Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  
TRANSCRIPT SPONSOR
Wall Street Horizon Logo

St. Jude Medical, Inc. (STJ)

Q2 2007 Earnings Call

July 18, 2007 8:15 am ET

Executives

Dan Starks - Chairman, President, and CEO

John Heinmiller - EVP and CFO

Eric Fain - President, Cardiac Rhythm Management Division

Mike Rousseau - President, U.S. Division

Joe McCullough - President, International Division

Analysts

Mike Weinstein - J.P. Morgan

Ben Andrew - William Blair

Tao Levy - Deutsche Bank

Rick Wise - Bear Stearns

Glenn Reicin - Morgan Stanley

Bob Hopkins - Lehman Brothers

Lawrence Lee - Wachovia

Jason Wittes - Leerink Swann

Presentation

Operator

Welcome to St. Jude Medical's Second Quarter 2007 Earnings Call. Hosting the call today from St. Jude Medical is Mr. Dan Starks, Chairman, President and CEO.

This news release contains 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, as well as 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, as well as the risk factors and other cautionary statements described in the company's filings with the SEC, including those described in the company's annual report on Form 10-K, filed on February 28, 2007. See pages 13 to 20 and the quarterly report on Form 10-Q filed on May 9, 2007, see pages 23 to 24. The company does not intend to update these statements and undertakes no duty to any person to provide any such update under any circumstance.

At this time all participants have been placed on the listen-only mode and the floor will be open for your questions following the presentation. It is now my pleasure to turn the floor to our host to Mr. Dan Starks. Sir, you may begin.

Dan Starks

Thank you, Carly. Welcome to our second quarter 2007 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, President of our U.S. Division, Joe McCullough, President of our International Division, and Angie Craig, Vice President of Corporate Relations.

I want to ask John Heinmiller to conduct his normal review of our second quarter results, along with his typical update for the entire St. Jude Medical business. I will then make a few comments and open it up for your questions. Go ahead please, John.

TRANSCRIPT SPONSOR

Wall Street Horizon Logo

Do you get frustrated during earnings season?

Have you had trades go south because of bad earnings dates?

We know what it's like. We’ve been there. We’re Wall Street Horizon and we work with some of the largest firms on Wall Street.

Founded by former Fidelity Investments executives, we understand the power of trading on good information and the pain and suffering of trading otherwise. We obsess about earnings and economic events calendars so you don’t have to. Accurate. On time. Guaranteed.

Let us help.

Get Smart

Get Wall Street Horizon.

View our Free 30-day trial for investment professionals

To sponsor a Seeking Alpha transcript click here.

John Heinmiller

Thank you, Dan. Sales for the quarter totaled $947 million, up approximately 14%, over the $833 million reported in the second quarter of last year. Favorable currency translations versus last year's second quarter increased this quarter sales by about $21 million.

During the second quarter we recorded a pre-tax charge of $35 million related to the settlement of an outstanding patent litigation matter. Comments during this call referencing second quarter results and our guidance for 2007 full year operating results, including earnings per share amounts, will be exclusive of this item.

Earnings per share were $0.45 for the second quarter of 2007, an 18% increase over earnings per share of $0.38 in the second quarter of 2006.

Before we discuss our second quarter 2007 sales results by product category, with guidance for the remainder of 2007, let me comment on the currency exchange rates we are currently using in our outlook for the remainder of 2007. The two main currencies influencing St. Jude's operations are the Euro and the Yen. For the Euro, we are assuming each Euro will translate into about $1.32 to $1.39. And for the Yen, we are assuming each 119 yen to 123 yen will translate into $1.

Now, for the discussion of sales by product category. For the second quarter, total cardiac rhythm management sales, which include revenue from both our ICD and pacemaker product lines, were $595 million, up 15% from last year’s second quarter. For the third quarter of 2007, we expect total cardiac rhythm management product sales to be in the range of $560 million to $600 million.

For the full year 2007, we now expect total cardiac rhythm management sales to be in the range of $2.300 billion to $2.370 billion, up approximately 12% to 15% versus 2006. For the second quarter, ICD sales were $327 million, up 18% from last year's second quarter, and above our previous guidance that ICD sales would be in the range of $285 million to $315 million this quarter.

U.S. ICD sales were $222 million, up 10% from last year's second quarter. International ICD sales were $105 million, a 36% increase over the second quarter of 2006, with $7 million of the increase due to favorable foreign currency translations.

For the third quarter of 2007, we expect St. Jude Medical ICD sales to be in the range of $305 million to $335 million. This outlook takes into account the normal seasonality that can reduce implant activity during the summer months, particularly in Europe.

For the full year 2007, we now expect ICD sales to be approximately $1.280 billion to $1.330 billion. In preparing our guidance for 2007, we have assumed that the global ICD market grows 3% to 9% as compared to 2006, approaching a $6 billion worldwide revenue market. For low-voltage devices, sales for the second quarter totaled $268 million, up 11% from last year's second quarter, and above our previous guidance that pacemaker sales would be $240 million to $255 million this quarter.

