in 2010 supporting the comparative effectiveness of LAA occlusion in AF patients.

LAA closure procedures may be performed on a stand-alone basis or in conjunction with AF ablation for patients who suffer from Atrial Fibrillation. Although this market still is in its infancy, full commercial launch of our LAA closure technology is underway in Europe with encouraging clinical response.

A fifth new growth driver within our Cardiovascular business is our PFO closure technology for patients who suffer from cryptogenic stroke. In Europe, we currently have full commercial release, significant product advantage and clear leadership in this emerging market. In the United States, our U.S. pivotal trial is well advanced with over 800 patients enrolled in an event driven trial design. Although a competitor's PFO closure trial was unsuccessful, we are optimistic that our RESPECT PFO closure trial will be successful due to differences in trial design, patient selection and reliability of device performance.

A sixth new growth initiative within our Cardiovascular business is that through our acquisition of AGA, we have become the clear leader in the market for repairing atrial septal defects, ventricular septal defects and other structural heart defects with minimally invasive catheter technology. Although this market is relatively mature in the United States and Europe, we expect to generate significant new market growth through our global reach in Brazil, China, India and other large potential markets that are dramatically underpenetrated.

A seventh new technology within our Cardiovascular business that will impact our sales growth in 2011 is our next-generation technology that blocks or redirects blood flow through peripheral vessels with a vascular plug instead of with surgical clips or embolic coils. During 2011, we expect to launch our fourth-generation AMPLATZER vascular plug into the United States market and clarify the level of growth we should expect from this new product platform going forward into 2012 and beyond.

In addition to the seven growth initiatives within our Cardiovascular business, I have just reviewed, that are expected to impact sales in 2011, we previously identified additional growth initiatives that are expected to impact sales in Europe beginning in 2013. These include our transcatheter aortic valve implant, or TAVI, program and our thoracic aortic aneurysm, or TAA program. With respect to the TAVI program, we expect to launch both our transfemoral and our transapical TAVI systems in Europe by the first half of 2013. We will provide additional updates on these programs at our investor meeting next week.

Moving on to our Neuromodulation business. We have entered 2011 with three new growth initiatives that are expected to impact our business in the near term. First is the launch of our Eon-mini line of spinal cord stimulators in Japan, which began last quarter. The success of our Eon-mini product line in the United States and in Europe gives us confidence we can gain a significant share of the spinal cord stimulation market in Japan.

The second new growth initiative within our Neuromodulation business is our entry into the market for deep brain stimulation, or DBS, for patients who suffer from Parkinson's disease. Beginning last quarter, we are rolling out full commercial launch in Europe of our Brio rechargeable deep brain stimulator, our Athena DBS clinician programmer and a complete line of proprietary leads and accessories.

Brio is a rechargeable and constant current system and is the smallest, lightest and longest-lasting system on the market. We expect to support this launch with publication of favorable data from our U.S. pivotal clinical trial during the first half of this year. We are second to enter this market and expect to gain meaningful share with a superior product line.

The third new growth driver within our Neuromodulation business is that we expect to receive CE Mark for a migraine indication in Europe during 2011. This puts us on track for our Migraine business in Europe to become a meaningful new growth driver for St. Jude Medical in 2012 and beyond.

Finally, moving on to our AF growth franchise. Our results reflect that international sales of AF products increased approximately 15% constant currency during Q4. These results are a leading indicator for the growth we expect as we launch products in the United States, which already are on the market in Europe. This includes our Contact line of ablation catheters, our Cool Flex line of ablation catheters and the emergence of MediGuide enabled cath labs.

We remain convinced that our MediGuide technology will be a key differentiator for multiple St. Jude Medical growth programs based on its ability to improve both the clinical effectiveness and the cost effectiveness of minimally invasive procedures in a wide variety of clinical settings. We look forward to providing you an update on all of these technologies at our annual investor meeting next week.

