Boston Scientific's CEO Discusses Q2 2011 Results - Earnings Call Transcript

| About: Boston Scientific (BSX)

Boston Scientific (NYSE:BSX)

Q2 2011 Earnings Call

July 28, 2011 8:00 am ET


Michael Phalen - Executive Vice President and President of International

William Kucheman - Executive Vice President and President of Cardiology, Rhythm & Vascular Group

Sean Wirtjes - VP of Finance and Treasurer

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

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

Jeffrey Capello - Chief Financial Officer and Executive Vice President


Matthew Dodds - Citigroup Inc

Charles Chon - Stifel, Nicolaus & Co., Inc.

Bruce Nudell

Brooks West - Piper Jaffray Companies

David Roman - Goldman Sachs Group Inc.

Michael Weinstein - JP Morgan Chase & Co

Robert Hopkins

Glenn Novarro - RBC Capital Markets, LLC

Kristen Stewart - Deutsche Bank AG

Larry Biegelsen - Wells Fargo Securities, LLC

David Lewis - Morgan Stanley

Frederick Wise - Leerink Swann LLC

Tao Levy - Collins Stewart LLC

Joanne Wuensch - BMO Capital Markets U.S.


Ladies and gentlemen, thank you for standing by, and welcome to the Boston Scientific Q2 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mr. Sean Wirtjes. Please go ahead, sir.

Sean Wirtjes

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

We issued a press release earlier this morning announcing our second quarter 2011 results, which included key financials and reconciliations of the non-GAAP financial measures used in the release. We posted a copy of that press release as well as reconciliations of the non-GAAP financial measures used in today's conference call and other supporting schedules to the Investor Relations section of our website under the heading Financial Information.

The agenda for this morning's call will include a review of the second quarter financial results as well as Q3 and updated full year 2011 guidance from Jeff, an update on our business performance in the quarter from Ray, followed by his perspective on the quarter overall.

We'll then open it up to questions. We'll also be joined during the question-and-answer session today by Sam Leno, Executive Vice President and Chief Operations Officer; Hank Kucheman, Executive Vice President and Group President of CRV; John Pedersen, Senior Vice President and President of our Urology and Women's Health business; Michael Onuscheck, Senior Vice President and President of our Neuromodulation business; Dr. Keith Dawkins, Chief Medical Officer for our CRV Group; and Dr. Ken Stein, Chief Medical Officer for CRM.

Before we begin, I'd like to remind everyone that this call contains forward-looking statements within the meaning of Federal Securities Laws, which may be identified by words like anticipate, expect, project, believe, plan, estimate, intend and similar words. These forward-looking statements include among other things statements regarding our expected market share, growth projections, markets for our products, new product approvals, launches in sales, competitive offerings, clinical trials, the regulatory environment applicable to us and our products, our liquidity and financial position, the strength of our balance sheet, capital structure and cash flows, our future financial performance including expected net sales, margins, earnings and tax rates from the third quarter and full year 2011, our future expenses including our R&D and SG&A spend and royalty expense, the timing and effects of our share repurchase programs, restructuring activities, investments and POWER growth strategy, including our Priority Growth Initiatives and investments in emerging markets such as China, future opportunities arising from J&J's decision to exit the DES market and views on our litigation. We caution you that actual results may differ materially from those discussed or implied in these forward-looking statements.

Factors that may cause such differences include, among other things, future political economic competitive reimbursement and regulatory conditions, clinical trial results, intellectual property rights litigation, financial market conditions, future business decisions made by us and our competitors, and the other factors described in the Risk Factors section in our most recent 10-K filed with the Securities and Exchange Commission as updated in the 10-Q that we filed or will file hereafter. These forward-looking statements speak only as of the date hereof and we disclaim any intention or obligation to update them.

At this point, I'll now turn it over to Jeff for a review of the second quarter financial results.

Jeffrey Capello

Thanks, Sean. Let me begin by providing some overall perspective on the quarter before getting into the details. We had a very good quarter, with adjusted earnings per share of $0.17, above our guidance range of $0.12 to $0.15 and the Street consensus of $0.14.

Although we did benefit from a few unanticipated items in the quarter that I will describe in more detail shortly, the quarter still exceeded our expectations, driven by solid revenue performance in most businesses and continued strong attention to cost control. The U.S. CRM market, which we believe declined in the high single-digits in the second quarter, continued to be the primary area of disappointment.

In addition to the financial results, we made strong progress on a number of other fronts in executing our strategy during the quarter. Let me now move to the detailed review of the quarter to discuss the operating results and highlight the progress being made.

Consolidated revenue for the second quarter was $1.975 billion versus our guidance range of $1.92 billion to $2 billion and represents an increase of 2% on a reported basis and a decrease of 2% in constant currency compared to the second quarter of last year, including the negative impact of the Neurovascular divestiture.

Compared to the $76 million of favorable foreign exchange assumed in our second quarter guidance range, FX had a $96 million positive impact on our second quarter sales, which positively affected our reported revenue by $20 million. In addition, the Neurovascular divestiture negatively impacted Q2 revenue growth by approximately 220 basis points or $44 million.

And we estimate that the defib ship hold and product removal actions in Q2 last year increased our revenue growth by approximately 220 basis points or $43 million in the quarter. This reflects a $62 million impact reported in Q2 last year, produced by the estimated share impact on a similar period in Q2 this year, which was in line with our expectations.

Ray will provide a broader overview of our businesses and major product categories. But I'll address our sales results for all our businesses at a high level here. Worldwide DES revenue came in at $400 million, including a $6 million positive impact from the partial reversal of the sales returns reserve relating to the launch of ION. This was near the midpoint of our guidance range of $385 million to $410 million, and it represents a reported increase of 3% at a constant currency decrease of 2%, compared to the second quarter of 2010.

Our worldwide DES revenue included $116 million for TAXUS and TAXUS Element, $176 million for PROMUS and $108 million for PROMUS Element. Our worldwide TAXUS, PROMUS and PROMUS Element split for the quarter was 29-44-27, with 56% of revenue from self manufactured products, which is up from 46% a year ago and 49% last quarter. We grew our worldwide DES market share leadership during the second quarter with an estimated global market share of 36%, which we estimate to be about 900 basis points higher than our nearest competitor and up 100 basis points compared to the sequential quarter. These figures exclude the impact of the ION reserve in the U.S.

Our strong commercial team is focused on the only 2-drug platform in the industry. And when you couple that with the continued adoption of PROMUS Element and strong U.S. launch of ION, we expect to maintain our market share leadership going forward.

U.S. DES revenue of $208 million, including the positive impact of the ION reserve, which was at the high end of our guidance range of $195 million to $210 million and essentially flat compared to the second quarter of last year. The performance in the quarter was driven primarily by the launch of ION. U.S. DES revenue includes $46 million of TAXUS, $34 million of ION, and $128 million of PROMUS, and represents a 38-62 mix of TAXUS, ION and PROMUS in the U.S. compared to a 35-65 mix a year ago.

Excluding the impact of the ION reserve, we estimate that our U.S. DES share was 50% for the quarter with 11 share points TAXUS, 8 share points of ION and 31 share points of PROMUS. We estimate that our U.S. DES share was up 400 basis points both sequentially compared to Q2 of last year off of the ION launch, and that we exited the quarter up 500 basis points at 51% of the market, excluding the impact of the ION reserve. We continue to maintain drug-eluting stent market share leadership in a competitive U.S. market with more than 1,600 basis points more than our nearest competitor.

Based on our estimates of the U.S. market for the second quarter, we believe that Abbott share was approximately 34%, while Medtronic and J&J achieved approximately 11% and 5%, respectively.

Given the early success of our ION launch, coupled with J&J's announcement that they're exiting the DES market and our planned launch of PROMUS Element ahead of our planned mid-2012 timing, we believe that we are very well positioned to maintain our strong market leadership in the U.S.

International DES sales of $192 million were at the low end of our guidance range of $190 million to $200 million, representing a reported decrease of 2% and a decrease of 3% on a constant-currency basis. This includes $35 million in TAXUS, $48 million in PROMUS and $109 million in PROMUS Element sales and represents an 18-25-57 mix of TAXUS, PROMUS, PROMUS Element internationally.

We continue to shift our international mix to self manufactured products on the strength of our Element platform. We estimate that our U.S -- the DES market share in EMEA in the second quarter was approximately 32%, which was flat on a sequential basis. TAXUS market share was approximately 6% with revenue of $15 million. PROMUS market share was less than 1% with revenue of less than $1 million. And PROMUS Element share was 26% with revenue of $67 million. Together, this represents a TAXUS, PROMUS, PROMUS Element mix in EMEA of 18-1-81.

We estimate Abbott share at 25%, Medtronic share at 20% and J&J share at 10% during the quarter. We continue to be very pleased with the market acceptance of the Element platform in EMEA. It now comprises 93% of our DES product mix in the region, driven by its market-leading alloy and stent design, which we believe improves ease-of-use. Through the success of PROMUS Element and the TAXUS platform, we have driven substantially all of our DES product mix in EMEA back to self-manufactured margins.

Our DES share in Japan was an estimated 38%, up 100 basis points sequentially with revenue of $49 million, driven by share recapture from a competitor. TAXUS market share in Q2 was approximately 6% with revenue of $7 million, and PROMUS market share was approximately 32% with revenue of $42 million. Together, this represents a TAXUS, PROMUS mix of 14-86.

We estimate Abbott share at 34%, Medtronic share at 8% and J&J share at 4% during the quarter. We performed better than planned in the quarter due to the late launch of a local competitor stent. However, we expect to pay some incremental pressure on our share in the near term now that they have launched.

That pressure is expected to abate once we gain approval of PROMUS Element, which is anticipated in mid-2012. We estimate that our intercontinental DES share to decrease slightly to about 20% in the second quarter with a share split of 4% TAXUS with $13 million of revenue, 2% PROMUS with $5 million revenue and 14% PROMUS Element with $41 million in revenue, or a TAXUS, PROMUS, PROMUS Element mix of 22-8-70.

Although we are starting to see some contribution from the launch of our Element DES platform in the emerging markets, primarily India and Brazil, we expect this to accelerate once we gain important pricing approvals in India and launch PROMUS Element in China in the fourth quarter this year.

I would now like to provide you with some detail on the drug-eluting stent market dynamics during the quarter. We estimate that the worldwide DES market in Q2 at approximately $1,090,000,000, which is down 1% on a reported basis and down 3% on a constant-currency basis versus the second quarter of last year.

The estimated worldwide market in the quarter includes a worldwide unit volume increase of approximately 10%, driven by a 7% increase in PCI volume and a 2 percentage point increase in penetration, offset by a market decline in average selling prices of approximately 10%. The U.S. DES market is estimated to be about $410 million for the second quarter, representing a decrease of approximately 10% in the second quarter of last year. This consists of a 2% volume decrease, which includes a slight decrease in both PCI volume and penetration levels and an approximately 8% decline in ASP.

During the quarter, our U.S. ASP generally fell in line with this aggregate market decline. U.S. PCI volume in the quarter was approximately 258,000 procedures, down 1% compared with the second quarter of 2010. We estimate that the U.S. DES penetration of 77% was down 100 basis points compared to the second quarter of 2010.

Combined with stented procedure rates and stents per procedure, we estimate that the total market for U.S. stents in Q2 2011 was approximately 340,000 units, including the 258,000 units of DES. We estimate that the international DES market at $680 million for the quarter, up about 5% on a reported basis and about 2% on a constant-currency basis compared to the second quarter of last year.

This consists of a unit volume increase of approximately 11%, which includes a 10% increase in PCI volume and a 4 percentage point increase in penetration. These unit volume and penetration increases were largely offset by a 10% decline in ASPs. Procedures were strong in the quarter with approximately 652,000 PCI procedures, including 333,000 procedures in EMEA, 50,000 procedures in Japan and 268,000 procedures in intercontinental, representing over 20% growth in this region compared to Q2 last year.