In the United States pacemaker sales were $127 million, a 9% increased compared with last year's second quarter. In our international markets pacemaker sales were approximately $141 million, up 14% from the second quarter of 2006, including a $7 million increase due to favorable foreign currency translations.

For the third quarter of 2007, we expect total pacemaker sales to be in the range of $255 million to $270 million. We now expect our full year 2007 worldwide pacemaker sales to be in the range of $1.10 billion to $1.40 billion. Atrial Fibrillation or AF product sales for the second quarter totaled $100 million, up 25% over the second quarter of last year, and above our previous guidance that AF product sales this quarter would be in the range of $87 million to $97 million.

For the third quarter of 2007, we expect AF product sales to be in the range of $93 million to $103 million. We expect full year 2007 AF product sales to be in the range of $385 million to $415 million. Total sales of cardiovascular products for the second quarter of 2007 were $200 million, up 5% over the second quarter of 2006.

As a remainder, products in the cardiovascular division include mechanical and tissue heart valves, Angio-Seal Vascular Closure, embolic protection, PFO closure and other cardiovascular devices that previously were manufactured either by our cardiology division, or by our cardiac surgery division.

Within this category of products, sales of vascular closure products in the second quarter of 2007 were $89 million, a 2% increase over the second quarter of 2006. Sales of heart valve products in the second quarter of 2007 were $76 million, a 7% increase over the second quarter of 2006.

For the third quarter of 2007, we expect cardiovascular product sales to be in the range of $180 million to $195 million. And we expect full year 2007 cardiovascular product sales to be in the range of $775 million to $795 million. Total sales of neuromodulation products in the second quarter of 2007 were $52 million, up 18% from the second quarter of 2006. For the third quarter of 2007, we expect sales of neuromodulation products to be in the range of $45 million to $50 million. And we expect full year 2007 neuromodulation sales to be in the range of $190 million to $200 million.

The geographic breakdown of St. Jude Medical sales in the second quarter of 2007 was 56% in the United States, versus 44% outside the United States. This compares to 58% in the U.S., and 42% OUS in the second quarter of 2006.

A detailed geographic breakdown of this quarter sales by product shows high voltage at $222 million U.S. and $105 million OUS, low voltage at $127 million U.S. and $141 million OUS, AF products at $44 million U.S. and $56 million OUS, Cardiovascular at $88 million U.S. and $112 million OUS, and finally neuromodulation products at $46 million U.S. and $6 million OUS.

The gross profit margin this quarter was 73.3%, representing a half of a percentage point improvement over the second quarter of 2006 and up two-tenths of a percentage point sequentially from the first quarter of 2007. For the full year 2007, we continue to expect gross profit margins to be in the range of 73% to 73.5%.

Our second quarter SG&A expenses were 36.8% of net sales compared to 36.1% in last year's second quarter, primarily reflecting the investments made in our U.S. field sales and sales support organizations and market development programs beginning in the second quarter of 2006.

In the first quarter of 2007, SG&A expenses as a percentage of net sales were 37%. We expect SG&A as a percentage of net sales to drop slowly, beginning in the second half of 2007, as we leverage the expanded investments we made in our sales and marketing programs in 2006 and in the first quarter of 2007.

Research and development expenses in the second quarter of 2007 were 12.6% of net sales, compared to 13.1% in the second quarter of 2006. For the full year 2007, we expect R&D expenses to be in the range of 12.5% to 13% of net sales, as we continue to balance delivering short-term results with the right investments in long-term growth drivers.

Other expense was $10 million in the second quarter, and for the third quarter of 2007 we expect the other income and expense line item will be a net expense of approximately $6 million to $9 million. For the full year 2007, we continue to expect the other income and expense line item will result in a net expense totaling approximately $30 million to $35 million.

Year-to-date our effective income tax rate was 27%, which we anticipate will approximate the effective rate for the full year of 2007.

Moving on to the balance sheet, at the end of June 2007, we had $108 million in cash and cash equivalents, and $1.657 billion in total debt. The outstanding debt on our balance sheet primarily represents $1.2 billion of 1.2% senior convertible debentures issued during the second quarter of 2007, $282 million of outstanding commercial paper borrowings, and $170 million of notes issued in Japan, which are due in 2010 and bear interest at a fixed rate of 1%.

Next, I want to offer some comments regarding our earnings per share outlook for the third quarter and the full year 2007. As a reminder, during the second quarter of 2007 we completed the final $300 million of our $1 billion share repurchase program, which is reflected in our guidance.

In preparing our earnings per share guidance we have assumed that in the third quarter of 2007 the share count used in our fully diluted EPS calculation will be about 349 million to 351 million shares, with the weighted average outstanding shares for the full year 2007 coming in at 351 million to 354 million.

The company expects consolidated earnings per share for the third quarter to be in the range of $0.44 to $0.45, and for the full year 2007 we now expect the consolidated earnings per share to be in the range of $1.74 to $1.78.

I will now turn it back to Dan.

Dan Starks

Thank you, John. One of St. Jude Medical's top priorities during the second quarter of 2007 was to continue to implement the growth program we reviewed during our Annual Investors' Conference in New York City on February 9th of this year. Our second quarter results reflect that we successfully did so.

