Boston Scientific Q2 2007 Earnings Call Transcript

Jul.20.07 | About: Boston Scientific (BSX)
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Boston Scientific Corp. (NYSE:BSX)

Q2 2007 Earnings Call

July 20, 2007 8:30 am ET

Executives

Dan Brennan - VP, IR

Jim Tobin - President & CEO

Paul LaViolette - COO

Sam Leno - CFO

Paul Sandman - EVP & General Counsel

Analysts

Dhulsini de Zoysa - Cowen & Company

Bob Hopkins - Lehman Brothers

Rick Wise - Bear Stearns

Glenn Novarro - Banc of America Securities

Mike Weinstein - J.P. Morgan

Lawrence Keusch - Goldman Sachs

Glenn Reicin - Morgan Stanley

Tim Nelson - Piper Jaffray

Bruce Nudell - UBS

Rishi Sadarangani - Alliance Bernstein

Joanne Wuensch - BMO Capital Markets

Presentation

Operator

Welcome to the Q2 Boston Scientific earnings conference call (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Mr. Dan Brennan. Please go ahead.

Dan Brennan

Thank you, Mary, and good morning, everyone. Thank you for joining us. With me on the call today are Chief Executive Officer, Jim Tobin; Chief Operating Officer, Paul LaViolette; and Chief Financial Officer, Sam Leno.

We issued a press release a short time ago regarding our Q2 2007 results. Key financials are attached to the release and we've also posted support schedules to our website, which you might find useful as well.

The agenda for this call will include a review of the financial results from Sam; and update on the CRM business from Jim; a review of the cardiovascular and other businesses; and an update on our quality initiatives from Paul; a CEO perspective from Jim; and a question-and-answer session.

Before we begin, we will be making some forward-looking statements on the call today so I would like to remind everyone of the Safe Harbor statement. This call contains forward-looking statements. The Company wishes to caution the listener that actual results may differ from those discussed in forward-looking statements and maybe affected by, among other things, risks associated with new product development and introduction, clinical trials, regulatory approvals, competitive offerings, intellectual property, litigation, the Company's overall business strategy, and other factors described in the Company's filings with the Securities and Exchange Commission.

As this is Sam's first time joining us, I will now turn it over to Jim Tobin for some brief introductory comments.

Jim Tobin

Thanks, Dan. Before we get into the results of the quarter, I would just like to take a minute and officially introduce Sam Leno as our new CFO. I've known Sam for 20 years. We first met when we worked together at Baxter. He's exceptionally well qualified to take on this role and truthfully; it was the only phone call that I made in this regard.

He's hit the ground running and contributed already in just over a month he's been here and he's going to do some things differently. He's going to take a different approach from time-to-time and I think you're going to like that approach.

In general, I've found him in the past to be on the conservative side and with a tendency to disclose more rather than less, which I think is something you're going to like. He's a solid guy, and I know we're in good hands and it's a new day and with a new CFO.

So now let me turn it over to Sam to take you through the numbers.

Sam Leno

Thanks, Jim. I'm very excited to be part of Boston Scientific team as I celebrate my six-week anniversary with the company and I still feel like I'm running alongside of a high-speed train trying to hop on.

I know many of you from my years in orthopedics and look forward to interacting with the investment community in the weeks and months to come in my new role as Chief Financial Officer at Boston Scientific.

My focus today and on future calls will be on providing a complete financial overview of the quarter while simplifying our disclosures in our discussion of both GAAP as well as adjusted financial results. I'm pleased to report that for the second consecutive quarter, we achieved revenue results in the upper half of our guidance range.

Total revenue for the second quarter was $2.071 billion, which is well in-line of our guidance range of $2 billion to $2.1 billion. This was slightly less than last quarter's revenue and 2% lower than our reported revenue for the second quarter of 2006.

In the second quarter, the contribution of foreign currency to sales growth was a positive 1% or about $28 million. As a reminder, our acquisition of Guidant closed on April 21st of last year. So on a pro forma basis, assuming Guidant was included for the entire second quarter of last year, this quarter's revenue represented a 6% year-over-year decline, driven principally by changes in both the DES and CRM markets.

U.S. revenue declined 7% compared to last year on a reported basis and 12% on a pro forma basis. International revenue increased 7% on a reported basis and 3% on a pro forma basis. As you know, there have been challenges in the drug eluting stent and cardiac rhythm management markets throughout 2006 and 2007, and these were the main drivers of our revenue reductions from last year.

Paul will delve into more detail on the DES market dynamics for the quarter, but I'll share with you the revenue results at a very high level. Worldwide DES came in at $437 million, just above the midpoint of our guidance range, which was $405 million to $460 million, and down 32% from the second quarter of 2006.

Geographically, U.S. DES revenue was $249 million. That was at the low end of our guidance range of $245 million to $275 million and 42% lower than the second quarter of last year. On the other hand, internationally DES sales of $188 million actually exceeded the top end of our guidance range, which was $160 million to $185 million, and was 14% lower than the second quarter of 2006.

The success of our TAXUS Japan launch was a key factor in the strength of our international numbers compared to the guidance range and should contribute favorably to continued strong performance in the third quarter and beyond. Jim will provide more color on the CRM market, as well as the revenue results for the quarter.

Reported revenue, excluding DES and defibrillators, which represents slightly more than 60% of our consolidated revenue was $1.257 billion for the quarter, producing solid growth of 6% over the second quarter of 2006 and 3% sequential quarter growth over the first quarter of this year.

We have posted a second quarter divisional revenue schedule on our website, so I won't go into a lot of detail on all of our businesses here, but I would like to point out some of the key highlights. Our worldwide Endosurgery business continued its track record of double-digit growth with a very balanced 11% growth over the prior year with endoscopy, urology, and oncology growing at 10%, 11%, and 12% respectively.

Neuro modulation revenue of $80 million represents an increase of 36% over prior year and 29% over the first quarter of this year on the strength of the pain management product portfolio.

As a side note, I also want to clarify how we account for bulk revenue shipments. In the second quarter and in all future quarters, the amount of revenue resulting from any bulk shipments that exceeds 30 days of inventory on the shelves at the respective customers at the end of each period will be deferred into future periods.

The CRM comparables for the second half of 2007 are easier than the first half. Normally we would expect summer seasonality to result in a more dramatic decline in sales between the second and third quarters, however we do have the momentum of our TAXUS Express launch in Japan ramping up nicely in the second half, together with good growth expectations in our diversified portfolio of-other businesses.

Looking at gross profit margin, reported gross profit margin for the quarter was 72.8%, which was equal to the first quarter of 2007 and 490 basis points higher than the second quarter 2006. The adjusted gross profit margin for the quarter, and that excludes stock compensation and acquisition-related charges, was 73.1%, and that was equal to the last quarter and 370 basis points lower than the second quarter of 2006.

Lower worldwide DES sales, our investments in quality, and the cost of the latitude communicators that we shipped to our patients in the second quarter were the primary drivers for the year-over-year gross profit margin decline.

Total revenue was 2% lower in the second quarter of 2007 versus the second quarter of 2006, but drug-eluting stents represented 21% of our consolidated sales in the second quarter of this year, and that was down from 31% of consolidated sales in the second quarter of last year.