This growth was largely driven by Asia-Pacific, including China and India. We expect the Asia-Pacific DES market to begin to approach the size of the EMEA market by the end of the year 2011, and potentially surpass it in 2012 as the second largest DES market in the world. We estimate that international DES penetration of 66% was up 400 basis points over the second quarter of 2010, including 61% in EMEA, 75% in Japan and 71% in intercontinental.

Worldwide CRM revenue was $544 million in the second quarter, representing a reported increase of 3% and a constant currency decrease of 2% compared to the second quarter of 2010. We estimate that our worldwide CRM share was down about 40 basis points sequentially at just over 19%. U.S. CRM revenue of $315 million represents a 2% decrease from the prior year. The year-over-year benefit of the ship hold was offset primarily by the continued decline in the U.S. defib market.

International CRM sales of $229 million were up 12% on a reported basis and down 1% in constant currency compared to the prior quarter. Worldwide defibrillator sales of $393 million were below our guidance range of $405 million to $425 million. This represents a reported increase of 4% and a constant currency decrease of 1% from Q2 2010.

During the quarter, we completed a routine evaluation of our CRM device performance. We already knew that our batteries had excellent longevity. However, the results showed that our batteries are lasting even longer than previously believed. As a result, we adjusted longevity assumption used in the accounting for our latitude revenue deferral. This adjustment, which was not included in our Q2 guidance, negatively impacted our quarter revenue by approximately $4 million.

U.S. defib sales were $243 million, which was below our guidance range of $255 million to $270 million and represent a 2% increase from last year, impacted by the stop ship issue last year and the market contraction this year. International defib sales of $150 million were at the low end of our guidance range of $150 million to $155 million, representing a 6% reported increase from last year and down 6% in constant currency.

In constant currency terms, our worldwide peripheral intervention business was up 7% in Q2, including international growth of 13% on the strength of recently introduced new products, particularly in our stent and Interventional Oncology franchise. We are very encouraged by the growth in the $700-million-plus business and expect it to continue to add to our growth profile going forward.

Non-stent Interventional Cardiology was down 5%. Electrocardiology was down 1%. We have continued to see a lag in some of these businesses in recent quarters as a result of procedural softness, continued pricing pressures as well as competitive product launches. On a worldwide basis, our Endoscopy business grew 6% in constant currency in the second quarter. Growth in the U.S. was 5%, despite a challenging environment, due to strong performance in our Hemostasis franchise including a Resolution Clip technology and our Biliary franchise, driven by recent launches of both the Advanix Biliary plastic Stent and the Expect Endoscopic Ultrasound Aspiration Needle. Internationally, Endoscopy grew 6% with broad-based strength across all geographic regions, driven by new product introductions, expanded indications and the expansion of our single-use products.

Our Urology and Women's Health business grew 3% at constant currency terms in the second quarter. The Urology business delivered another solid quarter with 6% worldwide growth, while our Women's Health business was down 3% due to elective procedures, market decline and competitive new product trialing in our pelvic floor business, partially offset by continued strong acceptance of our new Genesys HTA product.

Internationally, Urology and Women's Health again experienced double-digit growth, driven by new product introductions, increased sales investments and the penetration of new therapies. In Neuromodulation, we continued to build on our momentum in Q1. Our worldwide neuromod business grew 16% on a constant-currency basis in the second quarter, driven by continued commercial success of the new products launched over the past year. Our market-leading technology and strong commercial execution allow us to continue taking share in this market.

Moving on to sales. Reported gross profit margin for the second quarter was 65.2%. Excluding restructuring-related charges, adjusted gross profit margin for the quarter was 65.7% or 100 basis points lower than Q2 2010.

Lower volumes and margins relating to the divestiture of the Neurovascular business negatively impacted adjusted gross margins by 150 basis points in the quarter. This impact was partially offset by a 70-basis point negative impact in the ship hold in Q2 of last year with other factors largely offsetting each other.

Looking forward, we expect adjusted gross margins to continue to be in line with our previous guidance range of 65% to 66% for the remainder of the year.

Our reported SG&A expenses in the second quarter were $642 million. Adjusted SG&A expenses, excluding restructuring-related items, were $640 million or 32.4% of sales. This compares to $633 million in the second quarter of 2010. The decrease was primarily due to the divestiture of Neurovascular business, partially offset by a negative FX, higher spending on strategic growth initiatives, primarily in emerging markets and costs relating to recently acquired businesses.

The SG&A spend in the quarter was slightly below the low end of our guidance range of 33% to 34% of sales, due to the timing of expenditures and some benefits from restructuring efforts. Going forward, we expect our SG&A spend as a percentage of sales to be in the range of 32% to 33% for the full year, as we continue to ramp up our investment initiatives in key areas such as the emerging markets. As a percentage of sales, we expect SG&A to be slightly higher in Q3 than in Q4 due to seasonality of revenue, driven mostly by Europe.

Both reported and adjusted research and development expenses were $223 million for the second quarter or 11.3% of sales. This compares to $232 million in the second quarter of 2010. The reduction during the quarter related to lower expenses due to the divestiture of the Neurovascular business and the timing of some of our clinical trials, this was partially offset by costs relating to recently acquired businesses and FX. We continue to expect R&D spending to increase as we progress through the year, given the timing of our initiatives ending the year closer to $1 billion annual run rate.

Royalty expense was $52 million or 2.6% of sales in the second quarter this year, compared to $57 million in Q2 a year ago. Consistent with the prior year, we expect royalty to be lower in the second half as we reach lower per unit royalty rate tiers on our annual volume base arrangement. We reported GAAP pretax operating income of $237 million in the second quarter. On an adjusted basis excluding intangible asset impairment charges, acquisition, divestiture, and restructuring-related charges and amortization expense, operating income for the quarter was $383 million and 19.4% of sales, up 50 basis points from Q2 2010. As a percentage of sales, the increase in adjusted operating income is due to lower operating expenses, partially offset by lower gross margins.

I'd like to highlight the GAAP to adjusted operating profit reconciling items in a little more detail for you. We recorded intangible asset impairment charges of $12 million pretax or $9 million aftertax, related to changes in the timing and expectations of cash flows associated with certain acquired in-process R&D projects. We recorded acquisition-related charges of $7 million pretax or $6 million aftertax.

We recorded divestiture-related losses of $1 million on both pretax and after-tax basis. We recorded $30 million pretax or $20 million aftertax of restructuring-related charges in the quarter, which are primarily related to severance, product transfer expenses and certain other costs in connection with our previously announced plant network optimization and alignment for growth programs. Total amortization expense was $96 million pretax or $79 million aftertax.

The net cumulative effect of all these items was $145 million pretax and $116 million or $0.07 per share aftertax. Looking forward, we expect pretax amortization expense to be approximately $100 million in each of Q3 and Q4. Let me now move on to other income and expense.

Interest expense was $73 million in the second quarter, which was $30 million lower than in Q2 2010. The lower interest expense was primarily due to approximately $1.9 billion of debt repayment during the last 12 months, and a lower average interest rate as a result of fixed to floating rate swaps executed on some of our public debt during the first quarter. Our average interest expense rate in Q2 2011 was 5.2% or about 50 basis points lower than Q2 2010.

Other net of $6 million of expense in the second quarter this year compared to $9 million of expense in Q2 2010. Interest income was consistent in both periods while other expenses were $3 million lower, primarily as a result of higher currency exchange costs in the prior year period resulting from significant market volatility.

Our tax rate for the second quarter was 7.6% on a reported GAAP basis and 13.8% on an adjusted basis. Our adjusted tax rate for the second quarter reflected an $11 million benefit from discrete tax items. These discrete benefits were primarily attributable to various changes in U.S. state tax laws, excluding these discrete benefits we had an operational tax rate for the second quarter of approximately 17.4%. This rate reflects our full year operational tax rate of approximately 18%, reduced by certain timing items. Due to the impact of the timing items in Q1 and Q2, our year-to-date operational tax rate is only 15.5%. We expect our operational tax rate to be around 21% in Q3 and 23% in Q4, as the timing of items from Q1 and Q2 reverse.

We reported GAAP EPS for the second quarter of $0.10 per share, compared to $0.06 per share in the second quarter of last year. GAAP results for Q2 this year included a previously discussed intangible asset impairment charges, acquisition, divestiture, and restructuring-related charges and amortization expense.

Our adjusted EPS for the second quarter, which excludes these items, was $0.17 and was above the high end of our guidance range of $0.12 to $0.15 per share, driven by favorable operating expenses due to operating discipline and the timing of events as well as a few items that I will discuss in more detail shortly. Adjusted EPS for the second quarter of 2010 was $0.12. As a reminder, adjusted EPS in the second quarter of 2010 excluded a credit of $0.02 per share related to the true-up of the Q1 2010 goodwill impairment charge, $0.06 per share of amortization and $0.02 per share of restructuring-related charges.

Stock compensation expense was $34 million, and all per share calculation for computed using approximately 1.5 billion shares outstanding. DSO of 62 days was flat compared to the second quarter of 2010, as strong collections in the U.S. were offset by unfavorable FX as well as some weakness in EMEA cash collections.

Days inventory on hand was almost flat at 123 days compared to the prior year, as the benefit of inventory reductions attributable to the Neurovascular divestiture and finished goods reductions programs were offset by slightly higher inventory to support new product releases and unfavorable FX. We continue to work on reducing our inventory levels despite the required investments to support our new product introductions and plant network optimization initiatives.

Reported operating cash flow in the quarter was very strong at $390 million, compared to $286 million in Q2 2010. Q2 2011 cash flow included $38 million of restructuring payments. Q2 2010 cash flow included $34 million of restructuring payments and $6 million of legal settlement payments. Excluding these items, Q2 2011 operating cash flow was $428 million or $103 million higher than the Q2 2010, primarily due to higher adjusted operating income, lower interest expense and the avoidance of $122 million of tax payments resulting from the Neurovascular divestiture due to the ability to use tax attributes.

Capital expenditures were $82 million in the quarter, which were $20 million higher than Q2 2010. The higher spending, primarily related to the ongoing automation of our largest distribution center using Kiva robots and increasing manufacturing capacity in anticipation of the launch of PROMUS Element in the U.S. and in Japan next year.

Reported free cash flow was $308 million in the quarter, compared to $225 million in Q2 2010. In the second quarter, we continued strengthening our balance sheet by prepaying the remaining $750 million of our bank term loan, which brought our gross debt balance to our target of $4.2 million as of June 30, substantially ahead of schedule with our next maturity now in June 2014.

During the first half of 2011, we repaid $1.25 billion of our outstanding debt, including the entire $1 billion of our net bank term loan and $250 million of U.S. public bonds. As a result of our recent delevering efforts, strong financial results and robust cash flows, we continue the positive credit rating momentum.

Fitch raised us to an investment grade rating of BBB- with a stable outlook. And Moody's raised our outlook to positive from stable, putting us one step away from reaching investment grade with all 3 credit rating agencies.

Our continued deleveraging and strong cash flow provide us with increased flexibility to fund our Priority Growth Initiatives. This improvement, combined with recent favorable news on the litigation front, has given us the confidence to announce a new $1 billion stock repurchase program today. Coupled with approximately 37 million shares remaining under a previous share repurchase program, we now have a significant ability to increase shareholder return to our balanced program of targeted M&A and internal investments, as well as stock buyback.

We are confident that we can balance our priorities, investment in growth and returning immediate capital to shareholders, all the while improving our investment grade metrics on the strength of solid cash flows. At the end of Q2 2011, our credit facility covenant debt-to-EBITDA ratio was 1.4x, well below the maximum permitted level of 3.5x, representing over $1.7 billion of EBITDA safety margin. At June 30, we had access to significant liquidity of $2.5 billion, including $154 million of cash on hand and $2.35 billion of credit facilities.