Every major segment of St. Jude Medical's business contributed growth, market share gains or both on a year-over-year basis during Q2 for the third consecutive quarter. Over 75% of our revenue grew at double-digit rates on a year-over-year basis for the second quarter in a row.

We continued to deliver a strong flow of new products to the market. To name just a few, this includes our Zephyr family of pacemakers, our current and promote families of ICDs, new leads and lead delivery systems, and our next-generation EnSite advanced mapping and navigation system.

The U.S. ICD market is slowly beginning to recover as expected. We will need to wait for the other two companies to report their results before we can update our ICD market model for the second quarter. But we estimate that once all the numbers are in we will see that the U.S. ICD market grew in the mid single-digits on a year-over-year basis during the second quarter.

St. Jude Medical's second quarter results reinforced our optimism that the company's growth program is on track and that we will enter 2008 well-positioned to deliver earnings per share growth of at least 15%.

We will now turn the call back to our moderator and open it up for questions. Would each person on the line please limit yourself to two questions, so we can give as many people as possible an opportunity to participate. And Carly with that would you please go ahead and moderate the questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) The floor is now open for questions. Your first question is coming from Mike Weinstein from J.P. Morgan.

Mike Weinstein - J.P. Morgan

Thank you. And nice quarter this morning guys.

Dan Starks

Thank you.

Mike Weinstein - J.P. Morgan

Maybe, if you would just talk about the gains out of the quarter if the numbers here that were seen this morning without seeing other company's would suggested that the company has picked up some market share, so what would be helpful for us, if you could talk about the strength across the quarter, any signs of accelerating strength, if you would? And then as well Dan, if you could talk about or bear to talk about the sales force build out and where that stands today, why you think your reps are on the curve after all the additions you made and particularly last year? Thanks.

Dan Starks

Sure, Mike. With respect to trends during the quarter, we like to stay away from that level of detail because we think it really is not very helpful. We think that the trends across the entire quarter as a whole really are the minimal time line that it makes sense for us to comment about, and we really think that it is probably more helpful to everyone if people worked to understand what has happened in the ICD market and what we should expect going forward, we think it really makes more sense to look at results across two quarters.

But we don't want to make very specific comments about the mid single-digit year-over-year growth that we think we've seen in the U.S. ICD market until we see the other company's numbers. Once we see the other company's numbers our comments undoubtedly would moderate a little bit. But no question that the U.S. ICD market is beginning to come back, no question that the ICD market outside the United States is continuing to grow with a healthy rate.

All of this just reinforces everything that we've seen on a market dynamic basis, and reinforces our confidence that we will see a global ICD market growth this year in the single-digit range, and maybe that we're more mid single and possibly even closer to higher single-digit total global ICD market growth for the full-year. But it's a little bit premature for us to calibrate our comments to that level of detail.

With respect to the build out of our U.S. field sales and support organization, let me refer that to the President of our U.S. Division, Mike Rousseau, and ask Mike to comment on where we stand on that and any additional tone that you could offer.

Mike Rousseau

Yeah, Mike, as you know, we are now working our way through both the training and do not compete periods of a lot of the reps, as well as the ongoing training for the build-out of the sales force. This has clearly allowed us to open new accounts and probably just as importantly penetrate deeper into existing accounts growing our share across the Board.

For the first time we find ourselves in a position of, well, I hope critical mass in the field and being able to handle the product flow, which has been prolific certainly in the last year, year and half. We have also been able to exercise the marketing programs directly related to having excellence and confidence in the field. We did launch EnSite to support our live, local, direct ICD awareness campaigns, as well as initiate a full-blown referral program, where we get to leverage the opportunity with Cambridge Heart and now most recently Hansen

Finally, I would say that the products and the people have put us in an excellent position from a national contracting perspective, both at the IDN and the GPO level. So it's all coming into place, it will continue to work itself out and I suspect that we will get stronger as the year goes on.

Mike Weinstein - J.P. Morgan

And Mike, just one follow-up on that. Some of the hires you made last year, in my recollection was that some of that probably will be coming off of non-competes in the third quarter. Is that right, by my recollection of this?

Mike Rousseau

That’s correct.

Mike Weinstein - J.P. Morgan

And so, do we see a contribution in the third quarter, maybe in the backend of third quarter and starting in the fourth quarter?

Mike Rousseau

You know, Mike, there is no specific timeline. It will be over several quarters that people will get reintegrated and then we'll begin to see the results.

Mike Weinstein - J.P. Morgan

Okay.

Dan Starks

Then, Michael, you are exactly right. As we have mentioned in the past and let me just reiterate it to keep it fresh in everyone's minds with this. We reiterated in the past, the expansion of our field sales and support organization last year began, as everyone would recall, began in the second quarter, but really was significantly strong in the third quarter.