While extensive, the list I have just reviewed of initiatives that either have been completed or are underway to accelerate our sales growth longer term is not exhaustive. At our annual investor meeting next week, we also will update you on our Neuromodulation program for patients suffering from treatment-resistant depression, our program for percutaneous mitral valve repair and an advanced program we have underway targeting renal denervation in hypertensive patients who do not respond to medical therapy.

We are not offering guidance today for the level of sales growth we expect in 2012 and beyond, but when we take into account the dynamics of our core business, together with the impact of all of the initiatives I have just reviewed, that are designed to accelerate our sales growth long term, we are optimistic that St. Jude Medical is making good progress returning to a position where we can deliver double digit constant currency organic sales growth on a sustainable basis. As always, we are committed to doing so in a disciplined and cost effective way, that does not squander our cash and earnings growth by chasing highly dilutive or speculative acquisitions.

We are now ready to open it up for questions. I'd like to turn it over to you, Celeste, to moderate the questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question will come from the line of David Lewis with Morgan Stanley.

David Lewis - Morgan Stanley

Dan, you talked a lot about reinvestment to drive growth in 2012. One of the big points to that obviously was R&D. Can you talk about any sort of portfolio management that's going on within R&D or was the R&D increase of about 50 bps versus our model more tied to AGA? So sort of where are you investing differently now than where you were investing before?

Daniel Starks

In virtually each of the growth drivers that I've just reviewed -- and we'll talk about this more at the investor meeting next week. But beginning with the third quarter call, I have drawn attention to a number of growth drivers that have not previously been on investor's radar screens. And each of these have begun to draw additional investment from St. Jude Medical on the R&D side. And we've made enough progress in each of these new growth drivers to be convinced that the viability and ultimate success of the new initiatives. So we're increasing funding to accelerate the development programs with the idea that in addition to maintaining the highest quality products and in addition to maintaining our operations at the highest level of ethical compliance, our next highest priority is for us to return ourselves to the position where we can really deliver double-digit sales growth on a sustainable basis. So with that in mind, we have committed to significantly increase R&D to accelerate all of our new growth programs.

David Lewis - Morgan Stanley

We just think about the fourth quarter, it does appear that St. Jude is likely a share gainer in the fourth quarter. As you think about your CRM outlook for 2011 and specifically the first quarter, was there any assessment or allotment made for potential pressure from recent JAMA [Journal of the American Medical Association] articles or DOJ involvement with HRS [Heart Rhythm Society]?

Daniel Starks

Yes. Well, first, let me put these in perspective. So the recent JAMA article was recent only in the popular press, and it may have been news as well to others who do not particularly follow the CRM market. But the JAMA article, or Journal of the American Medical Association article, presented data that was already published back in May of 2010 at the Annual HRS Scientific Sessions. So the publication itself offered nothing new either to industry or to the clinical community. And then secondly, besides the fact that this news was really old news, the data itself was really very limited, and people would want to take into account the nature of a registry and the limitations of a registry. So for those who really don't understand what a registry is or haven't worked with them, a person might get the wrong idea. We run a number of registries and have managed a number of registries. Registries are notorious for having incomplete data. And so, a well-run registry has to be very actively managed. You need active oversight. You need significant active auditing, significant active fact checking. With a registry just as with, really, kind of more managed randomized clinical trials, whoever the sponsor of the registry is have to do a lot of going back to the clinicians who are submitting data to complete the data that they submitted. So it's really, again, registry data is notoriously incomplete. So I think with a relatively unmanaged registry, which was the type of registry that was reported in the JAMA article, it's really not good for answering questions. It does serve a useful role, however, in raising questions. And so I think that the type of questions that would be raised would be first, are there -- with respect to the HRS guidelines for implanting ICDs, the guidelines themselves explicitly are not all inclusive. The guidelines specifically provide that it may be appropriate for implants outside the guidelines. So to the extent that a registry would suggest that there are implants that are outside the guidelines, which are specifically culled out as appropriate in those guidelines, one would want to revisit what are those implants and how do they match up with the guidelines. The guidelines themselves are relatively new. Should the guidelines be modified to include additional implants that are being done for good medical reasons that are well documented in a complete medical record or not, that would be one good question, and there'd be other good questions that could be raised from registry data as well. And so in answer to your question of, did we take this into account in setting our guidance for the first quarter of 2011 and for full year 2011? We certainly did. There was not news here. This is information that we took into account with our guidance and market modeling dating back to the middle of last year.

