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Executives

Eric Fain - President of Cardiac Rhythm Management Division

Michael Rousseau - Group President and President of U S division

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

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

Analysts

David Roman - Goldman Sachs Group Inc.

Robert Hopkins - Lehman Brothers

Michael Weinstein - JP Morgan Chase & Co

Derrick Sung - Sanford C. Bernstein & Co., Inc.

Larry Biegelsen - Wells Fargo Securities, LLC

Kristen Stewart - Deutsche Bank AG

Frederick Wise - Leerink Swann LLC

Joanne Wuensch - BMO Capital Markets U.S.

St. Jude Medical (STJ) Q1 2011 Earnings Call April 20, 2011 8:00 AM ET

Operator

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

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

The statements made by the company are based upon management's current expectations and are subject to certain risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. These risks and uncertainties include market conditions and other factors beyond the company's control and the risk factors and other cautionary statements described in the company's filings with the SEC, including those described in the risk factors and cautionary statement sections of the company's annual report on Form 10-K for the fiscal year ended January 1, 2011. The company does not intend to update these statements and undertakes no duty to any person to provide any such update under any circumstance. [Operator Instructions]

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

Daniel Starks

Thank you, Sarah. Welcome to the St. Jude Medical First Quarter 2011 Earnings Conference Call. With me on the call today are John Heinmiller, Executive Vice President and Chief Financial Officer; Eric Fain, President of our Cardiac Rhythm Management Division; Mike Rousseau, Group President; and Angie Craig, Vice President of Corporate Relations and Human Resources.

Our plan this morning is for John Heinmiller to provide his normal review of our financial results for the first quarter 2011 and to give sales and earnings guidance both for the second quarter and full year 2011. I will then address several topics and open it up to your questions. Go ahead, John.

John Heinmiller

Thank you, Dan. Sales for the quarter totaled $1,376,000,000, up approximately 9% over the $1,262,000,000 reported in the first quarter of last year and at the upper end of our total sales guidance range of $1,320,000,000 to $1,385,000,000.

Favorable foreign currency translations versus last year's first quarter increased to this quarter's sales by about $17 million. We will update our currency assumptions in a moment, but the actual average exchange rates during the first quarter were within our previous guidance range.

On a constant currency basis, first quarter sales increased approximately 8% versus last year, and first quarter sales increased approximately 5% on an organic basis. Also, as you may recall, during the first quarter of 2010, a competitor announced the suspension of all sales of their ICD products in the United States. We estimate that this dynamic benefited our first quarter 2010 U.S. ICD sales by approximately $25 million. If we adjust to reflect this one-time benefit, our first quarter 2011 sales were up approximately 10% on a constant currency basis.

Finally, we estimate that the impact of the Japan earthquake and tsunami on our international sales was approximately $5 million in the quarter, primarily in our CRM business.

During the first quarter, we recorded after-tax charges of $19 million, or $0.06 per share, primarily related to AGA Medical integration expenses associated with contract termination costs in international locations. Also, in connection with the AGA Medical acquisition, we continued to amortize the acquired inventory step up to cost of sales.

In the first quarter, we recognized $15 million in cost of sales related to this item, and we expect the remaining $15 million will be absorbed into cost of sales during the second quarter of 2011. Comments during this call referencing first quarter results and guidance for full year 2011 results, including EPS amounts, will be exclusive of these items.

One additional item to note in the first quarter of 2011 was the inclusion of a $7 million expense from the recently enacted excise tax in Puerto Rico that is included in the other expense line item. This additional expense is almost entirely offset by a corresponding $6 million tax benefit reflecting the tax credit available in the United States related to the Puerto Rico excise tax, the net effect of which reduced our income tax rate to 22%. Taken together, these two items, therefore, did not affect earnings per share.

Earnings per share were $0.80 for the first quarter of 2011, a 7% increase over adjusted EPS of $0.75 in the first quarter of 2010 and above our guidance range of $0.77 to $0.79. On a currency neutral basis, and excluding the impact of a competitor's suspension of ICD sales in the first quarter of 2010, we estimate earnings per share increased approximately 8%.

Before we discuss our first quarter 2011 sales results by product category with guidance for the second quarter and the remainder of 2011, let me comment on foreign currency.

As discussed on prior calls, the two main currencies influencing St. Jude Medical's operations are the euro and the yen. In preparing our sales and earnings guidance for the first quarter and full year 2011, we used exchange rates which assumed that each euro would translate into about $1.32 to $1.37; and for the yen, each JPY 80 to JPY 85 would translate into USD $1. For the first quarter, the actual average exchange rates for the euro and the yen were consistent with these assumptions.

In preparing our sales and earnings guidance for the second quarter and the remainder of 2011, we are taking into account the recent strength in the euro and are now assuming that each euro will translate into about $1.39 to $1.44.

The U.S. dollar, however, has strengthened relative to the yen, and as a result, we now expect each JPY 82 to JPY 87 to translate into USD $1. These changes in assumptions regarding currency exchange rates add approximately $25 million to $30 million to our total forecasted sales for the remainder of 2011. However, we believe the impact of recent unfortunate events in Japan on the remainder of 2011 will essentially offset the favorable impact of currency.

Now for the sales by product category discussion for the first quarter. Total Cardiac Rhythm Management, or CRM sales, which includes revenues from both our ICD and pacemakers product lines, were $762 million, up 1% from last year's first quarter.

On a constant currency basis, first quarter CRM sales were essentially flat versus a strong first quarter from last year. Excluding the $25 million impact from a competitor being out of the market for ICD products a year ago, total first quarter 2011 CRM sales increased 5% versus last year's first quarter.

