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St. Jude Medical (NYSE:STJ)

Q2 2011 Earnings Call

July 20, 2011 8:00 am ET

Executives

Eric Fain - President of Cardiac Rhythm Management 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

Michael Weinstein - JP Morgan Chase & Co

Robert Hopkins

Raj Denhoy - Jefferies & Company, Inc.

Kristen Stewart - Deutsche Bank AG

Frederick Wise - Leerink Swann LLC

Adam Feinstein - Barclays Capital

Operator

Welcome to St. Jude Medical's Second 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 involve risks and uncertainties. Such forward-looking statements include the expectations, plans and prospects for the company, including potential clinical successes, anticipated regulatory approvals and future product launches and projected revenues, margins, earnings and market shares.

The statements made by the company are based upon management's current expectations and are subject to certain risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. These risks and uncertainties include market conditions and other factors beyond the company's control and the risk factors and other cautionary statements described in the company's filings with the SEC, including those described in the risk factors and cautionary statement sections of the company's annual report on Form 10-K for the fiscal year ended January 1, 2011 and the quarterly report on Form 10-Q for the fiscal quarter ended April 2, 2011. The company does not intend to update these statements and undertakes no duty to any person to provide any such update under any circumstances.

[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 Second 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 second quarter 2011 and to give sales and earnings guidance for the third quarter and full year 2011. I will then address several topics and open it up for your questions.

Go ahead please, John.

John Heinmiller

Thank you, Dan. Sales for the quarter totaled $1,447,000,000, up approximately 10% over the $1,313,000,000 reported in the second quarter of last year. Favorable foreign currency translations versus last year second quarter increased this quarter sales by about $75 million. We will update our currency assumptions in a moment, but the actual average exchange rates during the second quarter were within our previous guidance range.

On a constant currency basis, second quarter sales increased approximately 4% versus last year. Also, as you may recall, for the first 2 selling weeks of the second quarter of 2010, a competitor had suspended all sales of their ICD products in the United states. We estimate that this dynamic benefited our second quarter 2010 U.S. ICD sales by approximately $15 million. If we adjust to reflect this onetime benefit, our second quarter 2011 sales were up approximately 11% on an as reported basis, and 6% on a constant currency basis.

During the second quarter, in connection with the AGA Medical acquisition, we continued to amortize the acquired inventory step up to cost of sales. In this quarter, we recognized the remaining after-tax charges of $10 million or $0.03 per share in cost of sales related to this item.

In addition, we recognized $32 million or $0.10 per share in other after-tax charges, primarily related to restructuring actions initiated during the second quarter to realign certain activities within our CRM business. This relates to our May 12, 2011, press release and announcement in Sweden that we are transitioning CRM manufacturing to a more cost advantaged locations.

In addition to the cost recognized this quarter, we expect future costs associated with this transition to be approximately $60 million to $80 million or $45 million to $60 million in after-tax charges, which will be recognized over the next several quarters. We estimate that when fully implemented, the transition of CRM manufacturing to more cost advantaged locations will generate approximately an additional $40 million to $50 million in annual savings.

Additional information about these charges can be found in today's press release.

Comments during this call referencing second quarter results and guidance for our full year 2011 results, including earnings per share, will be exclusive of these items. Earnings per share were $0.85 for the second quarter of 2011, an 8% increase over adjusted earnings per share of $0.79 in the second quarter of 2010.

Before we discuss our second quarter 2011 sales results by product category with guidance for the third quarter and the remainder of 2011, let me comment on foreign currency. As discussed on prior calls, the 2 main currencies influencing St. Jude Medical's operations are the euro and the yen. In preparing our sales and earnings guidance for the second quarter and full year -- the third quarter and full year 2011, we used exchange rates which assumed that each euro would translate into about $1.39 to $1.44 and that each JPY 82 to JPY 87 would translate into USD $1.

For the second quarter, the actual average exchange rates for the euro and the yen were consistent with these assumptions.

In preparing our sales and earnings guidance for the third quarter and remainder of 2011, we are now assuming that each euro will translate into about $1.37 to $1.42 and that each JPY 78 to JPY 83 will translate into USD $1.

Now for the sales by product category discussion for the second quarter. Total Cardiac Rhythm Management, or CRM sales, which includes revenue from both our ICD and pacemaker product lines, were $793 million, up 1% from last year's second quarter. On a constant currency basis, second quarter CRM sales were down 4% versus the second quarter of last year. Excluding the $15 million benefit from a competitor being out of the market for ICD products a year ago, total second quarter 2011 CRM sales increased 3% versus last year's second quarter.

For the second quarter, ICD sales were $477 million, up 1% from last year's second quarter. On a constant currency basis, second quarter ICD sales decreased 3% versus last year. U.S. ICD sales were $272 million, down 9% versus last year's second quarter. International ICD sales were $205 million, a 20% increase over the second quarter of 2010, including $21 million of favorable foreign currency translations. Excluding the $15 million impact from a competitor being off the markets for ICD products a year ago, total second quarter 2011 ICD sales increased 5% versus last year's second quarter, and U.S. second quarter 2011 ICD sales decreased 5% versus the same time period a year ago.

For a low-voltage devices, sales for the second quarter totaled $316 million, essentially equal to last year's second quarter. On a constant currency basis, second quarter low-voltage device sales decreased 6% versus last year. In the United States, pacemaker sales were $129 million, down 8% from last year's second quarter. In our international markets, pacemaker sales were approximately $187 million, up 6% from the second quarter of 2010, including $18 million of favorable foreign currency translations.