Operator

Your next question comes from the line of Mike Weinstein with JPMorgan.

Michael Weinstein - JP Morgan Chase & Co

The first question, I just want to run through some math with you and John, chime in here, make sure I've got it right. Your sales guidance is even at the bottom of the range above consensus going into this call. You guided a 10% to 13% sales growth. If I adjust for AGA and adjust for currency, the implication will be 5% to 8% organic growth, is that right?

Daniel Starks

My math is 6% to 9%, Michael, but close enough.

Michael Weinstein - JP Morgan Chase & Co

And then, Dan, let's just talk about this, the incremental R&D spend. If I think about everything you're rattling off with so would say Neuromodulation for migraine, for depression, PFO closure or stroke, left atrial appendage closure for AF stroke prevention. You've got a TAVI program, you've got apparently a mitral valve repair program, we haven't heard about. You're doing work apparently in renal denervation. Those are a lot of big clinical programs, and obviously that's behind your discussion today about accelerating R&D investment. Can you fund all of these programs? I mean, relative to the size of the company, this is more than I would say any other company has going on. Can you fund all these programs simultaneously or do you think you'll be making choices over the next year or two?

Daniel Starks

Michael, well, the answer, the short answer is that it is both, when you ask me, is it either or. So all of these programs are funded and are nicely funded. If I went back to the R&D teams and asked them, if there was anything else they could use money for, they're going to say that they could use more funding. So I'll stop short of saying that they're fully funded, but they're all very strongly and adequately funded, and that the funding -- and for each of these programs is consistent with the timelines that we have offered for when we expect products to come to market. And we will continue to provide more detail about these timelines at our longer meeting next week where really the whole purpose of next week's meeting is to review this product flow, to review these new growth drivers, and to give you whatever update is appropriate with respect to timelines. So there is a complete connection between the level of funding, the scale of the undertaking and the time we expect to bring these products to market. And keep in mind that a lot of these products are coming to market in 2011. So there is very little -- there is also a significant development oriented toward longer-term projects, but a lot of this -- the heavy lifting has been completed in the product development itself, and now it's a question of regulatory path and with respect to regulatory path, the majority of these new products are either already beginning to come to the market in Europe or they will come to the market here in 2011. So it is -- we do have a robust program. We've tended to keep a low profile with some of our investment in new growth drivers. These new growth drivers are close enough to market that we're now providing additional information about them, but one will notice that on a sustainable basis, we've kept a very strong level of R&D, dating back at least as far back as 2004 and beyond. And so what we're getting here is, in a lot of these new programs we're just getting products coming up the other end of an extended pipeline. And in some instances, we've accelerated growth through acquisition. And in other instances, we've started new investment and new growth drivers during the last few years and just kept it confidential until this year.

Michael Weinstein - JP Morgan Chase & Co

John, the gross margin guidance of 73.5% to 74.0% for this year. That's an uptick from last year, but you're just now opening up and ramping up sales in 2011 for Costa Rica, you just got -- we saw CE Mark approval this week for Malaysia. The company previously, going -- if we went back a couple of years talked about a target of getting to a 75% gross margin. With those facilities now coming online and ramping over the next year or two, is that 75% still a legitimate target?

Daniel Starks

Let me jump in and answer that, Michael. Two things. First, we are disciplining ourselves not to offer specific guidance beyond 2011, is the first point. And so we're going to stop short of talking about 75% just as a bit of a detail. But in John's comments, when he talked about the uptick in gross margin in 2011 versus 2010, he was quick to add in the next sentence that we expect that gross margin to continue to rise as we ramp up manufacturing in Costa Rica and Malaysia. So directionally, your sense of where we're headed is correct, but we'll stop short of hanging our hat on a specific number.