The good news is that we have grown sales for the rest of the portfolio at 12% on a reported basis, but the gross profit margin on the balance of the portfolio is not as high as DES. Spending on our quality initiatives in the quarter also negatively impacted gross profit margin by about $19 million or 91 basis points compared to last year.

Reported research and development spending of $275 million for the quarter declined 3% compared to prior year. On a pro forma basis, excluding stock compensation expense, R&D expenses were down $5 million from prior year, and that's principally due to lower spending on the Endovations project, which Paul will talk about in more detail in a few minutes.

R&D spending was 13% of sales, as we continued to invest to fuel our future growth. Our reported SG&A expenses in the second quarter were $752 million, representing an increase of 3% over prior year.

Adjusted SG&A expenses, excluding amortization, stock compensation expense, acquisition-related, and other one-time charges were $723 million and represent a $10 million or 1% reduction from the pro forma SG&A expenses of $733 million in the second quarter of last year.

Reported operating income for the quarter was $280 million or 13.5% of sales. On an adjusted basis, again excluding stock comp, amortization, acquisition-related, and one-time charges, operating income was $474 million for the quarter, or 22.9% of sales.

We are focused on improving this going forward, as an integral part of our forecasting process for 2007 and our 2008 annual operating plan process. This will include realizing expected synergies in the Guidant acquisition, our lean OpEx initiatives that you've heard us talk about briefly in the past, as well as identifying plant efficiency improvements to make better use of our scale.

Interest expense of $146 million in the quarter was $35 million higher than the second quarter of last year, reflecting a full quarter of the increased debt from the Guidant acquisition. Our blended interest rate for the quarter was 6.2% and one notable other income expense item was a $23 million net charge to earnings to write down several of our publicly traded and private company investments that I will cover in my cash flow comments.

Our tax rate results are driven primarily from a manufacturing strategy. The reported tax rate for the quarter is 9% and the adjusted tax rate, excluding discreet tax items and special charges is 21%. In the second quarter, the principal reason for the 9% GAAP rate was the successful resolution of several previously outstanding tax matters in the quarter. GAAP earnings per share for the second quarter was $0.08 compared to our guidance range of $0.04 to $0.09 and the first quarter of $0.08. On a comparable basis to our adjusted earnings per share guidance range of $0.15 to $0.20 for the second quarter, our adjusted EPS was $0.18.

In the past, when discussing adjusted EPS we have excluded amortization, acquisition-related and other one-time items and stock compensation expense. In the future, including our guidance for the third quarter this year, we will exclude only amortization and acquisition-related charges. Going forward, any other noteworthy items that are included in our GAAP results should also be included in our adjusted results and they will be disclosed and discussed fully in detail.

We are making these changes with the goal of simplifying the understanding and interpretation of our published financial results each quarter. So to assist you in your modeling, we're also posting on our website immediately after this call quarterly GAAP to adjusted earnings reconciliations, excluding only amortization and acquisition-related charges back to the first quarter of 2006.

In using this new adjusted basis, excluding only amortization and acquisition-related charges, earnings per share for the second quarter of this year were $0.16, which would have been at the high end of a comparable range of $0.13 to $0.18. Earnings per share for the first quarter of 2007 on this basis would have been $0.17. Our amortization expense for the quarter was $158 million, stock comp was $32 million, and the acquisition-related charges were $11 million. All of our per-share calculations were computed using 1.5 billion shares outstanding.

Turning to working capital management, DSO was 63 days at the end of the quarter, and that's equal to the second quarter of 2006, but up three days from the first quarter this year. During the second quarter, we transitioned a collection responsibility for our CRM and cardiac surgery receivables from Abbott to our shared services center here in Natick. The time and focus to implement this transition has negatively impacted the collection experience of the BSC legacy as well as CRM and CS receivables temporarily.

Days inventory on hand were 130 days, which was seven days higher than the first quarter and an increase of 12 days over the second quarter of 2006. Principal contributors to our growth in days inventory on hand were the additional inventory necessary to support our PROMUS and DES platform and increased inventory related to CRM in support of the continuous improvement efforts surrounding quality. We will be putting plans in place to improve our DSO and our days inventory on hand as critical components to increasing and improving our operating cash flow going forward.

EBITDA was $509 million for the quarter, which was down slightly from the $527 million that we reported in the first quarter of this year. The principal contributor to this decline was a previously mentioned $23 million net charge write down several of our publicly traded and private company investments in the second quarter of 2007. We hold an investment portfolio of more than $500 million in the balance sheet and we are planning to monetize the majority of this over the next several quarters and into next year.

There is a mix of public and private investments in this portfolio and as a result of our plans to sell off most of these investments we have recorded a pre-tax loss of $23 million in our second quarter results. This relates to public securities that we hold where we have an unrealized loss. We are obligated to mark those investments to market and record the associated paper losses in the current period. However, for those public securities we hold where there is an unrealized gain, the gain is not recognizable until the sale of the securities are completed. But in the aggregate, our public securities have a higher market value than book value.

Operating cash flow was $211 million in the quarter, which compares to a negative cash flow of $59 million in the first quarter this year, excluding a one-time tax payment of approximately $385 million in connection with the divestiture of the Guidant vascular business to Abbott, the first quarter 2007 cash flow would have been approximately $326 million. The second quarter cash flow is $224 million below the second quarter of last year, principally due the lower revenue and an increase in interest payments.

Capital expenditures were $90 million in the quarter, resulting in free cash flow of $120 million. While on the subject of capital expenditures, I wanted to give you a sense for the remainder of the year, and I would anticipate the full year the total CapEx to be approximately $425 million to $450 million. We closed the quarter with $7.4 billion in net debt, which is down from $7.6 billion at the end of the first quarter.

We have more than $1.5 billion of cash on hand and a $2 billion undrawn bank facility and we intend to improve our operating and free cash flow as we focus more management effort on expenses and headcount controls, as well as better balance sheet management. We have ample access to capital and as we have discussed before, our first two principal payments are $650 million in April of 2008 and another $650 million in April of 2009.

Turning to guidance for the third quarter of 2007, consolidated revenues are expected to be in a range of $2 billion to $2.1 billion similar to the second quarter guidance. For DES, we are targeting worldwide revenue to be in a range of $426 million to $475 million, U.S. revenue of $235 million to $255 million, and OUS revenue of $191 million to $220 million. For our defibrillator business, we expect revenue of $364 million to $391 million worldwide, $250 million to $270 million in the U.S., and $114 million to $121 million in international.

Third quarter GAAP EPS is expected to be in a range of $0.03 to $0.08 and $0.12 to $0.17 on an adjusted basis, keeping in mind that adjusted now will exclude only amortization and acquisition-related charges and will, therefore, be lower than our prior adjusted calculations. It is clear to us that the DES and defibrillator markets are not recovering as quickly as we had expected, although we are still performing well. As a result and given the competitive landscape and new product launches that are expected to occur over the next 18 months, it is equally clear that we must quickly bring our expenses and head counts more in-line with our revenue base.

We will be examining all of our expenses in the upcoming months and will be preparing detailed action plans for each of our businesses and corporate staff functions. These actions will become an integral part of our 2008 operating plans and will give us the ability to enter 2008 with a lighter expense load. Our goal will be to reduce expenses and head count while preserving needed investments in critical R&D and quality projects to help ensure that our longer-term revenue goals are achieved. We expect to discuss these plans in more detail during the fourth quarter.

