Boston Scientific's CEO Discusses Q4 2010 Results - Earnings Call Transcript

| About: Boston Scientific (BSX)

Boston Scientific (NYSE:BSX)

Q4 2010 Earnings Call

February 02, 2011 8:00 am ET


Sean Wirtjes - VP of Finance and Treasurer

J. Elliott - Chief Executive Officer, President, Director and Member of Finance Committee

Ken Stein - Senior Vice President and Associate Chief Medical Officer of Cardiac Rhythm Management

Jeffrey Capello - Chief Financial Officer and Executive Vice President


Michael Weinstein - JP Morgan Chase & Co

Robert Hopkins - Lehman Brothers

Larry Biegelsen - Wells Fargo Securities, LLC

Kristen Stewart - Deutsche Bank AG

David Lewis - Morgan Stanley

Frederick Wise - Leerink Swann LLC

Rajeev Jashnani - UBS Investment Bank

Tao Levy - Collins Stewart LLC

Bruce Nudell - UBS Investment Bank


Ladies and gentlemen, thank you for standing by, and welcome to the Boston Scientific Fourth Quarter 2010 Earnings Conference. [Operator Instructions] I would now like to turn the conference over to our host, Sean Wirtjes. Please go ahead.

Sean Wirtjes

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

We issued a press release yesterday afternoon, announcing our fourth quarter and full year 2010 results, which included key financials and reconciliations of the non-GAAP financial measures used in the release. We posted a copy of that press release, as well as the reconciliations of the non-GAAP financial measures used in today's conference call and other supporting schedules to the Investor Relations section of our website at under the heading the Financial Information.

The agenda for this call will include a review of the fourth quarter and full year 2010 financial results, as well as full year and first quarter 2011 guidance from Jeff; an update on our business performance in the quarter from Ray, followed by his perspective on the quarter overall. We will then open it up to questions.

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

Before we begin, I'd like to remind everyone of our Safe Harbor statement. This call contains forward-looking statements based on our beliefs, assumptions and estimates using information available to us at the time, and that are not intended to be guarantees of future events or performance. These forward-looking statements include, among other things, statements regarding: Our expected market share; growth projections; new product approvals; launches; acceptance and sales; competitive offerings; our liquidity and financial position; our financial performance; expected net sales; gross margins, earnings and tax rates for the full year and first quarter 2011, including the expected impact of the pricing environment; procedural volumes; acquisitions and the Neurovascular divestiture; the timing and effects of our restructuring activities; the timing and effects of our priority growth initiatives; views on our litigations, the effect of our debt repayment; expected regulatory processes and environments;

clinical trials; regulatory compliance; and our capacity to fund acquisitions and other investments and successfully integrate them into our business.

The company wishes to caution the listener that actual results may differ from those discussed in forward-looking statements and may be affected by, among other things: Risks associated with future economic, competitive, reimbursement and regulatory conditions; new product introductions and the market acceptance of those products; clinical trial results; demographic trends; intellectual property; litigation; financial market conditions; the effect of our restructuring and growth initiatives; closing of announced acquisitions and integration of acquired businesses; future business decisions made by us and our competitors; and other risk factors described in the company's filings with the Securities and Exchange Commission. New risks and uncertainties may arise and be difficult to predict. Any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation nor have any intention to update any forward-looking statements. This cautionary statement is applicable to all forward-looking statements contained in this call.

Finally, as most of you are probably aware, the Boston area is experiencing the second of two consecutive snowstorms this morning. As a result, logistics have been a challenge, and some of today's participants are dialing in remotely. In the event that we encounter any technical difficulties, please bear with us and we'll do our best to resolve them quickly. During the Q&A, please also be aware that we may experience some brief delays as people unmute and mute their phones.

At this point, I'll now turn it over to Jeff for a review of the fourth quarter and full year financial results. Jeff?

Jeffrey Capello

Thanks, John. Let me start by providing you with a detailed review of the operating results for the quarter. Consolidated revenue for the fourth quarter was $2,002,000,000 versus our guidance range of $1,925,000,000 to $2 billion, and represents a 4% decline on both a recorded and constant-currency basis from the fourth quarter of last year. Compared to the $11 million of favorable foreign currency assumed in our fourth quarter guidance range, FX had a $1 million negative impact on our fourth quarter results, which negatively affected the reported revenue by approximately $12 million. We estimate that the detailed ship hold and product removal actions lowered our revenue growth rate by approximately 160 basis points or $33 million in the quarter.

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

Worldwide DES came in at $377 million, in the upper half of our guidance range of $355 million to $385 million and down 8% on both a recorded and constant-currency basis from the fourth quarter of last year. Our worldwide DES revenues includes $97 million for TAXUS and TAXUS Element, $197 million for PROMUS and $83 million for PROMUS Element. Our worldwide TAXUS, PROMUS, PROMUS Element split for the quarter was 26%, 52%, 22%. We continue to sustain our worldwide DES leadership in the fourth quarter, with an estimated global market share of 35%, which we estimate to be about 700 basis points higher than our nearest competitor and 400 basis points lower than our share in Q4 of 2009, primarily impacted by an introduction of new stents, principally in Japan.

U.S. DES revenue was $187 million, at the midpoint of our guidance range of $180 million to $195 million and 8% lower than the fourth quarter of last year, driven primarily by pricing pressures. This includes $56 million of TAXUS and $131 million of PROMUS revenue. It represents a 30%-70% mix of TAXUS and PROMUS in the U.S. compared to a 40%-60% mix in the fourth quarter of 2009. We estimate that our U.S. DES share was 46% for the quarter, with 14 share points of TAXUS and 32 share points of PROMUS.

Our U.S. DES share had been stable at 46% for each of the last five quarters, and we continue to maintain drug-eluting stent market share leadership in a very competitive U.S. market, with 15 more market share points than our nearest competitor. Based on our estimates of the U.S. market for the fourth quarter, we believe that Abbott's share was approximately 31%, while J&J and Medtronic achieved approximately 11% and 12%, respectively.

International DES sales of $190 million were at the high end of our guided range of $175 million to $190 million and represent a decrease from Q4 in the prior year of 8% on both a recorded and constant-currency basis. This includes $41 million in TAXUS, $66 million in PROMUS and $83 million on PROMUS Element sales, and represents a 22%, 35%, 44% mix of TAXUS, PROMUS and PROMUS Element internationally. The international contribution from PROMUS Element include $59 million in EMEA and $24 million in the Americas and Asia Pacific combined.

We estimate that our DES market share in EMEA for the fourth quarter was approximately 32%, which is down 100 basis points compared to the fourth quarter of 2009. TAXUS market share was approximately 8%, with revenue of $18 million; and PROMUS market share was approximately 1%, with revenue of $3 million. PROMUS Element market share was approximately 23% for the quarter, with revenue of $59 million. Together, this represents a TAXUS, PROMUS, PROMUS Element mix in EMEA of 22%, 4%, 74%. We continue to be very pleased with the market acceptance of the Element platform in EMEA.

On a sequential basis, comparing Q3 2010 to Q4 2010, sales of PROMUS Element grew from $43 million to $59 million, allowing us to increase our share by over 300 basis points and exit Q4 with approximately a quarter of the EMEA market. It now comprises over 80% of our DES product mix in the region, driven by its market-leading alloy and stent design, which improves ease-of-use. Through the success of PROMUS Element and the TAXUS platform, we have driven 96% of our DES product mix in EMEA, back to self-manufactured margins. With the recent introduction of TAXUS Element and the success of PROMUS Element, we expect that our unique ability to deliver two different drugs via multiple-stent platforms, will allow us to expand our position in the market.

Our DES share in Japan was 36%, down 800 basis points from the fourth quarter of 2009, with revenue of $57 million. The decrease in share was primarily driven by the number of accounts participating in the Abbott RESET trial during the middle of last year. TAXUS market share was approximately 5%, with revenue of $8 million; and PROMUS market share was approximately 31%, with revenue of $49 million. Together, this represents a TAXUS-PROMUS mix in Japan of 14%-86%. On a sequential basis, comparing Q3 2010 to Q4 2010, our DES share was up 100 basis points, as the impact of competitive trialing lapsed. We estimate Abbott share of 43%, Medtronic at 8% and J&J at 13% during the fourth quarter.

We estimate our Asia Pacific DES share remains steady at about 14% during the quarter. But this share is split, 3% TAXUS, with $7 million in revenue; 2% PROMUS, with $5 million in revenue; and 8% PROMUS Element, with $17 million in revenue; or a TAXUS, PROMUS, PROMUS Element mix of 24%, 16%, 60%.

DES sales in the Americas region were $25 million, representing approximately 54% market share, with 18% or $8 million in TAXUS revenue; 20% or $9 million in PROMUS revenue; and 16% or $7 million in PROMUS Element revenue. This represents a 33%, 37%, 30% mix of TAXUS, PROMUS, PROMUS element. With global DES market share of 35%, we maintained 700 basis points of share advantage over our nearest competitor in the fourth quarter. Our strong commercial team is focused on the only two-drug platform in the industry. And when you couple that with the continued strong adoption of PROMUS Element and TAXUS Element stents, we expect to increase our market share leadership going forward.

I would like to provide you with some detail on the drug-eluting stent market dynamics during the quarter. We estimate that the worldwide DES market in Q4 was approximately $1,079,000,000, which is up 2% on both a reported and constant-currency basis versus the fourth quarter of 2009. Our estimated worldwide market in the quarter includes a worldwide unit volume increase of approximately 15%, driven by an increase in both PCI volume and a 300-basis-point increase in penetration, offset by a worldwide market decline in average selling prices of approximately 8% in the U.S, and 8% in EMEA and in the low-double digits in the other regions.

The U.S. DES market is estimated to be about $450 million for the quarter, representing a decrease of approximately 7% from the fourth quarter of last year. This consists of a unit volume increase of approximately 1%, which includes a slight increase in PCI volume and flat penetration levels. This unit volume increase was offset by approximately 8% decline in ASPs. During the quarter, we saw our U.S. DES ASPs fall slightly more than the aggregate market declines, with TAXUS and PROMUS both down about 10% compared to the fourth quarter 2009.

U.S. PCI volume in the quarter was approximately 254,000 procedures, up slightly compared to the fourth quarter of 2009. We estimate that the U.S. DES penetration of 77% was flat compared to the fourth quarter of 2009. Combined with stented procedure rates and stents per procedure, we estimate that the total market for U.S. stents in the fourth quarter of 2010 was approximately 338,000 units, including 259,000 units of DES. We estimate the international DES market at $664 million for the quarter, representing an increase of approximately 9% from the fourth quarter of last year. This consists of a unit volume increase of approximately 24%, which includes a 9% increase in PCI volume and a 5% increase in penetration.

This unit volume increase was largely offset by a decline in ASPs. Procedures were strong in the quarter, with approximately 631,000 PCI procedures, including 347,000 in EMEA, 60,000 in Japan, 161,000 procedures in Asia Pacific and 62,000 procedures in the Americas. We estimate that the international DES penetration of 63% was up 500 basis points over the fourth quarter of 2009, including 58% in EMEA, 74% in Japan, 79% in Asia Pacific and 39% in the Americas.

Worldwide CRM market was $564 million in the fourth quarter, representing a reported decrease of 7% and a constant currency decrease of 6% compared to the fourth quarter of 2009. We estimate that our worldwide CRM market share was flat sequentially at 20%, and that the impact of lost share from the stop ship issue was approximately $33 million.

U.S. CRM revenue of $347 million represents an 11% decrease from the prior year, principally due to the defib ship hold and the product removal actions which we estimated reduced our U.S. CRM revenue by $33 million in the fourth quarter. International CRM sales of $270 million in the quarter were flat on a reported basis and up 2% in constant currency compared to the prior year. Excluding the impact of a large contract sale for Brady leads in Japan in the fourth quarter of 2009, international CRM sales increased 4% on a constant-currency basis.

