Boston Scientific Q3 2007 Earnings Call Transcript

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 |  About: Boston Scientific Corporation (BSX)
by: SA Transcripts

Operator

Ladies and gentlemen thank youfor standing by and welcome to the Q3 Boston Scientific Earnings ConferenceCall. At this time all lines are in a listen-only mode. Later there will be aquestion-and-answer session and instructions will be given at that time.(Operator Instructions) As a reminder, today's call is being recorded.

At this time I would now like toturn the conference over to the Vice President of Investor Relation, Mr. DanBrennan. Please go ahead sir.

Dan Brennan

Thank you, Kent and good morningeveryone. Thank you for joining us. With me on the call today are ChiefExecutive Officer, Jim Tobin; Chief Operating Officer, Paul LaViolette; andChief Financial Officer, Sam Leno.

We issued a press release a shorttime ago regarding our Q3 2007 results and key financials are attached to therelease and we've also posted support schedules to our website, which you mightfind useful as well.

We also issued a press releaseafter the close of the market on Wednesday regarding our initiatives toincrease shareholder value and we will be discussing that in greater detailthis morning as well.

The agenda for the call willinclude a review of the Q3 financial results from Sam; an update on the CRMbusiness from Jim; a review of the cardiovascular and other businesses; and anupdate on our quality initiatives from Paul. Additional detail on thoseinitiatives increased shareholder value from Sam and a CEO perspective fromJim; followed by a question-and-answer session.

Before we begin, we will bemaking some forward-looking statements on the call today so I would like toremind everyone of the Safe Harbor statement. Thiscall contains forward-looking statements. The company wishes to caution thelistener that actual results may differ from those discussed in forward-lookingstatements and maybe affected by among other things, risks associated withapprovals, competitive offerings, intellectual property, litigation, thecompany's overall business strategy, and other factors described in thecompany's filings with the Securities and Exchange Commission.

I will now turn it over to Samfor review of the third quarter results.

Sam Leno

Thanks Dan. I'll begin by firstdiscussing our revenue results. Total revenue for the third quarter was $2.48billion, which was at the mid-point of our guidance range of $2 billion to $2.1billion. This represents a 1% increase over the third quarter of last year anda slightly less than last quarter's revenue. A slight sequential decline is inlarge part due to seasonal impact of the third quarter as compared to thesecond. In the third quarter the contribution of foreign currency to sales growthwas a positive 2% or about $39 million. Compared to prior year domestic revenuedeclined 5% or international revenue increased 12%.

Paul will dwell into more detailson the DES market dynamics for the quarter but I'll share the revenue resultswith you at a higher level. Worldwide DES came in $448 million just below themid-point of our guidance range of $426 million to $475 million and down 22%from the third quarter of 2006. Geographically U.S. DES revenue was $240million, below the mid point of our guidance range of $235 million to $255million and 38% below the third quarter of last year.

International DES sales of $208million came in over the midpoint of our guidance range of $191 million to $220million and were 11% higher than the third quarter of 2006. The continuedsuccess of our TAXUS Japan launch, which generated $67 million of sales in thequarter was a key factor in the strength of our OUS numbers.

Jim will provide more color onthe CRM market, but I will review some of the details for the CRM sales here.We delivered excellent worldwide CRM sales of $517 million in the quarter,representing a 16% increase over the third quarter of 2006. U.S. CRM revenuewere $343 million also representing 16% growth over the prior year andinternational CRM sales were $174 million and again were 16% greater than thethird quarter of last year.

With respect to defibrillators worldwideICD sales of $372 million were in the lower half of the guidance range of $364million to $391 million and 18% higher than the third quarter of last year.U.S. ICD sales of $261 million were at the mid point of the $250 million to$270 million guidance range and 18% higher than last year. International ICDrevenue of $111 million was just below our guidance range of $114 million to$121 million and 18% higher than prior year.

Paul will provide some insight inour other markets and as we've done in the past we have included a divisionalsales summary with the press release, as a result I won't go into detail on allof our businesses here but I would like to point out some of the highlights.Reported worldwide revenue excluding DES and defibrillators continued itsstrong performance with $1.228 billion in revenue for the quarter representingan increase of 8% over the third quarter of last year.

Our worldwide Endosurgery businesscontinued its track record of strong revenue growth with a 9% increase overprior year, including Endoscopy sales of $212 million which were up 13% overprior year. Neuromodulation revenue of $81 million represented an increase of36% over prior year, as we continue to drive excellent growth in our painmanagement business.

In summary our revenue for thequarter continues to illustrate the benefits of our broad diversified portfolioof businesses and even though the DES revenues was down $124 million comparedto the third quarter of last year our CRM Endosurgery, Neuromodulation and therest of our businesses more than offset that decline to yield consolidatedsales growth of positive 1% over prior year.

Turning to gross profit margin,reported gross profit margin for the quarter was 71.9% which was 90 basispoints lower than the second quarter of this year and 300 basis points higherthan the third quarter of last year. The adjusted gross profit margin for thequarter excluding acquisition-related charges was 72% which was 90 basis pointslower than last quarter and 310 basis points lower than the third quarter of2006.

As we saw last quarter, revenuemix was a key contributor to the lower gross profit margin compared to prioryear.

Total revenue was 1% higher inthe third quarter of 2007 versus third quarter of 2006, but drug-eluting stentswhich are more profitable than the average for the company represented 22% overconsolidated sales in the third quarter of this year, down from 28% ofconsolidated sales in the third quarter of last year.

Product mix plays an importantrole in determining our gross profit margin.

Reported research and developmentremained at 13% of sales, with spending up $271 million for the quarter whichwas flat to both last year and last quarter.

Our reported SG&A expense inthe third quarter was $719 million which were 4% lower than last quarter andequal to the third quarter of 2006. On an adjusted basis, SG&A expenses excludingamortization and acquisition-related charges were $711 million which were 4%lower than the second quarter and basically equal to last year. And I will talkmore about R&D and SG&A, when I discuss our restructuring plans.

We reported a GAAP operating lossof $147 million for the quarter. On an adjusted basis, excluding amortizationand acquisition-related charges operating income was $445 million for thequarter and 21.7% of sales. The two most significant acquisition-relatedcharges what I previously disclosed and expected loss of $352 million primarilyassociated with the impairment and goodwill in connection with the anticipatedsales of our auditory and drug pump businesses, which are expected to close inJanuary of 2008, as well as the $75 million write-off of in-process researchand development was associated with the third quarter acquisition of RemonMedical, which is a company focused on creating communication technology, whichcompliments our CRM product line.

Interest expense was $147 millionin the quarter, essentially equal to both previous quarter and last year andduring the quarter, we repaid $750 million of debt. Interest savings onrepayment were offset by an increase in our average borrowing rate to 6.5% ascompared to 6.2% last quarter and 6.1% last year and the higher rate wasprimarily due to an increase in our term loan credit spreads.

Interest income was $19 millionvirtually identical to both the second quarter of this year as well as thethird quarter of last year.

Looking at our tax rate, reportedGAAP tax rate for the quarter was a negative 5% and the adjusted rate excludingacquisition-related charges was 10%. Reported and the adjusted tax rates forthe quarter reflect a reduction in our forecasted annual operational effectivetax rate for 2007 from 21% to 18% as well as a benefit in the quarter tocatch-up for the impact of this rate reduction on our first and second quarterresults.

We were able to reduce ourforecasted tax rate for 2007 as a result of tax planning that was implementedduring the year. It is not anticipated that this planning will provide anyfuture tax benefits beyond 2007.

In addition our third quarter taxrate reflects a $9 million benefit for the certain discreet tax items that arerequired to be accounted for within the quarter.

GAAP earnings per share for thethird quarter was a loss of $0.18 as compared to earnings of $0.08 last quarterand $0.05 in the third quarter of last year. GAAP results include a $0.29charge for the Advanced Bionics and [removing] charges that I mentionedearlier.

Our adjusted earnings per sharewhich exclude amortization and acquisition-related charges was $0.20 for thequarter as compared to $0.16 last quarter and $0.18 in the third quarter of2006. This compares favorably to our guidance range of $0.12 to $0.17 for thethird quarter. Included in this $0.20 are one-time tax benefits of about $0.02related to the prior period impact of the reduction in our forecasted annualtax rate to 18% and other discrete items for the quarter.

Also in the quarter, we recordeda net gain of about $0.01 in connection with the monetization of our investmentportfolio. So, excluding the one-time tax benefits in the net gain andinvestment adjusted earnings per share for the quarter was $0.17 which is atthe very top end of our guidance range.

Our amortization expense for thequarter was $155 million, stock compensation was $29 million and the pre-taxacquisition-related charges were $437 million. And all of our per-sharecalculations were computed using 1.5 billion shares outstanding.

Looking at the balance sheet andturning to working capital management, DSO was 65 days at the end of thequarter, and that's an increase of 2 days compared to last quarter and up 1 dayfrom the third quarter of 2006.

In addition to seasonality, whichis a key contributor to the increase in the second quarter, was a weakness ofthe dollar, particularly towards the end of the quarter, as the September 30thbalance sheet translations rates for the Euro and Yen were among the lowest ofthe quarter.