Operator

Your next question comes from the line of Raj Denhoy with Jefferies.

Raj Denhoy - Jefferies & Company, Inc.

You mentioned a couple of times about looking at the European experience in ICDs in particular, as a precursor for what we can expect here in the U.S., and you've mentioned that Promote Quadra device a couple of times as driving that. Can you offer any updates on the timing for that device and expectations for the replication of that same experience here in the U.S.?

Daniel Starks

Sure. I could put it over to Eric Fain, who is here, but I'll just go ahead and answer it. The first thing that we are always careful to start with, with respect to timing on approvals in the United States is that, that will depend on the progress of our application here with FDA. And we are unable to predict with precision of successful completion of FDA's requirements and when we will receive approval from FDA. So I want to start with a big fudge factor, but subject to that fudge factor, we expect to be on the market in the United States by the middle of this year.

Raj Denhoy - Jefferies & Company, Inc.

And when you look at European experience, and you guys have taken a good amount of share in Europe over the last several quarters. Promote is kind of the big differentiator for you in Europe. Has that been the major source of the share gains there? And you've mentioned a couple of times about looking at that experience as a predictor or what we could expect here in the U.S. Do you expect similar results on the back of that device here?

Daniel Starks

Yes.

Raj Denhoy - Jefferies & Company, Inc.

Just one quick one on the FFR, OCT business. I'm curious if you could offer a little more about the early experience with OCT. How is that competing against IVUS, do you feel you're at a disadvantage in that market without having IVUS? Any thoughts on an integrated system at some point with your FFR and OCT?

Daniel Starks

Let me mostly ask if you could defer your question to next week. We will talk about this at length next week. And so that would be the best answer. Frank Callaghan will offer a significant presentation on our intravascular imaging program, and then we will have a good Q&A period next week to get at this, and anything else that's on people's minds. The short answer, I'll just give you a short answer now, the short answer is that, there are things that OCT can do that IVUS can't do. There are things that OCT can do better than IVUS can do. There are some things that IVUS can do better than OCT. If we need to add IVUS to our integrated OCT, FFR program, we certainly will do that on the one hand. On the other hand, our OCT, FFR integrated platform is going to be extremely competitive and have a number of advantages over any competitive product offering.

Raj Denhoy - Jefferies & Company, Inc.

Just lastly, any updates on the timing of when we will get that integrated box on the market in the U.S.

Daniel Starks

We'll address that more next week.

Operator

Your next question comes from the line of Bob Hopkins with Bank of America Merrill Lynch.

Robert Hopkins - Lehman Brothers

First, a question for John. Just a reminder on FX. Is it still the case for St. Jude that roughly 50% of any benefit or gain will fall through to the net income line?

John Heinmiller

Yes.

Robert Hopkins - Lehman Brothers

And then just, is my math correct, at current rates, you should have about a $90 million top line benefit?

John Heinmiller

Yes. I think, Bob, our number wouldn't be that big, but then it really gets down to what kind of an assumption are you making. If you took today's euro and made some calculations, the number in my model would be closer to half of that. It's really -- and I should clarify that, it's really a combination of the euro and the yen that I'm thinking about. But on a midpoint guidance range of $5.7 billion or so, that we just went through, we're really talking about the margin.

Robert Hopkins - Lehman Brothers

And then for Dan, could you just update us on your current guidance and what you're assuming there for cardiac rhythm management market growth rates, because I know you obviously adjusted that last year a little bit as we went throughout the year. So just update us on that for 2011? And then if you could comment on any pricing trends that you saw in the fourth quarter and any pricing assumptions you're making for next year?