With that let me turn it over to Jim for his review of the CRM business.

Jim Tobin

Thanks, Sam. First, a few quick observations. This quarter marks really just the fourth quarter we've operated the CRM Group as part of Boston Scientific. In that brief time, we've made an enormous amount of progress, the most visible and really critical milestone occurred early in the second quarter with the resolution of the CRM warning letter. That allows us to move to the next phase of our program, which involves strengthening the pipeline and resuming our new product Cadence.

Clearing the warning letter also led to a number of immediate FDA approvals, including the ACUITY Steerable LV lead and several enhancements to the existing CRM products. This quarter we also geared up for the full launch of our new Brady lead DEXTRUS, which will improve our competitiveness in that space.

We also saw success in driving market adoption to the wanded version of latitude, which offers the benefits of remote patient monitoring for virtually all of our ICD and CRTD patients. In Japan, we successfully launched the Vitality DR, the smallest dual chamber ICD currently offered in Japan. This follows our Japanese launch of the renewal 4 CRTD, which continues to exceed our expectations.

Anyone close to the situation understands that we've strengthened our operations with an overriding commitment to quality, reliability, and open communications. This is allowing us to restore our new product Cadence, which is supported by enhanced sales and marketing execution, a combination, which we feel could lead to renewed momentum over the remainder of the year and into 2008.

I'll share more details of our progress in a moment, but first let me quickly review the numbers. Since Q3 of last year, when we experienced a distinct downturn, our recovery had been tracking well. We saw positive sequential growth in Q4 and Q1.

This quarter, while there continue to be positive qualitative signals, especially in the international markets, we haven't yet seen sustained, quantitative evidence of a full market recovery and our own progress was interrupted.

Looking at the Q2 numbers in detail, total worldwide CRM revenue for the quarter was $524 million compared to $529 million in the second quarter of 2006, a 1% decline from last year and down 3% sequentially from last quarter.

International growth was strong, with CRM revenues outside the U.S. growing more than 9% overall and 12% in defibrillators on a year-over-year basis. Sequential growth was up slightly, with gains coming in pacemakers while defibrillators were relatively flat. Total U.S. CRM revenue was $192 million, including $124 million in defibrillators and $68 million in pacemakers.

Our year-over-year gains show evidence of increasing penetration internationally for the indicated patient population. In the U.S. market, we experienced a marked slowdown in the sequential growth we've seen over the prior two quarters.

We issued a product advisory in April, which wasn't helpful, and contributed to the softening in our U.S. numbers for Q2. However, we feel this impact will be temporary as we continue to put the issues behind us that we inherited at the acquisition.

Overall, our U.S. CRM revenue for the second quarter was $332 million, including $253 million in defibrillators and $79 million in pacemakers. Total U.S. revenue was down about 6% compared to the second quarter of '06 and down sequentially over the prior quarter by 5%.

Both revenue in the U.S. for the quarter was essentially equal to last quarter. Without results from our largest competitor, it's difficult to determine how much of the decline in U.S. revenues was due to a change in market share versus a change in market size. U.S. comparisons to '06 figures will become less difficult by next quarter and we expect to resume a slow, but sustained recovery for the remainder of the year.

Now, let me provide some additional updates. Second only to our focus on quality is the importance of developing value-added technologies to drive market growth, brand preference, and share gains. A major focus of this effort is expanded remote patient monitoring to as many patients as possible.

We're very pleased with the latitude rollout and the feedback has been overwhelmingly positive. Roughly 50,000 patients are now enrolled on the system. This exceeds even our aggressive expectations and we're pleased with the rate of adoptions.

The definition of the CRM product offering is quickly shifting. Latitude and the information it provides physicians is to becoming an essential part of the core CRM technology.

I believe we have the premier offering in this space with our latitude platform, both in terms of its usability and available data, as well as our considerable experience with the product. It remains the only wireless remote patient management system that meets both the HRS and ACCHA guidelines.

While most recognize latitude for its remote follow-up capabilities, would also provides remote monitoring and patient alerts, a key differentiator of our system. We plan to maintain these advantages through regular hardware and software updates based on physician and patient feedback.

This year alone we've already released four product enhancements based on customer feedback and we've filled the best in class customer support organization to meet physician and patient needs.

Beyond latitude, we continue to work our next generation technologies through our refocused R&D efforts, with regulatory restrictions now removed, we look forward to restoring our Cadence of new product launches, which will include DEXTRUS and extendable retractable pacing lead that will enlarge our offering and improve our position in the Brady market.

The FDA has approved DEXTRUS and we plan to execute a full launch here in the third quarter. For defibrillators, we anticipate FDA approval of the Vitality NXT in the next six to nine months.

Which will extend wireless technology to our entire defibrillator portfolio. This will be followed by the launch of our next generation high voltage platform that was COGNOS intelligent in Europe and the U.S.

As you know, last week we announced that an agreement had been reached to settle claims against Guidant that were consolidated into the multi district litigation in Minnesota. We're pleased with this resolution, which is in the best interest of all involved. While some cases remain pending in other jurisdictions, this agreement permits us to close out a matter of uncertainty, put it behind us, and move forward.

So, in closing, I'll say that, while Q2 represents a bit of an interruption in our progress, I'm encouraged by what's been accomplished over this past year and optimistic that we will see renewed gains over the second half of the year.

Although sequential sales were down slightly in Q2, we see broader indicators that suggest the CRM market itself is continuing to recover, albeit slowly. Our attention is now on revenue growth and market share. This will be driven by a focused sales force that is committed to our long-term plan.

I'll share some additional perspective with you later in the call, but now I'm going to turn it over to Paul LaViolette.

Paul LaViolette

Thanks, Jim. Well, since so much of our variability derives from the DES market, let me invest sometime sizing that up, describing our view of its most recent dynamics, and where the market may go from here.

The first factor impacting DES market value is penetration, which, by all accounts is significantly lower than a year ago, but also now shows undeniable signs of stability. Our weekly measures of U.S. penetration have been at the 65% to 66% level for about 13 weeks in a row post ACC.

Europe and the rest of the world penetration in the second quarter was down moderately from prior year, about 4 points overall, averaging right about 50%. Japan has been very solid and currently resides in the 68% to 71% range.

The second factor impacting the market, now most heavily, and newly in Q2, post the ACC, is overall PCI volume. By our measures, U.S. PCI volume was down 28,000 procedures in Q2 '07 versus Q2 '06 to about 245,000 procedures, that's a 10% drop.

Compared to the first quarter, Q2 was down 7.5%. This is a direct effect of the COURAGE trial, both the data to a small degree and media coverage and diffuse reactions to it to a larger degree. Internationally, including all markets, procedures in Q2 were completely flat to Q1 and compared to Q2 of last year, international PCI procedures increased in Q2 of this year by 14,000 procedures or 3.5%.

So with newly gained stability and global penetration and some growth in PCI outside the United States, we clearly have to focus on the implications of COURAGE-related U.S. PCI reactions.