For the third quarter of 2011, we expect total CRM product sales to be in the range of $730 million to $760 million. For the full year 2011, we now expect total CRM sales to be in the range of $3,060,000,000 to $3,120,000,000.

At the midpoint of this guidance range, our 2011 CRM sales would be up approximately 3% versus 2010. After adjusting our 2010 sales for the onetime benefit of a competitor being off the market in the U.S. This revised 2011 guidance range for St. Jude Medical is primarily the result of a slowdown in the CRM market and does not change our continued expectation that we will increase our global CRM market share in 2011. Our revised CRM sales guidance for 2011 also takes into account our updated expectation that we will have our unified quadripolar CRT-D system available in the United States by the beginning of the fourth quarter of 2011.

Atrial Fibrillation or AF product sales for the second quarter totaled $208 million, slightly exceeding the top end of our guidance range and up 18% over the second quarter of last year, including $12 million of favorable foreign currency translations. On a constant currency basis, second quarter AF product sales increased 11% versus last year. For the third quarter of 2011, we expect AF product sales to be in the range of $185 million to $200 million. As a result of the strong performance in the first half of 2011, we are raising the top end of our full year 2011 AF product sales guidance range by $15 million. We now expect our 2011 AF product sales to be in the range of $800 million to $825 million.

Total sales of cardiovascular products for the second quarter of 2011 were $342 million, slightly exceeding the top end of our guidance range for the quarter, and up 35% over the second quarter of 2010, including $21 million of favorable foreign currency translations. On a constant currency basis, second quarter cardiovascular product sales increased 26% versus last year. As discussed on prior calls, we now breakout our sales of cardiovascular products into 2 categories, structural heart and vascular. 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.

For the second quarter of 2011, sales of structural heart products were $153 million, an increase of 74% over the second quarter of 2010 or 65% on a constant currency basis. Sales of vascular products in the second quarter of 2011 were $189 million, a 14% increase over the second quarter of 2010 or 6% on a constant currency basis.

For the third quarter of 2011, we expect cardiovascular product sales to be in the range of $315 million to $330 million. We are raising our full year 2011 cardiovascular product sales guidance to be in the range of $1,335,000,000 to $1,360,000,000.

Total sales of Neuromodulation products in the second quarter of 2011 were $104 million, up 9% from the second quarter of 2010, including $3 million of favorable foreign currency translations. For the third quarter of 2011, we expect sales of Neuromodulation products to be in the range of $98 million to $103 million, and we expect full year 2011 Neuromodulation sales in the range of $410 million to $425 million.

Looking to revenue by geography, in total, 47% of St. Jude Medical sales in the second quarter of 2011 came from the United States, while 53% came from international markets. As with prior quarters, the specific geographic breakdown of St. Jude Medical's sales for the second quarter of 2011 is available in our press release.

The gross profit margin this quarter was 74.5%, up 80 basis points from the second quarter of 2010. We continue to be encouraged by our strong gross margin, which primarily reflects improved manufacturing efficiencies along with a favorable product mix. As a result, we are raising our gross profit margin outlook for 2011 to now be in the range of 74.0% to 74.5%. Our second quarter SG&A expenses were 35.5% of net sales, an increase of 140 basis points over the second 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 during 2011.

For the full year 2011, we now forecast SG&A as a percentage of net sales to be in the range of 35.0% to 35.5%.

Research and development expenses or R&D in the second quarter of 2011 was 12.2% of net sales, compared with 11.8% of sales in the second quarter of 2010. For the full year 2011, we expect R&D as a percentage of net sales to be in the range of 12.5% to 13.0% as we continue to invest in our internal programs to drive growth in our business.

Net other expense was $25 million in the second quarter, which includes $8 million from the recently enacted excise tax in Puerto Rico.

For the third quarter of 2011, we expect the other income and expense line item will again be a net expense of approximately $25 million. For the full year 2011, we expect another of the other expense of approximately $100 million to $105 million.

For the second quarter, the company's effective income tax rate was 22.0% and for 2011, we continue to expect the tax rate to be in the range of 22.0% to 22.5%.

Moving on to the balance sheet. At the end of the second quarter of 2011, we had $833 million in cash and cash equivalents and $2,566,000,000 in total debt and $1.5 billion available under a revolving credit facility with the group of banks.

Next, I want to offer some comments regarding our earnings per share outlook for the third quarter and full year 2011.

In preparing our EPS guidance, we have assumed that in the third quarter of 2011, the share count used in our fully diluted EPS calculation will be about 334 million to 336 million shares, with the weighted average outstanding shares for the full year 2011 at 332 million to 334 million.

For the third quarter, the company expects consolidated earnings per share to be in the range of $0.74 to $0.76 and for the full year 2011, we expect consolidated EPS to be in the range of $3.25 to $3.30.

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

Daniel Starks

Thank you, John. The data that became available after our Q1 earnings conference call shows that the global CRM market contracted between 1% and 2% during Q1 on a year-over-year basis. As a conservative measure until we see results to the contrary, we will assume that the global CRM market will contract approximately 2% for full year 2011. This change in assumption means we expect the global CRM market to be approximately $11.4 billion for full year 2011, instead of the $11.9 billion size we assumed on our earnings conference call last quarter.

Since our share of the global CRM market is approximately 26% or 27%, this market model change effectively reduces the CRM sales revenue we expect for 2011 by approximately $130 million to $135 million.

Although the CRM market contracted during the first quarter and may continue to contract on a year-over-year basis throughout the remainder of 2011, we continue to believe that for us, the CRM market glass is half-full, not half empty. We see $8.5 billion of global CRM market held by vulnerable competitors. We took share from both of our major competitors in the CRM market in 2010 and expect to do so again in 2011 and again in 2012.