Daniel Starks

Sure. Nothing's changed in our outlook for a CRM market model. So we need to -- first thing would be -- so the last update that we gave was, we estimated that the global CRM market was growing at about 3% and so we said that we'll just assume that the current growth rate remains, and if the current growth rate increases, that will be upside to any of our expectations for just as a starting point to answer your question. So the next thing we have to do here is wait for the other two companies to report their Q4 numbers for us to see where 2010 actually came in. It may have come in -- I mean, and until then it's really speculative. It may have come in a little less than 3%, the global CRM market for 2010, but we need to see their numbers to know that. And then, we're just assuming, I mean, whether it's 3% or whether it's 2.5% or whether it's 2%, we're just assuming, whatever the current growth rate is, we consider this to be the new normal and with respect to really everything, with respect to the impact of health care reform, with respect to macroeconomic issues, with respect to ASP pressures, with respect to austerity measures, we consider 2010 to be the new normal and we accept these kind of tough market conditions as what we will continue to compete in going forward in 2011 and beyond. It seems to us that over time, we will get some relief on some of these market pressures and see some recovery in global markets, including in the CRM market, but we're not assuming any of that recovery. We're just assuming whatever the conditions are here in 2010, we expect to remain through 2011. So we're probably at about, we think we're in about 3% on the CRM side. If it's something a little bit different than that, it's not terribly material to our outlook. And on the ASP pressure, as we've said in the past, we expect across all franchises, we expect ongoing ASP pressures historically here on the CRM side, it's been somewhere in the range of 2% to 3%. I think of that as low single digit. And there are no dynamics we see in our business to change our expectation that we will continue to see low single-digit pressure on ASPs in the CRM business on a total global basis taking everything into account, ranging from new technology launches to changes in geographic mix to ongoing competitive pressures.

Operator

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

Frederick Wise - Leerink Swann LLC

First, maybe Dan, you could talk a little about the SG&A leverage. I think, John, you said that you expect to see continued leverage. I understand that AGA is adding. Is the leverage purely sales leverage as sales growth picks up, is there cost reduction? And maybe just give us a little more color on that.

Daniel Starks

Sure. Let me -- John and I are looking at each other, Rick, and either one of us are happy to take your question. Let me start. So on the SG&A side, if you look at the legacy AGA business and the St. Jude Medical business before we closed our acquisition of AGA, you would see that AGA's SG&A as a percent of sales was quite a little bit higher than St. Jude Medical's. And then as we've been -- so that's the starting point, then the next thing is that as we talk about our strategic approach to integrating an acquisition and integrate our acquisition with AGA, it's not at all a priority for us to focus on taking out costs from the new combined organizations. The priority for us is to make sure that we fully capture the talent and the growth opportunity of the combined organizations. Over time, there undoubtedly will be opportunities for continuous improvement that we can bring to bear on the SG&A side, and there undoubtedly will be synergies that it will make sense to capture in the right way at the right time. And then also on the AGA side, there are a number of new growth drivers that are now part of our program as a result of the acquisition that are really in their infancy and so they take a disproportionate percentage of investment at the front end to get the products launched. That would include the vascular plug technology here for -- that I mentioned that we really have a significant effort to have a good sales force focus on that new product line and a good sales force focus on creating more of a presence in the interventional radiology lab. We think long term that's a good additional space for us. So that's in -- short term that's inefficient SG&A. As that program becomes successful, you'll see a very meaningful leverage of that component of our SG&A and that's just one example, you get the same phenomenon with respect to the left atrial appendage closure, where it's really immaterial to sales right now, but we're going to really invest in the right sales, marketing and education programs to turn that into a major growth driver. And so at the front end it's inefficient with respect to SG&A, but as that program starts to get traction it will become as efficient on the SG&A side as any other programs we have. And so we've got with as many new growth drivers as we are bringing into the market in 2011 that leads to the -- that's reflected in the higher SG&A and that's what we're talking about with respect to leverage.

Frederick Wise - Leerink Swann LLC

We should -- do you see that possibly go down as a percentage of sales over time, it sounds like?

Daniel Starks

Absolutely. Absolutely.

Frederick Wise - Leerink Swann LLC

The pipeline clearly is full, you're going to spend R&D on products that are launching this year and next year, you're setting up these sort of new platforms, these new growth platforms. Does this mean that we can expect fewer acquisitions because of the higher R&D? You're more internally focused over the next 12 to 18 months or use platforms that are going to actually, maybe potentially, help you accelerate outside investment?