For the first quarter, ICD sales were $465 million, up 3% from last year's first quarter. On a currency basis, first quarter ICD sales increased 2% versus last year. U.S. ICD sales were $280 million, flat versus last year's first quarter. And international ICD sales were $185 million, an 8% increase over the first quarter of 2010, including $3 million of favorable foreign currency translations.

Excluding the $25 million impact from a competitor being out of the market for ICD products a year ago, first quarter 2011 ICD sales increased 9% versus last year's first quarter. And U.S. first quarter 2011 ICD sales also increased 9% versus the same time period.

For low voltage devices, sales for the first quarter totaled $297 million, down 1% from last year's first quarter. On a constant currency basis, first quarter low voltage device sales decreased 2% versus last year.

In the United States, pacemaker sales were $131 million, up 2% from last year's first quarter. In our international markets, pacemaker sales were approximately $166 million, down 3% from the first quarter of 2010, principally in Japan, including $4 million of favorable foreign currency translations. As I mentioned earlier, we saw an impact on the sales in the quarter due to the earthquake and tsunami in Japan.

In addition, the prior year period included certain pacemaker sales in Japan that were sold through a distributor in 2010, which we are in the process of transitioning to our direct sales force. While we believe this transition will ultimately be beneficial to our business, the timing of the transition negatively impacted the first quarter.

For the second quarter of 2011, we expect total CRM product sales to be in the range of $790 million to $820 million. And for the full year 2011, we continue to expect total CRM sales to be in the range of $3,170,000,000 to $3,250,000,000.

Atrial Fibrillation, or AF, product sales for the first quarter, totaled $195 million, up 15% over the first quarter of last year, including $3 million of favorable foreign currency translations. On a constant currency basis, first quarter AF product sales increased 13% versus last year.

For the second quarter of 2011, we expect AF product sales to be in the range of $190 million to $205 million, and we are increasing our full year 2011 AF product sales guidance to now be in the range of $780 million to $810 million.

Total sales of cardiovascular products for the first quarter of 2011 were $327 million, up 28% over the first quarter of 2010, including $6 million of favorable foreign currency translations. On a constant currency basis, first quarter cardiovascular product sales increased to 25% versus last year. Organic cardiovascular product sales growth was approximately 7%.

As we mentioned on our last earnings call, with the acquisition of AGA Medical, we will now be breaking out our sales of cardiovascular products in two categories: structural heart products and vascular products.

Sales of heart valve products along with the AMPLATZER Occluder products and left atrial appendage plug are categorized as structural heart. Our vascular products include vascular closure products, FFR PressureWire, OCT products, vascular plugs and other vascular accessories.

Within this category of products, sales of structural products in the first quarter of 2011 were $143 million, an increase of 66% over the first quarter of 2010, or 65% on a constant currency basis. Sales of vascular products in the first quarter of 2011 were $184 million, an 8% increase over the first quarter of 2010, or 5% on a constant currency basis.

For the second quarter of 2011, we expect cardiovascular product sales to be in the range of $325 million to $340 million, and we are raising our full year 2011 cardiovascular product sales guidance to now be in the range of $1,325,000,000 to $1,355,000,000.

Total sales of neuromodulation products in the first quarter of 2011 were $92 million, up 10% from the first quarter of 2010, including $1 million of favorable foreign currency translations. For the second quarter of 2011, we expect sales of neuromodulation products to be in the range of $100 million to $105 million, and we continue to expect full year 2011 neuromodulation sales in the range of $410 million to $435 million.

Looking to revenue by geography. In total, 49% of St. Jude Medical sales in the first quarter of 2011 came from the United States, while 51% came from international markets. As with prior quarters, the specific geographic breakdown of St. Jude Medical sales for the first quarter of 2011 is available in our press release.

If you review our updated sales guidance for 2011, you will note that we have increased both the lower and upper end of our sales outlook by $15 million due to the strength of our results in the AF and cardiovascular product lines.

In addition, as a result of a more favorable currency assumption, we now expect 2011 sales to benefit approximately $25 million to $30 million. However, we are taking a reduction in our 2011 sales expectation that offsets this currency impact tied to the aftermath of the earthquake and tsunami in Japan. We estimate that approximately $12 million to $17 million of the reduction in Japan sales will occur in the second quarter.

The gross profit margin this quarter was 74.6%, up slightly from the first quarter of 2010. We were encouraged by the gross profit margin this quarter, which primarily reflects improved manufacturing efficiencies along with a favorable product mix. As a result, we are increasing our outlook for 2011 and now expect gross profit margins to be in the range of 73.8% to 74.3%, up 30 basis points from our outlook one quarter ago.

Our first quarter SG&A expenses were at 35.5% of net sales, an increase of 40 basis points over the first quarter of 2010. As we mentioned on our last earnings call, the AGA Medical operations, including the amortization expense related to intangible assets acquired, are expected to increase SG&A expenses as a percentage of net sales by approximately 70 basis points in 2011.

For the full year 2011, we now forecast SG&A as a percentage of net sales in the range of 34.7% to 35.2%. Given the fixed nature of a portion of these expenses, our full year 2011 guidance includes the expectation that we will leverage these costs in future periods.

Research and development expenses in the first quarter of 2011 were 12.8% of net sales compared with 12.0% of sales in the first quarter of 2010. We estimate that this 80 basis point increase in R&D as a percentage of sales reduced EPS for the quarter by approximately $0.03. For the full year 2011, we continue to expect R&D expense to stay in the range of 12.5% to 13.5% of net sales as we continue to invest in our internal programs to drive growth in our business.