Worldwide defibrillator sales of $423 million were at the high end of our guidance range of $400 million to $425 million. This represents a reported decrease of 6% and a constant currency decrease of 5% from the fourth quarter of 2009.

U.S. defib sales were $273 million, which was near the midpoint of our guidance range of $265 million to $285 million and represents an 11% decrease from last year impacted by the stop ship issue. International defib sales of $150 million exceeded the high end of our range of $135 million to $140 million, representing a reported increase from last year of 6% and a 9% increase on constant-currency basis. The growth in the international defib area continues to be driven by very strong market acceptance of our COGNIS and TELIGEN devices and our new 4-SITE lead, as we continue to advance these products in geographies around the world.

Our non-DES and non-CRM worldwide revenue of $1,060,000,000 were flat compared to the fourth quarter of last year on both a reported and constant-currency basis. For the full year, these businesses generated revenues of $4,085,000,000, up 1% on a reported basis and flat in constant currency.

On a worldwide basis, our Endoscopy business grew 6% in constant currency terms in the fourth quarter. Growth in the U.S. was 3% despite downward pressure from a slowdown in elective procedures. Internationally, endoscopy sales grew 8%, with broad-based strength across all geographic regions, driven by new product introductions and very strong sales execution.

Our Urology/Women's Health business grew 3% in constant currency terms and 4% adjusted for selling days. In the U.S., Urology grew in the mid-single digits, largely due to an increase in procedures and strong sales execution. While our Women's Health business declined 2% due to a slowdown in elective procedures and competitive new product trialing. Internationally, both Urology and Women's Health experienced very strong growth, driven by new product introductions and increased sales investments and the penetration of new therapies into markets outside the U.S., resulting in an overall increase of 9% compared to the fourth quarter of 2009.

Our worldwide Neuromodulation business grew 8% in the quarter, driven by strong acceptance of our new splitters and leads, as well as international constant currency growth of 26%, as we continue to expand our presence outside the U.S. We continue to invest internally in this growth business and recently made an external investment by acquiring Intelect Medical. In constant-currency terms, our worldwide Peripheral Intervention business was up 2% in Q4, including international growth of 5% on the strength of new product introductions.

Non-stent Interventional Cardiology was down 8% and Electrophysiology was down 4%. We have seen a lag in some of these businesses in recent quarters as a result of procedural softness, increased pricing pressures, delays in our new products as well as competitive product launches. Ray will talk more about some of these new product launches in these businesses in a few minutes.

Let me now turn to full year 2010 revenue. Reported revenue for the year ended December 31, 2010, was $7,806,000,000, which represents a 5% reported decrease from the prior year. Excluding the impact of the defib ship hold and product removal actions, we estimate full year 2010 revenues would have been $8,002,000,000, representing a 2% decrease from 2009 and down 3% in constant currency. The impact of foreign currency on full year sales growth was a positive 1% or about $62 million compared to 2009.

Our global Cardiology business sustained its worldwide leadership, but was down 9% reported for the year and down 10% in constant currency. Our DES business was down 10% on a reported basis and down 11% in constant currency for the year. And our other non-stent IC business was down 5% reported and down 6% constant currency, primarily driven by global price erosion.

Our PI business was up 1% on a reported basis and flat in constant currency. Worldwide DES penetration was about 400 basis points for the full year versus last year, and we estimate that our full year share was down approximately 500 basis points from 41% to 36%.

We estimate our market share for the full year at about 46% or down 300 basis points from our full year 2009 share but flat since the fourth quarter 2009. Our international market share declined approximately 500 basis points from 35% to 30%. Our worldwide TAXUS, PROMUS, PROMUS Element mix of 26%, 52%, 22% for the fourth quarter has a higher contribution PROMUS Element than our 32%, 53%, 15% estimated mix for the full year 2010.

Worldwide CRM revenue came in at $2,180,000,000, which represents a decrease of 10% on both a reported and constant-currency basis from 2009, due primarily to the stop-ship, the subpec advisory and field disciplinary actions that occurred in late 2009. Excluding these impacts, we estimate worldwide CRM revenue would have been up 2% in constant currency terms. U.S. CRM revenue decreased by 15%, with defib and patient revenue down approximately 17% and down 8%, respectively. International CRM revenue was flat on a reported basis and up 1% in constant currency, with defib revenue growing 3% reported and 4% constant currency and Pacer revenue down 5%, both reported and in constant currency.

Our performance was strong across the majority of the rest of our businesses, driven by new product introductions and further expansion in international markets. Here are some of the highlights for these businesses. Our Endoscopy business grew 7% on a reported basis and 6% in constant currency. For the first time, Endoscopy also generated roughly 50% of the worldwide sales outside the U.S. in 2010. Our Urology and Women's Health division grew 5%, with 8% international growth, driven by new product introductions, increased sales investments and penetrations into new markets. And our Neuromodulation business continued to take share due to new product launches and strong commercial execution and grew 7% in 2010.

Reported gross profit margin for the quarter was 67%. Adjusted gross profit margin for the quarter, excluding restructuring-related charges was 67.6%, which is 110 points higher than the fourth quarter of 2009. The 110 basis point relative improvement from last year was primarily attributable to the positive impact of foreign exchange and the increase in PROMUS Element sales in Europe, as well sales returns reserves, inventory write-offs and the write-off of certain manufacturing technology that occurred in the fourth quarter 2009 as a result of the subpec advisory issue. These factors were partially offset by negative mix of the continued shift in DES, mix from TAXUS to PROMUS as well as lower DES share and pricing pressures.

For the full year 2010, adjusted gross profit margin of 67.3% was in the middle of our most recent guidance range. Our reported SG&A expenses in the fourth quarter were $683 million. Adjusted SG&A expenses, excluding restructuring-related items, were $677 million or 33.8% sales. This compares to $646 million in the fourth quarter of 2009 and $633 million in the third quarter of 2010. The primary driver of the increase was external third-party expenses which were accrued in connection with the defense of our position in our dispute with the Internal Revenue Service on the Guidant transfer pricing methodologies. This is partially offset by cost savings due to restructuring. For the full year 2010, adjusted SG&A expenses were $2,571,000,000 or 32.9% of sales, which is in the middle of our most recent guidance range.

Both reported and adjusted research and development expenses were $225 million for the quarter or 11.2% of sales. The reduction during the quarter is related to the benefit of some of our restructuring efforts and the related reinvestment programs, as well as a delay in some of our clinical trials. For the full year 2010, adjusted R&D expenses were $939 million or 12% of sales.

Royalty expense was $37 million or 1.9% of sales for the quarter, which is down from $41 million or 2% of sales in Q4 '09. The reduction in royalties was due to strong PROMUS and PROMUS Element sales, combined with our royalty structure, which provides for lower royalty rates once volume milestones have been achieved. For the full year 2010, adjusted royalty expense was $185 million or 2.4% of sales, slightly below our most recent guidance range.

We reported GAAP pretax operating income of $349 million for the quarter. On an adjusted basis, excluding restructuring and divestiture-related charges, a litigation-related credit, acquisition-related consideration expense and amortization expense, adjusted operating income for the quarter was $414 million and 20.7% of sales, down 40 basis points from the fourth quarter of 2009. The decrease versus Q4 '09 is primarily related to higher SG&A expenses, somewhat offset by favorability in gross margin, R&D and royalty expenses.

I'd now like to highlight the GAAP to adjusted operating profit reconciling items in a little bit more detail for you. We recorded a $30 million pretax or $23 million after-tax of restructuring-related charges in the quarter, which are primarily related to product transfer expenses and certain other costs in connection with our previously announced plant network optimization and alignment for growth programs. Total amortization expense was $132 million pretax or $116 million after-tax, which is $3 million higher than the fourth quarter of 2009, as we begin amortizing certain intangible assets related to our acquisition of Asthmatx.

We recorded an income of $104 million pretax or $77 million after-tax related to an arbitration-related settlement with Medinol. We recorded charges of $2 million on both a pretax and after-tax basis relating to the Neurovascular divestiture. We recorded net acquisition-related charges of $5 million pretax or $4 million after-tax, including continued consideration expense, which I'll discuss more fully in a moment. We recorded favorable discrete tax items with an after-tax impact of $9 million. The net cumulative effect of all these items was $65 million pretax and $77 million or $0.05 per share after-tax.

Let me now move on to other income expense. Interest expense for the quarter was $107 million and included a one-time charge of $15 million for accelerated interest associated with the December prepayment of all of our $600 million June 2011 bonds. In Q4 '09, interest expense was $122 million and included a one-time charge of $29 million for accelerated interest rate hedge costs and bank fees related to the prepayment of the remaining $1,850,000,000 of our bank term loan due April 2011, with the proceeds of our Q4 '09 $2 billion senior note offering. Excluding these one-time charges, Q4 2010 interest expense was $92 million or $1 million lower than Q4 '09.

On a same basis, our average interest rate expense in Q4 '10 was 5.5% or 20 basis points lower than Q4 '09. Full year 2010 interest expense was $393 million, which was $14 million lower than 2009, primarily due to lower average debt balances in 2010.

Other net expense was $13 million in the fourth quarter compared to $6 million of other income in the fourth quarter of 2009. For the fourth quarter 2010, other net included $1 million of interest income, which was comparable to fourth quarter of 2009 and $14 million of other expenses, primarily related to the write-down of certain investments.

Interest income for 2010 was $13 million, which was $6 million higher than 2009, primarily due to the collection of interest on past due receivables in Spain.

Our reported GAAP tax rate for the fourth quarter was a negative 3.1%; and on an adjusted basis, our tax rate was negative 6.6%. Our adjusted tax rate for the fourth quarter reflected a $56 million benefit from discrete tax items. The discrete benefits were primarily attributable to the release of tax reserves upon the final resolution of several years of IRS audits, as well as the expiration of the statute of limitations for assessing tax in several foreign jurisdictions. Excluding discrete benefits, we had an operational tax rate for the fourth quarter of approximately 12.1%, reflecting the true-up for the R&D tax credit for the first three quarters of the year. This rate reflects our full year operational tax rate of approximately 18%. For the full year, our tax rate was negative 0.2% on reported GAAP basis and 9% on an adjusted basis.

We reported GAAP EPS for the fourth quarter of $0.15 per share compared to a loss of $0.71 per share in the fourth quarter of last year. GAAP results for the fourth quarter included a previously discussed restructuring, acquisition, divestiture and amortization-related charges and arbitration-related income as well as discrete tax items. Our adjusted EPS in the fourth quarter, which excludes these items was $0.20 and was above the high end of our guidance range of $0.15 to $0.18 per share, driven by a $0.04 per share benefit from positive discrete tax items and tax rate improvement, partially offset by negative impacts of $0.01 per share from higher-than-expected expenses related to Guidant transfer of pricing dispute and interest expense due to the prepayment of all $600 million of our June 2011 notes in December.

Our adjusted EPS for the fourth quarter was in line with our adjusted EPS of $0.20 in the fourth quarter of 2009. As a reminder, adjusted EPS in the fourth quarter of 2009 excluded $1,499,000,000 pretax or $0.84 per share for a legal settlement of J&J, as well as $0.07 per share of amortization, $0.02 per share of restructuring-related charges and a credit of $0.02 per share related to discrete tax items. Stock comp was $28 million, and all per-share calculations were computed using 1.5 billion shares outstanding.