Daniel Starks

I would not encourage you to draw a conclusion either way, Rick. The way that we think about acquisitions is first, we start with our internal development programs, and our idea is that we don't really -- I don't want to be in a position where we think we have to do an acquisition. We really want to be very much in control of our growth program, and that to us means that we want to have our growth program covered with investment in internal R&D. That's number one. Then, the way we think about acquisitions is, if we see an opportunity to accelerate a new growth driver that we're invested in on the R&D side via acquisition, then it's kind of a comparative effectiveness assessment we do and does it make sense to accelerate that growth program through acquisition or does it make sense to fully devote the investment on an internal basis and pass on the acquisition. And so it's that kind of analysis that we go through in deciding whether to grow with internal development or grow -- accelerate our growth with an acquisition. So I don't think of it as, internal pipelines full therefore acquisitions are either more or less likely. We just always look at acquisitions from the perspective of does it, can we benefit our internal growth program with that acquisition or not. If we can and if all the stars line up, we go ahead and do it, and if we can't, we pass on it, and that leads to us usually passing on acquisition opportunities. We haven't done that many acquisitions. We did AGA and LightLab in 2010, and you've challenged me a little bit to go back and remember our whole history. We didn't do much in 2009. We did Radi and MediGuide in 2008. We did some other smaller investments in 2008 as well.

Frederick Wise - Leerink Swann LLC

Your share repo is completed, any future plans or thoughts about that or how you're going to use your cash?

Daniel Starks

John, what do you want to say about cash use?

John Heinmiller

I think as Dan mentioned, we're in a good position to have a lot of flexibility. We've got a strong balance sheet and an A-rated credit status and we'll just evaluate all the opportunities we have as they come to us, including share buyback if that's appropriate.

Daniel Starks

I hope you noticed, Rick, we're not directly going to answer your question.

Operator

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

Larry Biegelsen - Wells Fargo Securities, LLC

The commentary on the JAMA article was helpful, Dan, but obviously, HRS announced that there's a DOJ investigation. Are you saying that -- what gives you confidence that awareness of that DOJ investigation is not going to cause behavior to change among electrophysiologists?

Daniel Starks

What I would say is several things, Larry. First, as you've pointed out, and so I realize I'm not tell you anything. However, just give me the flexibility to comment for the benefit of others on the line who may not be so close to this. The first thing that is important in our minds with respect to the DOJ investigation is that, as you've said, it's not new. It dates back at least to March of 2010. So I mean, I don't -- in our experience, customers in the United States have been aware of their hospitals undergoing audits of reimbursement and appropriateness of reimbursement here during this entire -- virtually this entire last year. So there's really, I don't think there's much news here. I think it's more just that the issues freshened up a little bit and there are, again, people who aren't really involved in the business who didn't have any reason to pay attention to the announcements earlier last year about the DOJ investigation. But a lot of people have been living with these investigations and certainly have been well aware of them, and they talk to their colleagues about their institution being audited and compare experiences. And so I think that in the big scheme of things in the clinical community, I think there's a lot less news here and a lot less new awareness that just kind of the lay press might suggest. I think what I take out of -- to editorialize, what I take out of the HRS involvement, I take that as really being a very favorable indicator. So if you think about the Department of Justice conducting an investigation dating back at least to March of 2010, here we are in January of 2011, and now nine or 10 months into the investigation the Department of Justice is bringing in additional expertise to help it sort through the information that it's collected. That's what I get out of the announcement that HRS is advising the Department of Justice and HRS is exactly the same people that we're talking about here in the clinical community. The HRS leadership is luminaries in the electrophysiology community. And so this is now the -- there's a lot of overlap here between the leadership in HRS and the resources HRS draws on and the investigation that's been taking place since March of 2010, and the fact that the DOJ is asking for some input and advice from HRS on the investigation I take as being very positive. If there was something that would be a -- in my mind, I think of it as a smoking gun. If there was something that was a smoking gun or a scandal that had been uncovered after 10 months of investigation, there wouldn't be a reason to go to HRS to ask for help sorting through the data. So I think there's a lot less here. I think there's just some headline shock and the headline shock is not in the clinical community.