So there was quite a bit of an accelerated rate of expansion during the third quarter, which is people coming off non-competes, and as people are fully trained in, initiate the selling process in front of customers, we would expect they really see that, not so much in the third quarter. We'd expect to start to see that in the fourth quarter and we’d really then expect to see that in a stronger way starting out in 2008. And then again there was additional expansion in the fourth quarter where you’d start to expect to see the contribution in the first quarter of 2008 and really a full contribution in the second quarter of 2008. More adds again during the first quarter of 2007.

So you are exactly right that that’s the slope, and the second quarter results that we are seeing did not yet reflect the benefit of all of that additional contribution, all that additional growth dynamic they were looking forward to in the last part of this year and beginning of 2008.

Mike Weinstein - J.P. Morgan

Great, I’d look for them this time maybe. Thanks.

Operator

Thank you, your next question is coming from Ben Andrew from William Blair.

Ben Andrew - William Blair

Yes, just wanted to follow up on kind of the rep discussion. If you think about your presence in the market at this point, do you think you have full saturation? Mike you talked about the fact you’re in your critical mass but is there lot further you can go in the next 12 months with them?

Dan Starks

Ben let me ask Mike Rousseau to come in.

Mike Rousseau

Yeah, Ben, I think that that’s exactly right, that we will continue to see the sales force mature as we move forward.

Dan Starks

Ben, you are right that the current size we think fully covers the market. So we think we are right-sized for the current business. We expect to continue to expand the field sales and support organization as our market share expands and as the market size continue to expand, but right now we feel very good about the level of saturation, level of coverage that we have on a national basis.

Mike Rousseau

Ben, one final notice is that again our account, our ability to open new accounts, service those accounts and get deeper penetration to the current base of accounts, is all accelerating force.

Ben Andrew - William Blair

Okay and just briefly on the international side, the growth there has been good. Do you think that you can sustain this level of growth or is it likely to even accelerate, because the penetration rates remain pretty low in those markets? Thanks.

Dan Starks

Ben, I'm going to frustrate you a little bit by not answering directly. You are asking a good question, and you asked whether we think the growth rate is going to accelerate, though I want to just offer the discipline for our communications that we'll keep our comments consistent with the guidance that we've already given. We've given guidance now only through the end of 2007. We've not yet given guidance for 2008, so I don’t want to indicate one way or the other what we think the international ICD growth for St. Jude Medical might be in 2008.

We indicated earlier this year in our annual update to investors that we thought on a longer-term basis that we would expect the international ICD market to continue to grow somewhere in the range of about 15% to 20% and that continues to be the state of our thinking.

Ben Andrew - William Blair

Thank you.

Dan Starks

You're welcome.

Operator

Thank you.

Dan Starks

Yeah. Thank you.

Operator

Thank you. Your next question is coming from Tao Levy from Deutsche Bank.

Tao Levy - Deutsche Bank

Hi, good morning. I had a question on the pacemaker side of the business. Any new items there that are leading to the continued strength in that segment? And also just a clarification, the CRT business, the pacemaker alone, is that within your pacemaker numbers and any changes there in that business? Thanks.

Dan Starks

Tao, this is Dan. Let me answer your second question first. The CRT-P portion of our revenue, the biventricular configuration of our pacing system is reflected in our pacing numbers. So, yes, to that part of your question.

With respect to pacing generally, yes, there are a number of important dynamics that are behind the strength of our pacing results. It would start really with the product flow. It's the Victory line of pacemaker that we launched not so long ago and really then with a good contribution starting to show with the recently launched Zephyr family of pacemakers.

In addition, remember that one of the big limitations on our growth results on the pacing side in recent years has been our programmer platform. And so the launch of our Merlin Programmer platform over the last several quarters and the full launch of that both on the low-voltage side and on the high-voltage side had been another third dynamic that is clearly a strong contributor to the strong global pacing results that you see reflected here in the second quarter.

Then in addition to that the expansion of our field coverage and field support that Mike Rousseau was talking about previously, really the fourth dynamic. So, none of this is an accident and none of it is luck. It's really a result of very strong sustained flow of new products, on the device side, on the lead side, on the lead delivery system side, and on the programmer side, and as the result of the multi-quarter focused expansion of our customer field sales and support programs, as well as the expansion of our educational and broader marketing programs.

Tao Levy - Deutsche Bank

All right. And if I can just touch on the Japanese CRT-D market, you guys are about to launch a couple of new products there. Any sort of insight into the dynamics of that opportunity, market size, acceptance of these technologies in that country? Anything would be helpful, thanks.

Dan Starks

Tao, for St. Jude Medical we expect a gradual strengthening of our Japan ICD business supported by the pending launch of our CRT-D. We do expect a sharp inflection point, we expect to see a gradual strengthening of our Japan contribution. I think that over time, we would expect to see the product mix in Japan to be very similar to what we are seeing elsewhere on a global basis, but on the St. Jude Medical side as you know, we were the third company to enter the market, our market share there is a little bit under-reflected and we have a little bit smaller than our global market share, but with a good starting point for that program.

And as we launched CRT-D, we expect that to start in a small way, but we really think that in the same way that you have now seen our ICD and pacing program across the board strengthen where we've had a complete product line for four or eight quarters, I think that we now will begin to have a full product line in Japan. I think that we would expect to have our results show off the same kind of slope and strengthening of our business in Japan.

