St. Jude Medical's CEO Discusses Q4 2011 Results - Earnings Call Transcript

 |  About: St. Jude Medical, Inc. (STJ)
by: SA Transcripts


Welcome to St. Jude Medical's Fourth Quarter and Full Year 2011 Earnings Conference Call. Hosting the call today is Dan Starks, Chairman, President and Chief Executive Officer of St. Jude Medical.

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

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

Daniel J. Starks

Thank you, Jennifer. Welcome to the St. Jude Medical Fourth Quarter and Full Year 2011 Earnings Conference Call. With me on the call today are John Heinmiller, Executive Vice President and Chief Financial Officer; Eric Fain, President of our Cardiac Rhythm Management Division; Mike Rousseau, Group President; and Angie Craig, Vice President of Corporate Relations and Human Resources. Our plan this morning is for John Heinmiller to provide his normal review of our financial results for the fourth quarter and full year 2011, and to give sales and earnings guidance both for the first quarter and full year 2012. I will then address several topics and open it up for your questions.

Go ahead, John.

John C. Heinmiller

Thank you, Dan. Sales for the quarter totaled $1,407,000,000, up approximately 4% over the $1,350,000,000 reported in the fourth quarter of last year. Favorable foreign currency translations versus last year's fourth quarter increased this quarter sales by about $18 million. On a constant-currency basis, fourth quarter sales increased approximately 3% versus last year.

For the full year 2011, net sales were $5,612,000,000, up about 9% over 2010. Favorable foreign currency translations versus those used in 2010 increased 2011's net sales by approximately $183 million, resulting in constant-currency sales growth for the year of approximately 5%. On an organic basis, constant-currency sales growth for the full year 2011 was approximately 1%.

During the fourth quarter, we recognized $72 million or $0.22 per share in after-tax special charges, primarily in connection with our previously announced restructuring action initiated during the second quarter to streamline manufacturing within our CRM business, which consists primarily of closing down operations at our location in Sweden, as well as costs associated with our continuing efforts to leverage our sales and sales support organizations. In addition, we recognized $30 million or $0.10 per share in after-tax charges related to the write-down of certain intangible assets which were determined to be impaired.

Finally, during the fourth quarter, we recognized a $9 million after-tax contribution to the St. Jude Medical Foundation. Comments during this call referencing fourth quarter and full year 2011 results, including earnings per share amounts, will be exclusive of these items.

Earnings per share were $0.86 for the fourth quarter of 2011, a 15% increase over adjusted EPS of $0.75 in the fourth quarter of 2010 and above our guidance range of $0.83 to $0.85. For the full year 2011, adjusted earnings per share were $3.28, a 9% increase over adjusted EPS of $3.01 for the full year 2010.

Before we discuss our financial results for 2011 and offer our sales and earnings guidance for 2012, let me provide a few comments about currency exchange rates and the assumptions we are using in our outlook for this year. The 2 main currencies influencing St. Jude Medical's operations are the euro and the yen. For the fourth quarter, the actual average exchange rates used for the euro and the yen versus the assumptions we used in providing our guidance for the fourth quarter did not result in a material difference in reported sales. In preparing our sales and earnings guidance for the first quarter and full year 2012, we are assuming that each euro will translate into about $1.26 to $1.31 and for the yen, each 76 to 81 yen will translate into USD $1. I will now turn to our discussion of sales by product category.

For the fourth quarter, total Cardiac Rhythm Management or CRM sales, which include revenue from both our ICD and pacemaker product lines, were $728 million, down 4% from last year's fourth quarter, including $8 million of favorable foreign currency translations. On a constant-currency basis, total CRM product sales for the fourth quarter decreased 6%. Total CRM product sales for the full year 2011 were $3,034,000,000, approximately equal to CRM product sales for 2010. Favorable foreign currency translations increased 2011 CRM sales by approximately $92 million. On a constant-currency basis, total CRM product sales for the full year 2011 decreased 3%.

For the fourth quarter, ICD sales were $436 million, down 5% from last year's fourth quarter. U.S. ICD sales were $237 million, a 13% decrease. And international ICD sales were $199 million, an 8% increase over the fourth quarter of 2010, including $4 million of favorable foreign currency translations. On a constant-currency basis, total ICD sales for the fourth quarter decreased 6%.

For the full year 2011, ICD sales were $1,824,000,000, approximately equal to ICD sales for 2010. Favorable foreign currency translations increased 2011 ICD sales by approximately $47 million. On a constant-currency basis, ICD sales for the full year 2011 decreased 2%.

For low-voltage devices, sales for the fourth quarter totaled $292 million, down 4% from last year's fourth quarter. In the United States, pacemaker sales were $114 million. In our international markets, pacemaker sales were approximately $178 million, including $4 million of favorable foreign currency translations.

For the full year 2011, pacemaker sales were $1,210,000,000, approximately equal to pacemaker sales for 2010. Favorable foreign currency translations versus those in 2010 increased 2011's pacemaker sales by approximately $45 million. On a constant-currency basis, pacemaker sales for the full year 2011 decreased 5%.

For the first quarter of 2012, we expect total CRM sales to be in the range of $700 million to $740 million. For the full year 2012, we expect total CRM sales to be in the range of $3 billion to $3,080,000,000.

As you are evaluating our guidance for the first quarter and the full year 2012, keep in mind that our currency assumptions regarding currency translations will have a negative impact on reported sales in 2012 as compared to 2011. CRM sales in the first quarter will be approximately $10 million to $15 million, and for the full year 2012 will be approximately $70 million to $95 million. That is the impact that we expect from currency translations. On a constant-currency basis, the midpoint of our CRM sales guidance therefore assumes CRM sales will decline approximately 4% in the first quarter of 2012 and will increase approximately 3% for the full year 2012.

Atrial Fibrillation or AF product sales for the fourth quarter totaled $218 million, up 13% over the fourth quarter of last year, including $3 million of favorable foreign currency translations. For the full year 2011, AF product sales were $822 million, an increase of 16% over 2010, including a $30 million increase due to favorable foreign currency translations. On a constant-currency basis, AF product sales increased 12% in 2011.