With our current market share momentum, our pipeline of highly visible product advantages and the favorable tailwind created by replacement market dynamics, we are optimistic that our CRM business will grow at a level that allow St. Jude Medical to return to double-digit constant currency organic sales growth on a sustainable basis in future periods.

The most important variable impacting the growth of our CRM franchise for the remainder of this year is the timing of FDA approval for our Unify Quadra and Quartet, quadripolar CRT-D products. Our guidance assumes we will have these products available in the United States by the beginning of the fourth quarter.

In Europe, where our quadripolar CRT-D products are fully launched, CRT-D units and revenue grew more than 20% during the second quarter on a year-over-year basis.

In the United States, our quadripolar CRT-D sales training for our field organization is complete. Product launch inventory is ready, and we are prepared to initiate a full launch of these products within days of receiving FDA approval.

I would like to devote the remainder of my prepared remarks to reviewing highlights of the progress we are making in implementing the 18 new growth drivers we discussed during our 2011 annual investor conference in February. We have said previously that in the near term, 2 of our most important new growth drivers are our Trifecta pericardial stented tissue valve program and our CardioMEMS program. With respect to our Trifecta pericardial stented tissue valve program, we began to launch this product line in the United States toward the end of April. Early sales results are fully meeting our expectations. We are not going to start breaking out this number separately, but as an indication of the success of this new growth driver, we will disclose that during the second quarter global tissue valves sales grew over 30% on a year-over-year basis.

We expect our tissue valve franchise to continue growing at an elevated level during the remainder of this year as we deliver full quarter results for our Trifecta valve launch in the United States and for our Epic valve launch in Japan.

A second major growth driver, we applied for special attention in the near term relates to our program with CardioMEMS. As a reminder, the CardioMEMS CHAMPION trial reported a 39% reduction in heart failure hospitalizations compared with best standard of care during an average follow-up duration of 15 months in patients suffering from Class III heart failure. As we have said previously, this is exactly the kind of technology that will be favored under Health Care Reform and by increased attention to the comparative effectiveness of technology available for the millions of patients who suffer from heart failure. The FDA has granted expedited review status to the CardioMEMS PMA application, reflecting a high level of priority for this technology from a public policy perspective.

CMS reimbursement is already in place. We expect the CardioMEMS PMA to be reviewed by an FDA panel this fall followed by FDA approval and full U.S. launch in 2012.

Moving beyond Trifecta and CardioMEMS, we are encouraged by the development of our entire portfolio of new growth drivers, which continues to meet or exceed the expectations we established earlier this year. In our transcatheter aortic valve implant or TAVI program, we already have multiple implants and are on track to begin our pivotal clinical trial for CE Mark purposes in the fourth quarter. We continue to anticipate launching our Portico line of TAVI valves in Europe by the first half of 2013.

With respect to our left atrial appendage or LAA closure program, LAA closure revenue in Europe grew over 30% sequentially in Q2. Although the absolute revenue is still modest, we are making strong progress integrating LAA closure into the larger St. Jude Medical program in Europe and are just beginning to capture St. Jude Medical synergies. We fully expect our LAA closure revenue to contribute significant growth to our structural heart and AF programs in 2012 and beyond.

In the United States, we are finishing the feasibility portion of the IDE trial. We are submitting to FDA this month for permission to begin the pivotal phase of our LAA closure IDE clinical trial.

Next, I'd like to transition from the structural heart component of our Cardiovascular Division or CVD business to the Vascular component of our CVD business. The most important new growth drivers in our Vascular business in the near term are our fractional flow reserve or FFR product lines and our Optical Coherence Tomography or OCT product lines. Taken together, we are using these product lines to compete for our share of the $600 million market for FFR and intravascular imaging and to expand this market with evidence of comparative effectiveness both from a cost perspective and from a clinical perspective. We are just beginning to launch our Ilumien line of integrated FFR OCT technology in Europe and expect to launch this product soon in the United States as well.

We estimate that we are on track to exit 2011 with approximately a 33% share of the relevant market and that our market share will continue to grow in 2012 due to the strength of our integrated FFR and OCT program. We are continuing to expand the breadth of these product lines and develop the clinical evidence, reimbursement and customer acceptance needed to transform our first to market vascular technologies into major new growth drivers longer term.

Moving on to the substantial progress we are making with our emerging Renal Denervation business. We continue to keep details of our technology confidential for competitive reasons, but as we have previously stated, we view the renal denervation market as a major new growth opportunity for St. Jude Medical and of resource they robust development program to capture this opportunity. Our program has progressed to the point where we now expect CE Mark and a limited launch in Europe before the end of 2012. We will continue to provide updates on this major new growth program as appropriate.

Next, I would like to review the most significant new growth drivers we have resourced within our Neuromodulation business or NMD. Q2 was a productive quarter for our Neuromodulation business. We are especially focused on the progress we are making with our Deep Brain Stimulation or DBS business in Europe for Parkinson's disease with our Brio line of DBS products and our Athena physician programmer. Our DBS products grew approximately 30% sequentially in Q2 and helped our international Neuromodulation sales grow 50% on a year-over-year basis. Similar to what we have said about our LAA closure business, our DBS business in Europe is still a small part of our total sales, but is showing the right early indicators of becoming a significant contributor to help accelerate our sales growth in 2012 and beyond.