Days inventory on-hand were 132days, which was 2 days higher than the second quarter and an increase of 10days over the third quarter of 2006. The increase from last quarter was drivenin part by a build in Advanced Bionics inventory and preparation for the moveto a new facility, as well as a weakness of the dollar.

Looking at cash flow, adjustedEBITDA, excluding acquisition-related charges was $534 million for the quarter,which is slightly higher than the $486 million in the second quarter of thisyear. We monetized several of our public and private investments and receivednet proceeds of about $100 million. The balance of our equity investmentportfolio is approximately $435 million and we are in the process of monetizingmost of this over the next several quarters.

We recorded $34 million in gainsassociated with the proceeds from monetizing our investments in the quarter.And this was offset by a $14 million charge to write down other publicly tradedinvestments that had an unrealized loss as we continue to mark on the marketsince we have our intent to sell them.

In addition, we also recorded atotal $6 million in write downs associated with other investments in thequarter. Operating cash flow was $474 million in the quarter, which compares to$211 million in the second quarter of 2007 and $181 million in the thirdquarter of 2006. Lower cash interest payments and strong cash flow from TAXUSlaunch in Japanboth contributed to the increase from last quarter.

Capital expenditures were $87million in the quarter, which is inline with $90 million and $84 million thatwe spent in the second and third quarter of this year respectively. Thisresulted in free cash flow of $387 million in the quarter. Capital expendituresfor the full year are expected to be approximately $400 million. Wesuccessfully amended our credit facility and pre-paid $1 billion of our termloan in the quarter and we closed the quarter with $8.2 billion of gross debtin more than $1.2 billion in cash.

Turning to guidance for thefourth quarter of 2007, consolidated revenues are expected to be in the rangeof $2.050 billion to $2.150 billion. For DES we are targeting worldwide revenueto be in a range of $430 million to $480 million, US revenue of $228 million to $250million and OUS revenue of $210 million to $230 million.

For our defibrillator business,we expect revenue of $375 million to $405 million worldwide, $260 million to$280 million in the US, and$115 million to $125 million outside the US.

Adjusted earnings excludingcharges related to acquisitions, divestitures and restructuring as well asamortization expense are expected to be in a range of $0.14 to $0.19. Thecompany expects a net loss on a GAAP basis in the fourth quarter between $0.09and $0.02 a share. We expect to record restructuring related charges of $275million to $300 million or $0.12 to $0.14 per share in the fourth quarter. GAAPguidance excludes any potential gains or losses related to dispositions ofpreviously announced business divestitures.

I will provide more detail on ourrestructuring initiatives later in the call. But now, let me turn the call overto Jim for review of the CRM business.

Jim Tobin

Thank you, Sam. Since Sam hasalready detailed the CRM numbers for the quarter, I would like to make a fewfollow-up comments on our ongoing progress. As I have stated on prior calls,since day one of our Guidant purchased, we had a long-term plan for success inthe CRM market. And we are committed to that plan. We knew it will take yearsnot months to fix the underline problems at CRM, but after 18 months we feel weare well ahead in executing the plan.

The changes we have implanted tostrengthen our operations, improve quality and reliability and enhance ourcommunications have gone a long way to restoring trust and confidence withinplanning positions in our patients. The successful resolution of the CRMwarning letters allowed us to move well into the next phase of our strategy,strengthening the pipeline and resuming our new product cadence.

The past quarter, we have seensome ongoing evidence of this with the full launch of ACUITY and DEXTRUS leadsas well as European approval of the CONFIENT ICD. We also saw a continuedsuccess in driving market adoption of the LATITUDE Patient monitoring system.

A restored product cadencesupported by improved sales and marketing execution should allow us to beginachieving consistent share gains which is an essential step to our long-termgoal of positioning Boston Scientific for future leadership in the CRM space.

This quarter, we saw strong signsof our ongoing progress, although of a depressed base, we achieved soliddouble-digit year-over-year growth in defibrillators and pacemaker for both theUSand international markets. We also saw a positive sequential growth in US,reversing a slight decline from the prior quarter, when US sales took atemporary dip due to a product advisory.

Exiting the quarter, our US run rateshowed marked improvement in September giving us confidence that we are movingin the right direction as some of our new product introductions begin to havean impact.

Part of our improved performancethis quarter can be tied to our ability to resume our product cadence anddeliver on our pipeline through a refocused R&D strategy. With the CRMwarning letter restrictions now removed, we executed several new productlaunches and are gearing up for more in 2008. We are very pleased with ourprogress in area of device leads and believe that the improved pace of revenuesin September can be partly attributed to our two recently launched leads.

The ACUITY Steerable lead wasfully launched in the USearly in Q3 and has generated very positive feedback, the adoption ratesexceeding expectations. In addition, the DEXTRUS Pacing Lead was launched midquarter in the US and Europe. This innovative extendable retractable pacinglead has been well received allowing us to attract hundreds of non-BSC andplanning positions.

Looking forward, we anticipateEuropean approval with the ACUITY Spiral LV Lead by the end of the year and US approval inthe second quarter of '08. ACUITY Spiral will offer the smallest lead tip ofprofile of any LV Lead allowing excellent fixation performance in a range ofvessel anatomies.

On the device side, 2008 willprovide us a busy year with plans to launch five new pulse generators. In thefirst quarter, we will launch CONFIENT ICD, which recently received CE Mark.

Also in the first quarter, wewill launch a product we have not mentioned before, the LeVeen CRT-D. LeVeenbrings enhanced capabilities to enable clinicians to customize therapy based ona patient's individual needs. The device features Boston Scientific priortechnology based on more than a decade of clinical experience to improve apatient's response to cardiac resynchronization therapy.

LeVeen also offers clinicians'additional technologies to help manage heart failure patients with frequentatrial arrhythmias. The launch of CONFIENT and LeVeen will give us a fullywireless high voltage portfolio designed to work with our LATITUDE PatientManagement System . Both of these products along with ACUITY Steerable LV leadhave already been submitted to the FDA.

Plans for the second quarter of2008 will include the launch of another new product not mentioned before,[Ultruva], our first Boston Scientific branded pacemaker. In the latter half of2008, we anticipate launching our next generation high voltage platform in the U.S. and Europe,the Telegen ICD and Cognus CRT-D. We are excited about the potential of all ofthese new technologies will have with physicians and patients. Not only willthey advance the functionality and performance of the therapy, but they arebuilt on the solid foundation of our enhanced quality systems. I am confidentthese products will allow us to restore growth.

All our next generation deviceswill be compatible with LATITUDE, which continues to offer a strongdifferentiated platform for remote patient monitoring. More than 65,000patients are now enrolled on the system, a much steeper adoption curve than anycompeting system. We are increasingly seeing examples of both referring andplanning physicians choosing Boston Scientific devices based on the enhancedclinical benefits offered by LATITUDE. It remains the only system on the marketthat provides early notification of clinical events for both wireless and Wandapatients.

Our collected event data onLATITUDE patients represents the industries' largest experience with wirelessremote monitoring of implantable cardiac devices. The data shows detection ofsustained atrial arrhythmias allowing physicians to intervene earlier withtreatments as well as events of shock therapy for potentially life threateningarrhythmias.

I'd like to briefly address oneof the restructuring changes that we outlined in Wednesday's announcement onexpense and headcount reductions. The restructuring moves are intended to allowus to leverage resources, strengthen competitive positions and create a moresimplified and efficient business model. Part of the changes will involveintegrating the Electrophysiology business with the Cardiac Rhythm Managementbusiness.

Our goal is to create a moreefficient CRM organization that can better serve the needs ofelectrophysiologists. This combination will help realize the full potential ofour CRM business and will allow us to more effectively support the sharedcustomer base with a broader product offering of implantable devices ambulationtherapy.

In closing I'll say that I amencouraged by our progress this quarter in advancing our pipeline and achievingmeaningful year-over-year sales growth. Although sequential sales werebasically flat in Q3, we exited the quarter in good shape. The fundamentals ofthis market remains strong and I am optimistic that we will see continuedimprovement and sequential gains next quarter and into 2008.

Out attention is now clearly onrevenue growth driven by new device and lead technologies that are based on ourrevamped quality system. I'll share some additional perspectives later in thecall, but now I am going to turn it over to Paul.

Paul LaViolette

Thanks, Jim. Well, as has beenmentioned, I am going to focus my comments on the global stent market and ourperformance within it, top level comments on other businesses and our progresson quality initiatives, and then we will focus our attention on restructuringand answering your questions.

PCI procedure activity was stablein the third quarter. We saw a number of signs that sentiment towards the PCIamong referring cardiologists was stable or shifting positively. PCI proceduresoverall were down 11% year-over-year consistent with the second quarter, whilethe rate of stenting and the number of stents per case were both completelysteady with recent prior quarters. We saw a number of factors that contributeto PCI, including multiple measures of referring cardiologists' confidence inPCI, their confidence in medical management and their understanding of stentingdata, trend slightly favorably. I'll expand on these issues at our analystmeeting next week at TCT.