Net other expense was $26 million in the first quarter, which includes $7 million from the recently enacted excise tax in Puerto Rico. For the second quarter of 2011, we expect the other income and expense line item will be a net expense of approximately $25 million. And for the full year 2011, we expect other expense of approximately $100 million to $110 million.

For the first quarter, the company's effective income tax rate was 22.0%. This includes a $6 million benefit reflecting the credit available in the U.S. related to the Puerto Rico excise tax. As mentioned, the Puerto Rico excise tax is reported in other expense while the offsetting federal income tax credit is reflected as a reduction to income tax expense. For 2011, we now expect the tax rate to be in the range of 22.0% to 22.5%, which reflects the financial statement presentation reporting the Puerto Rico excise tax in other expense.

Moving on to the balance sheet. At the end of the first quarter 2011, we had $664 million in cash and cash equivalents and $2,637,000,000 in total debt and $1.5 billion available under a revolving credit facility with a group of banks.

Before I move on to our EPS outlook, I would like to comment on our cash dividend which we initiated this quarter. The initial quarterly dividend of $0.21 per share will be paid on April 29, 2011 to stockholders of record at the close of business on March 31, 2011. This dividend reflects our commitment to rewarding shareholders through value creation and demonstrates our confidence in our growth profile, earnings power and future cash flow generation.

We believe we are at a scale where we can commit to a quarterly dividend program while continuing to invest in research and development, perform periodic share repurchases and make acquisitions where appropriate and cost-effective.

Next I want to offer some comments regarding our EPS outlook for the second quarter and the full year 2011. In preparing our EPS guidance, we have assumed that in the second quarter of 2011, the share count used in our fully diluted EPS calculation will be about 332 million to 334 million shares, with the weighted average outstanding shares for the full year 2011 also at 332 million to 334 million. The weighted average outstanding share guidance for the full year is up from our previously stated full year guidance of 329 million to 331 million.

The company expects consolidated earnings per share for the second quarter to be in the range of $0.83 to $0.85. And for the full year 2011, we now expect consolidated EPS to be in the range of $3.28 to $3.33.

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

Daniel Starks

Thank you, John. During the first quarter, we continued to make good progress developing the new growth drivers we need to return to double-digit constant currency organic sales growth on a sustainable basis.

For those of you who are new to the St. Jude Medical story, we reviewed all of these new growth drivers in detail during our Annual Investor Conference held on February 4. I'm not going to repeat that review on this call, but I would like to offer updates on a few of our key near-term priorities.

The three new growth drivers that are most important to St. Jude Medical in the near term are first, the U.S. launch of our Trifecta line of pericardial stented tissue valves; second, the U.S. launch of our Unify Quadra, quadripolar CRT-D system; and third, our progress with respect to CardioMEMS.

First, Trifecta. We expect FDA approval of our Trifecta line of pericardial stented tissue valves before the end of this quarter. Sales training in the United States already has been completed. The inventory needed to support a strong product launch in the United States already is in place. We are fully prepared to begin launching our Trifecta line of pericardial stented tissue valves in the United States within days of receiving FDA approval.

In Europe, where we began to fully launch Trifecta during the fourth quarter of 2010, tissue valve sales exceeded expectations and increased over 30% on a year-over-year basis during the first quarter of 2011. We are optimistic that we can achieve a similar rate of growth in the United States within a comparable period of time.

Second is our Unify Quadra, quadripolar CRT-D system. We are awaiting FDA response to our completed PMA supplement submission. Although the timing of regulatory approvals can never be predicted, we are optimistic that we will receive FDA approval for our Unify Quadra product line around the middle of this year. Just as with Trifecta, we are ready to hit the ground running. Our field organization has already been trained. Inventory is in place to support a strong launch of our Unify quadripolar product line in the United States within days of receiving FDA approval. Our experience in Europe with our quadripolar CRT-D system makes us optimistic that our Unify Quadra product line will help us gain meaningful share in the United States once we have approval to bring it to market.

Third, CardioMEMS. CardioMEMS has informed us that the FDA has granted expedited review status to the CardioMEMS PMA application. Expedited PMA review reflects a rare level of priority for the CardioMEMS technology from a public policy perspective. Keep in mind that the CardioMEMS CHAMPION trial showed a 39% reduction in heart failure hospitalizations compared with best standard of care during an average follow-up duration of 15 months. This is exactly the kind of technology that is demanded by health care reform and by increased attention to the comparative effectiveness of technology available for the millions of patients who suffer from heart failure.

Also, the patient population targeted by the CardioMEMS technology includes heart failure patients who already are indicated for an ICD or CRT therapy, as well as heart failure patients who are not currently indicated for a St. Jude Medical device. We therefore expect CardioMEMS technology to help St. Jude Medical develop the CRM market and influence CRM market share gains, as well as become an independent new growth driver for St. Jude Medical. The CardioMEMS technology remains on track for full launch in the United States in 2012.

Moving beyond these top three new growth drivers, we have continued to make substantial progress on our entire portfolio of other new growth drivers since our last update to you on February 4. We received FDA approval for our new ablation catheters for our AF business, FDA approval of our ShockGuard technology designed to reduce inappropriate and unnecessary shocks for patients in need of the defibrillation therapy. And we announced this week that we have received CE Mark approval for our Accent MRI pacemaker.

We also recently received regulatory approval in Japan for our Unify and Fortify lines of ICDs and for our Epic line of stented tissue valves. With respect to our transcatheter aortic valve implant, or TAVI program, we expect the first human implants of our new TAVI products within the next few weeks. Although these first implants will be occurring slightly later than first predicted, this does not delay our expected time to market. We still are on track to enter the TAVI market in Europe by the first half of 2013.