DSO was 61 days, a two-day improvement from last quarter and the same as the fourth quarter of 2009. Strong cash collections in the U.S., Asia Pacific and Americas led to a very strong year. Days inventory on hand were 129 days, up 10 days from the fourth quarter of 2009, excluding the impact of unusually high inventory reserves recorded in the prior year. However, compared to last quarter, days inventory on hand decreased by eight days. We continue to work on reducing our inventory levels despite the required investments to support our new product introductions and plant network optimization initiatives.

Reported operating cash flow in the quarter was an inflow of $449 million compared to an outflow of $329 million in the fourth quarter of 2009. Q4 2010 cash flow included the receipt of $104 million from Medinol, related to an arbitration settlement and $32 million of restructuring payments. Q4 2009 cash flow included $738 million of legal settlements, including a payment to J&J related settlement of certain patent disputes and $52 million of restructuring payments. Excluding these items, Q4 2010 operating cash flow was $377 million or $84 million lower than Q4 '09, primarily due to higher cash used for working capital and lower adjusted operating profit, as described previously.

Capital expenditures were $63 million in the quarter, which was $24 million lower than the fourth quarter of 2009. Reported free cash flow was an inflow of $386 million in the quarter compared to an outflow of $417 million in the fourth quarter of 2009.

For the full year 2010, reported operating cash flow was $325 million or $510 million lower than 2009. 2010 operating cash flow includes $1,725,000,000 of payments to J&J related to the settlement of certain patent disputes and $130 million restructuring payments, partially offset by $250 million milestone payment receipt from Abbott and the $104 million Medinol arbitration settlement.

In 2009, operating cash flow included $716 million payments to J&J related to the settlement of certain patent dispute, $121 million in other legal settlement payments and $116 million for restructuring payments. Excluding these items, 2010 operating cash flow was $1.8 billion, which is comparable to 2009 and included the impact of ship hold offset by improvement in working capital, management and higher tax refunds.

2010 capital expenditures were $272 million or $40 million lower than 2009, reflecting our focus on the CapEx management and the timing of expenditures. 2010 reported free cash flow was $53 million or $470 million lower than 2009, primarily due to higher legal settlement payments during 2010. On an adjusted basis, free cash flow was $1,550,000,000 in 2010 compared to $1,480,000,000 in 2009.

We continued to strengthen our financial flexibility. In June, we successfully syndicated a new $1 billion, three-year term loan and a new $2 billion three-year revolving credit facility to replace our $1,750,000,000 revolving credit facility that was to mature in April 2011. This allowed us to put into place the appropriate capital structure to be able to reduce our leverage to between 1.5x to 2x EBITDA and overall gross debt to around $4 billion within the next few years. Additionally, based on strong free cash flow in 2010, we prepaid in December all of our $600 million June 2011 bonds using cash on hand.

Also during the quarter, Fitch raised our outlook from stable to positive, and Moody's raised our liquidity rating. In January 2011, we received over $1.4 billion of the total $1.5 billion proceeds from the divestiture of Neurovascular to Stryker and used the proceeds to make $253 million in upfront payments to acquire Sadra Medical and Intelect Medical and to repay our $250 million bond January '11 senior notes, further reducing our debt. We also paid $206 million related to a Guidant-related legal settlement with the U.S. Department of Justice.

When combined with our ending 2010 cash balance of $213 million, the net cash impact of these inflows and outflows provides us with pro forma cash balance of $840 million. Including the repayment of our January 2011 notes, our pro forma debt balance now is down to $5.2 billion compared to $6 billion at the end of September, well on our way to reducing our debt level to $4 billion. Additionally, we refinanced $250 million of our bank term loan with $250 million of borrowings under our U.S. trades receivable facility. Including these transactions, we have access to approximately $2.9 billion of total liquidity.

The actions we have taken significantly strengthened our financial flexibility, capital structure, liquidity and enhanced our credit profile. They also provide greater capacity to fund acquisitions and other investments in technology that deliver the most innovative solutions to physicians and their patients, as well as pay down further debt.

At the end of Q4 2010, our debt-to-EBITDA credit facility covenant ratio was 2.3x, well below the maximum permitted level of 3.85x, representing over $950 million of EBITDA safety margins.

We are well along in executing our February 2010 restructuring plan and among other things, combines our CB and CRM groups into the new CRV group, eliminates the international and Endosurgery headquarters, reorganizes our clinical and R&D organizations and streamlines our corporate staff functions and restructures our international operations to reduce our administrative costs and invest in commercial expansion opportunities, including significant investment in emerging markets. When they're completed, we expect that the execution of these restructuring initiatives will result in a gross reduction of our operating expenses by an estimated $200 million to $250 million. We are already investing a portion of these savings into customer-facing and development-related activities to help drive top-line growth in the future. We continue to be on schedule with this restructuring plan.

Before I move on to guidance, let me provide some background on contingent consideration expense. Until recently, contingent consideration or earnout payments associated with acquisitions had no impact on earnings. They were simply capitalized as additional purchase price when paid and if paid. Changes to the accounting rules related acquisitions became effective recently that now requires to estimate the fair value and timing of future contingent consideration and record it as a liability on a discounted basis at the time of acquisition. This liability must then be accretive to its fair value via quarterly charge to earnings and in addition, adjusted periodically for actual outcomes compared to initial assumptions involving earnout milestones based on either sales or regulatory approvals. We are required to perform a quarterly revaluation of the underlying liability with any favorable or unfavorable adjustments recorded to earnings in the current period as an adjustment to the initial valuation of the acquisition.

We followed these rules in accounting for the Asthmatx acquisition in the fourth quarter of 2010 and will apply them to other acquisitions involving contingent consideration in future periods. However, we have excluded all contingent consideration expense from our adjusted results this quarter and plan to do so in future periods as well. This will undoubtedly provide some volatility to our GAAP results going forward but will exclude it from our adjusted results to provide consistency and clarity around operating results versus purchase accounting and valuation issues.

Let me now turn to guidance for the full year 2011 as well as for the first quarter. As we exit 2010, we face a number of challenges. The growth of the worldwide CRM market remains low, and we estimate defib market growth to be flat despite the negative in the U.S., in the low- to mid-single digit internationally and the low-single digits worldwide. We exit 2010 down 200 basis points of worldwide CRM market share compared to the end of 2009 due to the defib ship hold and product removal actions in March and to a lesser extent, the subpec advisory and disciplinary actions in late 2009.

Although we recovered from these actions better than we originally hoped, we are entering 2011 with a little less share than we had a year ago. In the U.S., physician reaction to the study results published by Germany in early January and the DOJ investigation into ICD implants may have some negative impact on the CRM market in 2011.

We were very pleased that we're able to maintain our market leading U.S. DES share of 46% throughout 2010. However, we did lose some share in Japan in the first half of the year due to the RESET trial and new competitive products and expect the Japanese competitor to launch a new product early this year, which will put some pressure on our DES share in Japan.

The rate of DES pricing declines remain more adverse than we anticipated a year ago. As we look at the trends in our CRM business, we also anticipate pricing pressures in 2011, the increase in influence of economic buyers in the U.S. and Europe and increased competition in some of our key markets is clearly having a negative impact on price. We will continue to closely monitor this throughout the year, but pricing trends will put added downward pressure on revenue growth and profit margins in 2011 compared to 2010.

We continue to be the worldwide DES market leader by a significant measure, but we continue to have a higher mix of PROMUS versus TAXUS than we expected. While we have begun to realize some margin improvement benefit for PROMUS Element in Europe, the DES mix will continue to put some gross margin pressure on until we launch PROMUS Element in the U.S. and Japan in the middle of 2011.

We expect sales from our divested Neurovascular business to be approximately $100 million in 2011 related to transitional service agreements with minimal gross margin contribution. Neurovascular sales were $340 million in 2010, with above company average gross margins.

Finally, we generated discrete tax benefits of $0.07 per share in 2010. However, due to the difficulty of forecasting their timing and amount, our 2011 guidance does not assume we will generate any positive or negative discrete tax items. We have incorporated these issues and trends into our full year and Q1 sales earnings guidance.

Let may now turn to full year 2011 guidance. We finished 2010 with sales of $7,306,000,000, which represents a decrease of 5% compared to 2009. Excluding the estimated impact of the ship hold and product removal actions, we estimate that this decrease would have been 2%. The items that I mentioned earlier will put pressure on our sales growth rates and our margin 2011. We currently estimate that currency will be a tailwind in 2011. If the current foreign currency exchange rates hold through 2011, the positive impact on our sales growth would be approximately $56 million or about 1% for the year.

Including these factors and our plans for the year, we expect reported revenue for 2011 to be in the range of $7.5 billion to $7.9 billion. This represents a reported growth of down 4% to up 1% or a constant currency growth of down 5% to flat for the year. Excluding the impact of the Neurovascular divestiture on sales, we expect 2011 sales to be flat to up 5% on a reported basis or down 1% to up 4% on a constant currency basis.

We expect our adjusted gross margins for the year to be between 65% and 66%. As we discussed earlier, we will continue to see some pressure on our margins as a result of lower pricing in our DES and CRM product offerings; lower overall DES and CRM share; negative margin pressure from the Neurovascular divestiture, some of which will be temporary; and increased cost in new products as well cost to introduce those products. These factors will be somewhat offset by lower cost due to our manufacturing value improvement program.

With respect to SG&A expenses, investments in certain areas such as emerging markets, additional selling investments in other international markets and incremental cost related to recently acquired businesses will more than offset the positive impact of restructuring savings in 2010. As a result, the rate of adjusted SG&A as a percentage of sales for 2011 is expected to increase slightly compared to 2010 to between 33% and 34%.

We are committed to transforming our R&D organization and refocusing our spending to drive innovation and growth. 2011, we expect R&D spending to remain fairly flat as a percentage of sales compared to the 12% reported in 2010, as incremental costs related to recently acquired businesses are offset by savings in other areas.

We currently expect other economic expense to be down from last year due to $80 million of lower interest expense from lower outstanding debt balances and other initiatives to reduce interest expense in 2011. Royalty expense is expected to be slightly lower in 2011 compared to 2010 due to product mix changes involving products that incur royalties at different rates.

We expect adjusted tax rate for the year 2011 to be approximately 18%, excluding any discrete tax items that may arise during the year but including the U.S. R&D tax credit, which was recently extended through 2011. We are also subject to tax authority examinations in many jurisdictions that are scheduled to conclude in 2011. The final resolution of exams may result in additional favorable or unfavorable discrete tax items during the year that are difficult to forecast, but may impact our full year adjusted tax rate.

As a result, we expect adjusted EPS for the full year 2011, excluding charges related to acquisitions, divestitures, restructuring and amortization expense, to be within a range of $0.50 to $0.60. This includes dilution of approximately $0.06 from the Neurovascular divestiture and $0.03 or $0.04 per share for the acquisitions.

The company expects EPS on a GAAP basis for 2011 to be in a range of $0.53 to $0.68 per share. Included in our GAAP EPS estimate is approximately $0.03 to $0.04 per share restructuring related cost, $0.24 per share of amortization expense and a credit of $0.31 to $0.35 per share related to the after tax gain on the Neurovascular divestiture. We expect CapEx for the year to be $300 million to $350 million.

Turning to sales guidance for the first quarter of 2011. Reported consolidated revenues are expected to be in a range $1,825,000,000 to $1,925,000,000, which is down 7% to down 2%, both reported and in constant currency from the $1,960,000,000 recorded in the first quarter of 2010. Excluding the impact of the Neurovascular divestiture on sales, we expect first quarter 2011 sales to be down 4% to up 1%.

For DES, we are targeting worldwide revenue to be in a range of $345 million to $375 million, with U.S. revenues of $175 million to $290 million, including an approximately $10 million sales returns reserve for the introduction of TAXUS Element and U.S. revenue of $170 million and $185 million.

For our Defibrillator business, we expect revenue of $410 million to $440 million worldwide, with $270 million to $290 million in the U.S. and $140 million to $150 million o U.S.