Larry Biegelsen - Wells Fargo Securities, LLC

I know we have the R&D day, I guess it's next week but we had expected you to launch the MRI safe pacemaker I think by the end of 2010 in Europe. Could you just give us a quick update on that please?

Daniel Starks

Sure, the product's done. It's ready and it's just a matter of completing the regulatory process. So it's close.

Operator

And your final question comes from the line of Tao Levy with Collins Stewart.

Tao Levy - Collins Stewart LLC

Your two high growth areas Neuromodulation and AFib. They have a couple of warning letters here in the U.S. and I'm just trying to get a sense of your expectations for when they'll be removed if that's even possible, and also the impact to your guidance for 2011, if they are not lifted?

Daniel Starks

We're assuming status quo for purposes of our guidance as a baseline. With respect to saying anymore about it, we're just very conservative on -- I mean, and when I said that you could -- my comments that I just made could easily be mistaken. We made a lot of progress in remediating on the -- with respect to both warning letters, and I think we have a good possibility to have one or both warning letters completely resolved here this year. But we're being conservative in our guidance is my point, and my point did not reflect pessimism at all with respect to warning letter remediation. We've got a lot of optimism about remediation of warning letters, but conservatively there's nothing that would change in our guidance if either or both of the warning letters were not lifted here in 2011. Does that answer your question?

Tao Levy - Collins Stewart LLC

Yes, that’s perfect. On AGA's business, did you experience any impact from the competitors negative trial on the AGA's business, and do expect that to at all weigh on AGA's business until you complete your trial on PFOs?

Daniel Starks

Sure. Well, timing wise keep in mind for purposes of others who are listening to this part of the discussion that the competitive trial that was unsuccessful -- results were published prior to our acquisition of AGA. So there was nothing that would be a new development for us with respect to our PFO business. So we were well aware of the competitive trial and the limitations of it at the time that we did our due diligence on the AGA trial, and the significance of the differences in our PFO pivotal trial and the competitive pivotal trial that was not successful. So that probably mostly answers your question. And then with respect to the U.S. here, so we think we have a -- we are optimistic we'll get a positive result on the PFO closure trial here for cryptogenic stroke in the United States. Keep in mind that in Europe, this is already a robust business, and then keep in mind also that on the stroke side of PFO, there have been documented confirmations of emboli traveling from the right side of the -- from the right atrium into the left atrium through an open – you know through a patent foramen ovale, I mean, so there isn't really a question about whether that happens, it's a question about identifying the right risks and benefits of which patients ought to get that PFO closed, and which patients ought to -- we ought to just leave the PFO alone, but there's clearly a connection that's been well documented and now it's a question of just getting a little bit smarter about which patient's benefit from that procedure.

Tao Levy - Collins Stewart LLC

I was just wondering whether the Europeans had slowed down their interest in closing PFOs after November when they presented the full trial at the AHA [American Heart Association].

Daniel Starks

Nothing that I'm aware of, Tao. Not on my radar screen.

So we've gone a little bit long. I know there are other questioners that would like to jump in. I apologize we didn't get to everybody, but whoever has questions we really have a good forum set for everyone next week in New York City, and we'll stay a long time to answer all your questions next week, so I apologize if we didn't get to you today, but we'll look forward to getting to all of your questions next week.

And with that, I'll turn it back to you, Celeste, for your closing comments.

Operator

Ladies and gentlemen, today's call is being recorded and will be available for replay beginning at 12:00 p.m. Eastern Standard Time. The dial-in numbers are U.S. 1 (800) 642-1687 and international, (706) 645-9291, and entering pin 35328756. Thank you. This does conclude today's conference call. You may now disconnect.

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