For the first quarter of 2012, we expect AF product sales to be in the range of $200 million to $215 million. We expect full year 2012 AF product sales to be in the range of $885 million to $915 million. Our AF product sales guidance for 2012 assumes a constant-currency increase over 2011 in the range of 10% to 14%.

Total sales of cardiovascular products for the fourth quarter of 2011 were $340 million, up 18% over the fourth quarter of 2010. Total cardiovascular product sales for full year 2011 were $1,337,000,000, up 29% over 2010, including a $54 million increase due to favorable foreign currency translations. On a constant-currency basis, cardiovascular product sales increased 24% in 2011.

As discussed on prior calls, we now break out our sales of cardiovascular products into 2 categories, structural heart and vascular. Sales of heart valve products along with AMPLATZER Occluder products and left atrial appendage plug are categorized as structural heart. Our vascular products include vascular closure products, the FFR PressureWire, OCT products, vascular plugs and other vascular accessories.

For the fourth quarter of 2011, sales of structural heart products were $150 million, an increase of 35% over the fourth quarter of 2010 or 34% on a constant-currency basis. For the full year 2011, sales of structural heart products were $597 million, an increase of 64% over 2010 or 58% on a constant-currency basis.

Sales of vascular products in the fourth quarter of 2011 were $190 million, an 8% increase over the fourth quarter of 2010 or 5% on a constant-currency basis. For the full year 2011, sales of vascular products were $740 million, an increase of 10% over 2010 or 5% on a constant-currency basis.

For the first quarter of 2012, we expect cardiovascular product sales to be in the range of $315 million to $335 million. We expect full year 2012 cardiovascular product sales to be in the range of $1,350,000,000 to $1,390,000,000. Our cardiovascular product sales guidance for 2012 assumes a constant-currency increase over 2011 in the range of 4% to 7%. The sales guidance for 2012 takes into account the January 2012 termination of a contract in Japan, under which St. Jude Medical distributed vascular products manufactured by a third party. This contract termination is expected to reduce our cardiovascular product sales growth in 2012 by approximately 3 percentage points.

Total sales of Neuromodulation products in the fourth quarter of 2011 were $121 million, up 12% from the fourth quarter of 2010. For the full year 2011, Neuromodulation product sales were $419 million, up 10% over 2010, including a $7 million increase due to favorable foreign currency translation. For the first quarter of 2012, we expect sales of Neuromodulation products to be in the range of $90 million to $100 million. We expect full year 2012 Neuromodulation sales of $425 million to $450 million. Our Neuromodulation product sales guidance for 2012 assumes a constant-currency increase over 2011 in the range of 4% to 10%.

Let me pause at this point and recap our full year 2012 sales guidance. For Cardiac Rhythm Management devices, we expect sales for 2012 in the range of $3 billion to $3,080,000,000. Sales of our AF products for 2012 are expected to reach $885 million to $915 million. For cardiovascular products, we expect 2012 sales in the range of $1,350,000,000 to $1,390,000,000. And we expect sales of Neuromodulation products to be $425 million to $450 million. If you add up the sales across all growth platforms, total sales in 2012 are expected to be $5,660,000,000 to $5,835,000,000. This guidance range results in consolidated sales growth in the range of 4% to 7% on a constant-currency basis.

The geographic breakdown of St. Jude Medical sales in the fourth quarter of 2011 is detailed in our press release. In total, 45% of St. Jude Medical sales in the fourth quarter came from the United States, while 55% came from international markets. The gross profit margin during the fourth quarter was 73.5%, up 80 basis points from the fourth quarter of 2010. For the full year 2011, the gross profit margin was 74.1%, up 70 basis points from 2010. For the full year 2012, we expect gross profit margin to be in the range of 73.2% to 73.7%. We are forecasting a 40- to 90-basis point decrease in the gross profit margin, which reflects a combination of both positive and negative factors impacting our operations. The move to lower-cost manufacturing sites is underway and is beginning to generate a positive influence on our gross profit margin. In addition, we expect our gross profit margin will benefit from a number of continuous improvement initiatives targeting cost reductions. Offsetting these positive factors is the impact of geographic and product mix shifts, slightly lower average selling prices which can result from overall challenging market dynamics and the expected negative currency environment.

Our fourth quarter SG&A expenses were 34.2% of net sales, representing a 10-basis point improvement over the fourth quarter of 2010. For the full year 2011, SG&A expenses were 35.3% of net sales compared with 34.5% in 2010. For 2011, the AGA Medical operations, including the amortization expense related to intangible assets acquired, increased SG&A expenses as a percentage of net sales by approximately 70 basis points. For the full year 2012, we expect SG&A as a percentage of net sales to be in the range of 34.5% to 35.0%. As compared with 2011, our 2012 guidance represents a 30- to 80-basis point improvement in SG&A as a percentage of net sales. This results from a number of cost-saving initiatives, including the integration of the AGA Medical business into our cardiovascular United States and international divisions, and the integration of the Neuromodulation domestic sales organization into our United States division. We believe that efficiencies in the SG&A category will largely offset the decline in gross profit margin contemplated in our guidance for that line item.

Research and development expenses in the fourth quarter of 2011 and for the full year 2011 were 12.6% of net sales. For the full year 2012, we expect R&D expenses to be in the range of 12.5% to 13.0% of net sales as we continue funding our portfolio of new growth drivers to accelerate long-term sales growth. Other expense was $24 million in the fourth quarter and $95 million for the full year 2011. For the first quarter of 2012, we expect the other income and expense line item will be a net expense of approximately $18 million to $23 million. For the full year 2012, we expect the other expense of approximately $75 million to $85 million, primarily driven by interest expense on our outstanding debt. For the fourth quarter and for the full year 2011, our effective income tax rate was 22.0%. For 2012, we expect the effective tax rate to be in the range of 21.3% to 21.8%. This rate assumes that the R&D tax credit is extended for 2012.

Moving on to the balance sheet. At the end of 2011, we had $986 million in cash and cash equivalents, and $2,797,000,000 in total debt. There were no borrowings outstanding under our $1.5 billion revolving credit facility available with a group of banks.