With respect to our deep brain stimulation, or DBS program, sales results during the first quarter with our Brio rechargeable deep brain stimulator slightly exceeded our expectations. DBS sales still represent a small portion of our business, but we are beginning to gain the traction we need with our DBS program in Europe to validate that DBS will truly be a significant new growth driver for St. Jude Medical.

Sequential quarter sales growth for our new line of left atrial appendage, or LAA, closure devices in Europe and for our new Optical Coherence Tomography, or OCT products, was similarly encouraging during Q1. We will offer more specific updates about these and all of our other new growth drivers as we pass major milestones, or as is otherwise appropriate, during the remainder of this year.

While these are just a portion of the numerous growth drivers St. Jude Medical currently has in place, we would like to open it up for questions to be sure we are addressing the topics that are of most interest to those of you who are active on this call.

Before we do so, however, I would like to note that in the three months that have elapsed since our last quarterly earnings call, our gross margin has strengthened, we have continued to invest in R&D at an elevated rate, we initiated a quarterly dividend and our sales growth and earnings growth outlook have both improved. We're off to a good start, making 2011 another very successful year for St. Jude Medical.

With that, I will stop and turn it over to the moderator to open the call for questions. Sarah, would you please moderate the questions?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Mike Weinstein from JPMorgan.

Michael Weinstein - JP Morgan Chase & Co

Dan, a couple of questions. I need to start with the ICD market health question. There were concerns, Dan, at the start of the year, that the JAMA article and the DOJ investigation would hurt the market during the course of 2011. I think our survey work says that it has had some impact, but not a major impact. Can you give us your assessment of the market today without having seen the competitor's results? Thanks.

Daniel Starks

Sure. The short answer is that those issues are very small issues, Michael, with little impact on the global CRM market. As we've mentioned, partly in the last call and partly at the February 4 conference, when you look closely at the percent of the available population that is potentially impacted by the JAMA article, it amounted to just a very small percent of the total opportunity and really was not material on a total global basis when we look at the anticipated growth rate of the global CRM market. And our conviction that way was further reinforced by the HRS editorial that was published here recently, pointing out the many limitations of the JAMA article. For a little more color, let me pass it over to the President of our U.S. -- Group President and Acting President of our U.S. division, Mike Rousseau, to offer any more color on what we are seeing in the U.S. here during the first quarter with respect to the impact of the JAMA article. Mike, what are you seeing?

Michael Rousseau

Yes, Michael, we've seen some accounts increase their processing and probably have a higher level of scrutiny relative to timing. But there's been no meaningful or significant impact to the overall market.

Michael Weinstein - JP Morgan Chase & Co

Okay, great. Let me just follow-up with a couple of items. Dan, one, could you just comment about the Quadra launch in Europe? Your estimation of how that's going and just where you are with the timing of being able to access accounts in Europe with tenders over the balance of this year? And then second, on the DBS side, or neuromodulation side, if you can give us an update on expected publication timing for Parkinson's and migraine, then I'll drop it. Thanks.

Daniel Starks

Okay. I'll answer your second question first, and then I'll ask Eric Fain to comment on your first question, Michael. On the DBS side, so the information that we offered at the Annual Investor Conference still holds on the neuromodulation. So we're expecting our Parkinson's data to be presented at the Movement Disorder meeting in Toronto in the first half of June. So that's on track. Publication opportunities are pending and not yet at a point where public disclosure of where those data will be published. But the data will be presented for the first time here at the Movement Disorder Society meeting in June. And on the migraine side, we've presented an abstract for late-breaking clinical trials at the International Headache Society meeting in the second half of June. I believe that's in Berlin, if I'm not mistaken. I may be wrong in the city, but we're optimistic that the migraine clinical data will be accepted for late-breaking clinical trial submission and be presented then in the second half of June. I answered that part of your question, right, Michael?

Michael Weinstein - JP Morgan Chase & Co

You did, thank you.

Daniel Starks

Okay, all right. And then on the Quadra side, and just for some additional color on the state of our submission to FDA, as well as any additional commentary on the progress that we're making with the launch in Europe, let me pass the question to the President of our Cardiac Rhythm Management division, Eric Fain. Eric, go ahead.

Eric Fain

So for Europe, as we talked about at the investor conference, we had been successful in opening up greater than 90 new accounts in Europe post our launch. And that trend has continued in the first quarter of this year where we've been able to again add a significant number of new accounts where we had not had any CRT business in the past year. So that continues to go well. We continue to see good momentum there. In terms of the FDA approval status, what I can tell you, just in terms of additional comments, is that we had received questions from FDA. We had responded back to those. And right now, we're just waiting for them to get back to us.

Operator

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

Kristen Stewart - Deutsche Bank AG

Thanks for taking my question. I was just wondering if you could comment just on the expedited review of CardioMEMS, whether it's your expectation that you will have to go before an advisory panel? And with an expedited review, could you be ready for a launch prior to 2012?

Daniel Starks

Kristen, I'm going to ask Eric Fain to comment. Let me offer the initial comment though. Keep in mind that the CardioMEMS technology is still owned by the CardioMEMS company. And so this is their PMA submission and their regulatory process to manage, although we're very supportive and collaborative and close to it. But with that caveat, let me pass your question over to Eric Fain.

Eric Fain

So Kristen, we would definitely expect them to go in front of a panel. And so that's certainly the next significant milestone in the regulatory process. And depending on how timing of that lines up and again, with the expedited review, we would expect the process to move along on a faster path than a normal application. But based on that, that milestone is the one that I'd look to then really kind of get more confidence on any sort of timing for a commercial launch.