We also saw diagnostic procedurerates, which were about 10% below prior year in July narrowed that rate ofdecline from 10% to 8% to 6% below prior in August to September to Octobermonth-to-date. Considering that interventional cardiologists become the primaryinfluence over patient therapies once a diagnostic catheterization isperformed, we see this as a potentially positive leading indicator. We wouldexpect our Bellwether products, those accessories used in PCI to follow thistrend and we do see some early evidence of that. While we do not yet see PCIgrowth, we do see shifts in leading indicators, which if they persist wouldbode well for future market health.

DES penetration in Q3 was 63% inthe U.S., 48% in Europe and68% in Japan,clearly indicating that we have a very steady worldwide DES market. Theclinical trail data flow on DES has been quite favorable of late with reversalof mortality concerns in scar one year later and DES mortality benefits versusBMS in the Ontariostudy published in the New England Journal of Medicine. We expect this datatrend to persist at next weeks TCT as new long-term safety data arrives.

Survey results tell us that 75%of interventional cardiologists now believe late stent thrombosis and othersafety measures of drug-eluting stenting equal bare-metal stents. That positivepercentage has doubled, since this time last year, following the ESC meeting inBarcelona. Itdoes appear that cardiology community is beginning to clearly understand thesuperior efficacy and at least comparable safety of drug-eluting stents versusbare following a year of costly controversy.

Within that market, the BSC teamhas executed well. Revenue reports confirm, our US share grew to 56% whilemaintaining price discipline within the historic 4% year-over-year rate oferosion. And we maintained a price premium for TAXUS over CYPHER.

Our bare-metal stent franchisemore than doubled as that segment expanded and Liberté grew our market share inthe BMS segment.

International DES performance wasalso strong with market share over 40% in Europe and over 60% in Japan.

PROMUS continues to grow as apercent of our international mix with a steady increase in converted accountsand over 25% sequential growth in the quarter. All-in-all, we produced solidcardiology performance within markets that are below last year but stable andshowing potential signs of improvement.

Switching to our otherbusinesses, the aggregate Neuromodulation business grew over 30%, while weprepare for a definitive separation of the auditory business and look to fundthe pain management business as an integral part of Boston Scientific.

The spinal cord stimulationbusiness grew 38% enjoying both a healthy 14% market growth and approximately 3point market share increase. The business benefited from execution by theexpanded field force and several new product launches.

Within cardiovascular, we sawaccelerating growth in EP offset by increasing competition in neurovascular.Our EP franchise grew on the strength of its leading ablation platform, whileneurovascular did lose momentum due to the return to market of a previouslyrecalled competitive coil. We benefited from that recall at that time andbelieve we will retain about a third of the business gained during thatproducts absence.

Our urology business grew 7%,which is below our double-digit expectations due to a slower recovery fromvendor quality issues in the BPH franchise. BPH did however, grow 32% in thequarter and we expect urology to continue to gain momentum.

Our endoscopy business, thelargest non-cardiac business for Boston Scientific grew a healthy 10%domestically and internationally with strengths in a number product lines.

In closing, we've made substantialprogress and dramatic improvements in our quality systems. Having completelyall legacy BSC locations third-party audits, we believe, we today have anaffective quality system. We have received all third-party audit reports andare completing a punch list of required improvements in the areas of executionconsistency and evidenced generation. We plan, as we have conveyed previously,to meet with FDA this quarter. During that meeting, we will convey to theagency our specific audit readiness date. In reference to the agency, I willnot speculate further about the timeframe that will emerge from that meeting.We will update you as appropriate on our progress in these final stages ofwarning letter remediation.

With that I will turn it over toSam to address our restructuring initiatives.

Sam Leno

Thanks, Paul. We issued a pressrelease on Wednesday afternoon regarding our initiatives to increaseshareholder value and I wanted to take a few minutes to describe them andprovide some additional context.

The key components of theseactions include a substantial reduction in expense and headcount to bring ourexpenses in line with revenue. The restructuring of several of our businesses,the expansion of our previously announced divestitures of certain non-strategicbusinesses now include our venous access product line and a continuedmonetization over the majority of our remaining public and private investmentportfolio.

Before I go into details on theexpense and headcount reductions, I want to provide some color on thebusinesses that are being restructured. These actions are design to leverageresources, strengthen competitive positioning and create a more simplified andefficient business model internally.

The key elements of this portionof the plan include combining our peripheral interventions and interventionalcardiology divisions under one management structure. It also includesintegrating the electrophysiology division into CRM under one managementstructure. And eliminating our oncology division infrastructure andtransferring the associated product franchises into other Boston Scientificbusiness units, including peripheral interventions, neurovascular andendoscopy.

The oncology venous accessfranchise will be combined with the fluid management business, which as youknow is being divested.

And lastly, eliminating theInter-Continental headquarters infrastructure and moving to a two regioninternational structure. One region will consist of Europe, Middle East andAfrica; the other will consist of Asia Pacific, including Japan as well as Canadaand Latin America.

The process of monetizing themajority of our investment portfolio and divesting our non-strategic businessesis progressing well. As of the end of third quarter we have monetizedapproximately $150 million of our public and private investments and haveimplemented a plan to divest most of the balance of our public investments andmajority of our private investments. We will retain a number of the privateinvestments due to the strategic nature of the emerging technologiesrepresented by those businesses.

We also have an active processunderway to facilitate the sale of five businesses, which we have previouslyidentified for divestiture. The goals of these initiatives are to eliminate thedistractions, ongoing investments in the non-strategic businesses, restoreprofitable sales growth and strengthen the company for the future by improvingshareholder value.

I will focus my remainingcomments on our expense and headcount reductions and I thought it would behelpful to begin by providing a sense of the process that we deployed todetermine the level of expense and headcount reductions that we are targeting.We performed a detailed trending analysis of each division, each region andeach corporate staff function, by reviewing the past four to five years ofhistorical performance and compare that to our five-year strategic plan foreach of these segments of our business and our expense base.

The focus of this analysis wasnot to compare each business to each other, but rather to assess theappropriate level of investment and profitability for each. We were deliberatein avoiding activities that could negatively impact our focus on quality or onour goal of improving profitable revenue growth. We also looked at competitivebenchmarks and assessed our overall company operating income and earnings pershare goals relative to these benchmarks. We then established targets for eachdivision, geography and corporate staff functions.

The business is with the largestcaps to achieve the performance targets that we set, receive the largerheadcount and expense reduction goals and vice versa. We did not target expensereductions for our quality organization and continue to invest in efforts to strengthenour quality systems and to remediate our corporate warning letters as quick aspossible.

We will also continue to investin research and development projects that are strategic, meaningful and remainan important part of our growth strategy.

I would like to add some clarityto Wednesday's press release. As a result of this process, we are planning toreduce our operating expenses against our 2007 baseline by an estimated $475million to $525 million in 2006 representing a reduction of 12% to 13%. We alsoplan on reducing an additional $25 million to $50 million in 2009. The $475million to $525 million range is the annualized run rate amount of savings weexpect to achieve as we exit 2008, since the implementation of theseinitiatives will take place throughout 2008. However, based on the currentexpectations driven by our implementation schedule, we do plan to realize morethan 90% of these savings in 2008.

These reductions will be drivenby a restructuring plan to reduce headcount and non-headcount related expensesby eliminating the expenses associated with the businesses that we aredivesting. The plan assumes that those businesses will be divested as ofJanuary 1st, 2008. If these divestitures are not completed by January 1st, thenthe expenses reduction associated with those divestures will be delayed untilthey are divested. However, because these divestitures are dilutive to adjustedearnings per share, those expense reduction plays will have no negative affecton adjusted earnings per share.

As you would expect with thereduction of this magnitude, headcount reductions are a key component toachieving these goals. And as such, we are planning to eliminate approximately2,300 physicians worldwide through our restructuring initiatives which representapproximately 13% of our 18,000 person non-direct labor workforce baseline asof June 30th, 2007.

The reduction activities will beinitiated next month and are expected to be substantially completed by the endof 2008. We will not publicly discuss the impact of these reductions onindividual businesses or specific operating expense categories. But I can tellyou that all divisions, regions and corporate staff functions except forquality will participate in these reduction activities.

Some of the general themes thatare common across the reductions include portfolio optimization, workelimination, process reengineering and reducing the spans and layers within ourorganizational structure. In order to provide more contexts with thereductions, I thought it would be helpful to also provide a bit moregranularity. The estimated 2007 combined revenue of the businesses that we aredivesting is approximately $550 million.

Using the revenue guidance rangethat I just provided for the fourth quarter, the current forecast of 2007 fullyear revenue for the company is between $8.250 billion and $8.350 billion.Excluding the revenue associated with the businesses that have been divested,the 2007 baseline revenue should be between $7.7 billion and $7.8 billion.

From this adjusted 2007 base, ouraspirations are to grow top line 3% to 5% per year for 2008 and 2009, andearnings per share in a range of 18% to 20% in each year.

This growth and earnings pershare includes overcoming the approximate $0.05 to $0.06 dilution associatedwith the sale of the five previously mentioned businesses. Obviously, we aredealing with a lot of major assumptions when developing these estimates, notthe least of which are the volatile DES and CRM markets. Consequently, we cannotprovide specific guidance for this timeframe.

We will also not be discussingthe specific underlying assumptions that we use in arriving at this ranges. ButI did want to give you a sense of the growth expectations at a company of thesereductions.