Next I want to offer some comments regarding our earnings per share outlook for the first quarter and full year 2012. In preparing our EPS guidance, we have assumed that in the first quarter of 2012, the weighted average outstanding shares used in our fully diluted EPS calculation will be about 316 million to 318 million shares and the weighted average outstanding shares for the full year 2012 will be about 318 million to 320 million shares. These share count assumptions take into account the $300 million common stock repurchase plan which we announced in December. The company expects consolidated EPS for the first quarter of 2012 to be in the range of $0.82 to $0.84. And for the full year 2012, we expect consolidated EPS to be in the range of $3.43 to $3.48. This expectation includes the impact from negative currency translations, which we estimate based on our current exchange rate assumptions will reduce our reported consolidated sales by about $130 million to $175 million and will reduce our reported earnings per share in 2012 by approximately $0.15 to $0.21. On a constant-currency basis, our earnings per share guidance represents EPS growth of approximately 10% to 12%.

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

Daniel J. Starks

Thank you, John. St. Jude Medical's goal is to deliver constant-currency organic sales growth at a high single-digit to low double-digit rate on a sustainable basis. The guidance for 2012 we have communicated this morning shows that despite significant headwinds outside our control, we are making good progress toward achieving our goal. Our guidance shows we expect to deliver 4% to 7% constant-currency sales growth in 2012 despite a shrinking CRM market and minimal contribution from our portfolio of new growth drivers. We expect this growth rate to accelerate as the CRM market stabilizes, as new growth drivers already on the market gain momentum and as additional new growth drivers are released to the market later this year.

For the next few minutes, I would like to elaborate on a number of key points which support our confidence that our program to accelerate our sales growth is both comprehensive and realistic. First, our growth assumptions fully take into account the headwinds affecting the global CRM market. We estimate that on a constant-currency basis, the global CRM market contracted approximately 4% during 2011. The international CRM market continued to grow at a low single-digit rate in 2011, but this growth was more than offset by approximately an 8% to 9% market reduction in the United States. If we err in our CRM market growth assumptions for 2012, we are determined to err on the side of being conservative. We therefore assume that the global CRM market will continue to shrink in 2012 at a low single-digit rate on a constant-currency basis. Given today's foreign currency exchange rates, this translates into a mid single-digit rate of contraction on a reported revenue basis for the global CRM market in 2012. We acknowledge that our market growth assumption for 2012 may be too conservative, and that our guidance leaves room for upside.

Next, I would like to talk about our CRM market share expectations for 2012. We believe that we will gain at least one point of global CRM market share in 2012 due to the launch of our quadripolar ICD system in the United States, the tailwind provided by favorable replacement market dynamics, initiation of a new distributor in Japan, full European launch of our MRI-compatible pacemaker and additional new products we will talk about next week at our Annual Investor Conference.

We note that even without the benefit of our quadripolar ICD system in the United States, we gained approximately one point of global ICD market share in 2011, growing from an average 25% share in 2010 to an average 26% share in 2011. We expect stronger ICD share gain in 2012 now that full launch of our quadripolar ICD system in the United States is underway. One leading indicator we are tracking to measure the progress of our quadripolar ICD launch is the number of new contracts we have signed with customers in the United States in the last 8 weeks since we received FDA approval for the product. In that time, we have signed over 150 new ICD contracts with customers. Each contract reflects an expected gain in ICD market share in 2012 in the hospital or healthcare system covered by the contract.

Next, I would like to move on to our Cardiovascular Division or CVD franchise. We recommend that investors pay significant attention to our CVD business in 2012 because we expect to transform -- we expect it to transform from slow growth at the beginning of 2012 to a high rate of sustainable growth by the beginning of 2013. To explain this, I would like to start by discussing our fractional flow reserve or FFR technology. Although FFR technology has not yet been widely adopted and percutaneous coronary interventions, or PCI, we believe it is only a matter of time and continued market development efforts before St. Jude Medical's FFR technology becomes a standard of care. The starting point for our confidence is the clinical evidence generated by the landmark FAME trial. As a reminder, the FAME trial demonstrated that in patients undergoing PCIs for multivessel coronary artery disease, patients whose intervention was guided by FFR measurements rather than by conventional angiography alone had both a 34% reduction in the currency of death or myocardial infarction and a 14% lower cost of medical care.

Since St. Jude Medical already has over a 60% share of the global FFR market, the key to transforming our FFR technology from an emerging technology into a major new growth driver is effective market development. We therefore were especially pleased to announce last week that our FAME II clinical trial has generated such strong positive data regarding the benefit of our FFR technology. An independent safety monitoring board recommended that enrollment in the randomized trial be stopped early due to a view that it would be unethical to continue to enroll patients given the clear and compelling benefit the patients randomized to receive FFR assessment with PCI. Once the clinical data is fully analyzed, published and communicated to payors into the clinical community, we expect St. Jude Medical's FFR technology to become the standard of care for assessing and treating patients with single vessel and multivessel coronary artery disease. Based on the evidence generated by our FAME and our FAME II trials regarding the comparative effectiveness of our FFR technology, we think our FFR growth opportunity is well on its way to becoming a new $1 billion market.

A review of our FFR growth driver naturally leads to a discussion of our intravascular imaging business. We entered the $500 million market for intravascular imaging in the third quarter of 2010 with the world's first Optical Coherence Tomography or OCT technology. We consider this to be a next-generation technology which can compete successfully against the state of the art at the time, which was intravascular ultrasound or IVUS technology. Now that we have 6 quarters of experience marketing our OCT technology, our optimism about its growth potential has been validated. We expect to exit 2012 with between a 20% to 25% share of the global intravascular imaging market and a strong growth trajectory for 2013. Similar to what we have done to develop the market for our FFR technology, we are investing in a series of clinical trials to demonstrate the value our OCT technology contributes to improving the outcomes of PCI procedures. We already have delivered a series of improvements to our OCT platform to make it easier and more cost-effective to use. This has included the consolidation of our FFR technology and our OCT technology into our Ilumien system.

We received FDA clearance to begin launching our Ilumien system in the United States just last quarter. We expect the Ilumien system to become a must-have for a state-of-the-art cardiology cath lab, as we continue to generate clinical evidence of its advantages as measured by comparative effectiveness standards.