Today, we announced a new restructuring program designed to strengthen our operational effectiveness and efficiencies, increase our competitiveness and support new investments. The program is also our action plan to utilize the $100 million to $200 million in near-term net corporate SG&A savings opportunities we outlined at our Investor Day last November.

We've talked many times before about our zero-based budgeting, or ZBB, in emerging markets or EMI initiatives from a cost opportunity perspective. Through these initiatives, we have now identified the key activity to be included under the program and are ready to begin the execution phase. This includes standardizing and automating certain processes and activities, relocating select administrative and functional activities, rationalizing organizational reporting structures, leveraging preferred vendors, and involve other actions and then increasing overall productivity. Ray will talk more about the expected commercial benefits of the program later. From a cost standpoint, we estimate the program will reduce annual offering expenses by approximately $225 million to $275 million exiting 2013.

We expect some of these savings to be reinvested in targeted areas necessary for future growth, including our Priority Growth Initiatives and the commercial side of emerging markets including the new investment in China we announced yesterday.

Program activities will start to be initiated in the third quarter of 2011 and are expected to be substantially complete by the end of 2013. We anticipate the reduction of 1,200 to 1,400 positions worldwide through a combination of employee attrition and targeted headcount reductions as the program is implemented.

We estimate this program will result in total pretax charges of approximately $155 million to $210 million of which $5 million to $10 million should be non-cash. We expect charges of approximately $10 million in Q3. The remaining expenses will be recorded over in the future periods as we identify with more specificity the headcount can be eliminated and incur other program-related expenses.

Before we get into guidance, let me briefly provide some perspective on our second quarter and first half results. Our Q2 EPS at $0.17 included a combined $0.01 positive impact from manufacturing volume efficiencies and FX, about $0.01 of operating expense favorability and another positive $0.01 -- positive impact from discrete tax benefits. Excluding these items, we still would have been at the high end of our guidance range and met consensus for the quarter. When these items are combined with similar items we realized in Q1, our adjusted EPS for the first half of 2011 includes approximately $0.13 of one-time benefits.

Now I'll address our outlook and walk you through our guidance through the third quarter as well as revised guidance for the full year. Looking at the second half, we do expect some of the operating favorability we experienced in the first half to carry through and are also pursuing additional opportunities to further reduce FX, most notably, our new restructuring program. However, we expect any benefit from that program to be minimal in 2011.

We also continued to face headwinds in several of our markets, most notably CRM, and plan to continue to invest in emerging markets and other targeted areas. With respect to Q3, you should also keep in mind that sales are typically impacted by a seasonal headwind each year as a result of heavy vacation periods, particularly in Europe. Having considered those factors, we expect Q3 consolidated revenues to be in the range of $1.870 billion to $1.970 billion, which is down 2% to up 3% from the $1.915 billion recorded in the third quarter 2010.

If current foreign exchange rates hold constant through the third quarter, the tailwind from FX should be approximately $64 million or 340 basis points relative to Q3 2010. On a constant-currency basis, excluding the impact of the Neurovascular divestiture, consolidated Q3 sales should be in the range of up 2% to down 4%. For DES, we are targeting worldwide revenue to be in the range of $360 million to $390 million, with U.S. revenue of $200 million to $215 million and OUS revenue of $160 million to $175 million. For our defibrillator business, we expect revenue of $365 million to $395 million worldwide, with $235 million to $255 million in the U.S. and $130 million to $140 million outside U.S.

For the third quarter, adjusted EPS, excluding charges related to acquisitions and divestitures, restructuring and amortization expense, are expected to be in a range of $0.11 to $0.14 per share. GAAP EPS for the third quarter is expected to be in the range of $0.03 to $0.08. Included in our GAAP estimate is up to $0.01 per share of acquisition-related charges, $0.01 to $0.02 per share of restructuring-related charges and $0.05 per share of amortization expense.

For the full year, the company now estimates sales will be in the range of $7.675 billion to $7.875 billion, versus our previous guidance of $7.6 billion to $7.9 billion. Assuming that current foreign exchange rates hold constant, we expect the tailwind from FX to be approximately $228 million. On a constant-currency basis and excluding the impact of the ship hold and the Neurovascular divestiture, consolidated 2011 sales should be in the range of down 1% to down 4%.

Adjusted EPS for the full year is now expected to be in a range of $0.64 to $0.70 per share, versus our previous guidance of $0.58 to $0.68 per share.

On a GAAP basis, the company expects full year EPS in a range of $0.22 to $0.30 per share. This GAAP EPS estimate includes a credit of $0.34 to $0.35 per share relating to the net gain of Neurovascular divestiture, and charges of $0.45 per share related to the Q1 goodwill impairment, and $0.01 per share related to the Q2 intangible asset impairment, $0.06 to $0.07 per share of restructuring-related cost, $0.04 per share of discrete tax benefit and amortization expense of $0.23 per share.

Our Q3 full year guidance implies adjusted EPS for Q2 in a range of $0.14 to $0.17 per share. The sequential increase from Q3 to Q4 is expected to be largely driven by different seasonal factors in those periods, including those that I mentioned earlier related to Q3. That's it for guidance. Now let me turn it over to Ray for an overview of the businesses in the quarter as well as his overall thoughts.

J. Elliott

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

I'll start with our CRV Group. Our CRV business continues to lead the industry in responding to changes in the delivery of healthcare and positioning Boston Scientific as a company intensely focused on the care continuum for cardiovascular patients. Our CrossCare Program is being well received by customers and is producing significant wins including recent deals with Barnes-Jewish Christian HealthCare, Indiana University Health and Tenet to name only a few.

We've doubled the number of CrossCare accounts since our November Investor Day, and we're on track to achieve our aspirational goal of 200 contracts by the end of this year. We are evolving our selling organization by advancing our unique new sales structure pilot models, which are sensitive to economic buyers, ACOs and the future potential for episodic bundled care. We expect to know the outcome of these pilot models before year end.

We also continue to make significant progress on our CRV-related Priority Growth Initiatives through 4 of our recent acquisitions as well as numerous internal growth programs. Technologies from some of these initiatives are being, or will be, commercialized in 2011 and 2012. They're integral to the execution of our POWER strategy, as they play key roles in the realignment of our portfolio in setting the stage for future growth.

I'll give you a brief update on a few of these growth initiatives. The WATCHMAN Left Atrial Appendage Closure Device we acquired through Atritech has CE Mark approval, and our case volume continues to grow each month. We have over 2,700 patient years of follow-up with the WATCHMAN Device, and almost 1,800 patients recruited in the WATCHMAN portfolio of clinical trials worldwide. No other LAA enclosure device can remotely compare.

In the U.S., electrophysiologists have shown strong interest in the product, and we are on plan with patient enrollments in the PREVAIL confirmatory study with enrollment expected to be completed by the end of quarter 1 2012. Our Autonomic Modulation Therapy, or AMT, growth initiative is progressing well, and we anticipate having our first patient enrolled in the NECTAR-HF trial in the next month or so. AMT therapy intends to treat a large population of heart failure patients who are currently not candidates for heart failure device therapy, an example of one of the ways we intend to offer new therapies in high potential markets.

Our fast-track team focused on the interventional medical device management of patients with drug refractory hypertension continues to progress well. Extensive animal studies have been initiated or completed, and we plan to commence our human trial in 2012. And last but not least, it remains our current intention to initiate REPRISE, the CE Mark trial for the Lotus Valve acquired through the acquisition of Sadra Medical during the fourth quarter of this year.

We are demonstrating our commitment to realigning CRV for growth with the investments we've made so far. To reiterate, these are only a subset of the 7 CRV-related Priority Growth Initiatives originally discussed at our Investor Day last November. We continue to actively develop internal projects in nearly all of these areas while also pursuing many external opportunities. Through these activities, the execution of POWER strategy is a reality at CRV.

Let's move on to CRM. As Jeff mentioned earlier, worldwide defib revenue came in slightly below the low end of our guidance. And despite the tailwind from last year's ship hold in the U.S. was flat after taking into consideration an accounting adjustment. The continued decline in the U.S. market was the primary driver behind these results. However, we believe that our U.S. share has remained essentially flat over the last few quarters.

Japan continued to deliver strong CRM growth during the second quarter, driven by our 4-SITE, COGNIS and TELIGEN products. We have been very pleased with our growing relationship with Fukuda Denshi. Our partner is ramping up ahead of plan, and we have already seen twice the revenue contribution from them that we had expected through the second quarter.

Our newest technologies continue to prove their importance in the marketplace. COGNIS and TELIGEN, which are still the smallest, thinnest high-energy devices in the world with excellent longevity continue to be well received. We also continue to see very positive responses through our 4-SITE DF-4 lead system in international markets. This new lead system is built on our highly dependable reliance defib lead platform and reduces the required implant area within the body, making COGNIS and TELIGEN even smaller.

We remain committed to advancing our technologies and strengthening our CRM franchise. We launched our next-generation defibrillators, ENERGEN and PUNCTUA in Europe during the second quarter as planned. The full line of these products enhances BSE's position in size, shape and longevity, along with advanced algorithms to minimize right ventricular pacing, reduced inappropriate shocks and apply new heart failure diagnostics in our ICDs. They also represent our first tiered high-voltage product platform, giving European physicians and their patients more options while aligning Boston Scientific to be more competitive in price-sensitive segments requiring tenders.

Our PUNCTUA product enables us to offer advantages of size, shape and battery longevity, along with remote patient management to those customers. We plan to launch these next-generation defibrillators in the U.S. later this year -- late this year. depending upon final FDA requirements.

On the low voltage side, we continue to expect to launch our next-generation INGENIO wireless pacemaker, built on the same platform as our existing high-voltage devices in Europe and the U.S. early next year, depending once again on final regulatory requirements. This new platform represents our first new major technology introduction in this category in many, many years. And it is expected to be the foundation for a series of low-voltage radio launches, including an MRI-compatible pacemaker system with both single and dual chamber devices in Europe next year, but without many of the existing competitive product patient compromises.

Let's look at electric physiology. Our worldwide EP business was down versus a year ago, but this was principally due to constraints in our Chilli II catheter line. We resumed shipments in the U.S. in April, and the sales rebound has exceeded all expectations. European shipments will resume in the fall.

During the quarter, we completed the limited market release of our Blazer Open-Irrigated Catheter in Europe. This product represents our entry into the rapidly growing open-irrigated catheter market and is the only system with total tip cooling design. The limited market release went very well, and the catheter proved to have exceptional tip cooling and handling characteristics. We plan to move into full market release in the fall. This launch is a significant step in the execution of our global AFib strategy and one of our 6 internally approved AFib-focused projects. We expect these products plus the expansion, development and collaboration of BSE's global EP sales force to increase market share of Blazer-based products and be drivers of growth for the future.

Turning now to cardiovascular. Worldwide DES revenue was comfortably in the middle of our guidance range and reflected continued strong performance from our platinum chromium platform, particularly in the uptake of ION in the U.S. and the United States.

During the second quarter, we maintained our worldwide DES market share leadership, with 9 percentage points more than the nearest competitor. In the U.S., our leading DES market share grew 4 percentage points to 50% in the second quarter, primarily from the strength of the launch of ION. However, we exited the quarter with 51% market share, including paclitaxel share of 21%, up 7 percentage points from first quarter, and making our paclitaxel/everolimus mix the highest it has been in over 18 months.

The launch of ION is exceeding our expectations and proving that the combination of our platinum chromium platform, with its acute performance advantages and broad-sized matrix, and the proven performance of paclitaxel are being well received in the marketplace. We continue to extend our ION launch to additional customers. ION is our first U.S. introduction of the Element platform, setting the stage for our PROMUS Element launch in the U.S. next year. We expect the launch of PROMUS Element to be ahead of our previously announced date of June 30, 2012. I repeat, since it's an often-asked question, we expect the launch of PROMUS Element to be ahead of our previously announced date of June 30, 2012.