Tao Levy - Deutsche Bank

Thank you.

Operator

Thank you. Your next question is coming from Rick Wise from Bear Stearns.

Rick Wise - Bear Stearns

Good morning, Dan. I have a couple of product questions maybe you could up just to run for a couple of quick product timing of launch and schedule, for example on the wireless front the wireless ICD and CRT-D, is that still on track for early '08 or can you give us timing there and the Merlin that accompanies that? And maybe you can update us on the Unity platform as well?

Dan Starks

Sure, Rick. I am going to ask the President of Cardiac Rhythm Management Division, Eric Fain, to address your questions and again I'd just kind of caution that what we will offer is, would be timelines consistent. Well, we will address our product flow consistently with the way that we did at our annual update in February in New York City, and we are not going to go beyond that and talk further about our whole product lineup for 2008. But generally, the product flow that we've previously expressed is absolutely on track. And let me ask Eric Fain if you have additional details you want to offer or addition flavor that you could help with?

Eric Fain

Sure, Dan. As stands, we are on track with what we discussed in New York in February. We've received regulatory approval, both in the U.S. and OUS for the current and promote devices for the RF model that includes CE marking of the RF devices. We are expecting, we are right now doing, we are in the process of limited release in the Europe with the RF as we are in the U.S. with non-RF models and expect to go ahead and have a launch for both of those in towards, in the fourth quarter.

Rick Wise - Bear Stearns

Do we have the full program and support for the current and promote RF models?

Eric Fain

Yes. And full program and support for those as well.

John Heinmiller

And Rick, as you recall, when we talk about the Unity platform remember that, that's not the brand name that we've given to specific devices, that refers to the hardware platform and current and promote are the first versions of devices from that Unity platform. So, we are now in the market with the first devices on the Unity platform and going forward the additional devices that we have teed up are all of the Unity platform.

Rick Wise - Bear Stearns

Right. And I trust that's also a main factor helping gross margins as well. Just a last- and there have been a lot of controversies on the AF front in the recent weeks and perhaps headlines suggesting it's overused or questioning its use- I am just curious to hear your updated thoughts on those controversies and how it’s likely to effect or not St. Jude going forward. Thanks.

Dan Starks

Sure yeah, Rick, I personally kind of had a hard time agreeing with the characterization of controversy as I know you are exactly right. I think it is more just people who are not really familiar with the space as they start to become familiar with it. They raise typical kinds of questions, all of which we have very good answers for. So as people talk about atrial fibrillation and what is it that’s been going on in the clinical practice of atrial fibrillation and what have we now been seeing.

For the last, really it’s been the last fourteen years in atrial fibrillation practice. There we see just a very reasonable steady sensible progression and development of clinical practice. We see the same kind of progression in the medical community consensus of how to best care for patients suffering from atrial fibrillation.

As we have indicated now for the last fourteen years, on the economic side one of the beauties of device-based approaches to cure atrial fibrillation is how cost-effective it is and how much money we can save every national health care system with a fully developed, state-of-the-art, device-based approach to curing atrial fibrillation rather than having a patient suffer with lifelong drug therapy and Coumadin treatment and risk of stroke complication, and all the expenses associated with additional risk of stroke.

So we see this as a huge source of benefit for St. Jude Medical and for others focused in helping patients suffering from atrial fibrillation to really keep investing in this technology, keep advancing with the state-of-the-art, fund the landmark clinical trials that need to be done that we were behind.

And that we're doing our best to help promote and help bring forward and help generate the additional clinical evidence that everyone needs to see, and that we are very enthusiastic about, helping to create and make the best decisions on additional changes to the segmentation of patients that are to be indicated for atrial fibrillation ablation procedures and just generally to help coordinate for atrial fibrillation patients and help the economics surrounding the best care for AF patients.

So I think that as you see more attention, I think of it more as attention coming to this space rather than real controversies, because as people get better information and get up to speed with what we've seen now for the last 14 years, I think you are just seeing more focus on atrial fibrillation in the same way that we were really the very first to see it and the first to help bring it forward to where others are now paying more attention.

Rick Wise - Bear Stearns

Thanks so much Dan.

Dan Starks

You're welcome.

Operator

Thank you. Your next question is coming from Glenn Reicin from Morgan Stanley.

Glenn Reicin - Morgan Stanley

Good morning. Thanks for taking my call, couple of follow-up questions. In the beginning of the year, I think you've stated that you had about 400 reps that were garden leave and that they were not productive because of non-competes. What are you down to at the end of Q2?

And then secondly, I have another follow-up, but secondly you talked about Japan, sort of helping you in the future. I was just wondering was the gain in Japan outsize, relative to the handsome growth you had overseas for the first half of the year and if so, if you can help us quantify?

Dan Starks

Yeah. Sure Glenn and good morning. On your second question I kind of keep fresh on that, because I didn't fully understand it and I'm going to ask you to just walk me through it again. But, on the first question that you asked, with the numbers as I recall and the transcript will be more precise then my recollection. But, the numbers as I recall we've expressed in the past are that over the four quarters ended Q1 of 2007 we expanded our U.S. field sales organization by about 450 people.