We are making good progress expanding our DBS business beyond the indication for Parkinson's disease as reflected last week in our press release announcing that FDA has approved expansion of our broaden pivotal trial investigating this, extent to which stimulating an area of the brain known as Brodmann Area 25 is a safe and effective method for treating severe depression.

In the second quarter, we also reported the initial results of our Neuromodulation pivotal trial for peripheral or occipital nerve stimulation for patients suffering from treatment resistant migraine. The feedback on the clinical experts we work with in this program is that our clinical trial results were highly favorable and convincing for the proposition that our Neuromodulation system for treatment resistant migraine is both safe and effective and deserves to be available to patients on a commercial basis. We expect to receive CE Mark approval and begin to launch this product in Europe for the end of this year. We will provide an update with respect to migraine as a potential new growth driver in the United States after we have adequate visibility in the current FDA requirements for approval of this indication.

With respect to the business managed by our AF division or AFD, revenue growth during the second quarter was 18% on a year-over-year basis and confirms that our AF growth program is on track. The international component of our AF business grew 24% on a year-over-year basis during the second quarter. We view this result as an early indicator of the growth we expect to see with our AF franchise in the United States as we continue to bring new technologies to the U.S. that already are available and gaining market share in Europe. This includes our Cool Flex and contact lines of ablation catheters, as well as the MediGuide technology we are beginning to roll out in Europe on a limited basis.

To conclude my prepared remarks, I would like to refer back to the main points and conclusions we offered during our annual investor conference in February of this year. First, we have a balanced portfolio of major new growth drivers to support our goal of returning to sustained double-digit growth in sales. Second, we have clear visibility into ongoing EPS leverage from our strategy of expanding manufacturing in cost advantaged locations. Third, we have a strong balance sheet and cash flow to continue to repurchase stock and fund disciplined acquisitions as appropriate. And finally, St. Jude Medical's overall program for superior long-term growth is both robust and on track. Our guidance tells you that we expect to see our constant currency organic sales growth accelerate in the fourth quarter, setting up expectations for encouraging growth in 2012. The midpoint of our sales guidance implies constant currency organic sales growth of approximately 6% in the second quarter.

We'd now like to open it up for your questions, and I'll turn it back to our operator to monitor.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is coming from Bob Hopkins from Bank of America Merrill Lynch.

Robert Hopkins

So 3 quick questions, can you talk about the reasons for the delay with the Quadra approval in the U.S. beginning in the fourth quarter? And can you talk about what gives you confidence in an early fourth quarter approval? And then finally, what CRM share gain do you assume in your -- for the back half of 2011 to come up with your new guidance?

Daniel Starks

Bob, I'm not going to give you satisfying answers to any of your 3 questions, but on the topic of delay for quadripolar and confidence for quadripolar, really the answer would be very similar to both of those questions, which is that the approval is obviously subject to the timing of the FDA process and this is a process where timing really is not -- it's a little bit ambiguous and that's the nature of the process, so we see nothing unusual here. This is, I think this is just an example of the uncertainty associated with any regulatory process, and I would not read anything else into it. And with respect to the timing of -- the new timing where you've said that our guidance assumes that we will have the quadripolar system approved here for the fourth quarter, that's different than saying that we are confident about that. What we're saying is that based on our ongoing communications with FDA, that's our current expectation. We may beat that expectation. We may miss that expectation, but we're giving you the data so that if we announce approval sooner, you could anticipate upside to our guidance. If we announce approval later, you could anticipate some negative impact on our guidance. So we're just working to make our thinking completely visible. On the topic of exact market share tied to quadripolar, we don't offer our guidance with that level of specificity. Instead, what one would have to do is look at what we've said for market growth assumption, which is a year-over-year minus 2% for full year 2011. And look at what we've indicated for our total CRM sales here on a global basis, neither of which directly answers your question, but I'm sorry, that's the best that we're going to do here on this call. I can tell you a little more to your point and just working to get a sense of what's our confidence that quadripolar will be a vehicle for very meaningful share gain. Our confidence there is really very high. And for all of the reasons that physicians have responded so favorably to the quadripolar system in Europe, and you can get an indicator of that from the comment in our prepared remarks that where the system's already on the market, we've got 20%, over 20% year-over-year increase, both on a unit and on a revenue basis. So that would be maybe a good proof point that we will gain meaningful share with this technology in the United States and then a supporting comment might be that the impact of new technologies in Europe typically is slower than the impact of new technologies in the United States for a lot of different reasons, that includes that CE Mark doesn't get us into all parts of the European market, #1. For example, we only launch the quadripolar CRT-D system in France during the second quarter, just as one example. And then secondly, the impact of tenders in Europe is significant and tends to have -- tends to cause a bit of a lag in the uptake of new technology versus the dynamics that we work with here in the United States. So you and others have commented on here in the past and we certainly commented on the past, Eric Fain spelled out in some significant amount in our February investors conference, the reasons that, that quadripolar CRT-D system was expected to have such a good impact on market share shift and our experience to date is that it does have that kind of impact on market share shift and when we get it here in the United States, we would have a lot of confidence and a lot of optimism that, that will have every meaningful impact on share shift here in the United States.

Robert Hopkins

Has FDA requested any new data or any longer term follow up on the data that exists?

Daniel Starks

Well, we're not going to give details. This is a matter of kind of communications discipline. We don't really want to pick and choose when do we answer a question like that and when do we not answer a question like that. And generally those kinds of -- we keep our communications with all of the regulatory bodies confidential and don't give blow by blows about it but at the same time, we expect approval by the beginning of the fourth quarter. So that tells you that whatever the details are, that's our current expectation. We may beat that, we may miss that, but that's our current expectation based on all of our communications with FDA.