Given that these events are recent, we have only emerging information and need more time to solidify recovery indicators. But so far we know the following. Patients in the cath lab, patients that reach the cath lab are being treated the same. Stents per case are stable at just under 1.5.

Stented procedures, as a percent of PCI, are steady at 92.5%. According to our data, neither of these factors declined and that contradicts the recent good road data.

Sales of widely used PCI products in June, a short-term indicator of recent procedure trends, were equal to April, providing some evidence of steady procedural trends throughout the quarter.

Our research also indicates that diagnostic cath procedures are down 8% year-over-year. So referring cardiologists are holding patients back. Our research also indicates that primary care physicians are not exerting increased influence on patient care.

So what we have is a delay or a deferral dynamic between the referring and the interventional cardiologists. Three more points and then I'll move on.

First, for patients that fit the profile of the COURAGE trial criteria, and who are now being treated medically. Physicians believe that on average, medical management palettes those patients for about five months before referral to diagnostic Catheterization gets triggered.

That's a relatively short waiting period. Second, they also believe that close to half of these patients will fail medical management. These two factors imply some buildup of potential demand.

And third, referring cardiologists believe a significant percentage of these medically-managed patients would be best served by drug-eluting stenting in the presence of the type of dual any play towards program BSC has defined and plans to launch in the second half of this year.

So in summary on the stent market, it's about U.S. PCI change right now. We're early in this new market phase and while it's too soon to predict change, the factors that could shape recovery are becoming clearer.

Now more tangibly on DES, U.S. TAXUS results produced the eighth quarter in a row of market share between 54% and 55% and TAXUS ASP trends were unchanged at 3% to 4% annual decline with less than 1% sequential decline.

In international, we're achieving our goal of maximizing aggregate share and minimizing TAXUS erosion with our dual drug platform. We maintain clear leadership with about a 40% share in Europe and PROMUS continues to grow with minimal cannibalization of existing TAXUS accounts.

As Olimus products continue to grow and in Q3 will likely surpass Endeavor for number three market position, and in each quarter PROMUS is becoming a larger percent of total overall in the sales. We continue to believe we are uniquely positioned to lead this market with the strength of TAXUS, its data, its pipeline, the best Olimus alternative, and the largest non stent business in cardiology.

In the quarter, starting in May, we commenced our TAXUS launch in Japan and we have six to eight weeks of performance to report. We previously reported extensive preparation and training, inventory and product evaluation management, and sales results are meeting our expectations, but perhaps faster than planned.

Having started in May, our full quarter share isn't that meaningful, but we believe we held a little over 50% market share in June, exiting Q2 well above 50% and as of today, we are comfortable saying TAXUS is the market leader in Japan. We expect to gain share in the third quarter.

We have several hundred remaining accounts to open, physician interests, device performance, and selling and training momentum are continuing to generate market gains. Overall, we are extremely pleased with this outcome.

DES pipeline progress has also been impressive. We have commenced our third generation TAXUS clinical trial, using the Element stent while the second generation TAXUS Liberte regulatory review process continues towards its final stages.

We also initiated the First Human Use Trial on the TAXUS Petal Stent and on our new APEX coronary balloon and of course we have rolled in a stent PMA covering our PROMUS product was filed with the FDA. Enrollment in the indication expansion studies, Horizons and Syntax were also completed.

Boston Scientifics other core businesses had a number of notable highlights. As Sam mentioned and the surgery enjoyed overall double-digit growth, urology and gynecology returned to double-digit growth and we completed the Prolieve Asset Acquisition for improved margins in our fast growing EPA franchise.

Endoscopy grew a strong 9% in the U.S. and has a a number of leading physicians and growth trends. To better fuel Endoscopy the Endosurgery group has terminated the Endovations program, based on its risks in achieving high scale at low cost and will redeploy a portion of the Endovations investment to core business growth while returning some planned investments to OpEx reductions.

Neurovascular also grew double-digits on the strength of its core coil franchise and interventional neuro radiology market strength in which we remain larger than all other competitors combined. Our EP business also returned to double-digit domestic growth with strong ablation performance, neuromodulation was very strong, particularly in pain management where the market grew about 15% and BSC continued market share growth with an incremental 3 points gained in the quarter.

Lastly, our Peripheral Interventions business had mixed results due to primarily the loss of the Terumo sales relationship, but had strength in its new technology portfolio with over 20% sales growth in CryoVascular products, and of course, early incremental sales in our next end carotid system.

My final comments relate to continued progress on the reengineering of our quality systems. As previously disclosed we have entered the third party verification audit phase in which we're conducting over two dozen site audits to comprehensively test the entire system while focusing intensely on prior warning letter areas.

We believe we're on target to complete those audits this quarter. We're providing updates to the agency on our results and we'll meet with FDA later this summer to review our progress and discuss their plans for audits.

We believe we'll be ready for FDA early to mid-Q4. And with that I'll turn it back over to Jim for his perspective.

Jim Tobin

Thanks, Paul. Let me just give you some perspective on the quarter and then we'll open it up for questions. Overall, I describe our results for the quarter as mixed. We saw progress in a number of key areas, but not as much as we'd like in others. Most importantly, we made progress on quality throughout the organization, with the third party audits going well and moving us closer every day to when we invite the FDA in for their inspections.

We also marked a major quality milestone with the resolution of the CRM warning letter. That was a crucial addition to our ongoing efforts to rebuild trust and restore confidence.

In a drug-eluting stents, it seems that the market is beginning to stabilize, which is good news, however, it seems to be stabilizing at lower numbers than we had hoped. so we'll have focus on getting those numbers up to healthier levels.

Our leadership in the U.S. DES market remains solid, as it has now for three years. TAXUS was approved and launched in Japan and we're off to a very good start in that market. Sales have been impressive and price is holding up well. In CRM, our business continues to strengthen and recover.

We're seeing signs of market recovery as well, although at a slower pace than we would prefer. I'm still out there talking with docs on a regular basis and I'm encouraged by what I hear.

I'm bullish about our CRM business and its prospects and I can see a clear path to recovery both for the market and our share. I was pleased that we reach an agreement on a big chunk to the Guidant litigation. As I said earlier, the agreement eliminates a major source of uncertainty, puts it behind us, and let's us move forward. Those are all good things.

And let's not forget endosurgery, where all three businesses posted double-digit growth year-over-year. So, a mixed quarter, but we continue to move in the right direction. And let me turn it back to Dan and we'll moderate the Q&A.

Dan Brennan

Thanks, Jim. Mary, so let's open it up for questions. And as usual, in an effort to enable us to field as many questions as possible in the remaining time, I would request that you ask no more than two questions at a time. So, back to you Mary.

Question-and-Answer-Session

Operator

(Operator Instructions) Our first question comes from the line of Mr. Dhulsini de Zoysa with Cowen & Company. Go ahead.

Sam Leno

Good morning, Dhulsini.

Dhulsini de Zoysa - Cowen & Company

Good morning, Sam. It’s Dhulsini. I was wondering, Jim, as a place to start. Sam, thank you for the level of detail, I assume that's what we can expect going forward.

Jim Tobin

Yes.

Dhulsini de Zoysa - Cowen & Company

Great. Jim, I'm interested in your comments. I think you attributed some of the disappointment on the CRM side to the field action in April. I was wondering if you could give us any more color on the cadence of the U.S. tachy business through the quarter, particularly interested in the period before HRS versus after given competitive launches?