Next, I would like to talk about the significance of our RESPECT clinical trial for the pipeline of new growth drivers we are developing within our cardiovascular business. The RESPECT trial is a randomized multicenter study investigating whether closure of a patent foramen ovale, or PFO, using a St. Jude Medical AMPLATZER PFO closure device is safe and effective compared to current standard of care for the prevention of cryptogenic stroke. After enrolling 980 patients and collecting more than 2,300 patient years of data, we announced earlier this month that we have achieved a significant milestone in this event-driven trial and closed patient enrollment. We announced in our press release that we are confident in the robust design of our clinical study and in our differentiated product design. We are currently completing our analysis of data from the trial and anticipate presenting results from this landmark clinical trial at a major medical meeting later this year.

St. Jude Medical's AMPLATZER PFO closure device already is on the market in Europe and enjoys a strong leading market share. As with our FFR and our OCT technology, our next step is to generate compelling clinical evidence to substantiate its value and develop the market. We are optimistic that the data from the RESPECT trial will help us take that step, and the PFO closure will become a major new growth driver for St. Jude Medical.

Next, I would like to offer a brief update on our program for transcatheter aortic valve replacement, or TAVR, in our program for renal denervation for hypertension. As we indicated previously, both of these programs are on track for initial product launch in Europe before the end of this year. Both programs are based on true next-generation technologies which we think have a realistic opportunity to be considered best in class at the time of market launch. Although we will continue to keep some information regarding these programs confidential for competitive reasons, we look forward to providing additional information about both of these programs at our annual investor meeting next week. It is widely acknowledged that the market for TAVR technology is on track to become a new $1 billion growth opportunity. Although still early, we think the emerging market for renal denervation has the potential to become an even larger growth opportunity and that St. Jude Medical can be a leader in this space.

Next, I'd like to offer an update on our program for percutaneous mitral valve repair, or PMVR. As we have outlined previously, PMVR represents another opportunity which can be as big as the market for transcatheter aortic valve replacement. St. Jude Medical has a leading program in this space as reflected by our announcement last quarter that our first-in-human series already is underway. Although the timing for market release of this new growth driver is tentative due to its early phase, we estimate that we will receive CE mark and begin launching this technology in Europe before the end of 2013.

To add balance to our portfolio of new growth drivers within our CVD business, I would like to remind everyone that while we continue to work on bringing our largest new growth drivers to the market later this year and in 2013, we already have released to various markets our Trifecta line of pericardial stented tissue valves, our market-leading line of left atrial appendage, or LAA closure devices and our next-generation technology to block or redirect flow through blood vessels with a vascular plug instead of with surgical clips or embolic coils. All 3 of these product lines grew at a strong double-digit rate during 2011 and are expected to continue growing at a strong double-digit rate in 2012. The benefit of this growth in 2012 is partly offset by the January 2012 termination of a contract in Japan under which St. Jude Medical was distributing vascular products manufactured by a third party, as mentioned previously by John Heinmiller. When this offset in Japan disappears at the end of 2012 in our year-over-year comparisons, the growth of our Trifecta pericardial tissue valve products, our LAA closure products and our vascular plug technology will be more visible in our reported numbers.

Next, I would like to touch on recent developments within our AF growth franchise. As a starting point, it is worth noting that international sales of AF products increased approximately 19% during the fourth quarter, and our leading indicator for the growth we expect as we launch the same products in the United States. We now have several MediGuide enabled cath labs online in Europe. Our first MediGuide enabled cath labs will come online in the United States later this year. As we have described previously, this technology has the potential to become a game changer by helping make cath lab procedures faster, safer and less expensive.

Given St. Jude Medical's strong technology and market share leadership in the AF space, we place a high priority on continuing to develop the market. We therefore were especially pleased to see the St. Jude Medical ASSERT trial published earlier this month in the New England Journal of Medicine, which suggests a strong link between asymptomatic atrial fibrillation and cryptogenic stroke. The ASSERT trial, the growing body of clinical evidence regarding the value of early intervention for recent onset atrial fibrillation and the updated professional society guidelines presented at the Boston AF conference earlier this month are all indicators of an emerging clinical consensus that AF technology will be a winning technology in an environment of healthcare reform and increased attention to comparative effectiveness metrics. We are the industry leader in developing this market as reflected by our financial sponsorship of the ASSERT trial, the ongoing CABANA trial based in the United States and the ongoing EAST trial based in Europe.

Next, I'd like to touch on the major near-term growth drivers which are beginning to gain traction within our Neuromodulation business. First is deep brain stimulation, or DBS, for patients suffering from Parkinson's disease. We began full commercial launch in Europe during the first quarter of 2010 with our Brio rechargeable deep brain stimulator, our Athena DBS clinical programmer and a complete line of proprietary leads and accessories. Our DBS business grew rapidly in 2011 and is expected to double in size during 2012. This growth will be supported by the clinical trial data published earlier this month in the Lancet Neurology Journal, which demonstrated the value -- our unique constant currency -- DBS system has been helping manage the symptoms of Parkinson's disease.

This technology already is on the market in Europe, Australia and Latin America. Although we are not yet providing a definitive time line, we are optimistic that our DBS technology for patients suffering from Parkinson's disease will be on the market in the United States before the end of 2013.

One of the most important new growth drivers in our Neuromodulation business is our technology for patients who suffer from certain forms of migraine. We received CE mark for our first-generation Genesis system for migraine in September 2011 and began a limited launch during the first quarter. We expect -- during the fourth quarter, excuse me. We expect full commercial launch of our second-generation Eon family of products to begin in Europe next quarter. As we have said in the past, market development will take time. But we expect our migraine business to develop into a significant new growth opportunity with St. Jude Medical already the clear market leader.

To summarize, we expect St. Jude Medical's core business to deliver mid single-digit sales growth on a constant-currency basis during 2012. We expect our sales growth to accelerate to a high single-digit or low double-digit rate on a sustainable basis due to 3 major factors. First, the global Cardiac Rhythm Management market eventually will stabilize. Second, we expect to gain significant momentum with new growth drivers already released to the market, including our fractional flow reserve technology, our Optical Coherence Tomography technology, our patent foramen ovale closure technology, our left atrial appendage closure technology, our MediGuide technology, our deep brain stimulation technology and our migraine Neuromodulation technology. Third, we expect significant contribution to our sales growth for multiple major technologies we still are in the process of bringing to the market, which includes our transcatheter aortic valve replacement technology, our transcatheter mitral valve repair technology and our renal denervation technology for treatment-resistant hypertensive patients. We look forward to providing more information about these technologies and our entire growth program next week at our annual investor conference.