Kristen Stewart - Deutsche Bank AG

And then during the quarter, you guys have had some favorable, I guess, GPO contract announcements. Can you maybe just give us some color in terms of what you expect? Some level of contribution, maybe either this year or just kind of as we look ahead?

Daniel Starks

Kristen, we won't comment specifically on any particular contracts or GPO relationships. Just as a matter of general discipline, we offer some general statements that we have and will continue to have contracts with GPOs where it makes sense for our business. But we never talk about the details of any of the specific contracts or any specific customer relationships. We think those details do give us a competitive advantage, and therefore, we keep them confidential. So I think I would say -- I'm tempted to pass your question over to Mike Rousseau, but I think I won't, just by way of -- we obviously have some upside and some optimism as a result of recent contract developments, but we really don't want to say more about it for competitive purposes. And the other little caveat is that -- not only for competitive reasons, but on a customer basis, we really don't want to talk about the insights we get with specific customers with the idea that those insights really are disclosed to us within a confidential relationship. And so it's really not our information to disclose. So I'm going to stonewall you except to say that the topic you are focused on is a topic where we clearly have some upside that's developed during this quarter that we're working to capture.

Kristen Stewart - Deutsche Bank AG

So suffice it to say, the addition of being added as a new contract definitely gives you upside opportunity for new accounts?

Daniel Starks

Yes.

Kristen Stewart - Deutsche Bank AG

Perfect, thank you.

Operator

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

Robert Hopkins - Lehman Brothers

Thanks very for much. First, a question, just a follow-up on CardioMEMS, because there was an interesting disclosure last night from CMS in their IPPS document that suggested CardioMEMS believes they will get approval for their device in the U.S. in the second quarter. And in light of that statement in the IPPS document, has a panel been scheduled yet? And is Q2 possible in your view?

Daniel Starks

Let me ask Eric Fain to comment.

Eric Fain

So a panel has not yet been scheduled. So that's the information I can give you. And then in terms of the comment, just keep in mind that the comment really was in the context of the technology add-on payment, which needs to -- that process sort of ends at the end of the second quarter. So I would just keep that in mind.

Robert Hopkins - Lehman Brothers

Okay, and then Dan, just a little bit more on the ICD market growth outside the U.S. Last quarter, you talked about -- gave a little bit more disclosure on quadripolar and said where that product has been launched, your business grew in ICDs over 20%. I think you said 21% constant currency growth in the fourth quarter where that product has launched. And I was just wondering if you could disclose that same number here this quarter so we can get a sense of how it's doing, especially in light of the fact that Japan makes looking at the numbers a little bit complicated? So are you accelerating from that 21% at this point?

Daniel Starks

Bob, I'm not in a position to offer you that level of detail, I apologize. But I can tell you that the quadripolar product line continues to fully meet or exceed our expectations. But I don't want to offer a separate breakout for those results, I apologize.

Robert Hopkins - Lehman Brothers

Oh, no problem. Maybe then just one other last little question on the same topic. Can you talk to the impact of Japan on the ICD business from both the tsunami perspective, as well as the distributor issue? Do you have a quantification of the negative impact of those two issues on the ICD business in the first quarter?

Daniel Starks

Well, let me say, first, I'm going to take the opportunity of your question, Bob, to offer some comments on a topic that you didn't ask. And so please just give me that flexibility. With respect to Japan, I don't think that anybody can really appreciate the severity and consequences of the earthquake, particularly the tsunami and then the nuclear events that have happened in Japan, unless someone is really closely talking with a number of people who are living through those experiences. And I am just absolutely amazed at what our team in Japan has gone through and is continuing to go through. We've got about 650 employees there. We have a lot more family members in the total St. Jude Medical group there in Japan. And we've got people who have been sleeping in offices. We have people with all kinds of adaptation on communications. The commuter lines have been shut down and otherwise, disrupted. The rolling power outages continue to this day and have just the kind of impact that people couldn't imagine. We have at least one hospital where we have enjoyed a very high market share that is just gone as a result of the tsunami. The level of disruption to people's lives and to their families and to their emotions and to their focus and concentration is something that people just cannot imagine based on the limited media coverage that we see here in the United States. But when we are having our multiple daily communications directly with people on the ground there, we have just so much empathy and sorrow and respect for everything that our group has gone through and has stepped up to overcome and is continuing to step up to overcome. And having said all of that, the people's priority is -- this puts into perspective the modest significance of our business versus other events in people's lives. And so people's priority appropriately are toward their families and toward working to help others who were impacted by this devastation, rather than focusing with the normal level of priority and our business. And that's a little bit of a personal observation I wanted to pass along. And then on the topic of more of a business process, as we work to model what's the impact here for the remainder of this year, it's that we have no modeling algorithm. So we haven't had this experience. We can't look at what happened last time, obviously. And so we are -- and the highest priority is not for people to argue about the nits in a forecast for what the impact will be for the remainder of this year. So having said all of that, the most that we thought was productive, Bob, here, was to estimate the total dollar amount impacting Q1. It was really very modest at about $5 million, and then to estimate that we expect $25 million to $30 million of additional impact for the rest of this year. But as far dissecting it finer, it isn't something that we want our team in Japan to distract themselves with first. And secondly, nobody really has a history to use to fine-tune their forecast. So I'm not going to -- so I can't offer any more insight other than to say that this is clearly a negative across-the-board to our business in Japan. And with the biggest part of our business being our CRM business, it's clearly a negative to the CRM business. But on the other hand, as you look, you see that we have maintained our guidance for the year. The Q1 results were toward the upper end of the guidance, even with a hole in our results from the late quarter impact of events in Japan. So all in all, taking into account everything that people would ask about, whether it's a rate of total market growth, whether it's ASP pressure, whether it's impact of Japan, whether it's competitive pressures, all in all, our CRM business is really performing very solidly, up toward the upper end of our expectations. And really, the issue that is -- the big issue in our mind for outlook in our CRM business is when will we get FDA approval for our Unify Quadra line. That's really the issue. And the rest of the things that people focus on are solidly on track, or they're really relatively insignificant. It's really all about FDA approval, timing of FDA approval of our quadripolar CRT-D system.