For the first quarter, adjusted EPS, excluding charges-related acquisitions, divestitures, restructuring and amortization expense, are expected to be in a range of $0.07 to $0.10 per share. This assumes an effective tax rate for the quarter on adjusted earnings of approximately 18% and includes dilution of approximately $0.01 to $0.02 per share for Neurovascular and $0.01 for the acquisitions.

The company expects EPS on a GAAP basis in the first quarter of 2011 to be in the range of $0.30 to $0.38 per share. Included in our GAAP EPS estimate is approximately $0.01 per share of acquisition-related credits, $0.1 to $0.02 per share restructuring-related costs, $0.07 per share of amortization and a credit of $0.31 to $0.35 per share related to the after tax gain on the Neurovascular divestiture.

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

J. Elliott

Great. Thanks, Jeff.

Let me begin with a more qualitative review of our businesses. And then as usual, I'll share some brief thoughts on likes, dislikes and a few hot topics for the quarter overall.

Let's begin with our CRV business. We're pleased with the integration of our CRM and CB businesses into the Cardiology, Rhythm and Vascular group. The CRV group is leading the industry in responding to the changes in the delivery of healthcare and positioning Boston Scientific as a company intensely focused on the care continuum for cardiovascular patients. Our CrossCare program has been well received by our customers and has already produced significant wins. This initiative has put over 100 contracts in place. And last month, we completed an exercise of bringing our division and regional sales teams together to identify appropriate opportunities and institutions to which we believe our unique value proposition will grow BSC's market share.

We've begun and will continue to evolve our selling structure and strategies to align with future market realities. During March, our international team will be fully exposed to our CrossCare and corporate sales programs.

In the last few months, we've also been able to accelerate some of our priority growth initiatives that complement our CRV model. The acquisition of Sadra Medical and the pending acquisition of Atritech are important to the execution of our power strategy and play key roles in the realignment of our portfolio. These acquisitions are listed as priority growth initiatives within structural heart therapy and atrial fibrillation and reinforce our commitment to providing the broadest portfolio of less invasive devices across the cardiovascular care continuum.

Percutaneous aortic valve replacement is one of the fastest-growing medical device markets. Sadra provides BSC with the Lotus Valve, a truly differentiated, repositionable and retrievable product that we believe will solve many of the unmet needs associated with existing devices. We plan to initiate the CE Mark trial this year.

The acquisition of Atritech with its novel WATCHMAN Left Atrial Appendage Closure Technology will strengthen our cardiovascular product offering for patients with atrial fibrillation who are at a high risk for stroke. The WATCHMAN device is currently available outside the U.S., and patients are being enrolled in the PREVAIL study in preparation for U.S. approval. This device is implanted by both the electrophysiologist and the structural heart-focused interventional cardiologist, two groups that are already key customers of our CRV organization. We will leverage this expertise. During our due diligence, we gave full consideration to the implications of new oral anticoagulant therapies and continue to believe that this device will potentially be the optimum solution.

Looking at CRM, worldwide defibrillator revenue came in at the high end of our guidance at $423 million, led by International, which grew 9% in constant currency. In the U.S., we came in near the midpoint of our defibrillator guidance with our fourth quarter share stabilized at an estimated 26%. These estimates are based entirely on our own models and do not reflect the reporting of all of our competitors.

Japan delivered strong CRM growth during the fourth quarter, both year-over-year and sequentially, driven by our COGNIS, TELIGEN and 4-SITE products. We are looking forward to continued strength in Japan and growing our market share with our recently announced agreement with Fukuda Denshi to market and sell our CRM devices. Fukuda Denshi is a proven partner in commercializing CRM products and has been an established player in Japan for more than 70 years. With their extensive sales resources, distribution network and service capability, complement Boston Scientific's existing sales and marketing organization and will allow us to expand our reach and further serve our Japanese customers. Fukuda Denshi will begin distributing Boston Scientific CRM products late this quarter, with a full ramp-up expected in the second half of the year.

For the full year 2010, CRM was down 10% worldwide in constant currency compared to 2009, and we estimate that our fourth quarter 2010 worldwide defib market share was down two percentage points compared to the fourth quarter of 2009. Our CRM sales and share were negatively affected by the U.S. defib ship hold and product removal actions we initiated early last year, along with subpectoral product advisory and disciplinary actions we took with certain salespeople in the fourth quarter of 2009. Excluding these impacts, we estimate worldwide defib sales would have been up 2% in constant currency versus 2009.

Although these actions clearly hurt us last year, the superb execution of our commercial team helped us recover from them better than we had originally hoped. While our share was down year-over-year, we're encouraged by the positive response from our customers.

Our technologies continue to prove their importance in the marketplace. COGNIS and TELIGEN are still the smallest, thinnest, high-energy devices in the world, with excellent longevity and are well received in the marketplace. We've heard very positive responses to our 4-SITE DF-4 lead system in international markets, most recently in Japan where we launched it during the fourth quarter. This new lead system is built on our highly effective RELIANCE defib lead platform and reduces the required implant area within the body, making COGNIS and TELIGEN even smaller.

We remain committed to advancing our technologies and strengthening our CRM franchise. We received CE Mark approval for our next-generation INCEPTA, ENERGEN and PUNCTUA defibrillators and plan to launch these devices in Europe and the U.S. during the first and second half of this year, respectively, depending, of course, on final FDA requirements. These products enhance BSC's advantage in size, shape and longevity, along with advanced algorithms to minimize right ventricular pacing, reducing appropriate shocks and new heart failure diagnostics in our ICDs. They also represent our first-tiered CRM product offering, giving physicians and their patients more options, while allowing Boston Scientific direct access to lower-priced tendered segments.

Additionally, we expect to launch our next-generation INGENIO wireless pacemaker platform built on the same platform as our existing high-voltage devices in Europe and in the U.S. in the second half of 2011, depending again on final FDA requirements. This new platform is intended to be the start of a series of low-voltage, Brady launches and represents our first new major technology introduction in this category in many, many years.

Our worldwide EP business was down 4% in constant currency versus a year ago, due principally to a continued product availability constraints with our AccuStick II catheter line. We'll work to address this situation and expect to have resolution by the middle of this year. The expansion and development of BSC's global EP salesforce and increasing in market share of Blazer-based products are expected to be the drivers of growth for the future.

We continue to see increased adoption of Blazer Prime in both the U.S. and Europe. Blazer Prime is an improved version of the market-leading Blazer Ablation Catheter and is designed to deliver enhanced performance, responsiveness and durability. We have received IDE approval for the Blazer Open-Irrigated Ablation Catheter and began patient enrollment in a BLOCk-CTI clinical trial last month. We're awaiting CE mark approval for this catheter.

Turning now to Cardiovascular. Worldwide DES revenue of $377 million was at the top end of our guidance range, including an excellent $83 million in revenue from PROMUS Element. Outside the U.S., mix continues to rapidly move from PROMUS to PROMUS Element in the geographies where the element product has been launched. Our worldwide DES market share at 35% was, of course, down some four points versus the fourth quarter of 2009. While our mix continued to shift from TAXUS to PROMUS sequentially, nearly the entire additional shift has been in the form of PROMUS Element.

The DES market was up 2% to $1,079,000,000 due to an increase in penetration rates from 64% to 67% and a 7% increase in PCIs, offset by weak ASPs compared to a year ago. However, we expect PCI rates have increased to marginally weaken in 2011. U.S. penetration rates have been stable over the last year at 77%.

During the quarter, U.S. DES pricing declined by 8% versus the prior year and consistent with prior quarters. In the U.S., DES revenue of $187 million was in the middle of our guidance range, with shares stable at 46%.

During the quarter, we saw a mix shift two percentage points towards PROMUS, as we continue to benefit from our two-drug DES offering.

Our expectation of a mid-2011 launch for ION remains unchanged. ION will be our first U.S. introduction of the Element platform, featuring our innovative stent design and proprietary platinum chromium alloy, that provides enhanced livability, visibility and strength over currently available drug-eluting stents. The platinum chromium Element platform has been well received in international markets, and we believe ION can grow Boston Scientific's DES share in the U.S. due to its acute performance advantages, broad-sized matrix and the proven performance of paclitaxel.

Finally, we expect to complete our two-drug strategy with the Element platform in the U.S. next year with the launch of Everolimus Eluting PROMUS Element in mid-2012.

In EMEA, approximately 96% of our revenue was in self-manufactured product, including more than 80% with our newest Element platform. We are the European DES market share leader at 32%, including an estimated 23% share for PROMUS Element, which has gained share in every quarter since its launch in late-2009 while facing the newest competitive technology. We are aggressively promoting PROMUS Element as tenders arise and are hopeful that the platinum primary endpoint data to be presented at ACC in April will add to our market share story.

In Japan, we lost market share in the first half of 2010 due to the Abbott RESET trial and new competitive products. It appears that our DES market share has stabilized compared to the third quarter, with share up one percentage point sequentially to 36% in the fourth quarter. Price stabilized throughout the second half of 2010 after strong declines in the early part of the year. We expect to launch TAXUS Element in Japan in late 2011 to early 2012 and PROMUS Element in mid-2012.

During the fourth quarter, we maintained our worldwide DES market share leadership with a seven-percentage point over our nearest competitor. We intend to leverage our two-drug offering and further advance our element platform in the market to 2011.

We completed enrollment in our EVOLVE clinical trial in late January, which is an incredible four months ahead of schedule. The EVOLVE trial is designed to assess the safety and performance of our fourth-generation synergy stent, which features a bioabsorbable polymer, everolimus drug formulation to create a thin uniform coating on the ablumin or outer surface of a platinum chromium stent. Our next steps would be gain CE mark approval for synergy and start the U.S. pivotal trial. We are now planning to present data on EVOLVE at TCT this fall. The primary reason that we finished enrollment four months early is that physicians love the synergy product, and their enthusiasm is reflected in their early and often usage.

As noted earlier, we also look forward to presenting the PLATINUM clinical trial primary endpoint results assessing PROMUS Element's 12-month TLR rate at the upcoming ACC meeting in early April. The trial data will support our regulatory submission in the United States.

Turning to other CV product lines. Our worldwide non-stent IC core business was down 8% in constant currency in the fourth quarter versus down 6% in all of 2010. These declines are mainly attributable to continued price erosion in bare metal stents and PTCA Balloons as well as lower their metal stent volumes. However, we maintained our U.S. and worldwide PTCA Balloon leadership positions with 57% and 37% share, respectively in the fourth quarter.

In our Peripheral Interventions business, we continue to be excited about our number one worldwide market position. During the fourth quarter, we produced overall growth of 2% on a constant-currency basis, with 5% growth internationally and a 2% decline in the U.S. market. Our worldwide PI stent franchise grew a much improved 6%, aided by the increasing success of our EPIC self-expanding Stent in international markets, the Carotid WALLSTENT launch in Japan and the Express LD Vascular launch in the U.S. market.

In our core PI franchise, which includes PTA and Vascular Access, we grew 2% in the fourth quarter. Our Interventional Oncology franchise produced 5% worldwide growth constant currency. We're pleased to see a strengthening of growth trends in our PI business in the fourth quarter and hope to see continued progress in 2011.

On a full year basis, our worldwide PI business in 2010 was flat to 2009, with international growth of 3% and a U.S. decline of 3% on a constant-currency basis. Our worldwide PI stent franchise grew 2% and was bolstered by 6% international growth during the year. Our worldwide PI core franchise was down 1% versus 2009, and our Interventional Oncology business was flat to 2009.