With that, I would like to turn the call back to our moderator and open it up for questions. Jennifer, please go ahead.

Question-and-Answer Session


[Operator Instructions] Your first question comes from Bob Hopkins with Bank of America.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

So I wanted to start with a quick question, if it's okay, on your CRM guidance. If I heard you correctly, you're assuming the global market shrinks low single digits on a constant-currency basis. And you gained a point of share, and that nets out to 3% constant-currency growth for St. Jude's CRM business in 2012, is that correct?

Daniel J. Starks

That's exactly right.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

So I want to ask you a quick question on the market share side, because obviously there's been a lot of discussion in the marketplace about Riata and Durata and also on the positive side about the Quadpole launch. So I just want to gauge your confidence in that market share gaining assumption as you roll throughout the year. So do you feel that in the early part of 2012 you're going to be gaining share, or is it more that you think that as the noise dies down, you start to gain share in the back half? Just want to see how confident you are that you think you're going to be gaining share throughout the course of the year despite the positives and negatives that are out there.

Daniel J. Starks

Well first, let me start with our confidence on gaining a point of share. We have a high confidence that we're going to gain a point of share and -- we obviously already have a good look, a good preliminary look into how our quadripolar ICD system is being received by the market. And the idea that 8 weeks after market launch we have more than 150 new customer contracts signed for and -- which represent, each one of which represents an anticipated increase in market share in the first 8 weeks to us is a very compelling data point. It is one that already is in hand. And that as a start gives us a very high confidence that as all of the various dynamics net against each other, we will gain market share here in 2012. And exactly, Bob, exactly kind of laying out market share gain quarter, quarter, quarter and exactly the level of market growth, I don't really want to go down that path. But I can tell you that we're already -- we already have 150 new contracts for new market share gain, and that gives us a lot of confidence that if we're making a mistake in our guidance, we'd be making a mistake on the side of being conservative. Across the board with our guidance, our goal is to err on the side of being conservative. There's certainly a lot of volatility in the kind of macro conditions of the market, and so we're working to be conservative, if anything.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

And then what are you assuming in Cardiac Rhythm Management for pricing trends, and what went on pricing trends in Q4 versus the last couple of quarters?

Daniel J. Starks

Q4 was a tough quarter in the market. We saw ASP pressure at the level of low single-digit to a mid-single-digit levels. In the past, we've seen pricing pressure more in the low single-digit level. So if anything, the pressure was a little stronger in the fourth quarter on a stand-alone basis on the one hand. On the other hand, we don't necessarily extrapolate that for full year 2012. There was a negative currency impact in that ASP pressure. There was market mix changes with more revenue coming on the international markets, and we didn't have new products to impact the ASPs in the fourth quarter. But we saw continued severe ASP pressure and no signs of that letting up in the fourth quarter. And then, Bob, I think you might have asked me a second part that I lost track of here as I was answering the first part.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

No, but just real quickly, I wonder if John can give us the impact of FX on gross margin in 2012. How much of a negative is that on gross margins in 2012?

John C. Heinmiller

It represents about half of the decrease that we're contemplating. So we've given guidance that gross profit margin would decline in 2012 versus 2011. And I would say about half of that is attributed to currency.


Your next question comes from Mike Weinstein with JP Morgan.

Michael N. Weinstein - JP Morgan Chase & Co, Research Division

I'll start with a couple of pipeline items and then give you a break and come back to CRM. So first question, Dan, when do you expect we'll see the RESPECT trial? When do you expect that to get presented at a conference?

Daniel J. Starks

Well we don't know yet, Mike. The first realistic opportunity for that data would be the EuroPCR. I don't know if that will actually be the forum or not, but that'd be the first opportunity and if not there, then the ESC or the TCT. So that's kind of how we think about it.

Michael N. Weinstein - JP Morgan Chase & Co, Research Division

Next one is a bit of Neuromod. You've given what looks like conservative Neuromod guidance for the year. I assume that, that includes very little contribution from your deep brain stimulation effort in Europe or occipital nerve stimulation in Europe and obviously in U.S. revenues. Can you just comment a little bit more on the Neuromod business and when you might have visibility on a pathway to the U.S. for both these technologies?

Daniel J. Starks

The one factor on the Neuromodulation business that makes us conservative in our guidance is that a number -- is that the procedures are more elective in nature than the procedures in our other -- in most of our other business franchises. And so just thinking about structural changes and structural dynamics and macroeconomic influence on elective procedures and thinking about the increasing amount of deductible levels and private healthcare plans here in the United States, all those kinds of things, all of those factors, the macroeconomics and structural changes affecting our market make us conservative with procedures which are more elective in nature in predicting exactly how strong the market growth will be here in 2012. So that's what you see reflected in the level of guidance we've given for 2012. There -- in normal market conditions, and we would expect the market conditions to tend to normalize over time but we don't have the crystal ball to know to what extent that will happen in 2012, in normal market conditions, we would be more bullish in our growth expectations based on these new indications. And obviously, particularly on the migraine side, it's such an epidemic issue, it's such a -- so much morbidity associated with chronic migraine that -- and there was such an interesting benefit from our pivotal trial here for the new therapy that we can bring to migraine patients, that we would expect very significant contribution as additional confirming clinical evidence is generated, as reimbursement comes in the place for this procedure for migraine patients and as the referring physician population becomes more acquainted -- better acquainted with the body of clinical evidence that we've begun to generate about the reasons to refer chronic migraine patients for potential device therapy. So all of that takes time and both of those things together are the reasons that you see us being conservative in what we expect for 2012 again with Neuromodulation as with other parts of our business. If we've erred, we've erred on the side of being conservative and there is a credible chance for upside there. With respect to the U.S. pathway, we have a difficult regulatory environment. We have less visibility than we've had at various times in the past with the regulatory pathway and time lines. If we used our quadripolar ICD system as an example, we're disappointed with how long it took to get the product on the market here in the U.S. when it already had been on the market for 2 years in Europe. And from our perspective, there really weren't any special issues that should have slowed up that time line. So we're just adopting the stance of being -- kind of having that experience and having experience with our ST segment monitoring technology, and that's going to be just -- and now I'm going to forget exactly, but that's 4 to 5 years and maybe it was even longer than that. Maybe it was -- seems like the opportunity with this 5,000 patient clinical trial we've got to do for this diagnostic software is going to -- raises the possibility that it will be 8 years before we get this technology on the market versus the time we're able to get the technology on the market in Europe, so at least multiple years later. So with migraine, it's new with -- in a difficult regulatory environment, so we're -- until we have better visibility, we are going to encourage people not to factor it into their models. DBS for Parkinson's in the United States, we're encouraging people not to factor it into their models yet and as we get better visibility, we'll tell you about it. And when we start to factor it into our growth expectations, we'll let you know that and give everybody the opportunity to decide for themselves whether they're going to do the same.