Jim Tobin

Yes. It's hard to be that fine grained in the thing. We saw softness in our numbers, really through the whole quarter. So there wasn't that much difference pre-HRS, post-HRS. The advisory was on April, I don’t know 4, or 6, or something.

And so, so we were dealing with that issue through the whole quarter. So that, that really colored everything. I didn't see that much difference pre and post.

Dhulsini de Zoysa - Cowen & Company

Okay. What about, did you, since did you mentioned being out talking to EPs, see an opportunity to maybe reenter some accounts that have been holding off until the FDA issue was resolved?

Jim Tobin

Yes. It's interesting. The resolution of the warning letter to some people represented sort of a good housekeeping seal of approval. We probably would have gotten a lot more out of that event had we not issued a field advisory within days of that.

So there were mixed messages out there, so I think we probably missed an opportunity as a result of that.

Dhulsini de Zoysa - Cowen & Company

So it sounds like really until you get Vitality, NXT, and next-gen products coming, this is kind of the pace we should be expecting for the business?

Jim Tobin

Yes. I think that's fair. I think the only thing that is going to put the history of field advisories behind us is to have something positive to talk about. We're starting to see that with latitude and we're starting to make some progress on the lead side. So there's some good news, short-term, but until we get some new cans out there, that's going to be a slog.

Dhulsini de Zoysa - Cowen & Company

Okay. I'll get back in queue. Thank you.

Operator

And our next question comes from the line of Bob Hopkins with Lehman Brothers. Please go ahead.

Bob Hopkins - Lehman Brothers

Okay. Thank you very much and good morning.

Jim Tobin

Good morning, Bob.

Bob Hopkins - Lehman Brothers

Let's see. A couple quick questions here. First, for Paul, would you be willing to give us the PROMUS numbers and the TAXUS Japan numbers?

Paul LaViolette

No, Bob. We're not going to go ahead and disclose product-specific or regional-specific or country-specific revenues at this time.

Bob Hopkins - Lehman Brothers

Okay. And then would you say, then, that the Japanese drug-eluting stent market is around 600 million? Would that be a fair assumption?

Paul LaViolette

That might be a little bit on the high end, but it's certainly north of 500s in the $500 million to $600 million range. We've seen pretty steady penetration. It's been largely unaffected by the dynamics that have affected primarily the U.S. Volumes are reasonably steady in penetration. Actually, volumes are extremely steady. On a quarterly basis they were exactly the same first quarter and second quarter and penetration has been steady to within plus or minus 2%.

Bob Hopkins - Lehman Brothers

Okay. And they my second question is, under the subject of kind of cost-cutting opportunities and portfolio management. So I heard the comments about potential announcements at year-end, but, Sam, is there any preliminary sense as to the magnitude of the cost cuts? And if not, could you be specific as to when we will see an announcement? Is it on the fourth quarter call or will there be an analyst day in December or something like that?

And then as part of that, I was wondering if you could provide an update on the spin of endo? Because it seems like some of your commentary lately has suggested that perhaps you would be willing to sell outright different pieces of endo rather than spin it off, so just an update there would be helpful. Thanks.

Jim Tobin

Yeah, on the expense front, as you know, the company has been looking at both the execution and not just looking, but actually executing the synergies that came to us as an opportunity from the Guidant acquisition, as well as you’ve heard Paul and others talk about our lean OpEx focus. And all that has been going on.

And in addition to that, we have a number of other initiatives we have going on we're sort of putting all together right now. And while we do have a very specific sense of what the opportunity is, we're not prepared to disclose that opportunity until sometime later on this year, towards the end of the year, maybe at the end of the year. I can't give you a specific time yet, but we will disclose publicly our final plans once we firm them up internally.

On the endo side, as you know, we're still in the exploration phase as we've said many times when we began our first announcement of that back in March. But we should be able to come forward with a final position and a decision during the second half of this year.

Bob Hopkins - Lehman Brothers

Is the most likely outcome though, a spin of that, or is it premature to say that at this point?

Jim Tobin

It's premature. We're still in the exploration stage and it's still a Board matter.

Bob Hopkins - Lehman Brothers

Okay. Thank you very much.

Jim Tobin

You're welcome

Operator

And our next question comes from the line of Rick Wise with Bear Stearns. Please go ahead.

Rick Wise - Bear Stearns

Good morning, everybody. Can you give us a little clear picture, Sam, perhaps on some of your expense reduction costs? For example, is this more focused on the CRM side versus the DES side?

Jim, when we met in mid-June, you seemed to imply that CRM dollars of expenditures weren't going to change much. So, has that changed?

And maybe, Sam, is there a dollar amount you have in mind that you could share with us and some sort of rough timeframe, whether it's 6 months or 12 months or 24 months that you’d hope to accomplish all that? Thanks. Any perspective would be welcome.

Jim Tobin

Sure. Our focus on expenses is not new. It's been going on for some time. And what we have is an opportunity to look at all of our businesses and all of our corporate staff functions. So there's no one business or no one corporate staff function as being singled out. It does give us an opportunity to look at how we do corporate matters with corporate expenses, the processes that we have put in place over the years as the company has grown, the processes that came together as a result of disparate ways of doing things between Guidant and Legacy Boston Scientific.

So it's really a very broad-based and at the same time very detailed focus on all of our business and all of our corporate staff functions. That's probably the best I can give you right now. We do have clearly specific expectations in mind already, because the work has been going on for some time. But we're not prepared, as I said before, to disclose those until we have finalized those plans and presented them, both internally as well as to the Board.

Sam Leno

As far as CRM goes, we took a whack out of expenses in February. I guess, we announced it in February, it was 60 days after that that it took hold. So, the expenses have come down from where they were a year ago in the CRM business. And in light of Q2 results, we'll keep those expenses down as opposed to letting them lift back up to sort of the historical level. So that will represent sort of renewed pressure on the expense control side of things in CRM.

Rick Wise - Bear Stearns

Okay.

Jim Tobin

Let me answer your comment as to timing as well. Clearly, there are some things we can do in the short-term that have a very quick timing associated with them, but a lot of our focus that we've had in most recent months and that we'll have for a number of months going forward is really looking at how we get things done. Clearly, the way to have a permanent reduction of expenses is to change how we do things. And so our focus is really on business process improvement, where we have still have some overlapping activities between both the premerger Guidant and premerger Boston Scientific affairs.

We have the opportunity, given the size of both of these companies that have come together, to look towards best internal practices as well as best external practices, and that whole analysis process is, as you can imagine, quite time consuming. And the execution of the final plan, once it's available to us is also, has very different time lines associated with it. It would be my expectation, when we do announce publicly what our plans are, we will also give the sense as to timing.

Rick Wise - Bear Stearns

I see. And Paul, on PROMUS, you said that it's a larger percentage of sales than it sounds like you expected. Can you give us, you came in something like 50 million ahead of our forecast. Is PROMUS the bulk of that?

And maybe just give us a little more color on PROMUS. Are you opening new accounts, is the share in existing accounts? Any additional color would be welcome. Thank you so much.