The associated operating leveragethat should come with top line growth in that range along with the expensereductions we will be making should result in significant improvement andadjusted operating profit margins over the next two years. The identified reductionswill result in a pre-tax charge of approximately $450 million to $475 millionor $0.20 to $0.22 per diluted share. Approximately $275 million to $300 millionwill be recorded in the fourth quarter of 2007 with the remainder expected tobe recorded throughout 2008 and into 2009. These expenses will be recordedprimarily as restructuring charges with a portion recorded through other linesof the income statement. Approximately, $400 million to $425 million of this isexpected to be cash charges with the balance being non-cash.

Now, that we have finalized andpublicly announced our restructuring plans, we will be focused on implementingthe more than 750 individual projects and activities that are expected to yieldthese identified savings. We will hold ourselves accountable for achievingthese reductions and will provide periodic update on our progress.

To give you a sense of the rigorand discipline that we are applying there are 15 full time employees devotedtogether with 100 other employees dedicated with part of their time totracking, executing and routinely reporting internally through a dedicatedproject management office and into a steering committee consisting of severalmembers of our senior management team. We are confident that these plannedactions are the most appropriate way to ensure success with our goal ofincreasing shareholder value.

Now, let me turn it back to Jim,for his CEO perspective.

Jim Tobin

Thanks, Sam. I'm going to providesome brief perspective on the quarter and then I have some thoughts on therestructuring plan we announced on Wednesday. You've heard the numbers now, soyou know sales were at the mid point of our guidance and our earnings exceededguidance. Looking beyond the numbers though, this quarter had a better feel toit, the best way I can express it is to say that, the quarter represented thebeginning of a turn for us. There are several positive developments that standout. We became number in the DES sales worldwide with TAXUS in Japanputting us over the top. Japanapproval was the missing link in our selling TAXUS worldwide and now that weare on the market there you can see the result.

Our DES market share in the U.S.was another bright spot picking up 2% to 56%. And as I said we had double-digityear-over-year growth in CRM and I continue to feel optimistic about ourability to grow, based on a robust new product flow into next year.

We also announced our decision toretain our Endosurgery group and to split up the Advance Bionics business.Endosurgery has been a steady and a reliable performer with strong growth and Ihave every confidence it will continue to play that role for us. The painmanagement business has posted impressive growth numbers and it has enormouspotential.

But let me talk for a minuteabout the expense and headcount reductions we announced on Wednesday. These aresizeable reductions and rightly so, they will bring our expenses in line withrevenue and they will help us achieve three things; restore profitable salesgrowth, increase shareholder value and strengthen Boston Scientific for thefuture. We will make these cuts, but we will do so in a way that preserves ourability to make the investments in quality, R&D and capital and our peoplethat are essential to our success over long haul.

In the end, these reductions willcreate greater value for our customers and their patients as well as for ouremployees and shareholders. We faced challenges in the past and we've addressedthem effectively. We will do so this time as well and these reductions alongwith the sale of non-strategic assets and the restructuring of some of ourbusinesses are the right solution.

And with that, I will turn itback to Dan for Q&A.

Dan Brennan

Thanks Jim. Kent, let's open itup to questions and in an effort to enable us to field as many as possible inthe time remaining. I would request that we ask no more than two questions at atime.

Question-and-Answer Session

Operator

(Operator Instructions). And ourfirst question this morning comes from the line of Rick Wise with Bear Stearns.Please go ahead.

Rick Wise - Bear Stearns

Good morning, everybody. Coupleof things I guess -- have made my two question focus on, Paul may help us thinkthrough some of the price issues in the quarter. What kind of price impacts didyou see and how do you think pricing evolves going forward as more competitionenters the market?

Paul LaViolette

Well we did indicate that thepricing year-over-year was down in that 4% range, which is highly consistentwith the same trends over, I would say the last eight quarters, so really nodramatic change and it's hard to predict what will happen when new competitionenters. A lot depends on how the market perceives the efficacy of thoseproducts. We have that same range, 4% to 5% going forward in our outlook and ofcourse we can predict what competition will do, so I think we've demonstratedgreat discipline. We have price premium for TAXUS and I think that will be ourgoal going forward.

Rick Wise - Bear Stearns

Okay. Jim perhaps you could helpus think through a little more detail the impact of the Medtronic leadwithdrawal may be on the market generally and our new specifically may be youcould address again the impact on market and referrals for procedures, but maybe you could address more specifically the opportunity with leads. You clearlyhave some new leads in Japan,U.S. and Europe?Thanks so much.

Jim Tobin

Yeah thanks Rick. You know thelead situation is a tough one really for the market. This is not going to helprestore confidence in the marketplace as a whole, and it's going to representanother opportunity for people to wait on some of the cases that come along.So, from that point of view, I don't view this episode is being helpful tomarket growth. Our role in this is to make sure that patients get the leadswhen they need them. So, we are focused on making sure that anybody that needsa procedure that we have leads to fill as much of the gap as possible. We'vedialed-up manufacturing as much as we can, so we will be in position to helpserve the market as we go forward. But I don't view this as a big positive. Isee it as probably a short-term effect for us and probably short-term negativefor the market. So, that probably balances out for us. But this is isn't somethingthat has us dancing in the isle. This is not something we are happy about.

Rick Wise - Bear Stearns

Thank you very much.

Operator

Thanks. And we have a questionnow from the line of Bob Hopkins with Lehman Brothers. Please go ahead.

Bob Hopkins - Lehman Brothers

Thanks very much. First aquestion for Sam on the numbers that were provided looking out or the growthrate that were provided looking out at '08 and '09. So, I think you said off ofa base of $7 billion to $7.8 billion, you'd expect 3% to 5% revenue growth in'08 and '09, and then maybe EPS growth of $0.18 to $0.20. So, I was wonderingis the '07 EPS base from which we are working from around the 70 kind of setnumber that you are suggesting for full year 2007?

Sam Leno

Probably, we did provide a rangefor the fourth quarter. So, it is off a range of possible outcomes for 2007.

Bob Hopkins - Lehman Brothers

Okay. So, I was just using themid point of that range. And then Sam, in terms of the cuts I know you said youare not going to give specifics on exactly where the cuts are coming from but Iwas wondering if you be able to comment on the degree to which those cuts arecoming from direct sales people within the stent in ICD organization?

Paul LaViolette

Yeah, Bob this is Paul. And clearlywe are focused on growth, and growth as our challenge going forward, we don'tintend to save our way to success although we are very focused on aligning ourexpense base to our scale. So, when you think about direct selling expense, asa part of the overall cardiology P&L, for example, it's very low and that'sa generally very efficient organization and as we saw in this past quarter theyare gaining share against their rival. So, the goal is not to focus on directsales force size, we clearly believe we can be more efficient in selling and wewill focus on that. But we are we are not avoiding selling expense because wesee opportunity there, but we don't believe we are going to be a strongercompany with significantly smaller sales forces.

Bob Hopkins - Lehman Brothers

Thanks, very much.

Sam Leno

Hey Bob, let me go back to answerthe first part of your question. As you know, we did change how we viewadjusted earnings per share so what we said, we'd disclose virtually everythingcaps and merger related costs and the other major events. But in our quarter,we had $0.20 and $0.03 of that really was not associated with, what I wouldcall normal operations with tax contributing $0.02 and $0.01 of that comingfrom the gain and the disposal of investments. So, as you and others workingmodels through you want to continue to give consideration for those significantevents that we view is really non-operational but won't be disclosed in thisfollowing.

Bob Hopkins - Lehman Brothers

So, Sam. What is then the '07range that you are based in that 18% to 20% EPS growth offer for '08 and '09?

Sam Leno

Well, as I said, I think you needto take the reported earnings for the first nine months and add what youbelieve will do in the range and use that as your full year base.

Bob Hopkins - Lehman Brothers

Okay. Thank you.

Operator

Thanks. And we have a questionnow from the line Michael Weinstein with JP Morgan. Please go ahead. And sir,your line is open, if you do have a question. Please go ahead.

Michael Weinstein - JP Morgan

My apologies. Can you hear menow?

Sam Leno

Yes, Mike.

Jim Tobin

Hi, Mike.

Michael Weinstein - JPMorgan

Okay, sorry about that. Let meask a couple of questions, just to clarify some items here. First, the thirdquarter performance, couple of items that caught me was one step down in yourSG&A expense in the third quarter and this is ahead of the restructuring.Could you just talk a little bit about, where you got the gains this quarterahead of the actions you are taking? And then, I am going to follow up with thecouple of revenue items. Thanks.

Sam Leno

As you know, I can't give you thespecifics, Mike. But as you know, there is some degree of seasonality with thethird quarter being late on sales it's also typically a little later onexpenses as well. We do have from time-to-time other ups and downs are justpart of normal operations that go through the P&L.

Michael Weinstein - JP Morgan

Right, the drop you saw was morethan seasonality say, your second quarter SG&A expense was up 7% versus therevenue base a bit down, almost 2%. This quarter, your SG&A actually showedleverage for the first time, is there anything else that went on this quarterthat might have helped you?