About 40% of whom were already experienced in the pacing and ICD business. And so I think that's the state of data that we've offered. We've not broken out in more detail quarter-by-quarter how many of the headcount addition were experienced in the pacing and ICD businesses and how many were not.

But I suspect that that 40% number would be at least roughly appropriate across the whole pool on our quarter-by-quarter basis. Although, I haven't made the calculation and don't have that exact data, and I'm really just giving you a very rough estimate. So, that's where we stand with it. So then keep in mind that with the people that came into the field organization who were not already experienced, there were all kinds of different circumstances.

Some of the people that we added were immediately able to help on a contribution basis. For example, we were able to add this headcount expansion including activity such as administrative support so that the people who already were fully trained got up to speed in front of customers and were able to be effective in front of customers, could devote more of their time to customer activity. So, there was that level of expansion.

There also were people that we added at a level where it was going to take a year or two of training for them really to be able to contribute. So, at such a wide spectrum of circumstances you won't be able to dissect it and we haven't offered to dissect it. But, generally speaking, as you just want to step back then and say, okay well big picture, what's the impact of all of these? The impact of it is fully captured in our guidance and so that's probably the best answer I can give you, even though it’s a little bit incomplete. And let me just stop there and ask you if you want to push me more on this part of…

Glenn Reicin - Morgan Stanley

As we enter Q3 are the number of reps we have that are still on temporary leaves substantial or is that largely behind us?

Dan Starks

It's substantial. Definitely substantial.

Glenn Reicin - Morgan Stanley

And then what about Japan, what I meant to ask and data wasn’t clear, was the growth in Japan for the first half of the year substantially greater than the overall growth rate that we saw overseas? And if so, is there any way to quantify how big of an impact that was?

Dan Starks

Okay. Let me ask Joe McCullough if he can comment on that. I don't actually know the answer to your question. Let me ask Joe if he can comment on that.

Joe McCullough

Sure, I think the growth in our ICD business for this year is pretty evenly geographically spread. Except for in Japan the growth rate is a little bit lower, because we do not participate in the CRT-D segment, but as you know we are just starting to do that. We've had good growth in our traditional business in Japan in the first half of the year and we expect to continue that growth in traditional business and now, as Dan said earlier, start participating in the CRT-D segment.

Glenn Reicin - Morgan Stanley

Okay. Medtronic saw that benefit, a very substantial benefit, that's build the company?

Joe McCullough

I am sorry.

Glenn Reicin - Morgan Stanley

Medtronic saw that benefit already in Japan. We still haven't seen that yet on European now.

Joe McCullough

You are right, Glenn. Although, I think that the one caution that I would add, would just to reiterate, that I know at least some commentators have suggested that with Medtronic, and their CRT-D launch in Japan, there was a bit of an inflection point. We don't expect the sharp inflection point with CRT-D in our sales results. We expect a gradual contribution of CRT-D in Japan to our ICD sales results.

Glenn Reicin - Morgan Stanley

Okay. But just one more question for John. If I look at your SG&A spending levels in the second quarter, they do look higher than where you guided, and I see we have a luxury of investing more into promotion. What's clear to me is as BSX holds back on spending, you have up until now taken advantage of increased market development standing given their cutbacks. Is there any way you could quantify how much greater that spending was and where it went for the second quarter?

Dan Starks

John, let me just, I don't know, if you have comments or not, but let me ask if you do?

John Heinmiller

Well, I think, we wouldn't quantify, specifically where the investments were made, you obviously saw a significant presence from St. Jude Medical at the Heart Rhythm Society meeting that was captured in this quarter and actually the higher sales results tend to drive higher absolute dollar SG&A spending, and where our SG&A spend as a percentage of net sales actually declined a little bit sequentially from first quarter to second quarter. We are beginning to see just a gradual impact of that leverage that we expect now to slowly continue for the second half.

Glenn Reicin - Morgan Stanley

And so how much is correct though the actual level of spending was higher than you initially had guided given the strength of the business?

John Heinmiller

Not necessarily, I think we have given an overall annual guidance and we are right on track with that kind of spending so there wasn't really any unusual spending that took place during the second quarter.

Glenn Reicin - Morgan Stanley

Okay. Thank you.

Operator

Thank you. Your next question is coming from Bob Hopkins from Lehman Brothers.

Bob Hopkins - Lehman Brothers

Thank you and good morning.

Dan Starks

Good morning.

Bob Hopkins - Lehman Brothers

Just a follow-up on the previous questions about sales force. Just the sort of one last question maybe at what point do the bulk of the non-competes runoff? Is that the third quarter or is it fourth quarter, at what point would that be behind us?

Dan Starks

At the end of this year the bulk of that is behind us, Bob.

Bob Hopkins - Lehman Brothers.

Okay. And then in the United States, your ICD growth, are you giving any increased tailwind from a mixed shift, a greater mixed shift is CRT-D or is this still just primarily increased penetration of new accounts?