Operator

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

Michael Weinstein - JP Morgan Chase & Co

Let me just maybe pick up what Bob left off and just follow the Quadra theme, so your ICD sales were up 11% sequentially, if I look at your international performance and I don't have the data to splice out Japan where you got some distributor issues versus Europe. So how much share do you think you've gained on the back of Quadra, at this point, in the countries where it is available?

Daniel Starks

Well, we're not going to break that out separately, Michael, but again, we do track new accounts that we've picked up following the launch of our quadripolar CRT-D system in markets where it is available. And all of those data points are positive and encouraging. But I think -- so that, I'm sorry, that's about the best answer I'm going to give you. I know that's not exactly what you're looking for.

Michael Weinstein - JP Morgan Chase & Co

I understand. Let me ask you about a couple of your pipeline initiatives. #1, CardioMEMS. FDA announced probably 10 days ago a series of FDA panels from late September to early November, my understanding is that CardioMEMS doesn't know yet the exact date of the panel, but assuming an FDA would be in one of those panels and then get an FDA approval sometime around the end of the year, maybe it's early next year, what do you have to do to, a, once you buy in the company exercise or option, what do you have to do after that in order to get CardioMEMS in a position to actually do a full launch?

Daniel Starks

Well, we can move really very quickly, Michael. What the first point would be to say that -- and I will ask for some comments from my colleagues here, but let me start off by saying the first point is that our arrangement with CardioMEMS permits us to exercise our option and close on our acquisition of CardioMEMS before FDA approval, so I mean we can do it anytime from now certainly to the point that we've previously indicated, but so you might -- what we'll do is we will do everything that make sense here to make sure that we can fully leverage in an urgent way the value of this CardioMEMS technology following a positive panel meeting. And so I won't be more specific, but I'll offer that assurance, #1. #2, we have the distribution already in place, so there's not -- it's not that we need to put new distribution in place, we've got news great synergy here on with our current field organization with current call points, with current potential target implanters and target referring physicians. So we're really set to go in a fairly expedited time line to leverage that as a new growth driver once the timing of the regulatory path is confirmed to us. So those are couple of comments. I'm not sure if anybody wants to jump in with anything else here. Let me ask Eric, am I missing something or is there a point I ought to be making that I'm not thinking about?

Eric Fain

No, I think you covered well, Dan. Mike, the only other thing I'd add is obviously the priority for CardioMEMS right now is focusing on all the activity surrounding getting FDA approval, getting the panel and having a successful conclusion to that. At the same time, they are also internally just being prepared for launch and doing all the things that you'd expect something to do with an upcoming launch in mind. So as far as we are concerned, the communication's been up front and things are on track.

Michael Weinstein - JP Morgan Chase & Co

Okay, good, last item and then I'll let someone else jump in. You did pull your renal denervation program forward and you're now expecting to CE Mark by the end of 2012. When would we get to see that program? And is there anything you can share with us today?

Daniel Starks

First, Michael, you're absolutely correct, that we have pulled in our time line on that program. And again, I apologize that I'm not going to be more helpful here, but we were deliberately ambiguous in our additional comments to say that we will offer additional updates as appropriate. But this is a very strong focus for us. And again, this -- our renal denervation program is like that proverbial duck, it looks calm in the surface with the feet pedaling furiously beneath the surface and that's exactly what we're doing with our renal denervation program. We thought that third quarter -- that's the second quarter call with -- particularly with the focus on the CRM market dynamics was really not the best time for us to offer more specificity on the renal denervation growth driver, and so we're going to keep that in our pocket to comment on in future calls. But when the timing is right and it will be sooner rather than later, we will offer additional updates and now all we're doing is kind of dropping the teaser that the time line is pulled in and that we're making good progress.

Operator

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

Frederick Wise - Leerink Swann LLC

Dan, if we can turn back to CRM market growth and some of your comments there, you said and I just want to make sure I understand your comment, you said the market may continue to contract in, maybe I'm looking for too much subtlety here, it may continue to contract, should I read that as maybe a more hopeful sign that things are going to get better in the near term? Or a more cautious comment, that your concern that things get worse? And just in general, maybe you could talk about just general market trends you're seeing?