Sam Leno

Well, again, all I can say is,there is typically true upside taking place throughout the course of everyquarter, so in order to understand that you have to dissect not only thisquarter, but also the third quarter of 2006.

Michael Weinstein - JPMorgan

Okay. Let me just talk a little about the restructuring in thelong-term impact to the company. We are talking a lot about cost cutting rightnow. Can you help us gain a little bit of confidence that the level of cuts youare making here which are obviously very, very significant, doesn't impact thelong-term competitiveness of the company or even near-term competitiveness ofthe company in your key markets? And then, we are talking at all about pipelineor long-term pipeline. So, once you get cost basis, company readjust, can wehave a discussion about what the drivers of growth there are beyond as whateverdrug-eluting stent CRM market is giving?

Sam Leno

Let me give you my broadperspectives then I'd ask Paul and/or Jim to join as well. Clearly, the reasonI went into painstaking detail on how we decided to target each of ourbusinesses and corporate staff functions, is because we believe there is anappropriate level of operating profit margin that should come in each of ourbusinesses, driven in large part by what each divisions, product portfolioshould be able to deliver in gross profit and therefore operating profit. Andlooking at the trends of our businesses and where we flattened out in sales, inthe aggregate, the changes that we saw at the top line really caught us a bitflat for it and we didn't respond soon enough. And as a result sales come down,expenses didn't.

So, I believe if we were goingback and had full view prior to the flattening of the sales curve and saw thosesales about to flatten and take actions, then it would have been a lot lessnoticeable, because we'd have done that in a normal course. But we didn't dothat and as a result we continued to grow expenses assuming that we'd have aquick rebound in a two big markets and we didn't.

So, a lot of the expenses that weare taking out are things that we added to our infrastructure, we thought wewould gain for a much higher sales base. When we take those out that doesn'taffect our ability to grow the business in the future, which got ahead ofourselves on investing in expenses. In terms of what the decline in expensesmean to us going forward and our ability to invest appropriately in bothR&D projects and sales and marketing efforts, let me ask Paul and/or Jim tocome on that.

Paul LaViolette

Yeah. Mike, Ithink we have been extremely focused on our core businesses, our core strength,the core teams that have both built our strength in the marketplace today andwe will do so going forward. We are very focused on preserving technology andpersevering our commercial infrastructure, which is I would convey, our contentis pretty powerful. When you look at the portfolio of investments that we havebeen preserving, subsidizing, many of them had payback potential in 2011, 2012,some well beyond that.

So, we clearlyfocused on streamlining our investment portfolio with more focus on the shortand mid term. And recognizing that the risk associated with these verylong-term investments is high and accepting the fact that the ROI on them isaccordingly much lower.

I think whenyou look at our company overall, which you have seen in the past couple ofyears is a company that's grown very rapidly from the $3 billions scale to the$8 billions scale, while investing aggressively in warning letter remediationand integration of two very big deals with Guidant and Advanced Bionics. Andnot really taking a breath anytime along the past 36 months to actually growmore appropriately into our scale and to put efficient business processes inplace.

So, a lot ofwhat we are doing will get us there fast. It is a more painful approach. It isa more necessary approach. But when you think about how we have grown or how wehave taken on this scale and what we have not been able to do to manageefficiency into the business, I think you can really look at it as a catch upto do that.

Michael Weinstein - JP Morgan

I think it would be helpful totry and address the two questions, I think these are probably -- well thesequestions are going to go away which is going to be the question of, are thesecosts which are great for short-term earnings in improving the profitability ofthe company. And I think everybody agrees. It's needed. I know we aren'tcomfortable but that's not impacting the competitiveness of CRM or InterventionalCardiology. You have elected not to give any specifics. Can you talk about yoursales forces in those businesses and what you are doing? And then I guess thelast follow up would be what pipeline projects you will be focused on outsideof CRM and DES to drive growth beyond the 3% to 5% levels we looked at? Thanks.

Sam Leno

Mike, you are not going to getcomfortable with our ability to grow until you see us grow. So, I am not goingto spend any time trying to convince you that that's what's going to happen. Ifyou step back from this thing and think about what we were trying to dostrategically, we were trying to take the profitability that we saw with TAXUS,redeploy that into growth areas.

Those growth areas are CRM andAdvanced Bionics. If you just take this quarter's numbers and say okay, whatdid CRM and Advanced Bionics' grow? Well, that's about 18%. What did everythingelse grow? Minus five. Now, when we did all this, we weren't expecting there tobe a minus on the legacy business. We thought it would be a modest plus, a mid single-digitto high single-digit plus.

That kind of growth will returnwhen the pain of DES market readjusting itself is annualized in. So, we'll getback to reasonable growth in the legacy business and then have growth engineswith CRM and Advanced Bionics and the reason for that is simply that there is anew product pipeline in both of those businesses as well as DES. So, if youlook at from a macro point of view, we didn't expect that CRM or the DES marketto go backwards when we are doing all this and we got, we have to annualizethat in but basically the strategy that we put in places working and as I triedto point out in my remarks about CRM when you have got five new pulsegenerators coming in the next 14 months. The likelihood is that you are goingto see increased competitiveness for the product lines and that translates togrowth.

So, that basically is the storyand obviously if we are planning on that sort of thing happening we are notgoing to be diminishing our field force presence and the ability to compete.Because we expect to have a product flow that will allow us to compete so,that's what we are doing and you will see a play out.

Dan Brennan

Okay, next question? Okay Fine.

Jim Tobin

Before, we do that Mike I want togo back to your first question. I don't think we publish pro forma results fromlast year because as you know we acquired Guidant in the middle of April lastyear. But let me just give one number for the audience because it's probablyimportant in modeling a response to your question. When indicated that the dropin expenses in the third quarter of this year from the second quarter from 744in Q2 to 711, it doesn't approve with that seasonality but indeed the vastmajority if it is. Last year on a pro forma basis, our Q2 '06 total SG&Abase, was $757 million dropped into $712 million in the quarter. So, we had avery similar reduction if you add back in the Guidant expenses from last year,two to four year base.

Dan Brennan

Great. Okay, Kent the nextquestion.

Operator

Very good, next we'll hear fromthe line of Glenn Reicin with Morgan Stanley.

Glenn Reicin - Morgan Stanley

Good morning, folks. Just, onehousekeeping question, and then a couple of more substantial questions. Are yougoing to be posting the geographic breakdowns of the business going forward ofthis quarter?

Jim Tobin

Yes, those should have been outthere at the time the call began Glenn.

Glenn Reicin -Morgan Stanley

Okay. I'll take a look at the websiteand then Sam, just to clarify, so there is no misunderstanding. If you took outthe one-timers this quarter and we take your range for the fourth quarter. Weare coming up with a base of around $0.65-$0.70 excluding amortization andone-time charges and about $0.37 to $0.42 with amortization. I just want tounderstand the base at which we grow going forward. Is that correct?

Sam Leno

That range is in the appropriaterange.

Glenn Reicin -Morgan Stanley

Okay. And then you are saying $0.18 to$0.20 to or 20% above that?

Sam Leno

That's correct.

Glenn Reicin - Morgan Stanley

Okay.

Sam Leno

At least for the next two years.

Glenn Reicin -Morgan Stanley

Okay. And the rate of growth is similarboth pre-amortization and post, I guess it's about?

Sam Leno

The amortization isn't changing,so it's a pretty flat number.

Glenn Reicin -Morgan Stanley

Okay.

Sam Leno

That should be a good assumption.

Glenn Reicin - Morgan Stanley

And then, can you explain alittle bit, of what's happening internationally. The domestic businesses didn'tsurprise me this quarter, but internationally, it looks like it did fell offquite substantially. And then also on CRM, the guidance you are giving withrespect to fourth quarter does not imply much. Actually, it implies a prettybig deceleration of ICD growth for the fourth quarter. What is happeningoverseas right now?

Jim Tobin

The biggest thing in the IC -- inthe ICD space that we're dealing with is that, we're changing distributionmodels in Japan and that impacts us modestly but noticeably in our internationalnumbers and we are going to have to work through that, but that's offset byincreased competitiveness, new products and that sort of thing. So we're Ithink, I mean it's obvious that the international markets are growing fasterthan the domestic markets and so we are optimistic about our ability to competeoverseas.

Glenn Reicin - Morgan Stanley

And what are you doing in Japan,and is the timing really appropriate given the fact that Medtronic is currentlynot selling?

Jim Tobin

We didn't drive the timing. Thiswas driven by JLL's decision to switch from one horse to another. So we're inthe process of building our own distribution -- upgrading our own distributionin Japan.And so that's why we are doing it now, we knew it had no choice.

Glenn Reicin -Morgan Stanley

Okay. And then Paul what's happeningwith the DES market in Europe?

Paul LaViolette

Penetration as I mentioned 48%,that's essentially flat, so not growing but also not going backward and BostonScientific market shares as I mentioned over 40, basically 41%, which wasunchanged over the past quarter. So we consider our share position to be verystrong and our global share obviously with the addition of TAXUS, Japan to ourworldwide mix was boosted up to 46% for the quarter. So it's effectively thestrongest global position we've ever had.

Glenn Reicin - Morgan Stanley

Okay but it looks like from yourguidance you are not anticipating much of a net impact from PROMUS in terms ofa helpful impact?