Paul LaViolette

Sure thing, Rick. I would say that PROMUS is likely not the bulk of our overall overage to your forecast, although, not knowing exactly what you predicted, it's hard for me to say. Certainly, Boston Scientific Japan and the TAXUS express launch there has been a major contributor. PROMUS for us in Europe, first of all, in the rest of world, in intercontinental, it remains a growth opportunity. There are many markets that are still being opened. We just commenced sales, actually in the past weeks in Brazil and Australia. Across Europe we still have some markets, including one of the largest in France that is not yet approved. So, we have a number of markets still to open.

But from a more tactical perspective, the execution of the dual drug strategy is really key. Bear in mind, although TAXUS is clearly the number one brand by far, the majority of the overall market is not TAXUS and that gives us a lot of open market potential to target with like drug and with, we believe, superior deliverability.

And let me also say that while TAXUS is number one in the 40% range, it's on the shelf of 88% of accounts in Europe, which implies that we have a foot in the door of many accounts, but don't necessarily have the number one product turnover on the shelf. So being able to enter those accounts where we have a foothold and appeal to other physicians in those accounts that have a preference for an Olimus drug is really the strategy and we're only company that can deploy that strategy.

Rick Wise - Bear Stearns

Thanks so much, Paul.

Operator

And our next question comes from the line of Glenn Novarro with Banc of America Securities. Please go ahead.

Glenn Novarro - Banc of America Securities

Thanks. Good morning guys. I have two questions. One, I appreciate that you don't want to talk and give out numbers on cost cutting, but strategically, can you give us a sense of hat you plan to do with the stent sales force and marketing behind stents next year in light of new competition coming to the market, that being XIENCE and perhaps Endeavor?

Do you keep the sales force and the marketing spend high to defend share or do you start cutting back in anticipation of perhaps lost share? So, maybe just give us what your strategic thinking is next year in light of new competition. That's question one.

And then secondly, for Paul, are there any clinical trials, is there anything coming up at TCT or the European Society of Cardiology that may get PCI volumes going again? I'm just looking for the catalyst that finally turns around PCI volumes. Thanks.

Paul LaViolette

Sure. Glenn, first of all on 2008 outlook, I think there are probably four stents that are coming to market. You mentioned two of them. I think the other two are TAXUS Liberte and PROMUS. So we're going to be in the offensive mode in 2008. We're going to be launching new products. We're going to be deploying the dual drug strategy in the United States. And of course, we start with 54% to 55% market share. At least as of today, we would hope that that might even be larger between now and the end of the year.

So we're going to be on the offense in 2008, number one. Number two, specifically with regard to marketing and selling expenses, we are clearly looking at those expenses, as you would expect, because the market is lower. However, by any account, our selling and marketing expenses in the DES field are the most efficiently deployed selling and marketing expenses in the Company and perhaps in the industry. And that's because of the extraordinary productivity of our cardiology territory.

So, this is not a CRM field organization, as you're aware. We have a relatively limited number of several hundred direct coronary sales representatives. It would be very difficult to justify the economics of cutting that sales force back, while serving a $2 billion DES market with leading market share and two major product launches in 2008, not to mention other activity, including label expansion, size, and matrix expansion. So we think we're going to be very competitive in 2008. We think we're going to be on the offense.

In terms of data and stimuli for PCI volume, I think there are several factors. First of all, PCI volume is not awaiting a data release. DES specific utilization maybe, and perhaps the one factor that we're looking toward most, and we don't have a sense for what this will be as yet, is whether or not the five-year late stent thrombosis rate in the TAXUS clinical trial is changed from the trend of years three and four for the same. And that will be, I think, a key factor that cardiologists can cling to out of TCT to appease concern about safety.

But as I mentioned, penetration is less an issue today, although we would like it to increase. PCI volume is the larger issue. And I think the Interventional Cardiology community is mounting a more coordinated offense to clarify the COURAGE data, to deal with the right sizing of the indication of PCI versus medical management. And as I indicated, a lot of patients are now on more aggressive medical management.

History shows us, data shows us those patients don't tolerate the drugs well. They don't stay on drug protocols long. The data I used today was about five months. A significant percentage of those patients will be triggered for diagnostic catheterization. And we know that coronary disease is progressive and the demographics for this patient population are growing.

Glenn Novarro - Banc of America Securities

Okay. So you expect PCI volumes, probably by 4Q, should start to pick up as these patients who are medically managed today start to have issues starting in 4Q? Is that a decent assumption?

Paul LaViolette

I am agreeing with your direction. I won't put a quarter on it, but I'll be looking. As I described earlier, we're really one quarter into this phenomenon. We're understanding it better. We're starting to clarify the indicators of success. I'm going to be watching those indicators for change in the fourth quarter.

Glenn Novarro - Banc of America Securities

Okay, great. Thanks, Paul.

Operator

And our next question comes from the line of Mike Weinstein with J.P. Morgan. Please, go ahead.

Mike Weinstein - J.P. Morgan

Thanks for taking the questions. Good morning and welcome, Sam. I actually wanted to address most of the questions I had for Sam. I guess the first one is going to be on some of the debt covenants. And it's my understanding on the covenants you have on your -- I think this is on your credit facility, that you've got to have your pro forma debt to EBITDA down to less than 3.5 to 1, as of January 1. Is that correct?

Sam Leno

As of what month?

Mike Weinstein - J.P. Morgan

As of January 2008?

Sam Leno

No. It's as of April 1.

Mike Weinstein - J.P. Morgan

I thought it said in the 10-Q that you had to be at 4.5 to 1 today, and then you had to be below that, you had to be below 3.5 to 1 as of 2008 versus -- whichever, but that you're saying it does occur next year.

Sam Leno

It's actually the end of the first quarter. So it's March 31, not April 1.

Mike Weinstein - J.P. Morgan

And so, with that in mind and as you look at where you are right now, does that mean you have to do something to monetize Endosurgery assets, or can you just renegotiate those covenants, given where your EBITDA is running at today?

Sam Leno

We put the covenants in place at the time of the transaction. Clearly, a number of things have changed, but we're still in full compliance with our covenants. To answer the question about whether or not we would be in full compliance at the end of the quarter would be akin to giving guidance on a whole variety of aspects of our business, which we're not prepared to do. I can say one of my principal jobs is to make sure we always have access to capitals, so I'm absolutely riveted on this issue.

I don't believe we have a liquidity issue, as I’ve said in my scripted comments, we have plenty of cash. We have a little over $2 billion undrawn revolver, and we generate a fair amount of operating cash flow every quarter. So, I think we're in pretty good shape. We will disclose every quarter where we stand with the covenants, and it's my job to be sure that we stay clear of coming anywhere near breaking any of those covenants.

Mike Weinstein - J.P. Morgan

Okay. Let me switch gears in this just a little bit, and get your appreciation having been there just six weeks of the company's financials and accounting systems. How do you feel about the related health of those systems post the acquisition from last year. And your visibility into the different businesses at this point?

Sam Leno

Well, as I mentioned, personally, it's like you can describe it a number of ways. I describe it as trying to hop on a high-speed train running alongside. So, after six weeks, I don't have enough data points really to thoughtfully answer your question. I'm pleased with what I see. Clearly, I think as a company we're strong, we have a lot of opportunity. But beyond that, I have not really had the opportunity to delve into all the systems that drive the business, and the ways in which we deploy those systems.