Michael N. Weinstein - JP Morgan Chase & Co, Research Division

Okay, that's helpful. Let me just ask one quick follow-up on the CRM side. So Dave, what I remember is when you launched the last, call it wave of platforms in ICD, it was fortified and unified. And you talked about going out there and adding new centers, and the impact of that over the next several quarters was seen, depending on when you want to draw the line, you end up gaining maybe 200 to 300 basis points of share on the back of those product launches. Can you just put the Quadra experience in the context of that last product cycle that you guys had in terms of interest in new accounts and the ability to go to existing accounts and get them to upgrade to the newer technology?

Daniel J. Starks

We will, but it's a little bit early on this call. And I'm going to ask -- I'm going to pass your question over to Mike Rousseau, our Group President, Mike Rousseau to add additional color, Mike. But -- let me start with our European experience. So we -- our launch of quadripolar in Europe has been very similar to our launch of Unify and Fortify. The dynamics in Europe are different. The impact of tenders is very different in Europe than in the United States. But we've tracked in Europe with quadripolar, the number of new centers we got into on the strength of the quadripolar product differentiation. We had a very -- we've had a very significant, very encouraging gain of market share that we're taking into account with our expectations for gaining one point of global CRM share here in 2012 with quadripolar on the market in the United States. And the impact of quadripolar in Europe has probably been disguised somewhat by the tearing in that market and the extent of that market that really calls for simpler, less expensive technology and kind of offsets to the best of our CRT business in particular in Europe versus the negative impact of some of the real low-price competition business that really is not the part of the market that we focus on. And so in the United States with less impact from tenders, we do have the timing associated with contracts and selling cycles. But for new technology and customers generally acknowledge the CRT technology as being new technology. For new technology, we're really not held out of the market by the normal contracting cycle. There's an opportunity to contract for new technology regardless of the rest of the contracting dynamics. And so that's part of -- so we get -- we told you for the first 8 weeks and remember, it included Christmas and New Year so it might not have been a full 8 weeks, it might have been closer to 7. But for the first 8 weeks of experience, we're off to a very strong start. We are reenergized. We've gone from being on the defensive in October and November to clearly being on the offensive in the ICD and CRM space here in December. And I know there were some survey results showing a very attention-catching tick-up in our implant share in December. That's consistent with our own data. And so we're -- I'm giving you just -- I'm babbling a little bit and I apologize for my lack of articulateness, but hopefully I'm being helpful with my comments. And let me ask the person in our business who is closer to it than I am, Group President Mike Rousseau is all over this and might offer some additional commentary. Mike, what would you add?

Michael T. Rousseau

Yes, Mike, I would focus specifically on physician feedback early into this launch. The feedback has been incredibly consistent and similar from a performance standpoint that we've gotten in the international markets. First, I would speak to the ease-of-use and how well the lead tracks and how nicely it handles. That's almost an immediate feedback from the physician even at the first case. The next thing that's striking to the customer is their ability to optimize the LV lead placement, and the simplicity in which they could do that versus dealing with an older system or an older style of lead. The overall speed of implant for people that get into a rhythm and begin to implant the product consistently, that is something that they notice begins to take shape in their practice that the speed of implant with a dramatic reduction in fluoro time. These are very, very positive points that they're making, and they're being made consistently. Probably the most important point this early on is we have gotten nothing but consistent positive feedback from physicians that this lead and this system has the potential to become the standard of care in CRT-D therapy. So we're early in, but we are extremely encouraged.

Daniel J. Starks

Michael, are we going onto the next questioner? I guess that we are -- okay, Jennifer, please go ahead and take the next question.


Your next question comes from Bruce Nudell with Credit Suisse.

Bruce M. Nudell - UBS Investment Bank, Research Division

Dan and Eric, we've come to the conclusion Durata is fine, and you obviously have as well. But feedback from that Riata summit really indicates that the population of implanters are still -- at least have vague concerns that's not founded by data. And one of the issues with Riata is that the survival curves from returns said one thing, but the kind of field rates were much higher. When do you anticipate having a data set that's surveilled actively enough to really convince people that at 5 years Durata is like a totally robust product?

Daniel J. Starks

Bruce, I'm going to defer to Eric for the main answer to your question. Let me offer a few initial comments on the summit that you mentioned. That meeting last week was from an investor perspective and from a patient care perspective, I think really it was a non-event. It was very lightly attended. The proceedings weren't public. It wasn't webcast. There was a very low level of participation. And most of the physicians who attended that meeting were people that really are very close to one of our competitors and don't do much business with us. And a number of them in my understanding is really -- don't, never did implant Riata in the first place. So it was really a non-event from that investor perspective. And from a patient care perspective and just kind of general market perception and market behavior, there was -- there wasn't anything new there. And besides the fact that it wasn't public and it was kind of a little bit of an odd meeting in that the issues had all been vetted previously and all been worked over by both by an independent medical advisory board and then more importantly maybe by the Heart Rhythm Society and by all of their independent expertise from an objective perspective. So a good set of recommendations that was surprisingly consistent came out of the independent medical advisory board review as well as the Heart Rhythm Society review. So it was really a non-event, number one. The thing that was most interesting for us about the private meeting last week was that from a customer perspective, anytime we can get in front of physicians who tend not to use our product, we always like to take that opportunity. So we spent a good part of the day Friday talking to physicians who don't usually give us much time. And from that perspective, it was a good meeting. So I mean -- really none of it would be about last week. But on the topic of the robustness of our data, on lead reliability as you said, Eric, the resident expert on that topic, let me turn that part of your question over to Eric. Eric, go ahead.