Paul LaViolette

Well we don't break out specificproduct line sales but PROMUS continues to grow. PROMUS is available obviouslyonly in Europe and IC and netting that against the global power of the US andJapan markets that are TAXUS exclusive obviously PROMUS has a hard time movingthe worldwide needle, but PROMUS continues to play an increasingly importantrole for us.

Glenn Novarro - Banc of AmericaSecurities

All right. Thank you.

Sam Leno

All right Glenn. I'll go back toyour first question again just to a add a bit more clarity, when we provided anaspiration goal of growing $0.18 to $0.20 that incorporates overcoming to $0.05to $0.06 dilution that comes from the divestiture of that $550 million base ofbusiness. When we divest those businesses, some of those businesses do have amortizationassociated with it and that part of the amortization will go away with the restof the expenses. But in the aggregate, the sale of those businesses doesprovide a $0.05 to $0.06 total overcome and then on top of that grow thebusiness 18% to 20%.

Glenn Novarro - Banc of AmericaSecurities

Anyway at this point, can youestimate what the amortization is with those five businesses?

Sam Leno

I can, but I won't.

Glenn Novarro - Banc of AmericaSecurities

Okay. Thanks.

Operator

Thank you very much. Next we willhear from the line Larry Keusch, I believe with Goldman Sachs. Please go ahead.

Larry Keusch - Goldman Sachs

Hi, good morning. Could you Jim,I don't know how much you want to get into details here but just given thesensitivities around the Medtronics issues with their leads and now assumingthat all small French leads have potential fracture issues out their. Could youjust talk through kind of your surveillance? How are you watching thissituation? And why you may not have the issues that they have?

Jim Tobin

We have a very good handles onwhat our performance is on our leads, it was the Fidelis leads Medtronic wasquoting numbers in the 97 and change range. Our comparable numbers would be 99in change. So, that's a difference that is noticeable in the marketplace. Partof that's driven by just the fact that we've got LATITUDE in place. It iskeeping track everyday of 52,000 patients. We know what's going on and what wesee is not much which is the right thing. So, we are very confident in where weare with leads and we've got some new items to offer that are upgrades fromwhat we have had in the product line up until now and that will continue. Youwill see more new ones. So, we are feeling pretty comfortable that what we haveworks as advertised and that we will be able to deliver what customers expect.

Larry Keusch - Goldman Sachs

And I know that you're obviouslyalways looking at this. But if you guys come back post certain Medtronicannouncement and just again confirm that you are not seeing anything?

Jim Tobin

Yeah. We do that every day.

Larry Keusch - Goldman Sachs

Okay

Jim Tobin

There is nothing unusualhappening with our leads and the performance is good. I did take a look at itand I was quiet surprised that how good?

Larry Keusch - Goldman Sachs

Okay great, and just two quickquestions. Paul, I'll just rattle them up and then you can just answer. Paul,you sort of alluded to the fact that the DES market is feeling better andsafety data is going to continue to be enforced at the upcoming TCT. I was justwondering if that was a statement that was meant to be broad in terms ofoverall message is being delivered or does that also include some of what, whatyou guys are going to be presenting obviously you have the TAXUS 4 or 5 yeardata and that's a question out there, that remains whether we'll see any changethere? So that's question one. And then other sort of guidance question is, asyou guys have thought about your [de-fit] growth here, are you making anyassumptions at this point for any real share gain in those numbers as a resultof the Medtronic issues and prevailing other side of that is marketdeceleration, just trying to think about how you are kind of at least thinkingabout incorporating the Medtronic issues into your numbers are you just kind ofleaving alone for now?

Paul LaViolette

I think that the events of thisweek will decelerate what look like a re-acceleration of growth in the market,so that goes against us. I think we will probably see a little more businessbut that's not the way we are not thinking about it, we are thinking about wegot to make sure that customers are service that they are able to do theprocedures they want to do because there are leads available, the supply is notan issue and that's our focus, we haven't really started thinking about howmarket shares are going to shift as a result of this if they do it all.

Larry Keusch - Goldman Sachs

Got you.

Jim Tobin

And Larry, when I prepared mythoughts on the specific wording it's a reflection on both fronts on thegeneral data trend and on the specific data trend I feel pretty good.

Larry Keusch - Goldman Sachs

Great. Okay, thanks very much.

Operator

Thank you and we have a questionnow from the line of Tao Levy with Deutsche Bank. Please go ahead.

Tao Levy - Deutsche Bank

Hi good morning. Sam, I waswondering if you could just if possible break out roughly the percentages wherewere some of the cost initiatives are going to be use next year, sort of incost to good sold, R&D, SG&A just for modeling purposes?

Sam Leno

Well, our focus for expensereduction and headcount reduction is clearly on SG&A and R&D, so all ofour operating expenses there is a small portion of benefit that we hope to getover the next couple of years. In the administrative portion of manufacturingbecause the direct labor force will even flow based on your throughput based onsales demand but the vast majority of our savings, and clearly the largest vastmajority will be in total operating expenses and beyond that we haven't and wewon't be breaking out the difference between savings and R&D and SG&A.

Tao Levy - Deutsche Bank

Okay, great. And in the 3% to 5%revenue growth that you are talking about next year, is that on a constantcurrency basis?

Sam Leno

Yeah, there is much on the factof FX maybe a point or two in FX growth that would come to us but I think isreally minimal, it isn't like the days of old where sometimes you get 5 or 6points of growth from.

Tao Levy - Deutsche Bank

A point or two and 3% to 5%.

Sam Leno

Yeah. I said that maybe a pointor two based on where the rates are today, I don't even think it's a point.

Tao Levy - Deutsche Bank

Okay. And then just lastly. Paul,you made some comments that the third-party inspection folks had made somerecommendation. How long and how substantial are those recommendations? Andagain, how long will it take you to implement those?

Paul LaViolette

What I try to convey very clearlyis that we believe as of today, we have our systems in place the systems areeffective. So, most important takeaway from the third-party audits is that thesystems have integrity, there are no systems design issues and then you lookacross literally two dozen locations running all of those systems and our focusis on execution, so we have some variable execution, some of our smallerfacilities may not run quite as well as the larger ones, so we are really justprimarily focused on running the play. We are running the play over-and-overand making sure that everyday we get a little bit tighter.

So, we are very close. I am notgoing to comment specifically on how long things will take, but I choose thatwe are at punch list intentionally. It's the final list of last things we needto run better and then generate evidence. Some of the quality systems are newand they'll be audited on the objective evidence that they have produced, theywon't be audited on how they run that given day.

So, it's important that we put alittle bit of time under our belts to make sure we can prove that the qualitysystems are running well and that's what we are doing.

Tao Levy - Deutsche Bank

Great. Okay. Thanks a lot.

Operator

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

Tim Nelson - Piper Jaffray

Hi. Question for Jim, it's thefollow-up on the Japandistribution. Could you be more specific what is exactly happening with theJapan distribution system are you going direct or are you just switchingdistributors? And how will that impact and also can you update us on theproduct offerings you have in Japanin CRM space and in which generation are they I guess relative to the US offerings?

Jim Tobin

What happened was the JLL who hadbeen a chunk of our business as a distributor for a long time, choose to gowith ELA/Sorin and that then meant that we had a bit of business that was atrisk. So, we are dialing up our direct capability to address that andlikelihood is that at the end of the day we'll probably make as much moneythere as we have been. The top line will be, maybe a little less and the grossmargin line will be, maybe a little more. And so, from a profitability point ofview I think we will end up where we want to be.

As far as what's available there,it's in typical fashion, remember the TAXUS Express was just approved in Aprilin Japan, three years after the US and likewise in the CRM space it's basicallyour vitality generation DR was just approved in that sort of thing. So, itslagging, but the flip side is, with all we've done to drain the number oftrends down and to retest everything and to make sure that what we are doingeveryday is as robust as its possible can be. The last generation products arepretty good products and so they were competitive in Japan.

Tim Nelson - Piper Jaffray

Yes, there is also thedistribution switch that your Q3 sales suffer and how longer will it take tocomplete this transition?

Jim Tobin

Yes, Q3 sales did suffer, I wouldsay modesty, but it was clearly a negative and it will take another six to ninemonths before I think you will see that situations settle.

Tim Nelson - Piper Jaffray

Okay. Thanks.

Operator

Thank you. And our next questionthen comes from the line of Glenn Novarro with Banc of America. Please goahead.

Glenn Novarro - Banc of America Securities

Hi. Good morning. Two questionsfor Paul. First, Paul your comments about the drug in stent market in US,starting to yield better the fact that you are not seeing aggressive pricingand usually we get a bump up in 4Q volumes versus the 3Q, yet your 4Q USrevenues, by looking at your mid point, looks like its down from what you justdelivered in 3Q. So, are you just being conservative with your forecast? That'squestion one. And then the second question is, for 2008, do you want to give usa sense of where do think the TAXUS market share will fall out and play outover 2008 with endeavor and with designs coming to the market? And maybe youcan give us your impression of when expect both stents to come to the market?Thanks.