Clearly, systems can always be better, if you mean IT systems, and part of our strategy going forward is to continue, and also to increase the effectiveness of those systems. And that's one of the ways, frankly, that many companies, ours included will be able to bring expenses down, and have more efficient practices. So, systems is a critical ingredient to that whole expense reduction focus of ours.

Mike Weinstein - J.P. Morgan

One thing you did here today, which I'm sure everybody will appreciate this is you tried to simplify the company's historical definition of adjusted EPS. One thing that still differs between -- it makes it difficult to compare that adjusted numbers versus comparable companies is, it appears to be you're still including -- you're still backing out, not only the amortization from the Guidant transaction. But the amortization from all historical transactions, which obviously we don't do for either companies. Is there any reason why you've decided to do that, say, back out all amortization for the company rather than the one, from this one outstanding, obviously very large transaction?

Sam Leno

Yeah, only for simplicity, I think to try to parcel out the amortization associated with Guidant, and the amortization associated with everything else, given the size of the amortization number. There are a lot of ways to cut up the pie. It seemed to me to be most efficient, and clear to exclude all of it.

Mike Weinstein - J.P. Morgan

Okay. Just a last pipeline question for Jim. Cognos Intelligent, the timing of that, it wasn't clear?

Jim Tobin

Europe, mid-next year, U.S. end next year.

Mike Weinstein - J.P. Morgan

Okay, great. Thank you.

Jim Tobin

You're welcome.

Operator

And our next question comes from the line of Lawrence Keusch from Goldman Sachs. Please go ahead.

Lawrence Keusch - Goldman Sachs

Yeah, hi good morning, everyone. Perhaps first for Jim, could you, Jim, talk a little bit about how you see the stability of the CRM sales force now? I know there have obviously been some issues in the past. And then, the other part and I recognize it's challenging without Medtronic having reported their quarter. But as you look across that 2Q, and you had that warning letter. Do you sense that you did actually lose some market share there, and you're going to have to fight back on that as well?

Jim Tobin

As far as field force goes, turnover still exists, but it is manageable at this point. There's not a crisis in any regard. So, I think we're in relatively good shape there, compared to what we were facing, say a year ago. As far as share goes, this latest field action was handled, I think, pretty well. And I think that's what you can expect to see going forward, but every time we do something like this, there's one more traunch of customers. That basically say, you guys are just too hard to deal with. Why don't I just take some time off and we'll be back when it's safe to go back in the water again.

And that's the same thing that happened this time. So, we have to rebuild our business there, but at the same time we're seeing new business or returned business coming back to us from other directions.

So overall, there's always puts and takes and we haven't talked about how much inventory is out there and that sort of thing, but overall our share probability didn't go up this quarter, but it really didn't go backwards very much either. It was kind of a net-net, all that stuff adds up to a little bit of a tie.

Lawrence Keusch - Goldman Sachs

And Jim, just from your ending comment there, it sounds like you're implying that, you have continued to focus in on the inventory in the field and what we see is representative of what your share is?

James Tobin

Our demand, our reported sales number and our demand number bear a lot of similarity to each other. In other words, the inventories aren't changing very much. Our numbers are not influenced by inventory change.

Lawrence Keusch - Goldman Sachs

Okay. And then just two fast ones for Sam, first, on the portfolio of investments that you anticipate monetizing, how quickly do you think that can happen? And I assume that will at this point earmarked for debt.

And as you think philosophically about the cost reduction initiatives, how comprehensive do you want this to be, because my concern is that you do something and then you have to come back again and it turns into a long tail here of initiatives?

Sam Leno

Let me answer the portfolio question first. We have a significant mix of investments in both the public and the private portfolios. Some of those on the public side, some of those are fairly easy and straightforward; some have restrictions. On the private side, we're still evaluating some. Some are strategic, some are not, some are maybe.

The execution of the divestment of the portfolio is going to take us several quarters, two to four quarters, maybe a bit longer. We're focusing, clearly, on those that are both the least strategic and have the highest level of investment and that are the easiest to do, those that don't have any restrictions.

But this won't happen in a quarter, too. We'll make significant progress in the next couple of quarters, but this will continue on into next year as well.

In terms of cost reduction initiatives, it is our expectation as a company that we will be looking at expense management and expense controls very comprehensively, which is why I said we'd be looking at all of our businesses, not singling any one business out and looking at all of our corporate staff functions. For a variety of reasons. One is we have opportunity that comes to us as a result of the Guidant acquisition that we're still working on. We've got some of those behind us.

Two is, as a result of that, we have different systems and different processes and that should help us lighten the expense load somewhat as well.

And as importantly, the competitive landscape in terms of a shared market size for both the CRM and DES has changed and that gives us a lot more reason to be a bit conservative in our approach.

So we're going to look very comprehensively at everything and be thoughtful about our approach. It is not our intention to have this go on for year after year after year after year. That's not the right thing to do. Clearly, I think all of our experience is, if you need to take expenses out, you do it as quickly as you can and that will be our focus.

Lawrence Keusch - Goldman Sachs

Okay, terrific. Thank you very much, guys.

Operator

And our next question comes from the line of Glenn Reicin from Morgan Stanley.

Glenn Reicin - Morgan Stanley

Good morning. Thanks for taking my question. Jim, I have two questions on CRM. The first is, one bright spot in the quarter was that Pacer number and I'm scratching my head, trying to figure out why because that's your oldest product line. Maybe you could talk a little bit about that. Maybe it's a market issue or a bulk buying issue. I'm not sure?

Then the second question, which is more difficult is, we've talked before about the size of CRM sales force and you thought it was right-sized because the productivity per rep was very low on a historical basis. But what is clear is, one competitor in particular is pouring on resources. And I'm wondering whether you actually have to add resources on the CRM front?

James Tobin

As far as Pacers go, we didn't see that much change in our Pacer revenue in the U.S., or for that matter international. The total change is immaterial. So, I'm not sure, where I saw a change in Pacers was in St. Jude's International numbers, quarter to quarter.

So I'm not sure what you're looking at that indicates that our Pacer numbers are up substantially, but they're not up, they're up a little bit.

And yes, that's our oldest product line and yes, we're going to take care of that, but that won't happen overnight. As far as sales force size goes, we have the opportunity to reapportion our field force. There are places where we don't have enough coverage today.

There are places where we have, for the amount of business we have, too much coverage and we're betting that that's coming back. But if it doesn't, then we've got some capacity to move from point B back to point A, without changing the overall investment.

This is like an arms race where everybody just keeps pouring more resources into it and sooner or later that's got to stop. Somebody goes bankrupt, Russia. So I'm trying not to fuel that arms race. I think that's a long-term bad strategy for everybody. Sooner or later, we're going to come to our senses.

Glenn Reicin - Morgan Stanley

And what's the status of your coverage in smaller towns versus the larger teaching hospitals? It just seems to me like, at least the last six months, you've been triaging going for the biggest bang for your buck, so where does that leave you on the smaller accounts that may be growing faster?

James Tobin

If there's growth to be had, we're there. Okay? The smaller accounts tend to be more Pacer heavy and that, of course, our Pacer share is not as strong as our defib share. So I'm not sure that we're missing anything by not having a whole bunch of coverage in the smaller accounts.