Eric Fain

So Bruce, as you know, and it was presented at the meeting last week and we have an active registry program that has over 10,000 patients in it focused on our Optim lead technologies. And that's really something that we haven't made that much visible in the past and we're going to. I think that for our customers and I think for everybody involved and what we're are focused on is really about the data and making sure that we have very good, complete comprehensive data on the performance of our Optim leads and in our particular, our Durata lead. And we're going to be doing that going forward. We're going to have an independent group that will analyze the data itself and provide us feedback. We're going to make that visible in our product performance report so people will be able to get an update on a biannual basis. And I think the thing to really remember is that these active registries really do -- I think it's unprecedented. I think they really do represent the commercial experience because it's not just that it has 10,836 patients, it's with over 290 implanting centers and close to 500 implanting physicians. So that really does represent a very, very good cross-section of the whole implanting population, and we're getting good data back. And again, we'll make it more visible going forward. But thus far that data supports, as strong as anything anybody can talk about, the overall excellent performance of Durata by any measure.

Bruce M. Nudell - UBS Investment Bank, Research Division

And I guess I have one follow-up for either Dan or Eric. I watched the CardioMEMS panel, and I was kind of surprised to the extent at which there was miscommunication between the FDA and the company with regards to protocol. On the other hand, I was very struck by when Stevenson's pretty impassioned comments about utility technology. Is it -- should we just assume that another trial's necessary? Or is there some way sort of that to kind of resurrect what looks like a pretty efficacious tool?

Daniel J. Starks

Eric, to what extent do you want to comment?

Eric Fain

Bruce, the only comment I'd make is that CardioMEMS is in the process of working through the next steps with FDA and once they work that through, then we'll get more visibility into it. But that's pretty much all I'd say at this point.


Your next question comes from Rick Wise with Leerink Swann.

Frederick A. Wise - Leerink Swann LLC, Research Division

I guess I'll have to start off with an ICE market question. I mean, it sounds like you hope you think you've sort of captured a conservative view of the market. Maybe since one of your competitors has been talking in recent weeks, last couple months about stabilizing volumes, which sounds to me like it's not -- they're not talking about declines, can you talk at all about your more recent experience? Or can you more normalize a bit sort of the Riata noise? Are you seeing volumes stabilize in recent weeks in December, January? Can you characterize that at all then?

Daniel J. Starks

We can say a little bit, Rick. First, we have -- the comments we've made in the past, in past quarters over the last 4 quarters regarding our expectations for CRM market growth have always been based on the best information available, including the same level of information that we have today when we're commenting on our expectation for CRE market growth. One thing that we've taken away from the second half of 2011 is that even with the level of information that we have when we formulate our expectations for market growth, we were surprised by negative market dynamics in the second half of 2011. So that's a lesson learned. That's a takeaway here as we now opine on our expectations for 2012, we just determined that if we are going to be wrong here, we're going to be wrong on the side of being conservative. So take that as a very meaningful part of our perspective. On the topic of the market stabilizing, we can think of all kinds of reasons on why we would expect the market to stabilize here in 2012, and the comparisons get a lot easier. And we think in the United States, the most significant dynamic was the timing and scope of the Department of Justice investigation and that we again don't have inside information about the prospective timing and scope of the Department of Justice expectation. But it makes sense to us -- investigation -- but it makes sense to us that the customer behavior response to the timing and scope of that investigation really is now in place. And so we really wouldn't expect the customer behavior to now change further on the negative side. And so that would be a good reason to think that the current state of the market in the U.S. would be kind of a new foundation, and that we would at least be in a stabilized state here in the U.S. We understand the logic of that analysis, it makes sense to us. And I think that's the kind of thing that you might hear from competitors about thinking that the market is reaching a stabilized state. That may very well be and it may be that we've left some good upside for ourselves in our growth assumptions. At the same time, in the fourth quarter, the fourth quarter was -- we really did not have the best visibility there. We got mixed signals in the quarter on customer behavior. And it looks to us like there may have been a little bit of destocking from customers finishing out the year. And it looks like that always is a charged issue, it always makes us look at was there really destocking, and what are the implications of that destocking. Was there instead not destocking, but a change in market share that we're misidentifying as destocking? So we've been very -- we've been all over that topic and we're confident that where we saw customer ordering patterns different than in the past, it was not because of a change in market share. It instead was because of customers continuing to manage their assets more tightly, and so we're thinking that that's a bit of a new normal. But it won't surprise us -- when the other companies come out, it won't surprise us if there's some softness in their numbers from a little bit of destocking impact. At the same time we don't know, and we look forward to seeing what their own experience was during the fourth quarter. But all of that makes us say that this is not the time to declare an end to market stress in the CRM space. We may continue to see market stress during 2012 and we may very well have a mixed year with the first half of the year continuing to be a little bit weaker and see some recovery in the second half of the year. That wouldn't surprise us at all.

Bruce M. Nudell - UBS Investment Bank, Research Division

Okay. I know the stressor is price. At Mike's conference, you described price as continuing to be severe price pressure. Just -- I want to be real clear, what are you assuming in 2012 about price? What's embedded, and do you think that that's -- whatever you've just embedded in your projections, is that again conservative or realistic? Or how would you characterize that?