Sam Leno

Yeah. Glenn, for the fourthquarter, obviously based on the last four quarters with the ESV, we arelooking, not pessimistically but nor are we going to dial an optimism as yet inour expectations. So, you want to call it conservative, that's fine. I will tryto be very clear that the indications we are seeing are leading indicators.They haven't translated yet into a tangible change and procedural volume and/orpenetration. So, they are all headed in the right direction. But this isclearly demonstrated to be a fairly defused market change and it's going totake some time to get moving in the other direction. But I will say we don'tsee any change in pricing trends in the fourth quarter.

We are not going to comment onspecific market share expectations for 2008. I would say we would reiterate ourprior stents that competing drug-eluting stent programs are likely to beapproved more towards the middle of the year and not by the end of this year orearly into the year. We continue to believe that there is a very complex patheven following panel approval for a full PMA approval through plantsinspections and through labeling negotiations. Those tasks still lie ahead. Andso, our plans will be based on mid-08 launches.

Glenn Novarro - Banc of America Securities

Okay, great. Thank you.

Operator

Thanks. And our next questioncomes from the line of Bruce Nudell with UBS. Please go ahead.

Bruce Nudell - UBS

Thanks so much. Paul, could yougive us -- I have a couple of questions -- Paul, the revenue share that youhave in Japan?

Paul LaViolette

Yes. We had about 62% share.

Bruce Nudell - UBS

62%. And Jim, one of thequestions is, it looks even given the potential disruption you had in Japan atthe OUS ICD market this quarter is 15% or below growth rate. What do you thinkthe sustainable OUS rate is?

Jim Tobin

That's a difficult question.Honestly, I think it's in the 15%, 16% range. But that may turn out not beparticularly given the events of this week. There may be an interruption inthat. That's what I would have thought a week ago. Okay. Now I am not so sure.So, I guess, that's the best I can give you.

Bruce Nudell - UBS

So, the sustainable range youthink is mid teen.

Jim Tobin

I think so. But I think it'slikely to take a dip here and then it comes back to that.

Bruce Nudell - UBS

Okay. And then my final questionis you folks have had a very good luck at XIENCE in your own hands as PROMUSand Endeavor. Just watching it and seeing the full disclosure of the data atthe panel. When you fully launched in the US, when all of the players are in,what sort of share do you think TAXUS could hold? Given the fact that in thereal world, the revascularization rate with your products probably are reallylow. And there are greater concerns with safety and just the unknowns oflong-term safety. So, if you could just say a ballpark range where you thinkTAXUS could hold share given those cross currents?

Sam Leno

Well, Bruce it's a good question.And we think about it a lot. First of all, we know this for sure and this hasproven through registries and long-term follow up, TAXUS has a clearly lowclinical reintervention rate in the real world. So, that's point number one.

Point number two, we only have tolook to Europe where all of the products that are contemplated for 2008approval in the US are already for sale and already aggressively marketed. AndTAXUS is clear in a way the number platform.

If you look at Endeavor, what Isee is a product that has instant late loss of 0.67 and in comparison to TAXUSroughly two times the binary restenosis rate in very simple patients with verylow angiographic follow up. And that leads to a two times TLR rate. And that'swith no safety signal, no durable, no claimable safety signal. So, you have aclear and predictable efficacy cost without a safety gain and that's what I seethere and that's going to define its position in the marketplace.

In XIENCE, you have cycle likeclinical performance. You have a very low late loss, instant loss of well below0.2. But if you take away the oculostenotic reflex driven by high angiographicfollow up rates in the trials and look at ischemia-driven TLR there is nodifference between the two, but it is a deliverable OLIMUS and we think thereis clear value to having a deliverable OLIMUS in the market. And so I look at Endeavourand I see a product with very high late loss and no safety edge. I look atPROMUS and I see a product with low late loss and CYPHER-like safety and I ampleased to have that product in my bag along with TAXUS, which is the globalshare leader.

Bruce Nudell - UBS

Great. Just is it somewherebetween 20% and 40% and could you pick a number?

Sam Leno

Nice try, Bruce. Look forward tobuying you a cup of coffee and [tea, Bruce.]

Bruce Nudell - UBS

Thank you.

Sam Leno

I'll take your number. And I hadto give Bruce a round of applause please.

Operator

Thank you. And our next questioncomes from the line of Tim Lee Caris & Company. Please go ahead.

Tim Lee - Caris & Company

Hey good morning, it's Tim. Justtwo real quick questions. One on the restructuring side. Could we see anyimpairment of intangibles on the asset you recently purchased, just given thatthe sales growth did materialize as expected? And second one, just for Pauljust in terms of the USmarket share dynamics in the drug eluding stent side, it's been stable here forsometimes and you guys just bumped up here, 2 percentage points. Was thereanything specific here that caused that up tick? Thank you.

Sam Leno

I'd like to talk to your intangiblesfirst. We are obligated as all of the companies are to access our intangibleassets every year. In the second quarter of every year we pick up theassessment of one block of the intangibles and in the third quarter we pick upthe assessment for the other. So we have completed both in the second quarter,in the third quarter all the required assessments for intangibles and we had noimpairments.

Paul LaViolette

And Tim yeah we actually did havea defined selling strategy. We did have in the past several months and actuallypredating Q3, so I would contend we actually started to gain momentum in Q2with rejuvenating clinical selling activity, a key account and key opinionleader targeting strategy and we believe that these share gains are tangible evidenceand a result of the strategy and that strategy is ongoing. So we're hopeful tomaintain momentum.

Tim Lee - Caris & Company

Good. Thank you.

Operator

Thanks and our next question thencomes from the line [Christine Stuart] with Credit Suisse. Please go ahead.

Christine Stuart - Credit Suisse

Hi, I have two questions. Thefirst relates to GPO contract, I was just wondering if you could comment on therecently announced premier contract, by understanding that you are removed fromthat, I am just wondering if its possible to quantify the affect, I don't know,Medtronic leadership will lead to [higher up and higher] and my second questionis just on the internal everolimus product. When do you expect to startclinical trails and will that enable you to launch before your supply agreementends with Abbott? Thanks.

Jim Tobin

Right, well I'll comment onpremier generally. And then on everolimus specifically we -- I think we havethe strongest group sales organization in the industry, so we have contractsthat we believe will benefit us and we don't participate in contracts that wedon't think will benefit us and I would say that our status with premier is --we're comfortable with it and we don't see it having a cost in the marketplace. We have not put forward specific timelines on our internal everolimus programwhich would be the PROMUS element project; I will say it is meeting all of ourinternal timelines. We are obviously well aware of the contractual milestonesand we are comfortable with where that product stands relative to the contract.

Christine Stuart - Credit Suisse

And was premier just principallya function of price do you feel, or was it any concern over quality issues?

Jim Tobin

No, it was economics.

Christine Stuart - Credit Suisse

Okay. Thank you.

Operator

Thanks. And our next questionthen comes from the line of Joanne Wuensch with BMOCapital Markets. Please go ahead.

Joanne Wuensch - BMO Capital Markets

Hi. Thanks for taking thequestion. When you take a look at the cuts that you announced, can you give usan idea of how you prioritized what was being cut, what wasn't?

Jim Tobin

Yeah, sure. As we looked at ourbusiness as I mentioned. First of all we have no cuts in the qualityorganization and as we looked at R&D which is always a sensitive area, welooked very carefully at our track record of R&D, track record ofdelivering commercial products through the acquisitions that we have done andarmed with a lot of data then began to look at each of our individual R&Dprojects across everyone of our businesses with a critical eye. Where wethought we had a good opportunity to continue to grow revenue profitably, thoseprojects were untouched.

Where we had a lot of doubt as tothe commercialization of those products, they got looked at under a biggermicroscope. But clearly, from a sales growth point of view we paid a lot ofattention to R&D, to quality as well as to our sales force. Beyond that wetook a very critical eye to everything else and we looked at where the growthof the expenses have come from, what role each of the functions and businessesplayed towards the top-line growth profitably and began to set targets based onthat.

Joanne Wuensch - BMO Capital Markets

One of the critics or some of thecritics have said that you cut too much. Do you want to respond to that?

Sam Leno

Yes, I do. If they are runningthe business, I think there were probably much of divestures the same way thatwe did. It seems to be a critic matter, not much about the organization.

Joanne Wuensch - BMO Capital Markets

And have assurances been put inplace for the people who are staying to maintain morale, et cetera?

Sam Leno

We are working on a number ofprograms that we will both provide incentives to some part of the organizationto stay with us through the difficult times as well as a lot of internalcampaigns. One of which, will be today talking to our employees as to why evenwith -- this is an amazing company to work for in a terrific industry. And weare the leading company. So, Paul LaViolette and I for example have doneinternal road shows for the past six weeks talking to employees around thecountry and will continue to do that for the next several.

Talking about the rationale for-- how got here? What we are doing about it? Why we are doing what we aredoing? And why after all the reductions that have taken place, why will be astronger and better company for it? And Paul, you may want to make yourcomment.

Paul LaViolette

Well, I would add only on thefirst part of the question Joanne, after we defined the boundaries of ourfinancial performance, the business units themselves were far and away theinfluencers and a bottom up process identifying technology priorities or areasto retain versus areas to cut. So, these folks that own and operate thebusinesses made those choices. These were not corporately driven project lists.