We're pleased with the international growth of 5% during the quarter. We regularly monitor procedural and pricing trends within the U.S. and European markets and are confident in our ability to leverage new product launches into growth worldwide. Our next-generation SFA stent, Innova, recently received conditional IDE approval in December. Our plan is to begin enrollment in U.S. trial SuperNova in the second quarter of this year as well as launching Innova on an international basis. In our Interventional Oncology franchise, our Renegade Fathom System launch occurred in the first quarter and our Interventional 35 launch will occur in the second quarter.

Our next-generation workhorse PTA Balloons are scheduled for launch in the second half of 2011. We expect these to be foundational to our PI growth story in 2011 and will provide additional status updates as appropriate during upcoming calls.

Now moving to our Endoscopy business, endoscopy continued to have solid growth in the fourth quarter, posting 6% worldwide growth, with 3% growth in the U.S. and 8% growth internationally. Adjusting for selling days, U.S. growth was 5%. For the full year, the Endo business grew 6%, with 5% growth in the U.S. and 8% growth internationally.

In the fourth quarter, the Endo business had gained strong growth in its metal stent franchise recording a 10% increase worldwide. This performance was led by our biliary and esophageal stent product lines with increasing market acceptance of our WallFlex offering. Worldwide growth of 4% was also recorded in our biliary device franchise supported by growth in our access products.

The hemostasis franchise delivered strong double-digit growth of 15% on the growing adoption and utilization of our resolution clip technology. During the quarter, we announced both 510(k) clearance from the FDA and CE Mark Approval to market our advanced biliary plastic stents for the treatment of biliary strictures. In addition, we announced the WallFlex Biliary RX fully covered stent received CE Mark Approval for the treatment of benign biliary strictures.

During the first quarter of 2011, we launched additional devices in our market-leading biliary franchise, expanded sizes of our biopsy forceps and our next-generation resolution clip technology.

On October 26, we completed our acquisition of Asthmatx, which is now part of the Endo business. The Endo business is rapidly executing a detailed plan covering all major operational and commercial integration milestones. The 175th commercial procedure using the Alair Bronchial Thermoplasty System was successfully completed in early January 2011. We plan to ship our first international site this month, and site selection for our post-approval trial was initiated in the fourth quarter. We expect to launch in all major European countries by the end of 2011.

The addition of Asthmatx strengthens our current offering of pulmonary devices and will contribute to the overall growth and diversification of our Endoscopy division. It also represents one of many important steps in the execution of our strategy to realign Boston Scientific's portfolio.

Urology and Women's Health delivered 3% constant currency growth for the quarter, adjusting for selling days, growth was 4%.

Our International business continued to gain momentum, with 9% growth overall and double-digit growth in three out of the four international regions.

Our Urology business expanded its leadership position and delivered worldwide growth of 6%.

Our Women's Health business was down 2% in the fourth quarter, mainly due to softness in elective procedures. Procedural volumes in the U.S. have been negatively impacted as a result of the high employment rate and a decrease in the number of unemployed covered under corporate benefits.

Additionally, competitive new product launch activity in both slings and pelvic floor repair impacted our growth as hospitals initiated the normal new product evaluations. International enjoyed double-digit growth in Women's Health, driven by new product introductions, along with increased sales investments and penetration into new markets.

For the full year, Urology and Women's Health grew 5% on a constant-currency basis. Our International business grew 8%, while growth in the U.S. was 3%.

In the first quarter of 2011, we will rollout to our entire Women's Health salesforce our recently approved next-generation Genesys HTA System for the treatment of abnormal uterine bleeding. We believe the significant enhanced user interface and ease of operation of the Genesys system will enable the business to grow its share of the $400 million worldwide AUB market.

In our Neuromodulation business, we were happy to report from Cologne, Germany the first patient implant in our advantage DBS trial for Parkinson's disease. We believe our precise DBS system brings new technological capabilities, not currently available in DDS marketplace today. With our unique ability to steer current, we hope to give physicians greater flexibility is shaping stimulation in the brain. We also believe our recent acquisition of Intelect Medical further advances our unique technical position in DBS, one of our priority growth initiatives.

Historically, DBS companies have focused on surgical placement of the leads. And while we recognize the importance of this critical step, neurologists have been limited in their ability to optimize patient programming. The Intelect GUIDE platform provides the programming neurologist with a clear clinical picture of the brain structures and enables them to optimize clinical patient programming for better therapeutic outcomes. This advancement also has the potential to improve programming times, limit or eliminate unwanted side effects and reduce power consumption of the device. Simply put, our precise DBS systems current steering provides exceptional ability to put stimulation where you want it, and the Intelect GUIDE system provides a detailed 3D programming map to follow.

Within our spinal cord stimulation markets, we achieved 7% growth worldwide constant currency in 2010, with 6% growth in U.S. markets and 18% growth in international markets. Though not all competitor data have been released, we believe we gained market share in 2010 through our new product launches and superior sales execution. For 2011, we'll increase our focus on driving awareness of our product's unique smooth wave technology and investing in and expanding our field salesforce. Together with recent expansions to our lead portfolio in 2010 and the new click anchor to be launched this year, we anticipate more market share gains for Neuromodulation-s throughout 2011.

As usual, let me switch now. And I'll finish with some overall perspective on the quarter, what we liked, what we didn't like and a few hot topics for takeaways.

I'll start with what we liked. Number one, we like the fact that we had a very successful Investor Day meeting, our first in four years. It gave us an opportunity to articulate our power strategy and outline the steps we will take to drive sales and EPS growth, both in the near term and beyond. And it also allowed our leadership team to gain additional visibility with the investment community and to showcase our new product pipelines across all of our businesses. While recent attention is focused on our acquisitions, but our revitalized internal pipeline of more than 150 new products over the next four years should not be underestimated. This morning, we've highlighted several examples of how we're successfully implementing our power strategy. In the coming months, we'll continue to make progress against our goals of growing sales, reducing costs, leveraging earnings.

Number two. We liked signing our CRM distribution agreement with Fukuda Denshi in Japan. This is a well-established company that was founded in 1939 and reported more than $1 billion in sales last year. They have a proven track record and a long and successful history of delivering results. Fukuda Denshi has an impressive breadth of coverage, especially in the pacemaker market, and this agreement will provide us access to many more accounts. In addition, Fukuda Denshi will sell Boston Scientific-branded devices through their more than 300 sales reps responsible for CRM and thereby strengthening our own CM brand in Japan. Fukuda Denshi chose to sign an agreement with us and completely end their long-standing relationship with St. Jude, which dated back 16 years. They clearly recognize the opportunity for greater success in Japan with Boston Scientific.

Number three. We liked receiving CE Mark for our next generation of CRT-Ds and ICDs, INCEPTA, ENERGEN and PUNCTUA. These products are designed to provide physicians with multiple therapy options to match specific patient needs. The INCEPTA device includes new features to maximize appropriate therapy, manage right ventricular pacing and improve heart failure management and patient follow-up. Our ENERGEN devices will simplify the implant procedure and include all the features on longevity of today's premium devices. PUNCTUA will bring our legacy customers forward into the next-generation technology and will feature our signature device size and shape with advanced battery technology and excellent longevity. From a strategy point of view, we'll finally be able to get access to tiered-price European purchase requirements that up until now we've been locked out of.

Number four. We liked the fact that we completed the first human use EVOLVE study within six months. The rapid completion of this trial four months ahead of schedule reflects the cardiologist's enthusiasm for the breakthrough technology. EVOLVE has investigated our new unique synergy stamp, which utilizes a bioabsorbable, abluminal polymer one of two different doses of everolimus, delivering the drug only to the arterial side of the stent where it is needed. Within a few months, both the drug and the polymer are gone leaving behind a bare metal stent. We'll move forward with the presentation of the EVOLVE primary endpoint data to TCT this November and we'll be exploring a regulatory path to rapid commercialization worldwide.

Lastly, we liked the win-win sale of Neurovascular's Stryker at premium value. We'll assist Stryker over the next 24 months of transition, while redeploying more than $1.2 billion of after-tax capital to book that reduction and our priority growth initiatives.

Turning to dislikes, number one on the list is the ongoing pricing pressure we're seeing in virtually all our key markets. Price pressure has been a problem for sometime now, and we expect it to continue to impact our margins in 2011 and continue to be our greatest challenge.

Number two. We didn't like the continued weakness in elective procedures. We've seen this across nearly all our businesses, and it's a trend that has persisted over the past several quarters. We just completed a major internal study of procedure changes in the markets we serve with a focus on elective versus nonelective. Our research confirmed that there has been a decline of procedural volume growth rates. While we are starting to see a slight rebound, we expect the recovery to continue to be moderated by the following: lingering high unemployment rates; higher out of pocket expenses for insured patients, which may encourage them to delay care; an ongoing trend towards subspecialty employment by hospitals, which in cardiology is expected to be over 50% by 2012; and a shift in procedures from inpatient to outpatient settings, in the case of PEIs, doubling from 18% to more than 1/3 of procedures in the coming four years.

We have carefully assessed how these findings may impact our priority growth initiatives. We're confident we're focusing on new products, therapies and patient populations but not only less impacted by these trends but in fact, may mitigate their effect.

Number three on the list of dislikes is the uncertainty regarding the current regulatory environment, not just in the U.S., but globally. Some of this uncertainty was reduced recently with the FDA's 510(k) recommendations. Overall, however, increased attention on high-profile product recalls has led to more to more government oversight, stricter regulations and a higher hurdle for approvals by FDA and international regulatory agencies. Regulatory uncertainties are a very real and permanent part of our new market reality.

I'll close on a couple of hot topics. Key component of our power plan is to expand our footprint through greater focus on emerging markets. It's clear that many of our growth opportunities are outside the United States, especially in the under-penetrated markets of Brazil, China and India. We have committed to investing in these markets to the tune of $30 million to $40 million through this year. We have already taken a number of steps to help us win in these markets. We strengthened our sales forces in India and China, and this year, we plan to add more than 150 sales reps in these two countries alone. In addition, we have modified our partnership with our Indian distributor, Trivitron Healthcare, to allow us to invest and expand our sales footprint in India on a more direct basis while seeking manufacturing partnerships. We're also extending our clinical trial reach in these countries. Last week, we announced the beginning of the Platinum China trial, which is designed to support approval of our PROMUS Element stent in China. We're also planning a host of new product registrations and launches across emerging market countries, including the registration of PROMUS Element in China and a study focused on the TAXUS Element paclitaxel-eluting stent and diabetic patients in India, where 48% of the population with cardiovascular disease is also diabetic.

In addition, we have designed and are executing a PROMUS Element all-comers registry in India. All these actions represent a significant increase in our direct commercial presence in these high growth, high potential markets while helping to set the table for 2012 onward.

Our international organization now has a much leaner structure, a renewed focus on global sales and marketing and improved process for the launching of products quickly and efficiently. We have recently named two proven leaders to head our International business and our emerging markets team. Both individuals have extensive experience and demonstrated records of accomplishment. In addition, we're in the final stages of hiring general managers for both our India emerging markets hub in New Delhi and our Central Asia emerging markets hub in Istanbul.

Hot topic number two is our zero-based budgeting program or ZBB. We have instilled a great deal of discipline in headcount expense management, and over the past few years have done an excellent job of controlling our operating expenses while aiming to drive down product cost by above 5% each year. However, with rapidly changing market conditions that will put more pressure on margins, we know that we must do more. We need to examine our expense base from scratch as if we are building the required infrastructure to support our size and our expected growth as we know it today. We also need to examine the various business and sales models we use in each of the markets we serve and ask ourselves difficult questions about how to serve our customers profitably. So we've embarked on zero-based budgeting program to deeply examine our large functions and determine what activities we're performing and what expenses we're occurring for activities that are no longer necessary to support and grow our business profitably. We also need to better understand how we can change our business models by identifying policies and services that our customers are willing to modify in order to support their initiatives from proving their profitability. We cannot and will not continue to experience significant price erosion without changing many parts of our own business model. New, innovative low-cost sales models will be test-marketed in late 2011, with an anticipation of 2012 U.S. rollout.