Daniel Starks

Sure, yes. Rick, you're not reading too much subtlety into our comments. We do a lot of wordsmithing to work to get it exactly right on what we say, and between the lines, the message was the former, not the latter of your 2 propositions. And so we see that the CRM market based on everybody's reported numbers contracted between 1% and 2%, and really, is less than 2%, but between 1% and 2% in this first quarter, and so we're airing on the side, if we're going to air, we're going to air on the side of being conservative to say okay, then let's just pull in expectations. This is the right time to do it, let's do it all at once, pull in expectations, leave ourselves with the possibility of upside and announce as we have this morning then that as a conservative measure, we're just going to assume that the global CRM market will contract 2%, which is more than it contracted in Q1, but 2% for full year. Clearly, there's upside to that. What we see here in the market is that the U.S. CRM market fell into a pothole during the second quarter. It's 28% of our sales. I mean, so it's a meaningful percent, but on the other hand, it's 28% that fell into a pothole. It's not clear to us yet how much of that was timing and how much of that was something else. We're going to need the benefit of hindsight to finalize our analysis. Some of the data that we get lags in the conference call, so we're again adapting a conservative view, pulling in expectations all at once to a very conservative baseline, leaving ourselves with the possibility of upside. The factors that couple of factors that are clear to us that bear on -- it did bear on the U.S. CRM market during the second quarter and it helped create this pothole, some of it is general malaise in the macroeconomics, unemployment, soft hospital admissions, that's some of it, you can see that and you can see some additional validation of that comment in our U.S. Neuromodulation sales, because you saw we're really flat in our U.S. Neuromodulation sales year-over-year. It tends not to draw that much attention because international Neuromodulation sales grew 50%, and the total sales was okay. But in the U.S., the market is just weak and it's bearing on more than one product class that we have. And so it certainly is bearing on our largest product class, the CRM products. Another aspect here is it has become clear to us, we again, we get the anecdotal information, we don't get access to the information at its source, but we have customers who were not previously directly impacted by the ongoing Department of Justice investigation into reimbursement submissions here for ICDs. We have more customers who were contacted by the Department of Justice during the second quarter than in previous times. And so that's not something that we could predict and again, that's not something where we know what kind of the big picture activities are of the Department of Justice. We only find at about it when our customers get directly impacted and then they tell us that here, this is having an impact on their practice in the short term. That's hard to model on what's going to -- what the implications of that are in Q3 or in Q4. So again, we're just being conservative in saying, let's pull back expectations on a total global basis. Another there's also some soft factors that are difficult for us to model, but we have -- and we noticed that a number of physicians who have been very high-volume implanters in prior times and working particularly long hours, are taking a lot more time off as they transition from private practice into becoming hospital employees, and they get guaranteed vacation and they take it. So that's a soft factor and not want to make too much of, but it's enough of the factor that it is on our radar screen and it didn't affect the timing, at least the timing of implants here in the second quarter. So those are the main things. The other thing I'd say, Rick, would be that we're always very careful and we always caution ourselves and remind observers not to make too much of a single quarter in the CRM space. There are variations in inventory at the customer level, so you get inventory loads, you get inventory de-stocking, the ASPs are relatively high versus other products we work with, so it doesn't take that many units on a total market basis to really cause changes and results during a single 90-day period. We think it's a little bit better, we've said for years here, that it's more meaningful to combine the results of a couple of quarters to look both at market share trends and at market growth trends in the CRM space. So we do find some difference between sales numbers and implant numbers. And then when we're looking at year-over-year here, we've got the complexity of Boston Scientific being off the market in the U.S. for a portion of the quarter a year ago. So there's just a lot of compounding factors and we've netted them all out to offer conservative guidance all at once and pull back all at once here for expectations for the remainder of the year.

Frederick Wise - Leerink Swann LLC

Dan, just one last question. You've taken a, I think, sort of prudently, what the right word is conscious conservative stand on third quarter outlook, but if I look at your full year guidance, we got a very strong fourth quarter set up with the seemingly solid double-digit top line, potentially high teens EPS growth. If I'm remotely correct, that would seem to suggest a lot of optimism about the outlook, the product flow and may represent, John, some of the benefits of this restructuring CRM and the Swedish manufacturing benefits, just help us think about that strong fourth quarter.

John Heinmiller

There a lot of factors depending on our fourth quarter expectations. One of them and this comes back to some of the early questions that I was a little bit vague around, but the first thing is our fourth quarter assumes that we have our quadripolar CRT-D product launch at the beginning of -- by the beginning of the quarter. And so if we beat that, we've got upside, if we get that exactly, then our guidance holds. If we miss that date, then there is -- people off to start to factor in sales reductions for the fourth quarter. So that's the first thing. Second thing is that we -- let's take, for example, the Trifecta launch here. We already showed over 30% increase total global tissue valve sales in the second quarter. And we're just getting started with Trifecta, it was not a full quarter launch. The natural trends of uptake even with a full launch are that there is a selling cycle and there's a successful product line that gains traction over some time. You don't get the full traction in the first full quarter of its launch. So we're going to have first full quarter here in Q3. We'll get a higher run rate. We'll get additional confidence, enthusiasm on the Trifecta and in our pool of tissue valve program for the fourth quarter, so you see that. We've got trajectories. We've pointed to a number of these factors here, we've got trajectories that are very strong sequential quarter growth with our LAA closure product line. And then more importantly, with our FFR and OCT product lines. So then also with our deep brain stimulation product lines, so when we're talking about 30% sequential quarter growth and you start to run rate that and extrapolate that and then add to it that on our FFR OCT product line, we just started to launch our first integrated FFR OCT system in Europe, and we are optimistic that we will begin to launch that same system in the United States before the end of this quarter. And then extrapolate that to fourth quarter implications and extrapolate that to -- we're not offering guidance for 2012, but the same kinds of things that give us at the midpoint of our guidance about a 6% constant currency organic sales growth guidance for Q4, think about that. So how do those factors extend into 2012 and what about the implications of CardioMEMS in 2012 and then certainly, we've had -- we would anticipate having strong full year benefits of our quadripolar CRT-D program in 2012. You can really see that we have a little bit of a mismatch and timing of our CRM market pothole and update of our numerous new growth drivers here and for constant currency organic sales here in Q2 and modest guidance here for Q3, but none of that should be with a sense that of anything other than our long-term growth program with numerous new growth drivers to continue significantly diversifying our portfolio and get us back to double-digit constant currency organic sustainable sales growth, but that's fully on track, and not just by way of blowing smoke and waving arms, but you see it in our guidance for Q4, you see us recovering from what we are reporting today to about 6% sales growth there by those -- with all those other qualifications in the fourth quarter and a person can start to think well, it got to be better than in 2012, because everything that's going to help in the fourth quarter is going to be even stronger in 2012, and 2012 is going to have other significant growth drivers that are not yet bearing on Q4.