Dan Starks

It is primarily increased penetration of accounts now that does include continued penetration of new accounts, but that also includes our getting deeper and gaining a larger share of the rotation EnSite customers that we already have begun to do business with now, as their experience with our technology expansion as we continue to offer new devices. We get a larger share of the market inside a particular customer account.

So it's both of those. There we have been a little bit underrepresented in our CRT-D as a percent of mix on a national basis and there has been just a very little bit of mixed shift in favor of more CRT-D, but it’s been very little and I'd hesitate to even call it material. There has been a very little bit of increased CRT-D as a percent, but not by much.

Bob Hopkins - Lehman Brothers

And then lastly, I was wondering if I could ask Eric to just offer some broad comments, he’s now obviously in a leadership position at CRM for a short period of time. But if you could ask just to offer up any comments that you think might be helpful to us, any changes in strategy with the new leadership, just anything that you think might be helpful and thanks.

Dan Starks

Bob, I will put your question over to Eric, but before I do, I want to just jump in and say something that Eric won't. As you said, Eric has been in a leadership position only for a short period of a time. I know you know this, but I want to make sure that it’s clear to people, that Eric has been in our business now for- and in the ICD business- for 20 years and he has been one of the key leaders in the St. Jude Medical Cardiac Rhythm Management Division since 1996, at least that’s when I came on the scene, so I can’t speak with the same level of enthusiasm for pre-1996.

But since 1996 Eric has been absolutely a key leader and integral contributor for the success of our Cardiac Rhythm Management business and an integral contributor to the creation and execution of the strategy that we’ve been implementing now for the last 11 years. So it really isn’t, I want to make sure people don’t think that now we've got some new person who has come on board.

We really have very good continuity in strategy, very good continuity in leadership, very good continuity in all parts of our Cardiac Rhythm Management program. Now having said that, Eric still if you would like to add anything you are welcome to it.

Eric Fain

Sure. I think the main focus as we talked about in 2006, we introduced over 20 new products in the CRM across all the main product lines. In the first half of 2007 we also introduced a good number of products also again hitting all the major segments and will do that again in the second half of this year. Our focus is going to be to continue to maintain that pipeline, putting out products in all the major segments, and then also now that we've reached the certain point of maturity in terms of our technology, the focus going forward is going to be more towards differentiating new features, bringing those to the market place, and really focusing on clinical trials that will demonstrate important clinical outcomes.

Dan Starks

And Bob one of the reasons that we put that where it is, many of us on this conference call as we do, it's partly just a kind to show with our behavior, rather than a just pay lip-service to the fact that we are really running the business together. We've been for years, we've created this strategy together, we've been executing together, and we got a very broad-based, well-calibrated, deep leadership team. And so, that's again just a little bit responsive to what you are getting at.

Bob Hopkins - Lehman Brothers

Right, thanks so much. Appreciate it.

Operator

Thank you. Your next question is coming from Larry Biegelsen from Wachovia.

Lawrence Lee - Wachovia

Hi. This is actually Lawrence Lee for Larry.

Dan Starks

Hi Lawrence.

Lawrence Lee - Wachovia

Hi. Couple of questions on the ICD market.

Dan Starks

Go ahead.

Lawrence Lee - Wachovia

These are I think your ICD numbers in the quarter, but could you place your growth expectation in the market for the year? Are you just waiting for the other companies to report or what not?

Dan Starks

We have actually offered some additional confidence and optimism in our guidance for the year. Part of subtlety is that if you look at the annual guidance that we offered a quarter ago, the low end of that guidance was $1.250 billion. The low end of our guidance for the year now with today's additional communication has been increased up to $1.280 billion. So, there is a meaningful increase in the low end of our range.

We've tightened the range. Remember we had a $150 million range for the year just given the volatility that we've all seen especially in 2006. And so, what we've done is we've tightened the range, but with a degree of optimism. So, we brought up the lower end by $30 million. We brought down the top end by $20 million, but all in all I think it's a more robust guidance. And then that's going hand-in-hand with some increased optimism on the pacing side of our guidance, bringing up to low-end by $25 million and increasing the high-end another $10 million.

And so keep in mind that we really view the pacing and ICD business as a unified business with interdependent growth dynamics and a little bit of inverse growth dynamic in the underlying market rates of the pacing and ICD business. So, I think it's really very helpful to take the ICD guidance together with the pacing guidance and that's partly why we begin that part of our guidance, talking about our total combined CRM guidance. And I think you see really some good confidence and increased optimism, and you see that we've reflected the level of success that we've enjoyed here in the first half of the year.

Lawrence Lee - Wachovia

Okay. Thanks. Also can you talk about any pricing trends that you see going in market?

Dan Starks

On a total global basis the ASPs have been fairly stable.

Lawrence Lee - Wachovia

Okay. Thanks.

Dan Starks

And then let me just take one last question. Carly please go ahead with the last question.

Operator

Thank you. Your final question is coming from Jason Wittes from Leerink Swann.