OMEGA, our new bare metal stent of the PLATINUM -- on the platinum chromium platform, is off to a good start in Europe. And feedback from customers has been positive. We expect to start the U.S. IDE trial for OMEGA during the third quarter of this year.

During the quarter, we generated additional continued strong results from our PLATINUM clinical program and the 12-month results from our PLATINUM small vessel study presented at EuroPCR. The study demonstrated very low target lesion failure rates at 12 months for the 2.25-millimeter PROMUS Element stent versus the 2.25-millimeter TAXUS express stent. These data build on the positive outcomes of the PLATINUM Workhorse and QCA studies, confirming the successful transfer of the everolimus drug through our platinum chromium platform.

We are pleased to announce that the TUXEDO trial has commenced enrollment in India. This important trial compares the outcome of TAXUS Element, or ION, with XIENCE PRIME in a diabetic population. The role of paclitaxel in the treatment of diabetic patients has been appreciated by ICs for a long time, but this is the first head-to-head trial of contemporary DES technology in this challenging population.

The Synergy stent continues to be in follow-up in Europe, Australia and New Zealand. We look forward to presenting the primary endpoint data from this trial at TCT in November. Our next steps will be to gain CE Mark approval for Synergy and start the U.S. pivotal trial.

We're excited about Synergy's potential to reduce existing DAPT regimens, and we plan to evaluate this in a future trial. The predominant cost of DES treatment resides in the cost of DAPT, not in the cost of the stent. Therefore, confirming the safety and efficacy of a short DAPT regimen with Synergy offers the potential benefit to both patients clinically and the healthcare providers from an economic perspective.

Turning to other CV product lines, our worldwide non-stent IC core business was down in the second quarter. Consistent with prior period, the decline was largely attributable to share declines in IVUS and continued price erosion in PTCA balloons. We maintain our U.S. and worldwide PTCA balloon leadership positions in the second quarter, with 54% and 32% share respectively, and expect to see a modest improvement in IVUS results due to technical improvements in the near future.

In our peripheral interventions business, we generated good growth, driven by performance outside the U.S. Our worldwide TI stent franchise grew 5% constant currency, and was driven by outstanding international growth of 14%. U.S. stents were down 9%, driven by share loss in balloon expandable and carotid stents. We continue to take share with our Epic vascular self-expanding stent system in international markets and our Carotid WALLSTENT launch in Japan.

In our core PI franchise, which includes PTA and vascular access, we grew sales 4% in the second quarter, with 10% growth in vascular access and 1% growth in PTA. We produced excellent international growth of 10%, but the U.S. declined 3%. Our interventional oncology franchise produced very strong 15% worldwide growth in the second quarter, driven by 18% growth in the U.S. and 11% growth internationally. Our success with the Renegade/Fathom System launch and the Interlock .035 launch provided great momentum in the second quarter.

We are pleased to see the strength and growth trends in all 3 PI franchises in the second quarter and expect to see continued progress throughout 2011. Our performance was clearly boosted by the new product launches in multiple geographies mentioned earlier. These are the first PI new product launches in many years. We've also made very good progress with our continuing PI pipeline over the last quarter.

In our core franchise, our Mustang workhorse .035 PTA platform successfully completed tentative market evaluation during the quarter and moved to full launch in late June. We're also confident that our COYOTE .014 below-the-knee PTA platform, formerly codenamed Panther, will launch in the second half.

We fully launched Interlock. 035 in the U.S. and Europe at the end of the second quarter. This novel coil implant for obstructing and reducing blood flow in the peripheral vasculature during embolization procedures received very positive feedback from our radiology customers. Interlock. 035 extends on our best-in-class PI coiling technology, and is expected to provide continued strong growth in our interventional oncology franchise.

We continue to make progress with our 2 acquisitions focused on chronic total occlusions. Our TRUEPATH intraluminal CTO device is expected to begin a limited market release later this year. Our off-road re-entry CTO device is on track for an o U.S. launch by year end. We're in the planning phase for our U.S. clinical trial and expect to begin enrollment in the first half of 2012. With the accelerated growth from new products achieved in the second quarter, we are continuing to see results of our PI pipeline rejuvenation strategy.

Now moving to our endoscopy business. The endo business continued to have solid growth in the second quarter. The metal stent franchise again had strong results, recording an 8% increase internationally. This performance was led by our WallFlex Biliary RX fully covered stent, which recently received CE Mark Approval for the treatment of benign biliary strictures as well as the continued strong adoption of our WallFlex duodenal stent in Japan.

Worldwide growth of 5% was also recorded in our biliary device franchise, supported by growth in our product portfolio driven by our recent launches of both the Advantix biliary plastic stent and the Expect Endoscopic Ultrasound Aspiration Needle.

The hemostasis franchise delivered strong double-digit growth of 14% on the continued adoption and utilization of our Resolution Clip technology.

We continue to make great progress on the integration and commercial efforts of Asthmatx. During the quarter, we were pleased to receive 2 important decisions impacting the reimbursement of the Alair Bronchial Thermoplasty System. In June, CMS issued 2 new healthcare-common procedure coding systems, or HCPCS level II codes, which are effective July 1, 2011, specific to bronchial thermoplasty when provided to Medicare beneficiaries. In addition, on July 1, the AMA announced that effective January 1, 2012, bronchial thermoplasty can be billed using 2 new current procedural terminology or CPT codes. We view these 2 important announcements as very positive steps in our effort to secure reimbursement for the Alair Bronchial Thermoplasty System.

Let's now move on to urology and women's health business. Our international business continued to gain momentum, with strong double-digit growth in 3 out of 4 regions. Our urology business continued to expand its leadership position and delivered worldwide growth of 6%. Elective procedures continued to pressure our women's health business, particularly in the U.S.

The persistently high U.S. unemployment rate and increasing employee insurance deductibles and cost sharing continue to put pressure on elective procedures. Competitive new product launches in both slings and pelvic floor repair also impacted our growth, as hospitals initiated new product evaluations, as did the recent FDA update that came shortly after the end of the quarter, which I'll discuss a little later.

The U.S. rollout of our next-generation Genesys HTA System for the treatment of abnormal uterine bleeding had another strong quarter, delivering double-digit growth and expanding our market share. We continue to believe that the significantly enhanced user interface and ease of operation will enable the business to grow its share of the $400 million worldwide endometrial ablation market.

In neuromodulation, we achieved an outstanding 16% growth, taking substantial share in both the U.S. and internationally. We believe this strong growth was driven by physicians and patients recognizing the clinical outcomes afforded by our products and services.

We launched the Clik Anchor system internationally in May and are excited to share the benefits of our novel anchoring technology with international physician community. We expect continued strength in the back half of the year as we approach a full year of sales with our expanded product portfolio. We'll also expect further market share gains as we focus on improving our sales execution strategies.

Let me finish with some overall perspective on the quarter. What we liked, what we didn't like and some hot topics for takeaways. As usual, I'll start with what we liked. Number one and most importantly, we like the progress we've made in pursuit of our POWER strategy.

I'll review this for you now, starting with the P, which represents prepare our people. In recent months, we've taken significant steps to prepare our future leaders, including graduating the 78th member in honorable class at our Boston Scientific Top Gun leadership academy and selecting a new group of emerging executives for the class of 2011. Almost 2/3 of the graduates have received promotions just in the last year. We have aggressively and purposely improved our diversity inclusion through actions such as the creation of an executive diversity and inclusion council, the development of divisional diversity action plans and the expansion of our close the gap coalition effort to address disparities in cardiovascular care for the underserved patient populations of women, African-Americans and Hispanic Latino Americans.

We're extremely aggressive in hiring and developing plans to support our emerging market strategy. In CRV, we've also made important changes to our organizational and leadership structure, appointing new divisional presidents in each of our major CRV business units. These changes are part of a planned evolution for CRV in creating a more dedicated business focus and preparing the next generation of senior executives.

The O in POWER stands for optimize the company. At our Investor Day last November, we laid out several significant near-term cost reduction opportunities, many of which related to optimization. The integration of CRM and CB into a unified CRV is largely complete. The remaining tasks are on track, and the related savings are ahead of plan.

Through project transformation, our efforts have derived $200 million in productivity and efficiency within R&D. We now have a consistent global approach to product development, target standard costing and an annual cost improvement process based on our very successful Boston Scientific VIP program.

Our Plant Network Optimization program continues to make good progress. We have doubled the size of our operations in Costa Rica, and product transitions are on track and clearly [ph] reductions at only 12 manufacturing sites.

We're now implementing Kiva robots to automate our 550,000 square foot main distribution center in Quincy, Massachusetts. As we announced early today, we've also included the initial planning phase of our zero-based budgeting initiative. And components of our emerging market initiative allow us to move into the execution phase through our 2011 restructuring program. I'll provide more details on this in our hot topic section.

The W of the POWER strategy stands for win global market share. Toward that goal, we've been investing $30 million to $40 million this year in emerging markets, primarily India, China and Brazil. Our investments in people and infrastructure are proceeding rapidly, and we're on target to meet our hiring goals for the year, with more than 100 employees already hired in the first half of 2011 and strong double-digit revenue growth in both India and China.

This quarter, we plan to open an R&D facility in Shanghai and move into our new India country headquarters in Delhi. In all of our emerging markets, we're actively building our brand and maintaining a strong cadence of new product approvals and launches, such as the recent and important registration and anticipated quarter 4 launch of PROMUS Element in China.

Yesterday, we announced our intention to invest an additional $150 million in China over the next 5 years. This investment will be used to develop a local hold your own foreign entity manufacturing operation, which will enables us to access more of the Chinese market and to build a world-class physician training center. We also plan to increase our headcount in China to more than 1,200 employees, including an increase in our sales force to approximately 700 people in an effort to accelerate the expansion of our commercial footprint there.

By leveraging our emerging market opportunities, we expect to fuel growth, win global market share, gain access to global talent and bring our less-invasive therapies to more patients worldwide. Longer term, the products we design and develop in China may in fact reach other Boston Scientific global markets.

Now let's move on to the E in POWER, which stands for expand our sales and marketing focus. We're investing in re-shifting resources to businesses and geographies with higher opportunities for growth. As well as from more traditional marketing channels to areas such as digital media. We have deployed 2,500 iPads to increase the productivity of our sales reps and proprietary Boston Scientific apps, such as patient medical records to remotely access implant information, CRM device spot check to compare product specifications, iTrial dashboard to view clinical trial metrics and demo apps for products including the ION stent, the WallFlex stent and the Journey guidewire, as they're already available or in the works.

We're also evolving our cardiovascular service line to maximize the value of our combined CRV groups to patients, clinicians and economic customers. This means developing new sales approaches, structures and tools that leverage our full line of products to make this uniquely competitive. In addition to programs like CrossCare, we're expanding our value proposition in other ways, such as sharing our supply chain expertise with customers and helping to provide expanded patient advocacy, education and awareness to optimize patient care. We are also evaluating opportunities to partner or cross-sell to third parties to further expand the breadth of our capabilities and product offerings.

The R in POWER calls for us to realign our business portfolio. The core element of this plan is our 12 priority growth initiatives designed to enable long-term sustainable revenue growth. We continue to make excellent progress, with 6 acquisitions made in the past 9 months, as well as a number of internal projects with these targeted areas, including in endoscopic pulmonary intervention, we're progressing well with the integration of commercial efforts of Asthmatx and recently received, as already noted, 2 positive reimbursement decisions in the U.S. for the Alair Bronchial Thermoplasty System.

The structural heart, we expect to begin enrollment of the REPRISE trial to gain CE Mark for Sadra's Lotus Valve in the fourth quarter of this year.