Operator

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

Kristen Stewart - Deutsche Bank AG

One for Dan and then one for John. Dan, maybe just kind of taking a step back, clearly, I guess, there's a lot of moving parts within the CRM market and a lot of uncertainty going forward just complement general market trends so you seemingly have better visibility in the replacement cycle. Some of your competitors have obviously chosen to restructure their sales in reaction to the slower market trends, and I'm just curious if your view has changed at all on that topic in terms of just kind of rightsizing the expense structure for the organization and basically reaction to what seemingly is a permanently slower CRM market?

Daniel Starks

Kristen, well, 2 parts. First, on rightsizing, on the topic of rightsizing. Yes, we are very focused on maintaining right size. And so, I probably should refer this to Group President, Mike Rousseau, and maybe I will, he looks like he's chomping at the bit here a little bit, but let me say for Mike that Mike has been very proactive in maintaining the right balance, whether it's the balance -- and I mean there's a lot of factors that Mike is managing, including anticipating the launch of the CardioMEMS product and having the organization fully in place to maximize capturing that opportunity. But we have announced some restructuring that bears on CRM in our prepared comments this morning in John's portion of the comments. And you will see us continue to keep and to restructure as appropriate, that'd be #1. The other part though, I realize this isn't your question, I want to say it anyway though, just because others might be thinking along those lines. The competition here over the last periods has talked about integrating their sales force as a strategy. And there, nobody's asked us about it, but you've now given me an excuse to throw it in anyway, there all that competition is done is copy what we announced in the middle of 2001 where we established our U.S. division with integrated, with a lot of integration in our U.S. division and with specialty sales focus, where that is most helpful to the customer and with common management and common contracting and a lot in common infrastructure where that is most helpful to optimizing our cost structure. So here, 10 years later, haven't seen the example that we've now shown works very well. You see the competition saying hey they're going to do it too and so there, I'm not going to tell you, yes, that's what we're going to do instead I'll tell you, we did that 10 years ago and it's working really well for us.

Kristen Stewart - Deutsche Bank AG

Okay, and then I guess just for John, can you just help us with the impact from FX. I know that you'd mentioned with gross margins that it was mainly manufacturing efficiencies, but in the past you've given kind of an estimate in terms of what the earnings impact was from favorable FX. This quarter FX was a little bit greater that what we were modeling so can you just help kind of piece out, both from an EPS perspective and then from gross margin perspective what that impact was?

John Heinmiller

Well, I think that the comment from my perspective, Kristen, would be that the FX impact was really right in line with what our expectations were and we laid out the parameters of exchange rates we were using in preparing our guidance. And the actual exchange rates during the quarter really fell within those assumptions. So and then our results really again were in line really up and down the income statement, with what our expectations where the obvious difference was that we were at the low end of our CRM sales performance versus where we would like to be more in the middle or upper end of the guidance range. And then we exceeded our sales on AF and CVD, and then we're at the top end on our neuro business. And then that will translate into strong margins and we actually had $0.85 of earnings per share. So I think that the currency is all baked in there and really, if you look at it on a year-over-year basis, you keep in mind that we've got the AGA Medical business now consolidated in with St. Jude Medical. That influences our SG&A spending. We've made specific investments in R&D that are really accelerating our R&D spending versus a year ago. So there's so many different factors now in the current period that it's really hard to isolate the currency just as one topic.

Kristen Stewart - Deutsche Bank AG

In the past, I guess, you've said it's like to 40% to 45% kind of drop through to pretax, and then I look at that as about $0.08 of the current number about currency?

John Heinmiller

If you take that in isolation, I think that's accurate, and then you keep in mind all the other investing that we're doing, et cetera, and it gets blurred a little bit with some of the other changes that are working through our income statement versus a year ago when you make that reference point.

Kristen Stewart - Deutsche Bank AG

And lastly, Japan, you had modeled in last quarter bit of a headwind, any update there on whether that impact is tracking in line or a little bit better than what you were modeling, I think it was $20 million to $25 million or something like that.

Daniel Starks

Kristen, I'd say that it's tracking basically in line. The Japan sales, there are major parts of the market that are not affected by the events of the first quarter. But generally, our sales in Japan on a total basis had some significant weakness year-over-year in the second quarter, and we expect to recover from that and are already seeing encouraging signs of beginning to recover from that moving through the remainder of this year. So I'd say that the expectations that we set with respect to Japan last quarter have continued now with another quarter's experience.

Kristen Stewart - Deutsche Bank AG

And that was again just related to the earthquake and tsunami not from the distributer issues you're referring to?

Daniel Starks

Yes. I mean, they all come out in the same number. I mean -- but, yes. I mean there's distributor impact. There's a distributor impact there, too, but I was specifically referring to the tsunami and earthquake, yes.

Operator

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

Raj Denhoy - Jefferies & Company, Inc.

Wonder if I could ask -- you talked about the volume issues that are impacting the CRM market and the ICD market, particularly here in the U.S, but perhaps you can provide a little update on the pricing environment. Have you seen much change in pricing at this point?

Daniel Starks

Raj, we had not. We talk about our pricing on a total global basis. And on a total global basis year-over-year, pricing in the second quarter was really very much in line with what we expected. And we've indicated that we expect low single-digit decreases in ASPs -- so all of that was pretty much as anticipated. There are -- that then disguises a little bit pockets of very severe price pressure. But in the big picture sense where it counts, everything was as expected and you can see that in the strength of our gross margin.

Raj Denhoy - Jefferies & Company, Inc.

Okay. And then you provided a nice update on a lot of products. but I think you focused mostly on Europe. I'm curious if you have any updates on, for instance, TAVI, renal denervation, the combined FFR OCT products for the U.S. market?