And I would add, only my personalpassion to what Sam has said, we believe very strongly in what we have here.This is a challenging period, but we have a lot to look forward to. And our jobis to execute through this period and then to get everyone very intensivelyfocused on the value that is Boston Scientific and the growth that lies ahead.And I personally feel, we will do that and we will do that very effectively.

Joanne Wuensch - BMO Capital Markets

Okay. Thank you very much.

Paul LaViolette

You are welcome.

Operator

Thanks. And we have a questionthen from the line of Larry Biegelsen with Wachovia. Please go ahead.

Larry Biegelsen - Wachovia

All right. Thanks for taking mycall. First just a clarification, the fourth quarter ICD guidance in your 2008and 2009 sales growth aspirations, do they or don't they take into account theMedtronic recall, Jim?

Jim Tobin

I would say they do, because Idon't think that the Medtronic recall is going to have that much net effect.So, they were done before that happened, but we wouldn't change it.

Larry Biegelsen - Wachovia

And they pricing in Europe, Paul,I don't think I heard you talk about that. Can you comment on what's going onin the drug-eluting stent market there? And specifically PROMUS, any color onPROMUS XIENCE price? And then just lastly Paul, in the recent past, you've saidthat you think resolution of the warning letter would be an '08 event. I didn'thear you reiterate that today. Could you tell us if you still think that's an'08 event? Thanks.

Paul LaViolette

Yes. For the warning letter, wedidn't get specific because we are now moving into a period of working closelywith the FDA over the weeks ahead. So, we are not getting any details butabsolutely, we believe will be completed with this next year.

As related to European pricing, Iwould say we are not going to give this specific prices of either PROMUS orTAXUS. It's an interesting challenge to have two products known to be the sameand to drive any drive price differentiation between the two. So, that's sortof a natural outcome of the planning strategy that we have. And obviously thatwill be even more difficult over time, as more and more data comes out and asits clear to the marketplace that the two products are in fact the same underthe hood.

And I would say the Europeanprice trends are, as is the case with the other 15,000 products we sell, thereis always a little bit more aggressively downward in Europe than in the UnitedStates. But there has been no change in the pricing trajectory in Europe.

Larry Biegelsen - Wachovia

Thank you.

Operator

Thanks. And we have a questionnow from the line of Jason Wittes with Leerink Swann. Please go ahead.

Jason Wittes - Leerink Swann

Hi. Thanks a lot for hearing myquestions. Just another question about guidance for next year, the 3% to 5%,first of all, just to clarify that doesn't include any currency benefit. Andthen secondly, in terms of swing factors, can we assume that the biggest swingfactor is the behavior of the ICD and stent markets?

Sam Leno

First of all, as I mentionedearlier when the question was asked on Apex, I think Apex will be only a modestcontributor to the 3% to 5% growth. And also as I said in my scripted comments,the reason we have asked regional goals not guidance is because we are dealingwith two very volatile markets. Now, we have to make a number of assumptionswithin those volatile markets and all the moving parts. But clearly what makesit difficult to have clear view of the future, which is also why we only giveguidance on a quarter at a time. It's what going on in these markets.

Jason Wittes - Leerink Swann

Okay. And for R&D, thereductions that you made in R&D, does that necessarily keep the percentagesof revenue the same this year as next year or is there going to be a percentagecut that we should anticipate for 2008?

Sam Leno

R&D as a percent of sales, isthat what you are asking?

Jason Wittes - Leerink Swann

Yes. Exactly.

Sam Leno

Yes. You'll see that trenddownwards over the next 15 months.

Jason Wittes - Leerink Swann

Okay. And then one last questionat least I'll attempt this one. For the non-cardiovascular businesses those aresomewhat more predictable, should we be anticipating any kind of accelerationnext year or do we, should we expect the rate we saw this year, just sort ofthe tone for the next year or so?

Paul LaViolette

I would say we continue to expectdouble-digit growth from endosurgery. Neuromodulation has been well establishedas a fast grower and we expect that to be maintained. And then the other twoimportant CRM non-interventional cardiology businesses being neurovascular andEP both have pretty good growth profiles and we expect those to continue.

Jason Wittes - Leerink Swann

Okay. Great, thanks a lot.

Jim Tobin

Okay, Kent. Probably we have time for onemore questions.

Operator

All right, thank you. And thatquestion comes from the line of Matthew Dodds with Citigroup. Please go ahead.

Matthew Dodds - Citigroup

Great. Thanks for letting me on.Quick question first for Jim and Sam. On the gross margin, are we getting closeto the bottom with the impact of drug-eluding stents, because I know Jim in thepast when you got there you got it up to almost 70% really before drug-eludingstents hit? So I am just kind of wondering how much, CRMs dragged that numberdown from where you were before drug-eluding stents was a big piece of the pie.And then for Paul, when you look at some of the recent datas come out in thesehead-to-head trials in the US, Spirit III, CoStar II and then most recently EndeavorIV, you did a lot better in the area of acute and subacute thrombosis which,its not the focus of safety there is a lot of late safety, but it's a prettydynamic difference when you add the three trials up. So I am just wondering ifyou think there is a difference there and may be the balloon delivery systemthat's not getting enough attention on TAXUS versus the competitors or if thereis may be some experience there that your products have been out longer andpeople more comfortable with it and that's helping the trials?

Paul LaViolette

Well I think Matt it's a verygood observation on your part but I think these trials are generally simply toosmall to really draw conclusions on low frequency events. So I would say theone takeaway from all trails recognizing that -- it's a golden rule never tocompare trials, is that TAXUS always performs well. Makes no difference who runsthe trial, how the trial was designed, what we are compared to TAXUS alwaysdoes well. And then I'll let Jim answer the other question.

Jim Tobin

As far as gross margin goes wetook a number of actions in the recent past within CRM that have had a negativeimpact on gross margin, one is the rollout of LATITUDE wanted. The other isthat as a result of our efforts to dialup the focus on quality, we tooksubstantial write-offs in the area of parts that didn't -- components thatdidn't meet our exacting standards and those things -- the LATITUDE piece hasbeing going now basically all year and the components piece was a Q3 affect.The LATITUDE piece will moderate as time goes forward. The components thing ismore or less a one time deal although there maybe others that we decide tothrow overboard. But I don't know of any right now. So this is kind of thebottom from that perspective, now having said that we have a mix issue as we goforward which is where is the mix between TAXUS and PROMUS going to land in thenext couple of year period. The reason that's important is the margin on PROMUSis less than the margin on TAXUS, as actually everything, is less than themargin on TAXUS. And so, anything that including, high margin CRM is still lessthan TAXUS. So from a down draft point of view, you are going to have -- as wego forward you are going to continue to see PROMUS as a negative but everythingelse is going to trend in the other direction, how that all plays out TBD.

Sam Lone

And two other thought I wouldadd. In the past 18 months, as we have with the entire rest of theorganization, the engineering talent we have has been devoted completely toremediation of the quality warning letter and as a result the averages up tohere have historically put into driving 5% to 8% of costs down every year,haven't been there. So, one of the issues that have suppressed our margins lastyear and again this year into some extent next year will be, having thoseengineers hostage to the quality program. Once we get the quality warning letterlifted and we can turn our attention back to driving programs to reduce costthat will be beneficial.

But as you all know the benefitsassociated with VIP programs and driving on product costs as soon as theyhappen they don't go to the P&L, we have to sell off the inventory that wehave first. So, even if we were to wave the magic wands start at today, isstill a number of months before we actually see the benefits showing up on ourgross profit. And another moving part is because we have so many new productscoming out. We have to make sure we focus lot of our energy on how we handlethe growth of new inventory and the wind down of the old inventory. So ourability to both manage inventory carefully to manage the -- so don't we have anycannibalization that occurs in the new product that we sell, not just againstour competitors but also against ourselves we have to manage the inventorythere as well. So, between those and the issues and the issue that Jimmentioned, there a lot of moving parts that go into the gross profit equation.So, we have tried as best as we can to incorporate the best reasoning and thethoughts we have on all of those issues as we came up with that aspirationalgoal of 18% to 20% growth in the EPS.

Matthew Dodds - Citigroup

Thanks Dan, thanks Jim and thanksPaul.

Jim Tobin

Welcome, pleasure.

Dan Brennan

Okay. With that we'll concludethe call. Thank you for joining us today. We appreciate your interest in BostonScientific and look forward to seeing many of you at our Analyst Meeting nextTuesday at TCT meeting in Washington DC. Before you disconnect, Kent,will give you all the important details to the replay of this call.

Operator

Great. Thank you. And ladies andgentlemen, this conference will available for replay starting today Friday,October 19th, at 3:00 PM Eastern Time and it will available through MondayOctober 29th, at midnight Eastern Time. And you may access the AT&Texecutive playback service by dialing, 1-800-475-6701 from within the United States or Canada,or from the outside the United Statesor Canadaplease dial 320-365-3844 and then enter the access code of 882777. Thosenumbers once again are 1-800-475-6701 from within the US or Canadaor 320-365-3844 from outside the USor Canadaand again enter the access code of 882777.

And that does conclude ourconference for today. Thanks for your participation and for using AT&Texecutive teleconference. You may now disconnect.

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