In our atrial fibrillation business, the WATCHMAN Left Atrial Appendage Closure Device continues to grow its case volume outside the U.S., remains on plan for U.S. patient enrollments in the PREVAIL study, which we'll use together with the PROTECT-AF trial data to support future FDA approval. We also have completed the limited launch of our Blazer Open Irrigated Catheter in Europe and have 5 other internally approved AFib-focused projects underway.

In peripheral vascular disease, our TRUEPATH intraluminal CTO device should begin a limited market release a little later this year. And our off-road re-entry CTO device is on track for an o U.S. launch by year end, with U.S. trial enrollment expected to begin in the first half of 2012.

In AMT, we are very close to enrolling the first patient in the NECTAR-AF trial in Europe, which will evaluate our unique approach to vagal nerve stimulation to improve heart function in patients who are currently not candidates for heart failure device therapy.

In hypertension, we're focusing on proprietary technology for the interventional medical device management of patients with drug refractory hypertension, and plan to commence the first of many trials in 2012.

And in deep brain stimulation, the integration of Intellect's operations is complete. Our efforts to integrate their DBS technologies are progressing on track, including progress on our Parkinson's disease program in Germany.

Innovation is alive and well at Boston Scientific. In fact, Forbes Magazine just recognized that by naming us as one of the world's 100 most innovative companies. Of major medical device companies, only Stryker joined us on the list.

Moving on to like number two, we like the continued improvement in our balance sheet strength and capital structure. In the quarter, we pre paid the remaining $750 million of our term loan, which brought our gross debt to a targeted level of $4.2 billion, with our next payment not due until 2014. We feel a little like the family that made that final mortgage payment.

Our relentless focus on aggressively prepaying debt has been largely facilitated by our consistently strong free cash flow. Our efforts have not gone unnoticed by the credit rating agencies. In the quarter, Moody's moved us to positive outlook, bringing us to just one action step from investment grade. More importantly, last week, Fitch upgraded us to BBB-, which means that we now have investment grade status with 2 of the 3 major credit agencies.

Going forward, we expect our continued strong $100 million per month free cash flow to provide us with the flexibility and capacity to strike a balance between bolt-on acquisitions within our 12 priority growth initiatives and other internal investments and returning cash to shareholders.

To that point, we were very pleased to announce this morning that our board of directors has approved a new to plan to buy back as much as $1 billion in our common stock over the next 5 years. This is in addition to approximately 37 million shares remaining under a previous share repurchase program. At yesterday's closing stock price, these combined programs would allow us to buy back more than 10% of our company.

Number three, we like the recent positive developments in our DES franchise. You might consider the most obvious piece of good news to be J&J's decision to exit the DES market. I'll address that shortly as a hot topic. But I would argue an important event in the quarter was our U.S. launch of the platinum chromium ION stent and the resulting share implications. The increase in our U.S. DES market share from 46% in quarter one to 51% exiting quarter 2 is a significantly -- is primarily attributable to the successful start of the ION launch.

We picked up 4 percentage points in our paclitaxel share. And our paclitaxel/everolimus mix is now the most favorable that we have experienced in more than 18 months. You might assume the share gain came as a complete surprise. But this is something we have baked into our plan well before the launch. It has played out much as we expected, and the shift alignment has nicely contributed to improve gross margins and operating income, albeit somewhat offset by ASP pressure. In addition if the previously mentioned, TUXEDO study delivers the desired result, TAXUS Element and ION may well become the desired stent of choice in a very large and growing diabetic population.

Physician feedback during the launch has been exceptionally positive so far. It closely mirrors the response from international physicians during the launch of our Element series outside the domestic market. The positive market reaction bodes well for anticipated U.S. launch of PROMUS Element next year. We truly believe the platinum chromium platform sets a new standard for DES performance.

We expect that our 2-drug strategy, delivered on this advanced third-generation platform, will allow us to maintain our global DES leadership into the foreseeable future and bridge us to our bioerodable synergy platform, which is in currently in clinical trials.

Number four, we like the fact that we continue to reduce the litigation risks facing the company. We have significantly decreased the volume of litigation disputes with Johnson & Johnson over the past 2 years. We've had some recent favorable developments in some of the matters that remain. In May, a jury awarded us $19.5 million in damages for Johnson & Johnson's willful infringement of our Jang patent by the sale of the CYPHER 2.25 millimeter stent. We're seeking additional damages in our first trial motions. In June, the U.S. Court of Appeals for the Federal Circuit affirmed a finding that the right patents that Johnson & Johnson asserted against our PROMUS coronary stent franchise were invalid.

We also received good news concerning 2 government investigations involving our CRM group. The first relates to a previously disclosed criminal investigation by the U.S. Attorney's office here in Boston into the events surrounding our March 2010 iCDN CRT-D device ship hold and product removal actions. The U.S. Attorney's office informed us that it is discontinuing that investigation.

A second bit of good news relates to an investigation that was initiated in 2008 by the U.S. Attorney's office in Maryland concerning payments made to physicians who performed valuable training services for our CRM sales representatives. The U.S. Attorney's office for the district of Maryland advised that it is also discontinuing that investigation.

Though we still have litigation challenges. We believe our exposure is far less problematic now than it has been at some time, and things are moving in the right direction. We will continue to run our business and manage the litigation in an effort to further minimize future risks. But in the meantime, litigation risk has improved dramatically.

Dislikes. Turning to dislikes, the first in our continued decline -- the first is the continued decline of the U.S. defib market. During the second quarter, we saw some further softening in implant volumes in the U.S. market. There are a number of factors in play here, including physician reaction to the JAMA article and other negative study results and media articles, the DOJ investigation and local inquiries into the ICD implant appropriateness of use.

However, this is only part of the story. Based on our discussions with physicians and hospitals, we see that internal audits mandated by their senior leadership are significantly influencing the volumes at many accounts. With the increase in hospital consolidations and the growing focus on procurement and inventory efficiencies, many facilities are refusing to hold pay for the large device inventories. Additionally, the alignment of electrophysiologists with hospitals and hospital systems continues to grow stronger as independent practices turn increasingly to hospital-owned practices where the EP is an employed and not an operating partner.

These long-term trends go beyond the short-term impact of a couple of unfavorable stories or media stories. Adding these factors to the mix would lead us to believe the recovery will take a little longer than originally foreseen. We expect the worldwide CRM market to show slightly negative growth in the near term and then return to modest growth in the low single digits within the next couple of years.

The good news is that our U.S. defib share remained stable sequentially. We are also planning for FDA approval of our next-generation ENERGEN, PUNCTUA and INCEPTA models late this year, which will support our growth into 2012.

Number two in our dislikes is the continued weakness in elective procedures. We've seen this across nearly all businesses, and it's a trend that has now persistent for more than a year. Earlier this year, we updated findings from a major internal study of procedure volume changes in our served markets with a focus on elective versus nonelective procedures. The research confirmed the decline in procedural volume growth rates would generally reflect the current economic environment. We continue to monitor the recovery of procedural volumes with internal data and external market surveys.

Our operating plan assumes low to mid-single digit procedure growth, but we are optimistic that a modest recovery will emerge in the near term as built-up demand for procedures begins to unwind. However, any recovery will be moderated by lingering high unemployment rates; higher out-of-pocket expenses for insured patients, which may encourage them to delay care; an ongoing trend towards physician subspecialty employment by hospitals, which is expected to approach 60% by 2012; and a shift in procedures from inpatient to outpatient settings.

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

Number three is the ongoing pricing pressure we're seeing in many of our key markets. As part of our research on procedure volumes, we collected data that validates these pricing challenges. Evidence points to the increasing influence of economic bars in the U.S. and European hospitals, who have a sharper focus on vendor management and cost containment.

Long-term trends toward physician employment with hospitals and greater emphasis on health technology assessments have also impacted current pricing as well as our ability to secure premium prices for new products. Price pressure has been a problem for some time now, and we expect it to continue to impact our margins in the next year and continue to be one of our biggest challenges. What will set us apart in this area is our ability to offer highly differentiated products that demonstrate clear advantages through clinical data that bring value to physicians, patients and payers.

Dislike number 4 relates to the recent FDA update on the use of urogynecological surgical mesh for pelvic organ prolapse. On July 15, the FDA issued a communication that included a revision to the 2008 public health notice, updating clinicians and patients on the complications related to surgical mesh for pelvic organ prolapse and stress urinary incontinence. Based on their review of the available literature and adverse events reported to the FDA, they believe there is not sufficient clinical evidence versus traditional surgeries that do not use mesh. Furthermore, the FDA believes that the use of mesh introduces additional complications.

The communication also states that in September, they will hold an FDA advisory meeting in order to discuss their findings with outside experts. In this meeting, they will seek opinions on the type of clinical data that may be required to better assess the risk and benefits and possible regulatory changes for these products. The FDA continues to evaluate the effects of using surgical mesh for the treatment of stress urinary incontinence and will report those findings at a later date.

Since 2008, Boston Scientific Urology and Women's Health has been aware that FDA has had these concerns. Beginning in December 2010, we have had several discussions with the FDA on this matter. In April of this year, we had a face-to-face meeting with the FDA, in which 2 of our key opinion leaders educated the FDA on our products, treatment options and the risk/benefit profile. We have also been working with our mesh manufacturers throughout the med to prepare for the upcoming advisory meeting in September. We and the physicians who use mesh strongly believe that these products are a valuable tool to treat patients with pelvic floor disorders and stress urinary incontinence.

Let me turn now to hot topics. The first hot topic I'd like to address, the 2011 restructuring program that we announced today. Like most companies in our industry, Boston Scientific is facing a number of challenges and evolving market dynamics, many of which have been addressed today. In response to these challenges and to further position the company for long-term growth, we introduced the POWER strategy during our Investor Day last November.

POWER is the foundation around which all of our goals and objectives are based, and is designed to position us for continued innovation, future growth and increased shareholder value. In support of the POWER strategy and specific to the O for optimize company, we have identified opportunities to become more efficient, productive and competitive. Today, we announced details of our 2011 restructuring program designed to help achieve these goals while further supporting new investments and increasing shareholder value.

Key activities on the program include the company's zero-based budgeting initiative and components of the emerging markets initiative. The program as a whole is intended to drive long-term competitive advantage and enable us to accelerate innovation of technologies that save and enhance lives.

Under the restructuring program, we plan to expand our ability to deliver best-in-class global shared services, particularly in emerging markets. This will enable us to grow our global commercial presence and take advantage of many cost-reducing and productivity-enhancing opportunities. In addition, we are undertaking efforts to streamline various corporate functions in international regions to increase productivity and align corporate resources to key business strategies.

It's clear that we are facing an evolving industry landscape being reshaped by a number of external factors. To remain competitive and maintain the right level of resources, we're taking the necessary steps to reduce our cost, optimize our processes and enhance productivity. Through the 2011 restructuring program, we are practically managing this change to ensure we have the proper infrastructure to support our size and anticipated growth.

This program will also better prepare us to grow in a rapidly expanding international markets by increasing our footprint and leveraging global talent. There are those who believe our expense ratios are already low or lowest relative to our competitors. On the contrary, we believe that in the world we're heading into, their expenses will prove to be too high, and we are correctly at the leading edge of the sort, but not that at the fabled bleeding edge.

As the last hot topic, I'd like to address J&J's decision to exit the DES market at the end of 2011. For several years now, we have all followed J&J's difficult times in the DES market, quality issues declining market share, layoff setbacks with its needle program and the general lack of a pipeline.

Given all that, their decision on CYPHER in total still took us by surprise. Obviously, we're excited about the potential upside, but frankly, we don't anticipate much benefit this year since the remaining businesses with a loyal base of customers who likely won't transition products until forced to.