In addition to our new ZBB project, we've also recently launched two other initiatives designed to improve our operating expense leverage. The first is our emerging markets initiative or EMI project, including the creation of low-cost, offshore shared services organization, incorporating the concept across a wider range of functions and activities. The second is called Project Transformation. This initiative is targeted to completely overhauling how we manage R&D projects. Over the years, we have solely evolved the way we manage R&D projects. Without paying particular attention to whether or not the processes and procedures that we put in place were efficient, redundant or even necessary. As a result, many of our R&D projects have historically well over budget and late. Project Transformation will overhaul the way we view R&D by installing more modern methods and practices, impose more discipline on functionality and design freezes, remove inherent bureaucracy, streamline the decisionmaking processes driven by inter-functional dependencies and provide project-focused, team-based compensation incentives.

Hot topic number three is litigation reduction. We continue to work hard to reduce litigation risk facing the company. Although we're disappointed that the Department of Justice chose to follow related civil suit against us last week, we do not anticipate any significant financial impact to the company. We were pleased to close down the long-standing government criminal investigation into the 2005 Guidant recalls when a federal judge in Minnesota approved the plea agreement between Guidant and the DOJ. All of that conduct took place before Boston Scientific acquired Guidant in 2006. That was another successful example of our continuing efforts to clear out unfavorable terms as many historical litigation risks as we can.

We've previously announced settlements of several patent infringement cases that J&J and Boston Scientific filed against one another over the last decade. In May, there is a federal court trial in a case where we are seeking damages against J&J based upon our claim that J&J siphoned many coronary stent infringing some of our patents. J&J also had some cases filed against us, which we're defending aggressively. In one of those cases, J&J accuses our PROMUS stent of infringing four specific patents. However, all of those patents were found invalid by a federal judge in Delaware. We are now awaiting a decision from the Court of Appeals on that ruling.

These same four patents were reexamined by the United States Patent Office and currently stand rejected. J&J, in a separate lawsuit, claims that PROMUS stent infringes another set of J&J patents, but these patents have also been rejected by the U.S. Patent Office on reexamination. The patent office process is not yet completed for any of these patents, but we are very pleased with where we stand as of today.

I want to close the hot topics section with our priority growth initiatives. We have chosen these initiatives very carefully. Our goal is to improve treatment options within select markets with less invasive, device-based options that reduce refractory drug use while remaining cost effective. Each of these areas is supported by strong demographic and economic data and is well aligned with our existing core competencies and sales channels. Collectively, the markets for these growth initiatives are expected to grow well over 20% per year for the next several years.

Our recent acquisitions of Asthmatx, Intelect Medical and Sadra Medical and our agreement to acquire Atritech demonstrate that we're successfully executing our strategy to realign our portfolio. Each of these companies provides us with new technology that addresses unmet patient needs in a fast-growing market that is well supported by our existing sales force. These deals are also the right size to be affordable. They're structured with performance-based earnouts, and they allow an accelerated path to market, with should not allow us to get bogged down with integration challenges. The previously mentioned recent sale of our Neurovascular business further complements our realignment strategy. Taken as a whole, these deals reinforce our improved liquidity and financial strength, further evidence of our improved liquidity and financial strength came during the quarter from Moody's, who raised our liquidity rating; and from Fitch, who raised our outlook. These strong fundamentals, coupled with our robust cash flow, allow us to fully support our commitment to innovation and growth through our combination of internal government projects and acquisitions.

Nevertheless, in the near term, pricing and procedural weakness will not be the market's or Boston Scientific's friend. And the recent acquisitions, although very valuable, will not drive sales this year. 2011 will be difficult but necessary transition year to set the table for 2012 through 2015. The focus is now clearly on execution, not strategy, and I expect the turnaround actions required to re-energize Boston Scientific's performance will be substantially completed by the end of 2011.

With that, I'll turn it back to Sean, who'll moderate our Q&A.

Sean Wirtjes

Thanks, Ray. Gwen, let's open it up to questions. [Operator Instructions] Gwen, please go ahead.

Question-and-Answer Session


[Operator Instructions]

We do have a question from the line of Rick Wise, Leerink Swann.

Frederick Wise - Leerink Swann LLC

Let me start with thinking about the 2011 guidance. Can you help us understand whether to what degree you're assuming further cost savings or benefits in the recent restructuring initiatives in your guidance? And I've got to believe that there are some -- are you actually reinvesting them as you talk about this transition year, Ray?

J. Elliott

I'll start this off and let Jeff jump in. Yes, we are. We've got strong restructuring benefits and as usual, very strong performance from our ops group. But, two things are happening, some of that is being absorbed, as I mentioned, by continuing price and some softness in procedural, and then the other parts of that are being absorbed by new product launches and investments in emerging markets and in other places. And Jeff, I don't know if you want to add some detail to that?

Jeffrey Capello

I would say that the restructuring plan that we announced, the Alignment for Growth plan, the savings of that program are rolling through 2011, as part of them did in 2010. But most of those are being reinvested back into the growth initiatives that Ray referred to. Just relative to the zero-based budgeting and EMI programs, two of the programs we highlighted during the Investor Day that are each worth $100 million plus. Those programs are in active planning stage, in terms of teams and evaluation efforts, but there is really no benefit for those built into this year. Those really start to kick in '12 and '13.

Rajeev Jashnani - UBS Investment Bank

Another bigger picture question maybe, Ray. You mentioned the phrase portfolio realignment. Maybe just update us on your thoughts, where you stand on both the in and out aspect of portfolio realignment, and you had said in the release that there was no acquisition sales impact in 2010. I assume we do expect some positive benefit and that's dialed into 2011?

J. Elliott

Yes, I just actually did that with the sales forces, Rick gave an update. So as you work down the list of the many items we mentioned, we're actively involved from a business development perspective in discussing opportunities with people and in looking at deals. So that's true. They will be sized as per the type or sizing you've seen from us so far and the R&D project shift that's taking place is done over about 2 1/2 years. So we had very little investment in these growth initiatives internally and there's a shift of approximately $300 million that will take place over the next 2 1/2 years to allow us to do two things, do the internal work in cases where we are the developer of the technology and/or absorb the R&D burn rates of the companies we're acquiring. So that's the answer on that. 2010, there's very little sales, there's not a lot of sales either in 2011 of those, Rick. There are some where we have CE Mark opportunities where it already exists, of course we'll get some European sales. But virtually everything we're doing, whether it's investment and/or acquisition portfolio realignment, the work is being done. The strategy and the layout was done in '10. The work's being done in '11 and that sets the table for '12 through '15. I mean, obviously, I wish it could be done differently. But I just don't see any other way of doing it.


We have a question from the line of Kristen Stewart with Deutsche Bank.

Kristen Stewart - Deutsche Bank AG

I was wondering if you could kind of walk us through the gross margin change year-to-year from where we ended 2010, to the $65 million to $66 million that you're expecting for 2011. I know obviously Neurovascular has an impact there. So maybe if you can just break down components of that relative to the price assumptions and then what level of a mix benefit we might expect from PROMUS Element.

J. Elliott

I should have mentioned to everybody, the weather, we're all in remote environment here. So I'm going to, kind of field questions out. People are over in Europe and Jeff and I are in separate locations. So Jeff I'll ask you to jump in and answer that one.

J. Elliott

Sure. Kristen, so if you look at the gross margins year-over-year and take the midpoint of our guidance for 2011, they're down about 200 basis points year-over-year, and there's really five factors that drive that. The first factor and the factor that has one of the largest impact, is impact to Neurovascular business divestiture. So that business, which had roughly $350 million worth of revenue last year had gross margins which were very favorable compared to our company average. So we lose that $350 million of revenue with above-average gross margins, which has a negative impact on our average gross margins. The second factor in the Neurovascular divestiture is, we inherit some distribution and some manufacturing, kind of a supply chain stream into Stryker at basically no gross margin. So the combination of the first factor, which is worth about 100 basis points and the second factor, which is worth about 50 to 70 basis points, has about 160, 170-point negative drag on our gross margins. That's the bad news. The good news is, on the supply cost side or the distribution side, we're manufacturing for them and helping distribute the product, that's a two-year arrangement that goes away. So that revenue kinds of tails off and the dilutive impact of that margin kind of dissipates at the end of the second year. So the first component is about 150, 170 basis points negative impact from Neurovascular. The second impact is roughly similar, slightly lower impact of pricing. We see the pricing environment getting a little bit more challenging in 2011 and we've assumed that in our guidance. So we're assuming that, that's -- call it 150 basis points, plus or minus of negative pricing pressure, which is more than we faced in 2010. Going in the opposite direction, as we've talked about at the Investor Day, we have a very robust value improvement program, where we strive to take out at least 5% of our net cost of our products every year. That's going to be helpful to the tune of about 100 basis points. And then the last two factors, one is positive mix generated by both PROMUS Element and some of the CRM new products we have coming out, that's about 60. And then going in the opposite direction, we have a number of costs that we'll incur this year as a result of introducing TAXUS Element in the U.S. and introducing the new ICD, then a new pacemaker in the U.S. that are roughly almost similar to the mix benefit. So just to recap, it's Neurovascular in kind of a, call it 150 to 170 negative price of 150, positive manufacturing of 100 and positive mix of 50, offset by 50 of, kind of temporary, kind of onetime of kind of getting new products in the market and getting TAXUS Element introduced and as well as the new ICDs and peacemakers.

Kristen Stewart - Deutsche Bank AG

And then just real quickly, I know that the Investor Day, you guys had talked about EPS guidance in the near term being double digits. If I look at the EPS guidance that you provided and kind of back out the dilution, it looks like you're a little bit below that goal. So can you tell us if anything has, kind of changed over the last couple of months that makes you rethink some of the longer-term projections or even near medium-term projections on growth?

Jeffrey Capello

Well, it's interesting. I think when we went through the Investor Day, we had not yet finished the plan for 2011. As Ray had said, we recognized that given the Neurovascular divestiture and the dilutive impact of the acquisitions, plus the tax benefit, we had a pretty large EPS tax benefit of $0.07 for the year. So if you weed all those factors out, that $0.69 that we had in 2010 really becomes, kind of more of a $0.52, kind of comparable run rate number. Having said that, we had anticipated that '11 would be a bit of a challenging year and it is a bit of a challenging year, and a number of those factors -- we made the decision to put $30 million to $40 million into SGIs. Those are front-loaded at the beginning year and when you hire 200 plus reps in any given year, you kind of start to get the revenue impact at the back half of the year. So that's even more, kind of headwind at us. So there are a number of factors that were more headwind, that then in 2012 start to, kind of payoff, including some of the acquisitions, in terms of some revenue growth. So the easiest way for me to answer the question is, if you were to look at the model that supported the Investor Day, the midpoint of our guidance that we just released is right in line with what we ended up having for the Investor Day in terms of 2011. So we're not really off where we had thought we'd be. It's a little higher on the price than we anticipated in 2011. But as we mentioned in the Investor Day, there are number of things that we can do. We have about $600 million of concessions that we grant to customers every year that we can get a lot better at, in terms of, whether it be watching our free goods or product returns. We think we can hopefully work that price number down to a lower number, but that's something we need to work on, 2011.