Daniel J. Starks

Yes, yes, I think you're exactly right, it's from conservative to realistic and a little tongue-in-cheek, Rick. But yes, I mean, what we do here is we have no interest in being unduly optimistic. We have absolutely no interest in that. There's no benefit for anybody. And so what we -- what we're -- when we say we're realistic about the headwinds on the CRM space, the market just shrank in 2011 somewhere in the range of about 4%. So and -- so we're -- there will be new technology coming into the market that is valuable technology that deserves and will receive a premium as a positive offset. At the same time, the economic conditions in Europe have been and by our estimation will continue to be very stressed and with very significant price pressure, particularly in Europe. The -- and we get -- our business, it's a little bit of a double-edged sword. On the very positive side, we expect our total geographic business mix to continue to include stronger growth in international markets. And we already are -- 55% of our revenue here in the fourth quarter was -- came from international markets and to the extent that continues, then that's going to be a total global impact on average selling prices, and that's part of what we take into account in our market model. But there's a positive side with the unit growth that is disproportionate at the same time that it is at lower average selling prices. So we mix -- we blend all of that together in setting our market model component of our guidance, and that's -- so all of those factors have been mixed in. It's very much an art, not a science.


Your next question comes from Kristen Stewart with Deutsche Bank.

Kristen M. Stewart - Deutsche Bank AG, Research Division

Maybe you could just go over a little bit more about some of the restructuring efforts that you're undergoing, and just what might be the contribution maybe this year as we look out. How much of that would be in 2013? Some companies are talking about looking to offset that device tax. And then the second part is if you can't necessarily get the acceleration in core growth on the top line, you mentioned that share organic was around one, and I would assume it's probably a little bit better if you adjust for the ship hold impact year-to-year. But what happens if you kind of can't accelerate that? What are the other levers that you can pull to still have confidence in getting to the earnings growth targets you outlined?

Daniel J. Starks

Kristen, on the first part of your question, we'd like to hold off to next week to give you more complete information about the impact of our ongoing restructuring. And it's a significant impact, and it's a number of different components to our restructuring program. But I promise it will answer it better next week, and let me just defer that part to next week. On the topic of core growth. So the way -- I think you're right on the point of ship hold. But for simplicity, the 1% constant-currency organic sales growth in 2011 guidance which if we're wrong, we are deliberately working to be wrong on the side of being conservative. But guidance for 4% to 7% organic constant-currency sales growth in 2011. And then I think the major goal of this call this morning was to give some visibility and just organize the growth dynamics that all will contribute or that the balance will contribute to acceleration of the current growth rate, acceleration above 4% to 7% constant-currency organic sales. And so as you kind of pose the question of what if none of that, and I realize you didn't say this, but as you say what if that doesn't work, I mean, there's so much there. I mean we've got -- so look at -- I mean, we got multiple landmark clinical trials that now have been completed but haven't yet impacted market development that are going to impact market development in 2012. We have a product that just started to come into the market here as recently as the fourth quarter with the Ilumien and with the quadripolar, and so it really wasn't -- that's got a normal growth curve through 2012, and it'll result in a stronger growth going into 2013. We've got a 3-percentage point negative offset in our CVD business from a change with a distributor in Japan, which again is just highly visible. But that's going to disappear after fourth quarter -- after 4 quarters, so we've got a stronger growth rate unmasked at the end of the fourth quarter. So I just would really want to emphasize that on the hypothesis of what if our pipeline of new growth drivers on balance does not increase our current quarter sales growth rate, we just don't take that as being realistic. But appreciating the purpose of your question as a hypothesis and what's our strength and what's our flexibility to leverage the middle of the income statement, we've got a lot of strength and flexibility to leverage the middle of the income statement. The dilutive impact of funding these new growth drivers for starters is something that we'll -- maybe we might offer some more information about next week. I'm not sure how much information we're going to want offer. But if you took for example our TAVR catheter development technology development program, we have virtually no revenue assumed in our guidance for 2012. And we've got -- we have multiple tens of millions of dollars of investment spending on it. So if a person were to at some -- if we were to make the decision that our new growth drivers were not going to pay off for us, and I -- that's not at all. We see no way that, that would be a credible outcome. But if we were to hypothetically assume that, we have all that investment in those new growth drivers that would come back into earnings, and it would be a tremendous leverage in the middle of the income statement. These new growth drivers impact the gross margin as we have some old volumes of new products starting to come out into the market. It just starts to kind of be a trickle of new sales that are negative to the gross margin. So if you said let's just make it a steady state business, let's make it a current sales growth and that's it, we would have a far higher EPS growth.


Your next question comes from David Roman with Goldman Sachs.

Daniel J. Starks

Okay, and then I'm going to just -- well, this is going to be our last question. I'm being reminded here that I'm going a bit long. So David, you're the last questioner.

David H. Roman - Goldman Sachs Group Inc., Research Division

All right. I know you're going to give some more detail on the pipeline at the analyst meeting next week. But maybe you could offer us some perspective as to how we should think about the new product cadence as we go through the course of the year. Is 2012 more your clinical data where we start to get the evidence on the potential for out of year growth? Or is this the year where we start to see more approvals coming? And then as those approvals come, how do we square that up from a launch curve perspective, both U.S. and OUS?

Daniel J. Starks

The hotspot in the business to pay particular attention to during 2012 is the impact of the new growth drivers in our cardiovascular business. And so we alluded to this with -- in our prepared comments saying that we would recommend that everybody particularly focus on our CVD business because we're starting out the year with single-digit growth, and that with a lower growth in that part of our business. And we expect to come out of this year with a significant acceleration in the sales growth there. So that's the spot to particularly watch to see how much during the year to monitor our progress. On the CRM side, the quadripolar is going to give us a spike, and it will give us a multiyear spike, and it will set a new standard and eventually competition will get a product offering and we'll be back to the impact of a mature market. But on the CVD side, that's the dynamic part of our business in particular here during 2012. And we do expect stronger growth in the second half of this year that won't -- it's not the kind of stronger growth that will get people especially excited except for its impact, the implications it has for growth rate starting out in 2013. So this will be a bit of a transformative year, and we expect to show proof of sales acceleration during the year with the idea that we will have -- we would expect to have accelerated sales growth in 2013.


I would like to turn the floor back over to Mr. Starks for additional or closing remarks.

Daniel J. Starks

Okay. So we're going to conclude this at this point. And thanks, everybody, for bearing with us as we went longer than usual. And we look forward to talking about all these topics in more next week, and hope everybody will join us for our annual investor conference. And with that, I'll turn it back to you, Jennifer, for your concluding comments. Thank you.


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