Robert Hopkins - Lehman Brothers

Understood, thank you.

Daniel Starks

You're welcome.

Operator

And your next question comes from the line of Rick Wise from Leerink.

Frederick Wise - Leerink Swann LLC

Dan, let me start off with the MRI safe EU approval. And maybe I just missed it, did you update us on the U.S. timing? But just the question really is how big an impact do you think this is going to have on the market? And how important is it to St. Jude?

Daniel Starks

Rick, let me ask Eric Fain to comment. What do you think, Eric?

Eric Fain

So in terms of the EU market, it's clearly a positive for us. That's the one product category where we didn't have an offering to compete with competitive products out there. And I think based on the feedback that we're getting on early experience and based on the features set, that our system matches up quite nicely with what's there and offer some product advantages. In terms of the U.S. FDA process, we're continuing to work with them to answer their questions in terms of meeting their requirements for beginning our IDE study. And we expect to begin our IDE study sometime in the second half of this year.

Frederick Wise - Leerink Swann LLC

Turning to AGA, just any update on -- just how the integration is going? Some of your thoughts about the EU rollout? I know that what St. Jude brought was expanded sales and marketing ability. And any update on the RESPECT and PREMIUM trials? Just in terms of enrollment, cut-off, just any update on what's going on there?

Daniel Starks

Rick, on the topic of those two trials. I don't have an update for you. The enrollment rates are continuing, except to say that the enrollment rates are continuing as expected. So there's really nothing remarkable there and no change to the update that was provided at our Annual Investor Conference. With respect to the AGA integration generally, this has been just a great acquisition and a great integration experience, and we knew it was going to be. So when you start out with an AGA team, that really is just a top team. And then remember that our integration strategy was basically to bolt on AGA to our Cardiovascular Division and to make the investment on the additional SG&A to facilitate that. You could anticipate that this would be seamless, and it really has been seamless. The additional parts of the integration that are kind of at the margin but that you'll see play through our results and play through our income statement are -- in our international markets there during the first quarter, we did negotiate some changes and distributor arrangements. You'll notice that the total dollar amount of the inventory step up this quarter versus what we talked about last quarter has increased. That's a function of the inventory impact of some of our distributor buyouts. You could anticipate with the changes in distribution as we buyout distributors where it makes sense and where it's mutually agreeable and work to convert to our direct St. Jude Medical organization. You could anticipate that there would be some short-term disruptions to sales growth as part of that process, as well as you see some fluctuations in the inventory step up amount. But all of that is -- and then, with the distributor buyouts, that puts additional training burden into our program plans to transition the distributor business to our direct people. So you see some SG&A impact from our expanding our direct group where we need to and doing our internal training and internal launch plans as we transition the product line to us. So you'll see the implications of that in our results. But what I think what we're really focused on is making sure that we're starting to get traction from our direct organization on the left atrial appendage occlusion in particular, which I mentioned we are very encouraged by that level of traction. It's not a material increase in sales yet, but it's a positive leading indicator. What we want to see is we want to see those kinds of leading indicators in the AGA business continue to encourage us during this year, setting up meaningful additional organic sales growth from the AGA portfolio for 2012. So we're one quarter into the year, and so far, so good. And now, we've just got to get the same kinds of results and build on these leading indicators in the next three quarters and we'll be positioned for a very strong 2012, with organic sales growth on the cardiovascular side of our business.

Frederick Wise - Leerink Swann LLC

Thanks, Dan.

Daniel Starks

You're welcome.

Operator

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

Larry Biegelsen - Wells Fargo Securities, LLC

Thanks for taking my questions. First, U.S. neuromodulation. Dan, could you give us an update on what's happening in that market? That market seems to have slowed.

Daniel Starks

Yes, you're right, Larry. You're exactly right, it has. So you see in our results, only 3% growth in our U.S. spinal cord stimulation business here in the first quarter. And so that's a pure insight into the SCS market in the U.S. And it's clearly slowed. And it's clearly slowed due to kind of macroeconomics and recession and loss of medical coverage and expiration of COBRA coverage and reluctance of patients indicated for a spinal cord stimulation system to make the copay. So no question that it slowed. This is the part of our business that has been most impacted by negative macroeconomics. And you didn't ask, but I know you see it. And I'll just point out for others that on the International side, where we delivered 38% growth in international neuromodulation businesses, is continuing to go as we'd like to see it. The spinal cord stimulation market has plenty of opportunity in it. It hasn't had the same depression that we see from the U.S. spinal cord stimulation market and in the International market. That 38% growth number reflects what I referred to previously when I said that the Deep Brain Stimulation sales with our Brio rechargeable system have modestly exceeded expectations. So we're looking forward to bringing more new growth drivers into the International business with the idea that, that gives people some advanced insight into the growth rate that we'll see restored to the U.S. as these same technologies come into the U.S. And with respect to the spinal cord stimulation market generally in the U.S., we do expect that market to recover as the economy recovers and as unemployment rates drop here in the U.S.