J. Elliott

And I think too, Chris, and I'd just add quickly to that, you're absolutely right on Investor Day and I think Jeff's answer is right as well. The near-term, if you remember was zero to two years, medium-term was two to four. So if you look at what we have to do in '11 and obviously we didn't want to get into, at the Investor Day, of giving 2011 guidance as being double digit, we didn't give any guidance on 2011. But if you look at that two-year period, to Jeff's point, I don't think we're off it at all. As I look at 2012 without getting into specific guidance, I mean there's an awful lot of great stuff there. But if we don't set the table and invest now and do right things in 2011, make the right acquisitions, et cetera, et cetera, you don't get to do a really great job in 2012 and 2015. Somewhere along the way, you've got to bite the bullet and do this stuff and we have to do with it now. So that's the answer, but I don't think anythings changed at all, in terms of our view of the future of the company.


We have a question from the line of with Tao Levy with Collins Stewart.

Tao Levy - Collins Stewart LLC

Just quickly a clarification on the Neurovascular business. Will you guys be generating revenue from that segment in 2011?

J. Elliott

Yes. I think Jeff mentioned that. I think what we're guiding you to, is roughly $100 million. But keep in mind there's virtually no margin on it. These are transition services we're providing to Stryker across a broad array of areas, to allow them to, over a two-year period, take complete control of the business. So yes, the answer is yes, to the tune of about $100 million, but the GP impact is next to nothing. So therefore, it really lowers that average GP, as Jeff mentioned.

Tao Levy - Collins Stewart LLC

And if I just look at the, your sort of the cadence of the earnings guidance that you're talking about or you're providing, as well as a look at the revenue. The revenue seem fairly evenly split throughout the year, in terms of first quarter versus the full year, about a quarter of revenues coming into the first quarter. But the earnings, looks like there's a big disparity there between the first quarter as a percentage of the full year. Is there anything specific that's happening in the first quarter that you expect to recoup as the year goes on?

J. Elliott

Yes, Jeff, I'll let you jump in on that one.

Jeffrey Capello

Yes, so there is. Typically, the first quarter is more of a challenge than the rest of the quarters, for a number of reasons, in this quarter, in this year in particular. So if you look at, kind of the factors that I went through when Kristen asked the quarter on the gross margin, gross margins will be under more pressure in the first quarter for a couple of reasons. One of which is the impact, just the way kind of Neurovascular business performed a year ago. The impact in Neurovascular is a little bit more dilutive from a margin perspective in the first quarter and we also think price because of some of the pricing actions that happened in the back half of this year, will be more of a challenge on a comparable basis for the first half this year than the second half. Because we don't think that the pricing, on a relative basis, will be as difficult, kind of, as we exit the year. So this pricing is a bit little more of a headwind. The other couple of factors are, when I talked about the costs associated with introducing new products, so we have a sales return reserve of $10 million we're booking for TAXUS Element. TAXUS Element will be a little bit more expensive in the short-term as we ramp up that product and get the volumes, so the cost will be a little bit more expensive. We also have some product transition costs, excess and obsolescence planned, and some higher product costs associated with the new products coming out for CRM. Those hit the first quarter more disproportionate than they do the full part of the year and the final factor is in our volume improvement program. We work every year to, kind of come up with a list of projects that we work on. That list of projects gets, kind of cemented in place as we finish the year, and then as you start the year, you start working on your projects. Those projects tend to pay off, kind of as you go through the year because there's specific projects that you need to go off and execute. So there's less of a benefit of the volume improvement program in the first quarter than there is in the rest of the year. So those four factors combined -- but we're fairly confident though that, that gross margin pressure lapses, as some of these factors just go away and some of them we just, kind of grow in to, kind of the programs.

J. Elliott

And Tao, let me add a point, too. Because Jeff touched on this, I just want to hit on it again. We are conservative in our approach relative to GAAP accounting. So when we take reserves for cannibalization on new product, returns of old product, we absorb that immediately into our margins. It's not offloaded into an adjusted methodology or a non-GAAP methodology. So we got to be careful here, whether you look at us versus other people or just looking at us, that you understand that's what we're doing so we take the hit there and don't represent it anywhere else.


We have a question from the line of Bob Hopkins, Bank of America.

Robert Hopkins - Lehman Brothers

First one on pricing, and then I want to ask Ken or Hank to talk about the Jim article a little bit. So first on pricing. Did you see price get worse in Q4 versus Q3?

J. Elliott

I think our pricing declined and I think we -- if you're talking DES first, I think we suspect ours and perhaps Abbott's price decline more than the market and probably is about where it should be. I don't think we saw -- maybe there was a point or so in CRM, but I don't think there was much there, it may have been slightly worse.

Robert Hopkins - Lehman Brothers

The reason I asked is, you're suggesting, as part of this gross margin guidance, that 150-basis-point negative impact from incremental pricing pressure versus what you saw in 2010, and I think throughout most of it 2010, you guys were pretty vocal about saying you were seeing pricing pressure then. So what kind of incremental pricing pressure are you assuming in, say, stents and ICDs in 2011 versus '10 to get to that 150 basis points overall for the whole company?

J. Elliott

I'll let Jeff answer on the guidance. But if you remember in Jeff's formal remarks, he did talk about the fact that the market, again I'm talking just DES now, for the moment, that the market was down eight, which we believe is correct and verifiable and we were down 10-ish. So we're down a couple points more than the market. We think perhaps our friends at Abbott are as well. Jeff, I don't know if you jump in, in terms, from a guidance perspective and respond to that?

Jeffrey Capello

Yes, so price happens every year, right? So as you look at, kind of what happened in 2010, we saw some pricing pressure and a little bit more in the back half of the year. So that's built in and it had a certain impact to 2010. And then 2011, you start again with, kind of what you think the price is going to be. So I think the 150 basis points is the incremental impact on prices above and beyond what the exit rate was in 2010. That number is a little higher than it was for 2010. But as I mentioned earlier, we have $600 million worth of concessions we give to customers and Ray, kind of pointed this out in his comments. We don't intend to just, kind of sit back and, kind of let this happen. We've got a number programs we're going to kick in here to see if we can get that 150 down. But I think, relative to coming out with reasonable guidance, hopefully we're conservative in that area.

J. Elliott

And I too, what happens Bob, is if you think about INGENIO and you think about product lineups, and you think about PROMUS Element coming to Japan, in the U.S., albeit in 2012. Those are highly differentiatable products and that's in part, what's going to offset a lot of the pricing that's going on today is that ability to differentiate and sell and market of that basis.


We have a question from the line of Bruce Nudell, UBS.

Bruce Nudell - UBS Investment Bank

Ray, just looking at the guidance cadence, it's $0.07, $0.10 first quarter, $0.14 to $0.17 the subsequent quarters. Could you just give a little granularity of what's going to change first quarter through the subsequent three quarters? Just, is it improved sales? Is it mix? Price is not to going change. What is actually going to change over that transition period?

J. Elliott

Yes, again, I'll let Jeff come in and talk on the first quarter, because it's not that the other three are abnormal, it's more that the first has more negatives in it. But if you look at the timing of the new product releases, just to take that one example, that's obviously going to make a big difference because a lot of them are late first half, second half as per my description in the remarks. And then the variety of things of that Jeff referred to, and on the top of that, I'll throw in most of the $30 million to $40 million we're investing in emerging markets is virtually all in the first half. In fact, it all will be if it of the hiring and everything done. We've got 150 reps that we're investing in, in total. We've already hired a number of those and they don't give you a return. I mean, it's all cost and lower return at the beginning of the game. So it's just a lot of heavy front-end investment, Bruce, because if we don't do it now, a year from now, when we're in the first quarter 2012, we won't be where we need to be. So we got to front-end load it in order to get there. Jeff, I don't know if you want to add some thoughts to that.

Jeffrey Capello

Let me just, kind of step through the P&L maybe give you a sense of what would be different in the back half of the year compared to the front have the year. I think the first factor is revenue. So as Ray had mentioned, it's roughly 150 new incremental reps we're adding in emerging markets. That number is about 50 or 70 light. So we're going to do about, in excess of 220 more sales representatives including the 150 that Ray referred to. So what happens from a revenue perspective is you add those people, you've got to train them, you incur all the cost from an SG&A perspective and they become productive in, it varies by business, but it's anywhere from the six-month to the 12-month in terms of full productivity. So we front-loaded the SG&A associated with those costs and we'll start to see the revenue growth as we, kind of exit the year, kind of in the third and fourth quarter. So there's a timing impact between the commercial investment and the financial return from a revenue perspective, and that impacts the first quarter. Gross margin-wise, I talked about the new product introduction cost, we have a $10 million sales returns reserve that we intend to book in the first quarter for the introduction of TAXUS Element, which we're quite excited about. We've got to get the old product back. In addition, we have a number of excess and obsolescence types charges to, kind of, as we look at migrating from our COGNIS and TELIGEN platforms to our Progeny platform, and there's a little bit more expense associated with that. So that's also in the first quarter and that's, kind of a onetime cost as it goes away, and we add the value implement programs, which our manufacturing guys just did a terrific job on. They've got all the projects lined up. They're going to get at those projects, but those projects don't show the economic return until, kind of slightly, kind of midpoint of the year and the back half of the year. So gross margin is a little bit more compressed in the first quarter. I talked about the SG&A. The R&D was a little lighter at the back half of the year, but then we've got the acquisitions coming in. So the acquisitions and the OpEx and then interest expense-wise, we did a number of things, in terms of paying down debt and we recently swapped out some debt. Those are all helpful. In the swap case, we didn't do the swap until recently. So there'll be much more of a benefit for Q2 through Q4 than Q1. So it's really a combination of all of those factors. It, kind of weighed down the first quarter, but it gives us pretty good confidence. We can isolate them. We know what they are and we've got plans in place to, kind of execute against them, that the EPS is going to be stronger as we work our way through the year. The other factor that no one's brought up yet, that I just want to make sure people are clear on, because it represents another element of conservatism in our assumptions is, as I mentioned in my prepared remarks, we have roughly $840 million of cash today. That doesn't count the cash that we'll generate in the months of February through the months of December. So we're going to start to building a cash position and our assumptions, relative to the guidance, is that we hold that cash and we wait and see what happens from an M&A perspective and a debt perspective. So there's some conservatism built-in with regard to that in terms of what we'd like to do with the cash. I think that's important for people to recognize.

Bruce Nudell - UBS Investment Bank

And just one follow-up. The thing that's most worrisome about the JAMA article, in my perception, is that you had a bunch of outlier hospitals with a lot of "off-guideline" use. I know that you know this data was imperfect and it only referred to half of the first time implants, but could you, kind of characterize, in your view what this is going to do to market growth rates in 2011? If the U.S. market was minus 1% this year, where is it going to be next year? What's the mechanism by which it'll retrench, if it does?

J. Elliott

Maybe I'll ask Ken to make some comments on the JAMA article and then maybe our view on that.

Ken Stein

Yes, thanks, Ray. I mean, I don't think we're in a position to speculate on what kind of impact that's going to have on the market. I think it is important to point out, and as you say, and I've spoken to quite a few of my former colleagues about this. It's a tremendously flawed article, in terms of methodology. I think we recognize, what it does show is that the vast majority of primary prevention implants did occur within the guidelines. It only covers primary prevention cases. I think also, you've got to bear in mind, the fundamental problem with ICDs, in this country right now, is underutilization and not overutilization. And given that, I think frankly in the long term, anything that focuses people on label use of devices is going to be good for patients and good for the industry.


We have a question from the line of Mike Weinstein with J.P. Morgan.

Michael Weinstein - JP Morgan Chase & Co

So I'm going to just circle back, Jeff to, and Ray as well, to the comment, just about an aggregate to 2011 EPS guidance and you guys reported on your adjusted numbers $0.59 in 2010. You're guiding it $0.50 to $0.60 for 2011, and Ray, you made a comment that you thought that the guidance was consistent with the analyst meeting and that your view, nothing had changed and that this was pretty much as you're expecting. So maybe just flush that out a little bit more, because you were talking about 13% to 27% decrease in earnings year-over-year?