Current estimates of the global CYPHER stent business are in the $200 million range for 2012, and some have predicted Boston Scientific could capture as much as 2/3 of that business. I'm not willing to validate such a prediction, but I do know the following facts: We have the leading Olimus stent in PROMUS; we have launched our third-generation paclitaxel platform in ION, which has enjoyed good early success; and we expect to launch our third-generation everolimus element platform, PROMUS Element, earlier than mid 2012. We believe these products will serve us very well in attempting to capture the lion's share of the DES business left on the table by J&J in addition to having striking delivery and performance benefits to those combatants remaining.

A more difficult factor to assess in the J&J story is their $400 million segment of non-DES interventional cardiology products, which includes bare metal stents, guidewires, balloons and diagnostics. This segment suddenly becomes more vulnerable to competition once we remove DES from their Cath Lab portfolio. However, we expect it to be much tougher to take share here since J&J has some strong products and will continue to have a sales force focused on that area.

Overall for Boston Scientific, it's a rare opportunity and frankly a rare gift. We assure you that we are taking steps needed to maximize the share of this business that will come our way.

In closing, we believe that we've shown great progress in continuing the execution of our POWER business strategy. Among other things, we have aggressively reduced our debt to target capital structure levels and regained our investment grade profile. We've already announced 6 new acquisitions, and our improved balance sheet will allow us to continue to pursue appropriate acquisitions in our priority growth areas. We will without question return value to shareholders through share repurchases. We have announced a restructuring program designed to strengthen operational effectiveness, achieve substantial cost savings and make Boston Scientific a stronger global competitor. We have and will aggressively reinvest in double-digit growth emerging markets.

We have talked about Boston Scientific being powered for growth, now we are proving it.

That's it for my comments. With the amount of information provided today, I'm sure there will be no lack of questions. So with that, I'll turn it back over to Sean, who will moderate the Q&A.

Sean Wirtjes

Thanks, Ray. Marla, let's open it up to questions. In order to enable us to take as many questions as possible in the time we have left, please limit yourself to one question and a related follow-up. Again, I'll remind you that Ray and Jeff will be joined during the Q&A session by Sam and several of our business presidents, as well as Doctor Dawkins and Doctor Stein. Marla, please go ahead.

Question-and-Answer Session


[Operator Instructions] And we'll go to the line of Bob Hopkins with Bank of America.

Robert Hopkins

First question, I just want to ask a clarifying question on the guidance. It looks like for the back half, you're suggesting high-$0.20 earnings power or annualized in the high 50s. And so I guess my question is one, is that right? And two, is that the run rate that we should be thinking about as we consider 2012 models? And were there any kind of onetime issues, positive or negative, in that back half guidance? And then finally, does that back half guidance assume a 22% tax rate, or do you assume that you continue to get benefit from these discrete items?

Jeffrey Capello

So Bob, let me go back. This is Jeff. Let me go back through kind of the range for guidance for the back half of the year. So we've come out with our guidance range for the third quarter, is $0.11 to $0.14, and our guidance for the fourth quarter is $0.14 to $0.17. So you take the midpoint of both those, you get kind of $0.13 and $0.16-ish. That's the way to think about it. From a comparative perspective, that has a tax rate of roughly 21% in for the third quarter and 23%-ish for the fourth quarter.

J. Elliott

To get you to 18 overall.

Jeffrey Capello

18 overall for the year. So I mean, the dynamic is kind of hard to understand as we had that number of kind of favorable one-time things rolled through the first and second quarters of this year, which I laid out in the script. We had roughly $0.08 plus of favorability in the first quarter and another $0.03 or $0.04 in the second quarter. So there is first half and second half dynamic. The other challenge that people need to be aware of is that as you look at kind of the comparison from a year-over-year perspective, we had a lot of favorability from a tax perspective in the back half of last year, particularly the third and fourth quarter. So you got to be careful when you do these comparisons.


Our next question will go to the line of Mike Weinstein with JPMorgan.

Michael Weinstein - JP Morgan Chase & Co

A follow-up here for Bob. I think his question is he's trying to get at the earnings power of the company, maybe on a clean basis for the back half of the year going into 2012. So should we think about the earnings power of Boston Scientific today something around $0.60, or is it higher than that?

Jeffrey Capello

So I understood his question. He's looking for a guide through 2012, Mike. Thanks for the heads up, but we're not going to get that 2012 guidance. But let me go over a couple of facts that I think that can help you from another direction. What's going to be different about next year than this year -- let me just reiterate some of the things that we think are going to be different, maybe that will help you a little bit. At the Investor Day, we announced cost savings initiatives to save somewhere between $650 million to $750 million. And they would start to kind of kick in, in '12 and '13. So as you look at that list, and this is a roundabout way to kind of answer both your questions, but a big piece of it was PROMUS Element. So PROMUS Element was geared to generate about $200 million in benefits. And as Ray said, we're at or ahead of schedule for that. So that was targeted to be kind of a mid-2012 event, so we're ahead of that. So we expect that to achieve, do better than that. You've got VIP savings initiatives in manufacturing, which we continue to do pretty well on. This new restructuring program of a couple of hundred million dollars by the end of '13, we'll get a fair piece of that in 2012. And then you get the plant network optimization program, roughly $100 million of the savings of which will kick in. So we've got a number of kind of tailwinds that are going to hit us and help us as we kind of move our way through '12. In addition of the top line, as Ray said, and I think some of the analysts have already taken a shot at it, we estimate, as Ray had said, that the Cordis business for '12, if everything was consistent, would be about $600 million split between $200 million in DES and $400 million other interventional cardiology. That's a piece that was not included in our Investor Day. So that's upside. We're going to go aggressively at that. Certainly, the CRM market is softer than we planned, but I think the 2 of those, I would believe that the Cordis would kind of offset that. And I think that's kind of -- that would be our perspective. We haven't finished all the work yet. Additionally, we have a number of things that should start to kick in '12 from a top line perspective. Some of the acquisitions, predominantly Atritech, we expect to contribute at a higher rate, particularly in Europe. As well as Asthmatx, we'll start to see more growth from that acquisition. And then finally, the emerging markets. We are investing even more in the emerging markets than we thought in the back half, and we're enjoying pretty good success. So we start to see that kick in. And then the final factor I should probably kind of highlight, we thought we would have Progeny and INGENIO out, our new tachy devices and our new Brady platform at the end of this year. We're slightly delayed, but we're pretty confident we'll get them out early next year. That makes a big difference for our CRM business. Particularly on INGENIO, the Brady side, where we haven't had a new platform for over 10 years. So those are some factors that will increase our earnings power. But I guess the other factor is the share repurchase. None of the Investor Day estimates included any utilization of cash. And I've been clear that about that for the last year and a half. This company generates a lot of cash, and we'll be generating $100 million per month for the back of the year. We'll be sitting, whether we do nothing, we'll be sitting close to $700 million to $800 million of cash.

J. Elliott

And I think too, Mike, I mean, one of the questions Jeff and I get is particularly in the light of a softening CRM market, do you guys still believe you can grow at 0% to 3% in the near term while you're driving down cost. So we've gone down the checklist, and Jeff gave you a shortlist there, of if you use CRM as a negative, can you still do 0% to 3%? And we're still confident in everything we said at the Investor Day conference because frankly, even if CRM is softer, and it is, Cordis I think not only equals it, but I think probably more than offsets it. So therefore, if we execute on everything else and Cordis and CRM net each other or better, we're still back believing we can deliver that program.


Our next question will go to the line of Glenn Novarro with RBC Capital Markets.

Glenn Novarro - RBC Capital Markets, LLC

Ray, question for you. This is one of the first times you've had a chance to speak publicly since you announced your retirement several months ago. Stock's down 10% since that retirement. I think most of The Street looked at your retirement and said there must be something wrong with the turnaround, something must be failing, there must be another shoe to drop. And yet, based on these results, the share buyback announcement, it looks like things are still very much on track. I know the end markets are still tough, but is there anything out there that's particularly worrisome to you, or are things really on track and that's why you're leaving? And then as a follow-up, any update on the new CEO search?

J. Elliott

I'm leaving because I'm old, Glenn. No, there's nothing. There is no shoe to drop. Health's fine, business is in great shape. I'm doing what I came here to do. It's a great team. It's a great team here. It's not my plan, it's their plan. There is not now and never has been anything to read into my departure. The CEO search process is going well and going appropriately so, I understand the need of people to try and think facialize and read into events, but it's a complete waste of time. There is no story there other than the fact that the turnaround -- we're all happy about this, that the turnaround is exceeding our, expectations particularly I think coming a lot earlier than we may have expected.


And our next question will go to the line of Rick Wise with Leerink Swann.

Frederick Wise - Leerink Swann LLC

Two operational questions. First, just if you could help us think about the CRM range you've given us for the next quarter, maybe the factors driving the high end and low end, and just help us in perspective there. Is it all market at one end or the other? And maybe, Ray, if you could expand on the implications for the CrossCare program. If you hit that 200 account goal you're talking about, and I assume you have more aggressive goals for 2012 and beyond. Does that mean all things equal, higher sales growth rates, better pricing, better margins? What's the impact there?

J. Elliott

Good. Rick, I think what I'll do is I'll have Jeff respond to the first one because we'll give you a little bit of a layout on sort of worldwide U.S., o U.S., CRM or defib, I think, is more of the focus area. And we'll talk a bit about that. And then Hank is here with me, and while I could do an adequate job, he can do a better one on the CrossCare to answer that part. So we'll start with Jeff.

Jeffrey Capello

So, Rick, from a defib perspective for next quarter, if you look at our guidance, kind of a year-over-year basis, the low end of the range would present a situation where we have contraction of the upper single digits -- sorry, that's the high end, upper single digits, the low end would be contraction in the low double digits. And I think as we come out of the second quarter and kind of look at what's happening or we believe to be happening, we're just not sure in terms of the pressures, the JAMA, the rack audits and so on that we talked about, how much further pressure but that might put. So I think -- I like to think we've been conservative by saying kind of down upper single digit at the high end, down lower double digit at the low end. We won't really know until we see Medtronic's results, and I think it's going to take another quarter or 2 to kind of see and wait and to have things settle down. We're going to see how much of this is sustainable versus non-sustainable. It does not assume that we're losing a lot of share in the U.S. We didn't lose much of any share per our calculations in the second quarter, so we think it's certainly a market softness. And as one of our competitors came out with last week, the market has softened a little, clearly in the second quarter. And how much and how sustainable it will be or how long it will take to recover, that will just remain to be seen.

William Kucheman

And Rick, this is Hank. In terms of CrossCare performance, we're on track, as Ray alluded to earlier, to hit our aspirational goal of 200 by year end. I believe that momentum will continue into '12. And what we see from the data that I get is that our revenue market share within those accounts versus non-CrossCare accounts is advantaged higher, as well as our margins. So overall, it's a pretty good combination for us. The commercial team is executing exceptionally well. And I think the strength of the cardiovascular continuum of care line that we have is working to our advantage today.


Next, we'll go to the line of David Lewis with Morgan Stanley.

David Lewis - Morgan Stanley

Jeff, just on the $150 million board-approved EM expansion, how does that differ from the emerging market spending you talked about 6 months ago? And I wonder if you could share with us when you think the emerging markets businesses can reach a level of corporate profitability. And then I had one follow-up.

Jeffrey Capello

Okay, sure. So the $150 million is additive. So the $30 million to $40 million we talked about at Investor Day, and we're in the middle of executing now, was designed for us to significantly increase our commercial presence, feed on The Street, if you will. The $150 million is designed to fund both a new manufacturing facility in China as well as a new customer center. And you can think about that as a program. It's going to take at least 3 or 4 years to build out that facility, so that will kind of -- a vast majority of that will kind of occur kind of fairly linearly over the next 3 to 4 years. And in terms of return on the emerging markets, I mean, we enjoyed over 20% growth in India, China and Brazil this quarter. And we see that situation as one in which we're just getting started. You'll recall that our market share in India is only 3% or 4%, and PROMUS Element got approved a quarter ago. It just takes some time to get approval from a large customer perspective and get pricing organized. So we are ramping up very quickly, and I think that's going to be one of the upsides that The Street's going to see for next year. You're just going to begin to see the benefit of that as we exit this year. And really, sales will start to ramp next year.