Larry Biegelsen - Wells Fargo Securities, LLC

Dan, I appreciated your comments earlier on JAMA and the DOJ investigation. But could you comment on just the CRM market growth and some pricing trends in general? Are you saying that there is no change from your prior expectations and comment? And just lastly, what is the plan to bring the quadripole lead onto the Unify platform in Europe? Thanks.

Daniel Starks

My update to the global CRM market growth generally would be last quarter, I indicated that our thinking was we would wait for the third significant company to report its quarterly results for us to then calculate the growth rate we saw on a total global basis for the CRM market in 2010. And now having the benefit of those -- and I mentioned that our methodology would be to say that now, here's the new normal for the CRM market growth. And we'll expect the CRM market to continue growing in 2011 at about the rate that it grew in 2010. So that's just a reminder to folks on how we said we were looking at the CRM market. We now calculate that the global CRM market in 2010 grew in round numbers, grew about 2%. And so we are expecting -- and I'm just going to call that low single-digit. So we're expecting the CRM market -- we think the CRM market is growing at a low single-digit rate. We expect the global CRM market to continue growing at a low single-digit rate here in 2011. On the ASP pressure side, we see nothing unusual on ASP pressures. And that means that the environment continues to be an environment of significant ASP pressure but offset by continuing innovation and the value of continuing innovation and the mix that results from new products, new technologies. They get a price premium added to the older generation devices where price pressure is severe. All of that calculates to about a low single-digit pressure on ASPs here on a total global basis in our CRM business. And that's what we've historically seen, and that's what we continue to see. So I rambled a little bit, Larry, but I think I answered that part of your question there. On the topic of the Unify Quadra in Europe, let me ask Eric Fain for his comments.

Eric Fain

So Larry, we haven't announced it, but we have received CE Mark for the Unify Quadra system recently. And right now, it's just in very limited launch as we're managing the inventory. And obviously, we're the only company with a quadripolar system available. So we're just going to manage that along the lines as we roll things out carefully.

Larry Biegelsen - Wells Fargo Securities, LLC

Thank you.

Operator

Your next question comes from the line of Derrick Sung from Sanford Bernstein.

Derrick Sung - Sanford C. Bernstein & Co., Inc.

John, maybe I could start with you. I'm going to ask you to give a little bit more color on your gross margins. Certainly, this quarter, gross margins came in quite strong. I was wondering if you could give us some details as to what the specific drivers were for that? And then just moving forward, how much has some of the new -- the offshore plants that you are ramping up, how much is that contributing today, and how much do you expect that to contribute in the future?

John Heinmiller

Sure. I think as we mentioned in the prepared remarks, it's really a combination of improvements to our existing manufacturing operations where we're getting the benefit of some efficiencies as well as the value of the new technologies that are in our product line that tend to really drive what we characterize as kind of a mix benefit. And so the combination of those things, really, were very encouraging and stronger than what we expected this quarter and really motivated us then to raise the guidance in the gross profit margin here for the rest of the year. With respect to the impact of our recently opened facilities in Malaysia and Costa Rica, we really are yet to get benefit in the gross profit margin from those activities. And so that really is a positive trend that we'll develop here overtime, but is not yet reflected in our results.

Derrick Sung - Sanford C. Bernstein & Co., Inc.

And is that reflected in your raised guidance? Or would that be kind of a 2012 timing?

John Heinmiller

Yes, I think that, that would not be reflected in the raised guidance. It would be something that's out in the future, beyond 2011.

Derrick Sung - Sanford C. Bernstein & Co., Inc.

Okay, great. Thank you. And one more follow-up on the AF business. Your guidance for Q1 was -- you significantly exceeded your guidance for Q1 this quarter, and the guidance actually kind of seemed low to us when we looked at it. Was just wondering what happened differently this quarter than what you were expecting to exceed that guidance? And then also on the AF front, you had that warning letter that's still hanging over at division. Is that holding up any key products that might be meaningful or have a meaningful impact when that warning letter gets lifted?

Daniel Starks

Sure. Derrick, I'll start with the last part of your question here, on the impact of the warning letter. The warning letter has had a huge impact on release of products to the U.S. And as you know, throughout 2010, one could see depressed growth rates in our U.S. AF business. And that was very, very much affected by the warning letter. So that's first. Second, the impact of the warning letter is and has been fully taken into account with our initial guidance and with our revised guidance here. For some additional color, maybe what I point out is when you're looking at -- when people are looking at our AF results, the consolidated sales growth on a reported basis were 15%, and that was certainly decent. But if you break it out into International and U.S., the International growth is 18%, the U.S. growth was 10%. And keep in mind then that on the international side of the business, we really do have a full line of ablation catheters. On the U.S. side of the business, we've been operating without a competitive line of ablation catheters. And so a takeaway that one might have from that is that we continue to gain share internationally and in the U.S. where we are competing. But in the U.S., we have a hole on the ablation side of the business, and we really have not been competing with ablation catheters in the U.S. in any meaningful way. So if you were to take the market size and market growth of ablation catheters in the U.S. out of our numbers and say that's a special issue, it counts but that's a special issue. Then you'd see that where we have products and where we are competing in the U.S., we're continuing to take share. Then raising the question of when do we get -- start to have competitive product offerings and really start to compete in the U.S. with ablation catheters, we just issued a press release on April 4 announcing FDA approval for our Safire BLU and Therapy Cool Path ablation catheters. So they didn't help us at all in Q1. They will help us now for the remainder of this year. Those are our first competitive product offerings in the ablation segment of the U.S. market. And so that's kind of how I would dissect it. When you say that our original guidance looked a little low to you and maybe to some others and now what's happened, I think you've just seein a reflection of our philosophy that if we're going to err, we're going to err on the side of being conservative. And we've always been well rewarded for under promising and over delivering. And we're happy to be patient in offering guidance that we have a very high confidence we can meet or exceed. And if we are able to raise our guidance from quarter to quarter, we take that as all positive indications for the health and future and growth profile of the business.