Daniel Starks

Well, no, we don't. And so we're focused -- and the reason for that is because just there are there so different issues. So here with the -- on the regulatory path and so we haven't set time lines, let's see, in my recollection they fail me a little bit on TAVI. I can't recall if we set a time line for TAVI in the U.S. or not at our conference in February, I'm getting some headshakes. So I think we did not, but when we have better visibility into U.S. timing to fill these programs, we will provide it. But we don't have -- we're not yet suggesting that anybody factored into their models.

Raj Denhoy - Jefferies & Company, Inc.

Okay. And I think one thought you did provide an update on was the Cool Flex, the AF catheter, you mentioned there will be an IDE trial perhaps starting the second half of this year, is that still on track?

Daniel Starks

Yes. Yes, it is.

Operator

Your last question comes from the line of Adam Feinstein from Barclays Capital.

Adam Feinstein - Barclays Capital

Maybe just to end things here. I mean clearly, the issue is the weak market growth and managing through that. And just so -- maybe just a couple of questions on that, I mean, and clearly, we saw your results today, we saw the Medtronic results in May, which had the month of April in it, so clearly a challenging market environment. So what do you think in terms of -- is this a shorter-term phenomenon? Do you think we're going to see this environment for several more quarters? And you commented earlier that you haven't seen pricing really changed, just wanted you to elaborate on that? Do you think that's something that you feel confident, will see stability there or is that something that you guys aren't watching?

Daniel Starks

Well, first, on the first part of your question, Adam, we wish that the CRM market was more predictable. And maybe that -- but it sure as heck just hasn't been. I mean and so we -- #1, we respond to that by being conservative. And then #2, we know that it has not been predictable, and so we've got a lot of people as others do, we have a lot of people spending a lot of time analyzing everything that one could imagine for factors bearing on the CRM market. The fact that it is has been unpredictable is not due to our lack of attention, it seems to be the nature of the beast in spite of how much focus we give it. So when you ask me to offer any kind of assurance here on what's going to happen next, the best assurance I can offer to you is that it will continue to be unpredictable. And so that's why we work to err on the side of being conservative. If we erred and we work to set up upside. If a person goes back to fundamentals and talks about penetration into the indicated patient population, one would think back to the publication during this last quarter of the UCLA Duke Northwestern Group, that published the data on the under penetration of the indicated technologies for heart failure patients, including the under penetration of ICD and CRT therapy for heart failure patients. And so that data was the lead author there was Onno Roe [ph] and I hope you will forgive me if I've mispronounced his name. But that publication really did a good job of indicating the range of patients whose lives are being lost every year because of not getting therapy we know they ought to have. On the heart failure side, it was something like 68,000 patients at the mid point who are needlessly dying every year because they're not getting the known established indicated therapy that they ought to be getting. And on the ICD and CRT side, that was about almost 1/3 of the total, so it was something like at the midpoint, about 20,000 lives in the United States being lost needlessly every single year because patients aren't getting ICDs or CRT therapy that they're indicated for. So that's a given and now what ought to happen next, we could convince ourselves that we ought to see that this ought to be characterized as a pothole, which is how I characterized it. And the pothole by definition is finite and we'll climb out of the pothole, but we are humbled by the fact that we have a lot of analysis and a wide margin of error.

Adam Feinstein - Barclays Capital

Okay, great. Just a follow up, I guess, just on the pricing piece, and one's going to know it's not predictable, but when you talk about things being stable, what is pricing in the U.S. right now?

Daniel Starks

This is tongue-in-cheek on purpose, but it varies. But more seriously, the first thing that one ought to think about on pricing is what is the premium going to be, what's the appropriate premium going to be for the new technology that we are about to put into the market here in the U.S.? That would be the first significant factor that one would want to think about. And so historically, and I know I'm not going to tell you anything new, I'll still I can't resist, I'll just say, historically, exact apples to apples, mature technology to mature technology, pricing pressure is severe. And it has been 4 years. The reason that the parade of horribles doesn't come to reality on what's going to happen to pricing is because of the offset of meaningful valuable new technology and resetting premium ASPs on the back of that valuable premium new technology. So and we used the example that in the past it used to be just what's going to happen to pacer pricing, and what happened was high-voltage shock technology got added into a pacer and we called it an ICD. And then what happened to that, it became dual chamber ICD and then it became CRT technology and now we've got in Europe, we've got our ICD technology with ST segment monitoring, we've got our ICD technology with LAP, direct left atrial pressure. Sensor monitoring we've got quadripolar on the market in Europe, we're about to bring quadripolar to the market in the United states, and so those new technologies, when we run dry on innovation, our discussion on ASP trends will change, but as long as we maintain a good pipeline of meaningful cost effective and clinically effective innovation, I would expect our thesis on total global ASPs to remain the same, which is yes, we continue to be under a lot of pressure. It's a topic of a lot of very active management. Everything doesn't go our way. But it all nets out to something that does limit it to low single-digit decrease on a year-over-year basis.

With that, I apologize to whoever is in the queue that we haven't able to get to, and I'd like to thank everyone for staying with us longer than our normal time, and I'll now turn the call back over to our moderator, Sarah, to read concluding comments, and we'll sign off. Thank you, everybody.

Operator

Thank you, everyone. Today's call is being recorded and will be available for replay beginning at 12:00 p.m. Eastern standard time. The dial-in numbers are (800) 642-1687 and for international, (706) 645-9291, and enter pin number 78279631. Thank you. This does conclude today's teleconference. Please disconnect your lines at this time.

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