Jason Wittes - Leerink Swann

Hi, thank you very much. I guess one last question on the sales force, just a clarification and then a second question. And that is, first off, in terms of the reps that are non-competes, can they do nothing until those non-competes are completed? And then can we anticipate that once they do come on-line there is still a bit of a training period and then a lag before we actually see the impact? Is that what you are implying?

Dan Starks

Jason, I'll put your question to Mike Rousseau and ask Mike if he would care to comment.

Mike Rousseau

Jason, we always are mindful and respectful of non-competes that people bring with them when they move over to St. Jude. Having said that, there are lots of things that they can do. They can contribute in other areas, they can learn other lines. They can help us from a marketing perspective. So, there are things for them to do through that year. But, the focus as they come towards the end of the last 90 days is really getting them prepared to move back into their territory and compete at the highest possible level.

Jason Wittes - Leerink Swann

Okay, and another question. You have gone into agreements with both Hansen Medical and Cambridge Heart. Can we assume that you are looking to potentially use those relationships, to potentially bundle some products together. Any comments on that?

Dan Starks

I think Jason, at any time there is kind of a multiple question all-in-one there. I want to work to sort out the pieces of it. I think the Hansen relationship is a very different relationship from the Cambridge Heart relationship.

When we think about the Cambridge Heart relationship, we remember that it is especially interesting to the St. Jude Medical growth strategy, as they contributed to our referral development program and so there as we have put the personnel capacity into the field to create a significant amount of capacity to spend a significant amount of dedicated time reaching out to referring physicians, among the content that we can take to referring physicians is information about the Microvolt T-Wave, we've evolved as in technology in the way that may deserve the place in the practice of these referring physicians.

And so that's really what comes to mind first when you ask what is the thinking behind our working relationship with Cambridge Heart, if we really think it is a good technology. It's a technology that deserves the place in the practice of referring physicians in particular and it's a good way for them to help organize the thinking and help provide the good level of clinical insight patients in the course of determining whether we make a referral to physician who could make the final evaluation on whether to prescribe an ICD.

On the Hansen Medical side, what we can do there is, we are working to do everything that is appropriate to help, make the procedure for curing atrial fibrillation more efficient and effective, and to the extent that clinicians would like to use the Hansen Medical Sensei System- one of the beauties of that system is, it’s an open front and open architecture design and it's a system that can provide their remote cancer to control, but they can do it with anybody's device.

And so that's pretty appealing and we think that deserves a place in the market. And we are happy to help associate with that technology. And so, what we are doing there, the relationship with Hansen is primarily a relationship where we've agreed to provide the interface between our EnSite System which really has got so much attraction and now has such a valuable contribution to make to the clinical practice, so that our EnSite System can be used with the Hansen's Sensei System, if that's what a physician wants to do. So that's really the focus there on the Hansen side of our collaboration.

Jason Wittes - Leerink Swann

Okay. It's obviously a little early to see much of any movement with Hansen, but for Cambridge Heart is that fully rolled out? And does that actually contribute to any sales synergies in this quarter?

Dan Starks

I am going to again segment my answer to two.

Jason Wittes - Leerink Swann

Okay.

Dan Starks

On fully rolled out, I can answer that. On contributing to sales, I am going to waffle. On fully rolled out, no. What we have done is, we've focused on training and so we've made a lot of progress on the training side and trained now a very good part of our field organization and really have a good level of training completed.

On the topic of sales, we're really not going to comment on sales of Cambridge Heart products with the idea that we want to be very sensitive to the fact that Cambridge Heart is a public company so that any comment with respect to sales would be far more material to Cambridge Heart than it would be to St. Jude Medical.

Jason Wittes - Leerink Swann

Actually, I was referring to, you know, actually helping this broad into referrals, it is just too early to know.

Dan Starks

I think it's too early to know. You know anecdotal success and plenty of reasons for us to be optimistic that this is a productive program well-conceived and well worth to continue to execute on.

Jason Wittes - Leerink Swann

Great.

Dan Starks

And with that I apologize to those of you we haven't given an opportunity to ask your question, but we've reached the limit of our call and Carly I'd like to ask you to make any concluding comments.

Operator

Thank you. Today's call is being recorded and will be available for replay beginning at 12 PM Eastern Standard Time. The dial-in numbers of the U.S. are 877-519-4471 and International 973-341-3080, and enter the pin number of 8773644. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.

TRANSCRIPT SPONSOR

Wall Street Horizon Logo

Do you get frustrated during earnings season?

Have you had trades go south because of bad earnings dates?

We know what it's like. We’ve been there. We’re Wall Street Horizon and we work with some of the largest firms on Wall Street.

Founded by former Fidelity Investments executives, we understand the power of trading on good information and the pain and suffering of trading otherwise. We obsess about earnings and economic events calendars so you don’t have to. Accurate. On time. Guaranteed.

Let us help.

Get Smart

Get Wall Street Horizon.

View our Free 30-day trial for investment professionals

To sponsor a Seeking Alpha transcript click here.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: St. Jude Medical Q2 2007 Earnings Call Transcript
This Transcript
All Transcripts