Derrick Sung - Sanford C. Bernstein & Co., Inc.

Okay, great. So just to clarify, your guidance, moving forward, does that include -- does that assume that you get that warning letter lifted this year, or does that not?

Daniel Starks

It does not.

Derrick Sung - Sanford C. Bernstein & Co., Inc.

Great. Okay, thank you very much.

Daniel Starks

You're welcome.

Operator

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

David Roman - Goldman Sachs Group Inc.

Dan, I was hoping you could talk a little bit more about some of the comments you made in your prepared remarks and also in the press release regarding returning to double-digit growth. If you kind of look at the 8% constant currency numbers you reported this year, you adjust for Japan, it's obviously a little higher. Can you maybe talk us through the delta from 8% to 10%? Is that mostly an improvement in end-user markets that gets you there such as neuromodulation, which you referenced being negatively impacted by the economy? Is it share gain in your existing markets, or is it the majority opening up some of the new markets that you plan to address, whether it's CardioMEMS or transcatheter valves?

Daniel Starks

It's primarily the 18 significant new growth drivers that we discussed in detail in our annual investor meeting, February 4.

David Roman - Goldman Sachs Group Inc.

Okay, so is there's no delineation among those, which, if any, are more significant than others?

Daniel Starks

Well, sure. We've mentioned the significance. There's a lot to talk about, David. And it really would be, I think, beyond the scope of this call to really do justice to the topic that you're raising. I mean, what I would say -- for most folks, I would just say, if one goes back and looks at the transcript and looks at the slides from our February 4 conference, and there is a lot of Q&A about what did we think was most significant and what were the different time lines, everything was timed out for impact, some of it was impact here, starting out in 2011. Some of it was second half of 2011, some of it really starting to impact in 2012. And so I mean, there's a lot going on there for -- we mentioned that although this wasn't one of the 18, we've always flagged that our quadripolar CRT system is one of the most important growth drivers in the nearer term. We've flagged it in the near term, the Trifecta pericardial stented tissue valve growth driver in the U.S. here is a big deal in the nearest term. We flagged that beginning in 2012, we think quite a bit of the CardioMEMS technology and think it deserves a good priority in people's attention. But there's just -- everything had its own characteristics out of those 18 new growth drivers, plus the additional quadripolar CRT system. And so I can't -- I just would refer people back to the day of discussion that we offered there on February 4.

David Roman - Goldman Sachs Group Inc.

And to clarify, one thing you said on ASPs being down low single digits, is that ASPs net of mix? Or is that just pure price?

Daniel Starks

Net of mix.

David Roman - Goldman Sachs Group Inc.

Okay, thank you.

Daniel Starks

You're welcome.

Operator

And your last question comes from the line of Joanne Wuensch from BMO Capital Markets.

Joanne Wuensch - BMO Capital Markets U.S.

Thanks very much, and thank you for taking my question. Could you please share with us what the heart valve number was in the quarter and give us a little bit of an update on how the Trifecta valve has done outside the United States and what your expectations are for what it might do in the United States? Thank you.

Daniel Starks

Joanne, we're not going to break out the heart valve number separately. I apologize that we can't offer that information to you. And the best thing I could say about Trifecta -- I remember that our President of our International business, Denis Gestin, offered some additional color with some detail in our February 4 meeting in response to a similar question. My memory isn't good enough to remember exactly what that additional detail was that Denis offered, but what I am prepared for is -- I think the best indicator would be to say that we began full launch, full commercial release of Trifecta in Europe in the fourth quarter of 2010. And in the first quarter of 2011, our total tissue valve business in Europe grew faster than 30%. And so there is an indicator. And we are confident enough, I mean, our field organization is already trained. The launch material is completely prepared, positioned to implement. The inventory is completely staged. So we are ready to go literally within days of FDA approval of Trifecta. And we're really, on a daily basis, awaiting FDA approval of Trifecta. Our sense is, there always is some inefficiency in the initial steps of a launch. There always is the need to schedule meetings, the need to schedule cases, the need to schedule meetings with multiple people in customer accounts that -- so it's never like best case out of the chute in the real world. So we don't expect it to be best case out of the chute in the United States. But we think that a couple of quarters into full commercial release, that we would expect to see our U.S. tissue business growing above 30% in the same way that we see it growing above 30% in our International business. So the total size of this opportunity is smaller than some of the other major new growth drivers that we're working to capture, but the degree of assurance and the small level of risk to our upside and our confidence that we're going to fully capture this upside here with Trifecta is very high. So as soon as we've got that approval, we're going to start launching. And we're optimistic here that this is going to make a difference to our sales growth rate in the U.S. in the Cardiovascular business in the second half of 2011 and again, in 2012.

Joanne Wuensch - BMO Capital Markets U.S.

Thank you.

Daniel Starks

You're welcome. And with that, I'll indicate that we have concluded our call and thank everybody for participating and turn the call over to our moderator for final closing comments. Sarah, go ahead. Thank you.

Operator

Today's call was recorded and will be available for replay, beginning at 12:00 p.m. Eastern Standard Time. The dial-in numbers are (800) 642-1687. And for international, (706) 645-9291 and enter pin number 56025411. Thank you. This does conclude today's conference. Please disconnect your lines at this time.

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