J. Elliott

And then David, I would add onto that, although we don't send you guys our strat plan obviously, but if you could see our strategic plan, you would note that the sales for China are substantially higher in our strategic plan than the roughly $400 million aspirational goal that we gave you at the time of the investor. So while the $150 million, as Jeff pointed out, is correctly incremental. There's a lot of incremental sales in our plan is well. And the final comment I would make is as much as we try to keep from losing money in India and China by investing heavily upfront, we're apparently incapable of doing that, because our returns today, not tomorrow, but today, on China and India are very, very attractive despite the size of our incoming SG&A investments. Because the sales are growing so rapidly at attractive margins, it's offsetting the early investment.

David Lewis - Morgan Stanley

Right, that's very clear. And then I had one more quick question. You said it twice, so it was hard to miss, so it's very clear that you believe PROMUS Element's going to come earlier, and I just think in light of PROMUS Element coming earlier than your prior plan and the implications of J&J, how should we think about pricing for DES, which got a little worse this quarter, nothing to write home about, but as you head into 2012, is there reason to believe that these 2 events that we could see pricing get better faster than you initially expected?

J. Elliott

Yes. I wish you were. And Hank can jump in on the end of this if he wants to. But I wish you were right, but I don't think that's the case. For us, this is a share gain game in the near term with very, very attractive margins in a marketplace that isn't growing because of price. If you look at J&J's pricing relative to the rest of us, particularly relevant to Abbott and us, they were not a major price cutter because they had small share with very loyal physicians. And so I don't it changing very much. What I see changing is us taking share and having the very, very attractive profit that comes with that. Hank, did you want to add any additional color?

William Kucheman

No. I agree, I think the price pressure that's in play today will continue at least for the foreseeable future regardless of the factors that you just mentioned.


Next, we'll go to the line of Larry Biegelsen with Wells Fargo.

Larry Biegelsen - Wells Fargo Securities, LLC

On the CRM market, if we could talk about pacemakers for a second. What's going on in the U.S. pacemaker market and internationally? Your results internationally were very strong. Is that sustainable? But your results in the U.S. were a little weak. And then I just had one follow up.

J. Elliott

Jeff, do you want to take that?

Jeffrey Capello

Yes, I think what's happening is we see, similar to on the tachy side, that the pacer side's getting hit by a lot of the same dynamics that are hitting on the tachy side. So certainly, we don't appear to be losing a lot of share per our calculation. We'll have to see when Medtronic comes out, but I think it's more of a general market softness.

J. Elliott

And Europe just got new product launches, so that's undoubtedly affecting, along with Japan, the international numbers. But I doubt that the marketplace was there. In fact, we're fairly sure the marketplaces aren't particularly any better, but obviously, we get the benefit of new products releases there in Intergen and PUNCTUA, that we don't have currently in the U.S., would be the other factor I would add.

Larry Biegelsen - Wells Fargo Securities, LLC

So there was nothing one-time in the quarter in your international pacemaker business?

J. Elliott

No, nothing at all.

Larry Biegelsen - Wells Fargo Securities, LLC

And then if I look at the international ICD market. I mean, if I'm doing the math right, so far, it looks like that market has slowed a little bit to low single digits. Is that accurate, and is there anything specific there?

Jeffrey Capello

Yes. Well, I think that's a good observation. I mean, we track the markets pretty carefully. And what we saw in the second quarter, and once again, it's a preliminary finding because we haven't seen St. Jude yet. We believe in -- sorry, Medtronic, thank you. We believe there's been a bit of slowdown, particularly in Europe, a couple of hundred basis point slowdown in the growth of that market. And so we'll have to wait and see what Medtronic releases to kind of confirm that. And then I think it'll take a couple of quarters to prove that whether that's a trend or whether it's just a one-time thing in terms of quarters.


And we have a question from Kristen Stewart with Deutsche Bank.

Kristen Stewart - Deutsche Bank AG

Just wanted to clarify. Just the constant currency revenue guidance, it looks like you guys brought that down from flat to down 3 to now down 1 to down 4. Is that just simply CRM market, maybe a little worse than what you're thinking?

Jeffrey Capello

Kristen, it's Jeff. That's the biggest part of it. We came into the year thinking the CRM market would be challenging. And I think we now all know that it's going to be more challenging. So the biggest delta between those 2 is the CRM. And as Ray had said, from a quarter's perspective, we're going to aggressively pursue both the DES and the other IC component of that, but we think because of contracts and inventory level, it's going to take us a little while to kind of free up some of that share. That could be potential upside.

Kristen Stewart - Deutsche Bank AG

Yes, but it's not like a further deterioration in pricing relative to where it was, it's mainly just kind of volume-driven CRM change?

Jeffrey Capello

That's correct. And the pricing is more or less tracking as we anticipated.

Kristen Stewart - Deutsche Bank AG

Okay. Then just the restructuring programs, you guys talked a lot about them last year. And just kind of the savings you had mentioned earlier in the call, just the $650 million to $750 million. Is the -- how should we think that the restructuring savings you announced today, is that additive to the $650 million to $750 million? Because some of them seems to be a lot of what you talked about at the Investor Day with zero-based budgeting. And then obviously, the incremental investment in China, is that, detractions from those savings? Could you just kind of maybe put all that into context, because it's a lot of moving parts.

Jeffrey Capello

So just to reiterate, on your first comment, yes. We laid out the $650 million to $750 million, there was $100 million to $200 million of ZBB EMI included within that. That's exactly what it is. It's us executing -- beginning to execute on a segment of that $650 million to $750 million, which is going to start in earnest here this quarter, in the third quarter, and play out over the next couple of years. But that is inclusive, but it's incremental upside, as we look at next year, clearly. So I think it kind of relates back to kind of the questions that Mike and Bob had. As you look at next year, you've got $100 million to $200 million of EMI ZBB, which we've just announced. It's $200 million, and that will play out over 2 years. So we haven't really split that between years, but there'll be a good portion next year. You've got PROMUS Element, which is $200 million, which a good piece of that will be next year. And then you've got -- in combination, you've got the P&L effort, which have always stated, it's another $100 million. So you've got, depending on how you do the math, it could be up around $300 million plus of upside from a tailwind perspective. It wasn't in 2011, so if you do that on a percent basis, that's $0.15. We're being more specific on that.

J. Elliott

And Kristen, on the -- it's Ray. On the $150 million, and it's similar to what I was saying to David Lewis, that there's no change in our operating income or EPS aspirational goals as presented at the Investor Day because what you're seeing is the $150 million, which is incremental on China, versus the $30 million to $40 million we've been doing now to create a plant position and training center, which then creates the opportunity to be a local player. And it has substantial benefits on opportunity to get at the marketplace's reimbursement levels and so on. So what you're not seeing is the incremental sales in our strategic plan, the incremental OI to offset the $150 million, thereby getting us back to everything we committed to on the earnings aspirational side at the Investor Day.


We have a question from Tao Levy with Collins Stewart.

Tao Levy - Collins Stewart LLC

I just wanted to ask a couple of questions on actually the U.S. stent business. So I'm just wondering here, what's the feedback from sales regarding why you took share with ION in the quarter? I would've thought most of that business would have already been taken by PROMUS Element. So I was a little surprised to see paclitaxel gain that much share.

William Kucheman

Tao, this is Hank. As all of us who follow this space know, that acute performance, the ability to get to the lesion in and out of procedure without complication, ease of use, are very important attributes in terms of buyer behavior. So what you're finding with ION is that it's a very well-designed stent that delivers well, the radiopacity, the ability to see the stent, is very acute and well-received by physicians. So it's basically an acute performance advantage versus other products on the market today that physicians are responding to.

Tao Levy - Collins Stewart LLC

And in terms of its pricing. Last quarter, I think your pricing was a little bit worse than the market for DES in the U.S., and this quarter is more in line. Did that come out as a slight premium?

William Kucheman

We're pricing that at market.


And we'll go to the line of Brooks West with Piper Jaffray.

Brooks West - Piper Jaffray Companies

Ray, a question on use of capital and kind of the implications for the buyback announced today. Given your well-discussed top line challenges, how should we think about prioritization of use of cash? And then are you seeing opportunities, specifically on the acquisition front, that are still of interest?

J. Elliott

Yes, and I'll let Jeff add to this. I'll give you the short front-end. The answer -- also, I'll start more backwards, the answer is we're busily looking at -- in fact, the board asked this question the other day when we went through the share repurchase. And we took them through all the acquisitions we are looking at, where we're at in stages of them, which divisions it was with and so on. So we're very, very active on the acquisition front. However, the reality is if you look at our growth initiatives, the probable target market size is over $100 million to $400 million. That hasn't changed. There's no monsters out there. We don't do highly dilutive, large acquisitions. So as you look at our ability to create cash and now our lack of need to pay down debt, you're going to have excess capital if you maintain that structure, and we like the structure. So the priority is always growth, provided you can get to the target companies you want and even if you do the sizes as I've described. And secondly on the share buyback, I want to be clear. Our philosophy on share buyback is buying back an undervalued company in order to create shareholder value. So we're not interested in spiking the EPS or spiking the stock or continuing on if at some point it got to be what we believe is fairly valued. It is simply an exercise for us in creating shareholder value as long as it's undervalued, as long as we believe it's undervalued. So the mixture is always going to be that blend of do we have a target? A target's likely $100 million to $400 million, that's priority one because its growth. Is the stock undervalued, and do we have excess capital, yes or no? And then, we will move our cash into the stock. Jeff, I don't know if you want to add any additional.

Jeffrey Capello

Yes, I'd agree with that. And I'd add from the capacity perspective, if you look at the company's capability of generating cash flow, it's been very strong in the past 2 to 3 years. We just haven't had the ability to use any of that capacity because we've had earn outs and litigation settlements. So as we sit here today at the end of the second quarter with a couple of hundred million in cash, if you assume we can generate at least $100 million per month, so that's $300 million per quarter, we could be sitting, at the end of the year, we should be sitting at the end of next year with close to $2 billion worth of cash. And we're not going to sit with $2 billion worth of cash earning 30 basis points. So I think the senior management team is very pleased that the board agreed with our strategy of starting to return some capital directly to shareholders. And we intend to start that as soon as the window opens here in the third quarter next week.

J. Elliott

And the last and final part. As I fundamentally believe, we have too many shares outstanding. And again, I wouldn't use capital to buy back the company if the company was fairly valued. But if it's undervalued, and by the way, you have too many shares outstanding, in our case primarily created from the dilution of the Guidant acquisition. This is a very action for us to take as long as we continue to put growth and acquisitions as the #1 priority when available.

Jeffrey Capello

And the nice thing about the capacity is we've got ample capacity to do both. That capacity's going to execute kind of a normalized share repurchase program and do a bolt-on acquisition and still have cash left over to protect yourselves against any contingent event. So we're going to have a really balanced, I think, well-run program here going forward.


And we'll go to the line of Charles Chon with Stifel.

Charles Chon - Stifel, Nicolaus & Co., Inc.

I was just wondering if we could dig a little more on Japan. First, it seems just from the commentary that the business was largely unaffected during the quarter despite everything that happened there following the disaster. What exactly is going on there? You mentioned the Fukuda relationship that's going very well, how much of the performance is really a result of that in terms of getting off the ground, offsetting any potential disruptions post-disaster?

J. Elliott

Charles. I'll get it started, and Jeff can jump in, or others as they see fit. So I think that's right. I think we, through some great management over there and really the way our folks structured things, we were certainly less affected. We were affected, but less than others. We did have the benefits of a couple of situations where the local Japanese competitors asked us to help them, so there was some short-term benefit there. Certainly, Fukuda Denshi and the really, really strong relationship that's building there, and their performance has been beneficial. We've certainly had some new products that have helped us along the way. So a lot of good things going on there, would be a starting place to go. Jeff, I don't know if you want to add some things on it.