J. Elliott

Yes, I think I'll start out and then Jeff can jump in. I don't want to cherry-pick all the negatives, because there's positives as well, that Jeff mentioned. But if you just take the three largest quotes negatives, which will be Neurovascular, the dilution from acquisitions and our inability to plan for discrete tax items. I mean, that's about $0.17 right off the top and then there's a number of other items. So my comments, that I made about things not changing, are because there was no 2011 guidance at the investor meeting. I'm not trying to play word games. There's simply wasn't, nor would we do that. The guidance we were giving or the directional, aspirational guidance we were giving was simply over the near term, which was over the two years. So obviously, 2011 is a, what I call "set the table year," and 2012 has a lot of huge positives in it, unless we've misread things. So when I say nothing has changed, over that two-year time frame, perhaps a little bit of weakening in price late in the year. But other than that, nothing has changed, Mike, in our plans. Nothing has changed our initiatives, nothing has change in the aspirational guidance that we gave at Investor Day. I can't think of anything that has changed. Jeff, I don't...

J. Elliott

So I mean, I think the one factor that's different is, when we're sitting here putting together the Investor Day, the $0.04 of favorable tax that occurred in the fourth quarter, we didn't know whether that's going to materialize or not. So and that obviously inflates to $0.69 along with the other $0.03. So you start to kind of look at these various factors. And I think as Ray had said, the $0.17 is kind of a big number as you look at it.

Michael Weinstein - JP Morgan Chase & Co

Just to clarify on a couple of items. The incremental price pressure that you saw that was specific common to drug-eluting stents.

Jeffrey Capello


Kristen Stewart - Deutsche Bank AG

And then in international ICDs this quarter, you had a stronger-than-expected quarter there, but you also referenced some initial launches in Japan. And so it got me thinking that maybe there were some stocking benefit this quarter that we shouldn't assume repeat in the first quarter?

J. Elliott

No, no. because our business distribution system doesn't work that way, nor does our revenue recognition. So that's not a factor.

Michael Weinstein - JP Morgan Chase & Co

I though you just adjusted for revenue recognition on that issue in the U.S.. You do that internationally as well in all in your markets?

J. Elliott

Well, by stocking, are you referring to -- we don't have distribution systems in that sense. Are you talking about hospital load up?

Michael Weinstein - JP Morgan Chase & Co


J. Elliott

We talked with our teams about that, Mike, and just make sure that is not the case. We didn't see anything along those lines, that was adding -- I don't think that's a factor in this.

Michael Weinstein - JP Morgan Chase & Co

And let me just me clarify, because you're in this process of external activity. You put three notable transactions on the table the last few months and the expectation is that you're going to continue to build your pipeline as we go forward here. So how should we think about that $0.50 to $0.60 guidance for this year relative to the continued deal activity? Should we assume, that at this point, you haven't factor that in and that we should expect some movement on it, $0.50 to $0.60 if you do additional deals?

J. Elliott

Yes, I think there's two assumptions. What you said is correct. However, I wouldn't necessarily assume everything is dilutive. We don't necessarily control the timing of these deals. So the ones that we are able to negotiate, in some cases as you know, we already whole ownership in them. Conversations have been held. So the timing and our ability to control it on an absolute sense isn't necessarily there. So they're going to come, when they come if we can negotiate the right deal and secondly, to my point, I wouldn't assume that they're all necessarily dilutive. There are in fact, a couple of opportunities that look to be marginally accretive and would offset some of that. So the $0.50 to $0.60 is, as we know it today, and it'll move around a little bit, depending upon the timing and order of which we're able to exercise the strategy on the growth initiatives.


We have a question from the line of David Lewis with Morgan Stanley.

David Lewis - Morgan Stanley

Ray, just one of the big takeaways from today, at least for me, was the reinvestment or significant reinvestment -- it may not be an acceleration, but in emerging markets and I don't think at the Analyst Day this came up, sort of dramatically. So maybe give us a sense of, given that significant reinvestment, if you think about the next three to four years of the business, sort of develop market challenges versus o U.S. and emerging market opportunities. What general sense do you think, in terms of international emerging markets, can grow as it relates to your developed market growth rates. Given this investment?

J. Elliott

Well, I think they're growing. If you just focus on -- if your remember it, on the Investor Day, David, my reference to it, as I used a couple of slides on India and China, we didn't talk beyond that, you're right and questions didn't come up on it, that I can recall. But if I look at those marketplaces, there's two significant things. They tend to be growing 15% to 20%. Some more, some less, but the average, that area, the ones we're focused on, and I would include Turkey and the Central Asia hub as well, in that, and other parts of the Americas. Our market share is atrociously low, but we have high brand recognition. So what I smell is huge opportunity and in order to capture that opportunity, we have to partnerships and we have to get a lot of feet on the street. The numbers we used, the slide's right in front of me right now, but the numbers we used at the Investor Day, for just the India-China market, was our ability to get -- I won't tell you what we do now, but it's not big. But the ability to get to between $300 million to $500 million of sales in those two countries over the medium term period. So over the zero to four-year period. I have no reason to believe that those numbers aren't reachable and that would make a difference to our company. I mean, huge difference.

Jeffrey Capello

Maybe, Ray, if I just add a bit to that, from an emerging market perspective. I mean, those, as Ray had said, those markets are growing 15% to 20%. The Indian market is somewhere in the high-200s, if not low-300s and China is bigger than that, and our share is in the low-single digits compared to 46% in the U.S., 32% in Europe and 54% in other areas of the world. So for us, it's not only the 15% to 20% growth, but it's establishing our fair share. So if you look at 150 reps being hired in both of those, transitioning more to a direct model in India, launching PROMUS Element, including clinical trials in both China and India, as well as specific training programs. It's a significant focus for the company and there's a large opportunity for us going forward there.

David Lewis - Morgan Stanley

And Jeff, maybe just two quick follow-ups financially. The first is, could you just give us your sense of adjusted normalized cash flow for '10, and what you expect that apples-on-apples number to be for '11? And just to come back to this dynamic of gross margin, if you think about your 2015 outlook of around 75%, it sounds like the two biggest factors here are Neurovascular mix and maybe pricing. But do you still feel good about, either the 72% in 2015 or the net improvement that you talked about, which number is a better number for investors to think about?

Jeffrey Capello

So let's start with the cash flow. So from a cash flow perspective, I think in the prepared comments, I laid out, kind of the cash flow for the full year. The cash flow for the full year, adjusted from a free cash flow perspective, at least was 1.5-ish. I'll give you that exact number, as I look for that, I'll talk about 2011. So we're still working on the rollout of the cash flow plan. Certainly, having lower operating profit, relative to 2010, will weigh a little bit on the cash flow. But we're still fairly comfortable that we can generate, in the environment or in the neighborhood of $100 million of free cash flow per month, so roughly $1.2 billion of free cash flow for 2011. On the strength of looking at our CapEx and our working capital and maybe getting a little sharper on both those. Which, if you add that to, kind of our position where we are today, in terms of cash, we'll be sitting at the end of the with quite a bit of cash and some options. One of which is to pay down more debt from an EPS perspective or do more deals. From the perspective of your question on gross margin, what do I feel better about, what do we feel more better about, kind of the increase or the absolute percentage of gross margin? I'd say we, kind of feel the same about both. As I mentioned earlier, when we put together the Investor Day, we had a certain path we're going down. That path, we're still on and our assumptions, with respect to '11, were directionally -- we hadn't finished the work, but aren't far off kind of where we are today in terms of guidance. And the factors that we think will drive gross margin, which include introduction of PROMUS Element, that's worth $200 million. We feel the same, if not better, about that based on the performance where we ended the year, from a European perspective. Our plant network optimization program's worth $100 million. That plant's up and running. We're having product come out of it. It's doing extremely well. We feel very good about that as an initiative, and then you've got -- certainly the pricing, we've got to watch pricing very carefully. Pricing is a little bit more of a drag than we anticipated on '11. However, I come back to the $600 million, a concession. So there's a lot of things we can go off and work on from a pricing perspective. And the other factor that we didn't talk much about in the Investor Day but is inherent in our strategy is, as we do these acquisitions, all the acquisitions we've done to date, those gross margins are more similar to neurovascular. They're going to be accretive to our gross margins in total. So as those acquisitions start to ramp up and the revenue starts to come in and, kind of benefit '12 and '13, that's going to be a positive mix factor for us, from a gross margin perspective. We haven't spent a lot of time on that, but that was the rationale for the acquisitions, bring in higher margin products, where we can differentiate and have less price pressure.


We have a question from the line of Larry Biegelsen from Wells Fargo.

Larry Biegelsen - Wells Fargo Securities, LLC

Just back to JAMA and the potential impact, Ray. Earlier this month, I think at the J.P. Morgan conference, you did mention that you thought it would have an impact. Can you talk a little bit, directionally about what you're assuming for the U.S. ICD market in 2011?

J. Elliott

Yes, I think Jeff covered that in the comments and I did as well. It's a flat-ish, kind of 1% market, and you're correct, I did say that at J.P. Morgan, and stand by that, and I think Ken covered it earlier in his comments. In that, there is likely to be a near-term reaction to it. I think it's a story that our people can tell and explain to others in terms of the data quality and some of the things Ken referenced and then in the long haul, the underutilization is so huge in this country and the products, both our us and those of our competitors, are getting so much better in terms of the capabilities. I completely stand by what I said. Will there be some short-term sensitivity to the JAMA article? Yes, I believe there will be and we'll see it in reduced procedures. Is it going to have any meaningful medium or long-term impact? I believe absolutely not, quite the opposite. I think the stories will be much stronger on higher utilization than they'll ever be, on studies of that quality.

Larry Biegelsen - Wells Fargo Securities, LLC

When we think about the $0.40 and near-term EPS opportunities that you talked about at the analyst meeting, what's the base? Is it the $0.52 adjusted for 2010? Is it 2011? And I know you're still on track to achieve those by 2013, Ray?

J. Elliott

Yes, the basis, as Jeff mentioned, there's nothing other than maybe a little more price pressure, there's nothing new in what we provided here on the adjusted basis. The GAAP one's a little different, obviously, because it's got the gain on the sale of Neurovascular. So just let's ignore that temporarily. So there's nothing new and the development of the $0.40 should refer to, some of which Jeff just covered under margin and I covered previously in emerging markets and other things. There's nothing new, from the investor meeting, that we've seen or that you've read now or heard on this call, with perhaps the exception of a little more pricing pressure, mostly on the DES side, which should resolve itself as products differentiate and people are able to tell an independent story. So it's a challenging year, yes. But is there something dramatically new since we met with you folks in New York? The answer is no.

Jeffrey Capello

Maybe just to confirm. David asked a question about free cash flow. So the free cash flow for '09 and '10 on an adjusted basis was roughly $1.5 billion. And as he had asked, expectation for next year, at least at this point is roughly $1.2 billion, give or take, we're working on a couple of things. And the difference is, we had a number of positive tax refunds in 2010, as well as, 2010 was a little more profitable than 2009 will be. So that's the difference there.


Do you have any closing remarks?

Sean Wirtjes

Yes. Thank you very much. With that, we'll conclude the call. Thank you, all, for joining us today. We appreciate your interest in Boston Scientific. Before you disconnect, Gwen will give you all the pertinent details for the replay. Thanks.


Ladies and gentlemen, this conference will be available for replay after 11 a.m. Eastern time today through February 16. You may access the AT&T Teleconference replay system at anytime by dialing 1 (800) 475-6701 and entering the access code 186274. International participants dial (320) 365-3844. That does conclude our conference for today. Thank you for your participation and using AT&T Executive Teleconference services. You may now disconnect.

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