Glenn Reicin - Morgan Stanley

Okay. Thank you very much.

Operator

And our next question comes from the line of Tim Nelson with Piper Jaffray. Please go ahead.

Tim Nelson - Piper Jaffray

Hi. Could you give us an update on the neuromodulation business, perhaps indicate where the momentum is, whether it's neurostent or (indiscernible) and progress for the next milestone payment and what that might be?

Paul LaViolette

Yes, Tim. Really, in the quarter, we saw some progress on both fronts, as I indicated earlier, the pain management business, which has been our fastest-growing division continued to make that progress with both share gains and pretty solid overall procedural growth.

The auditory side did see some sequential growth, primarily due to acceleration from the Harmony launch. So we did actually see some progress on both fronts. I don't believe there's another milestone payment due until early next year? Is that the case? Yes.

Tim Nelson - Piper Jaffray

What might that be?

Paul LaViolette

Well, it's going to be derived by sales growth, so it hasn't been determined.

Tim Nelson - Piper Jaffray

Okay. But you're on track toward it, I would assume?

Paul LaViolette

We are on track toward a payment.

Tim Nelson - Piper Jaffray

Okay. Great. Thank you.

Operator

And our next question comes there the line of Bruce Nudell with UBS. Please go ahead.

Bruce Nudell - UBS

Hi, thanks. Jim, two questions for you. The first question I have is, I know that the numbers aren't all in for the U.S. ICD market yet, but given Medtronics share trajectory, it really looks like once again it's around a $1 billion market, which will be the case for the last six quarters.

Is there any real hope that the message regarding U.S. ICD implant rates or the necessity for U.S. ICDs will change any time soon? Haven't doctors kind of made up their mind about who should and shouldn't get an ICD? Do we expect, do you realistically expect any change in inflection in that market?

And the second question is more strategic. Namely, that, while the COURAGE trial may have an inordinate impact up front, nonetheless, if you get half of those 10% drop in procedures back, you still have a pretty flat market going forward once that normalizes, so you've got ICDs and stents which could be pretty slow-growth markets going forward. Does it really make sense to sell Endosurgery, which is growing at low double-digit rates? So, those are the two questions. Thanks.

Jim Tobin

As far as the market itself for ICDs, you know that there's going to be a summer slowdown and you know that you're not going to see resumed growth in that market in the short-term. The issue is what will happen longer term and I think, honestly, the absence of field actions and the introduction of new products by all competitors are going to have some positive impact on the market, but is that an inflection point, I doubt it? Okay. It will have, instead of having downward pressure, there will be upward pressure, but it's not going to be dramatic.

The point about COURAGE, I think, COURAGE and a lot of other things going on in the marketplace, you're going to see the stent market revive here and so that may not be sustained for long, but there will be, again upward pressure in that market and add to that the fact we've had one arm tied behind our back by not being in Japan for the last umpteen years and now we are and the impact of that is substantial, it's meaningful, it's material.

Bruce Nudell - UBS

I guess my follow-up, though, is that even if the stent market does rebound a bit, does Endosurgery in comparison to the key cardio businesses, doesn't look bad at all, so from a strategic point of view, viewing Boston historically as a growth company does it really make sense to consider the divestiture of a pretty steady, stable business that has performed quite well over the historical long run.

Jim Tobin

As we've said about a hundred times, we're exploring this, we're looking at it, we're thinking about, we'll let you know when we decide something.

Bruce Nudell - UBS

Thanks.

Paul LaViolette

Thanks, Bruce.

Operator

And our next question comes from the line of Rishi Sadarangani with Alliance Bernstein. Please go ahead.

Rishi Sadarangani - Alliance Bernstein

Yes, thank you. Good morning, gentlemen. And I had a couple of quick questions. One was on this litigation settlement that you just arrived at, could you perhaps dimension if at all possible what the remaining claims might amount to our some measure of what if you were to settle all those claims or what that settlement would look like relative to the amounts you paid out or will be settling for with respect to the settlement you announced. So that's my first question.

My second question is that there is a fairly large deferred tax liability; I think it was about $2.6 billion on your balance sheet. And I was just wondering if you could provide some more clarity on what that might entail and if there's any cash amounts that may be required to settle some or all of it in the next 12 to 18 months? Thank you.

Paul Sandman

This is Paul Sandman. On the litigation settlement, the settlement we announced covered the approximately 4,000 plaintiffs in the multi district litigation and Federal Court in Minnesota, as well as an as yet undetermined number of additional, similar claims. So at this point we do not know what total number of claimants could be wrapped into this settlement and we're really not prepared to speculate on how much will be remaining or what we would do about it.

Rishi Sadarangani - Alliance Bernstein

Okay. And on the deferred tax liability question, please.

Sam Leno

The deferred taxes are related to the Guidant intangibles that came to us as part of the transaction to FAS 109 and those taxes, the deferred taxes, moved as the amortizable intangibles are expensed off, so that takes a good bit of time.

Rishi Sadarangani - Alliance Bernstein

Okay. So would there be any potential in your view, cash outflows associated with that in the next 12 months?

Sam Leno

There's no event that would cause it to be anything other than normal, if that's what you're asking.

Rishi Sadarangani - Alliance Bernstein

Okay, okay. Thank you.

Dan Brennan

And Mary, I think we probably have time for one more question.

Operator

Okay. Our last question comes from the line of Vivian Cervantes (ph) with BMO Capital Markets. Please go ahead.

Joanne Wuensch - BMO Capital Markets

Hi, it's Joanne Wuensch. Thank you for taking my question. You are laughing. All right, I have two questions. Sam, I know you've been there for six weeks, can you give us an idea of what you're seeing in regards to the systems which are in the place for just managing everything, accounts receivables, inventory, etcetera and how you may compare that to your experience at Zimmer, where everything was so extremely well-run.

And then, my second question has to do more with ICD pricing and what you may be experiencing in regards to not only your pricing, but also competitive pricing? Thank you.

Sam Leno

Let me take the systems one. I think the systems from what I can tell after only six weeks, admittedly, in six weeks I have not spent a lot of my time on systems, only getting an appetite whetter, if you will, to understand what systems we do have.

What I've seen so far, I think we have very rich systems to help us manage working capital, both receivables and inventory, and we have an incredible investment in our financial planning and analysis part of what we do as well. So we're blessed with a lot of information that flows out of our systems and out of our people who deploy those systems every day. So what I see so far, I'm very pleased with.

Jim Tobin

Joanne, as far as ICD pricing goes, it's been relatively stable. That's not the basis of competition in any great regard. I would expect that that would continue as we look forward because everybody's spent a lot of money on R&D.

Joanne Wuensch - BMO Capital Markets

Thank you.

Dan Brennan

Okay. With that, we'll conclude the call. Thank you for joining us today. We appreciate your interest in Boston Scientific. And before you disconnect, Mary will give you all the pertinent details for the replay of this call. Thank you and good day.

Operator

Thank you, ladies and gentlemen. This conference will be available for replay after 1:45 pm Eastern time today through August 3rd, at midnight. You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code 875770. International participants, dial 320-365-3844. Those numbers again are 1-800-475-6701 and 320-365-3844, access code 875770. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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