Jeffrey Capello

Yes. I mean, the only thing I would add from a responsiveness perspective, I think our organization in Japan just done a phenomenal job. Some of our competitors lost manufacturing capacity during the event and actually lost the ability to distribute as well. And our organization has responded quite well. The other benefit that we had within the quarter is the Nobori stent. It did not get released as broadly as we anticipated, so we've got a little bit more of a benefit we thought. That will be little bit more of a challenge in the back half of the year. But I think our Japanese team is executing well. And they are eagerly awaiting the PROMUS Element approval next year to kind of start to kind of get back from the share that we'd given up.

Charles Chon - Stifel, Nicolaus & Co., Inc.

Great. Just one clarification question, Jeff, from your prepared comments. I just want to doublecheck your Japan PCI number. Did you say that there were 50,000 procedures, or 58,000 procedures during the quarter?

Jeffrey Capello



And we'll go to the line of Bruce Nudell with Credit Suisse.

Bruce Nudell

I had one question about LAA and one about the x U.S. ICD market. First on the LAA side, I mean, it really looks like procedural complications are coming down. If you wait long enough, you could probably show superiority. But from the referral basis for the asymptomatic patients who don't get to see an EP, it may be hard to get them to undergo an intervention. For people who go to see an EP for an ablation, the EP is kind of tacitly admitting, "Well, hey this ablation may not work." Could you just comment generally about your sense of how this market will evolve, and what needs to be done with regards to the referral basis? And the second question is looking forward to Medtronic's ICD results x U.S., attributing whatever share that St. Jude might get to quadruple, it looks like it's bounded by like a 2% to 5% CRT-D share shift. Where do you guys think it's going to wind up?

J. Elliott

Okay, so on the first one, we'll give Doctor Stein the chance to get unmuted and give us some conversation back on clinical aspects regarding LAA. And then we'll get to the second question when Ken is done.

Ken Stein

Bruce, so I think we certainly agree with you regarding the advantages of left atrial appendage closure, clear data coming out and data that we hope to confirm with the ALL study on [indiscernible] and secure efficacy with respect to oral anticoagulation. I think your question primarily deals with Earltab [ph]. And I think that all of us understand that there's a need to further educate referring physician, internist, general cardiologists of indications for access [indiscernible] for stroke, lesions with atrial fibrillation. I think fortunately for us, that's not a stone that we have to roll uphill on our own. There are all of these coming out with novel oral anticoagulants as well. There are heavy quality measures around anticoagulation or stroke in atrial fibrillation, Jin's a professional society [indiscernible], et cetera. And I think once patients and referring physicians understand how to identify patients who are at high risk for having a stroke in atrial fibrillation -- and from our point of view, what do we need to make sure folks understand that we're an alternative for patients who are unable to take anti-coagulation, who are unwilling to take anti-coagulation. And I think someone's tried [indiscernible] has tried being on the backs. These are drugs that wilted at clinical trials and thrived and just continue within a couple of years. At that point, I think convincing them that we offer an potential alternative won't be that difficult.

J. Elliott

Good, Ken. And then on the quadripolar side of your question, Bruce, I'll just start with one sentence and then Jeff and Hank and Doctor Stein, if he wishes, can also jump in. At least on the European side, we haven't seen a sort of a material impact. It's been a little bit, but not really in the sense of the kind of framework and numbers you just suggested now. Again, it's relatively early. So we've seen a little bit from it, but really, hardly anything else. Jeff and Hank or others want to add something to that?

Jeffrey Capello

Yes. I would agree with what Ray is saying. We've tried to back in to some of the numbers that St. Jude has been quoting on the CRT-D side, particularly in Europe. And it's difficult to kind of get to those numbers, so we're still working on that. Certainly, when Medtronic comes out, maybe we'll be able to better refine it. We do think that we lost a little bit of share, and perhaps Medtronic lost a little bit of share in kind of maybe 100 basis points apiece, predominantly in Europe in the second quarter. What's very difficult though is we've got Progeny introduced and in we're a limited rollout, and we're starting to ramp up full speed now. So I think some of that share lost on the strength of quadpole but also on timing in terms of us getting Progeny into the market a little later than we thought. But that rollout is going very well, and I think you'll see that kind of come back a little in the second half in terms of share.

William Kucheman

This is Hank. Bruce, the only thing that I would add is that with our current technology, if you recall, we have twice as many pace convectors on the left side of the heart. And if you remember from our last discussion, the election trial data, which was recently published in Europace, demonstrated that our bipolar and devices, with this repositioning, basically successfully avoided re-stem without leave rete positioning more than 95% of the time. So that's very consistent with the claims that are made with quadpole. So we think we have a very effective platform to deal with this. And I don't know if Doctor Stein has anything to add to that or not.

Ken Stein

I have nothing to add. I've got to give you the medical degree at this point, right? I mean, it's a catch-up for them. It gets their performance close to ours. We still think we can do better with quadpole down the road. There's no clinical evidence at this point that, that system has any kind of innovation.


And we'll go to the line of Joanne Wuensch with BMO Capital Markets.

Joanne Wuensch - BMO Capital Markets U.S.

Two things. One, you talked about PROMUS being ahead of schedule. I happen to agree with you, but I'm curious whether or not you can provide us any information regarding conversations you've had with the FDA. And when you say ahead of schedule, how far ahead?

J. Elliott

Thanks for the questions, but we'll have no answers, Joanne. That was great. Two things, no, we wouldn't go further on the date. If there's a time when we can really nail it down for you and we're really comfortable, we will try and do that because it's a material item obviously in our success. And then just as a matter of practice and policy, we would never disclose conversations, good or bad, with the FDA.

Joanne Wuensch - BMO Capital Markets U.S.

Okay. And maybe question you can answer. What's going in neuromodulation? You spoke briefly about some new products and market share gains, but could you elaborate on that?

J. Elliott

Yes, it's all about new products. In fact, they're on a roll, they have 6 of them. They are taking share consistently, at least by our measurement, every month, every quarter. The integration of Intellect, although not on the market because it's DBS, going to help us extend that future along with the new Falcon line, and hopefully some nice DBS outcomes in Germany. So there's a lot of good stuff there. If Michael is still on and can unmute, I would ask him to give you a little more color around my opening.

Michael Phalen

Ray, I would agree with everything that you said. We've got a great deal of market momentum coming off of our latest product launches. The things that we launched at the end of last year were leads that enable the physician to have more flexibility in how they treat the patient. We have regularly been told that our leads are the most durable and usable in the marketplace. And so there's an efficiency gain in the operating room that the physicians are benefiting from. And then this very last quarter, we released a product called the Clik Anchor, which is probably the most intuitive product in the marketplace. It has an audible click that assures the physician that they've locked anchor in place. Lead migration is the #1 cause for revision in our industry. And with this product, we're seeing substantial reduction in the number of lead migrations that we're having. And for the physician, that's just a reoperation that they have to go back for wasting their time. So our physicians are very excited by the thoughtfulness of the products that we're bringing to the market, and that's giving us market momentum and acceptance of the product. So we're very excited with where we stand right now.


We'll go to the line of David Roman with Goldman Sachs.

David Roman - Goldman Sachs Group Inc.

On the call, you were very helpful in giving us some details about kind of what the impact of the CRM market is to kind of the near-term expectations of 0% to 3% revenue growth. I think, Ray, in the past, you talked a little bit about kind of a more like a mid-single growth rate being the new normal for medtech, and Boston Scientific potentially achieving that level. If I look at it very simplistically, if I look at your business mix, sort of 75% revenue in cardiovascular and CRM and that kind of being a flattish number and maybe the rest of the business is growing 10%. I still only get to like a 2% to 3% top line growth rate. And even if I look at it, maybe 90% of revenue in developed markets and 10% in emerging, still kind of coming in that low single-digit range. Can you maybe help me square the difference between that and kind of the 6% to 7% number that you talked about before?

J. Elliott

Yes, I think that's all correct, David. Let me correct you on my quote if you don't mind. What I said is I believe that 6% to 8% growth in sales allows you to become a growth company, and it is the old double digit of yesteryears and presumably attracts higher multiples. I think exactly what you just said is exactly correct. But we have to separate from our Investor Day what we said about near term and longer term. So that math that you just stated gets us exactly to what you just said. So you're bang on correct. But what happens is though, when you add in the acquisitions we've made and the emerging markets numbers we have for years 3 through 5 which you don't have, you end up having -- yes, 2/3 of the business at 0% to 3% you talked about, but you then have a portion of the business growing at 25% to 28%. When you combine the growth in emerging markets and the new acquisitions we've made and builds we're likely to make. So the solving for x that gets us to 6% to 8% growth company, higher multiple, and all that stuff is composed of the early years just as you've described, next couple of years, and the next 3 years just as I've described. That gets you home to 6% to 8% on the top and consistent and substantial double-digit EPS on the bottom.

David Roman - Goldman Sachs Group Inc.

And then if I sort of look at Boston Scientific versus the peer group, it sounds like the implementation of share repurchase programs starts to make your earnings profile look somewhat like what the peer group does with respect to a combination of operational and financial leverage with incremental, sort of just to the bottom line, coming from the restructuring as well as deleveraging on the interest expense line. Is that sort of the right way to look at it?

Jeffrey Capello

So this is Jeff. I would say on the bottom line from EPS growth perspective, probably it makes us looks better in terms of on the percentage increase basis, at least the way that I look at things. If you look at the fact that the end markets appear to be challenging, I think in terms of tailwind, in terms of cost saving initiatives and kind of margin-enhancing opportunities, we probably have, relatively speaking, a longer list of things that we're beginning to implement than our competitors. So in a difficult end market, from an EPS growth perspective, we probably have more growth opportunity percentage-wise.

J. Elliott

Yes. I would agree.


Ladies and gentlemen, our final question will come from the line of Matthew Dodds with Citi Group.

Matthew Dodds - Citigroup Inc

A couple of quick questions. For the amortization expense, the $96 million, is that the new run rate to think about post the write-down in the first quarter?

Jeffrey Capello

Matt, it's Jeff. Yes it is, but it has nothing to do with the write-down because the write-down all happened against goodwill. Really, it is -- some of the intangibles in the Guidant acquisition, now that we're past the 5th year, have dropped off. So that -- it's really the drop off the intangibles.

Matthew Dodds - Citigroup Inc

Okay. Then Just one broader question, Ray. You made some comments on Europe on CRM. When you look broadly at the Europe business, do you get the sense that the market for your products were sequentially tougher from the first quarter because of differing opinions about how Europe did in the second quarter?

J. Elliott

Yes. Given our mix of products, I would say the answer is yes. It's a tougher marketplace over there. And I think that is we're very focused on, as I'm sure our peers and competitors are, on not so much the Greece debt crisis, Portugal and so on, but the implications of who's holding that debt and if they get caught into problems, could that impact the healthcare system. So if you think about Spain being a higher-price market as an example, and the amount of Portugal debt Spain holds, the amount of Greece debt that Portugal holds, there is a sequencing here in socialized governments of healthcare being affected if any chain of events happen. So the answer is yes, and we continue to be very focused on not so much "Europe," but rather the individual countries within Europe and our product positioning and of course, their financial liability.

Jeffrey Capello

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


Thank you. Ladies and gentlemen, this conference will be available for replay after 1 p.m. Eastern Time today through August 14, 2011 at midnight. You may access the AT&T Teleconference playback service at any time by dialing 1 (800) 475-6701 and entering the access code 208854. International participants, please dial 1 (320) 365-3844.

That does conclude our conference for today. Thank you for your participation and for using the AT&T Executive Teleconference Service. You may now disconnect.

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