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Boston Scientific Q3 2007 Earnings Call Transcript

posted on: October 19, 2007 | about stocks: BSX

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Boston Scientific Corp. (BSX)

Q3 2007 Earnings Call

October 19, 2007 8:00 am ET

Executives

Dan Brennan - VP of IR

Jim Tobin - President and CEO

Paul LaViolette - COO

Sam Leno - CFO

Analysts

Rick Wise - Bear Stearns

Bob Hopkins - Lehman Brothers

Michael Weinstein - JP Morgan

Glenn Reicin - Morgan Stanley

Larry Keusch - Goldman Sachs

Tao Levy - Deutsche Bank

Tim Nelson - Piper Jaffray

Glenn Novarro - Banc of America Securities

Bruce Nudell - UBS

Tim Lee - Caris & Company

Christine Stuart - Credit Suisse

Joanne Wuensch - BMO Capital Markets

Larry Biegelsen - Wachovia

Jason Wittes - Leerink Swann

Matthew Dodds - Citigroup

Presentation

Operator

Ladies and gentlemen thank you for standing by and welcome to the Q3 Boston Scientific Earnings Conference Call. At this time all lines are in a listen-only mode. Later there will be a question-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 to turn the conference over to the Vice President of Investor Relation, Mr. Dan Brennan. Please go ahead sir.

Dan Brennan

Thank you, Kent 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 Q3 2007 results and key financials are attached to the release and we've also posted support schedules to our website, which you might find useful as well.

We also issued a press release after the close of the market on Wednesday regarding our initiatives to increase shareholder value and we will be discussing that in greater detail this morning as well.

The agenda for the call will include a review of the Q3 financial results from Sam; an update on the CRM business from Jim; a review of the cardiovascular and other businesses; and an update on our quality initiatives from Paul. Additional detail on those initiatives increased shareholder value from Sam and a CEO perspective from Jim; followed by 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 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.

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

Sam Leno

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

Paul will dwell into more details on the DES market dynamics for the quarter but I'll share the revenue results with you at a higher level. Worldwide DES came in $448 million just below the mid-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 $240 million, below the mid point of our guidance range of $235 million to $255 million and 38% below the third quarter of last year.

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

Jim will provide more color on the 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 revenue were $343 million also representing 16% growth over the prior year and international CRM sales were $174 million and again were 16% greater than the third quarter of last year.

With respect to defibrillators worldwide ICD sales of $372 million were in the lower half of the guidance range of $364 million 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 ICD revenue 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 in our other markets and as we've done in the past we have included a divisional sales summary with the press release, as a result I won't go into detail on all of our businesses here but I would like to point out some of the highlights. Reported worldwide revenue excluding DES and defibrillators continued its strong performance with $1.228 billion in revenue for the quarter representing an increase of 8% over the third quarter of last year.

Our worldwide Endosurgery business continued its track record of strong revenue growth with a 9% increase over prior year, including Endoscopy sales of $212 million which were up 13% over prior year. Neuromodulation revenue of $81 million represented an increase of 36% over prior year, as we continue to drive excellent growth in our pain management business.

In summary our revenue for the quarter continues to illustrate the benefits of our broad diversified portfolio of businesses and even though the DES revenues was down $124 million compared to the third quarter of last year our CRM Endosurgery, Neuromodulation and the rest of our businesses more than offset that decline to yield consolidated sales 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 basis points lower than the second quarter of this year and 300 basis points higher than the third quarter of last year. The adjusted gross profit margin for the quarter excluding acquisition-related charges was 72% which was 90 basis points lower than last quarter and 310 basis points lower than the third quarter of 2006.

As we saw last quarter, revenue mix was a key contributor to the lower gross profit margin compared to prior year.

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

Product mix plays an important role in determining our gross profit margin.

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

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

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

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

Interest income was $19 million virtually identical to both the second quarter of this year as well as the third quarter of last year.

Looking at our tax rate, reported GAAP tax rate for the quarter was a negative 5% and the adjusted rate excluding acquisition-related charges was 10%. Reported and the adjusted tax rates for the quarter reflect a reduction in our forecasted annual operational effective tax rate for 2007 from 21% to 18% as well as a benefit in the quarter to catch-up for the impact of this rate reduction on our first and second quarter results.

We were able to reduce our forecasted tax rate for 2007 as a result of tax planning that was implemented during the year. It is not anticipated that this planning will provide any future tax benefits beyond 2007.

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

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

Our adjusted earnings per share which exclude amortization and acquisition-related charges was $0.20 for the quarter as compared to $0.16 last quarter and $0.18 in the third quarter of 2006. This compares favorably to our guidance range of $0.12 to $0.17 for the third quarter. Included in this $0.20 are one-time tax benefits of about $0.02 related to the prior period impact of the reduction in our forecasted annual tax rate to 18% and other discrete items for the quarter.

Also in the quarter, we recorded a net gain of about $0.01 in connection with the monetization of our investment portfolio. So, excluding the one-time tax benefits in the net gain and investment adjusted earnings per share for the quarter was $0.17 which is at the very top end of our guidance range.

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

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

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

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

Looking at cash flow, adjusted EBITDA, excluding acquisition-related charges was $534 million for the quarter, which is slightly higher than the $486 million in the second quarter of this year. We monetized several of our public and private investments and received net proceeds of about $100 million. The balance of our equity investment portfolio is approximately $435 million and we are in the process of monetizing most of this over the next several quarters.

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

In addition, we also recorded a total $6 million in write downs associated with other investments in the quarter. 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 third quarter of 2006. Lower cash interest payments and strong cash flow from TAXUS launch in Japan both contributed to the increase from last quarter.

Capital expenditures were $87 million in the quarter, which is inline with $90 million and $84 million that we spent in the second and third quarter of this year respectively. This resulted in free cash flow of $387 million in the quarter. Capital expenditures for the full year are expected to be approximately $400 million. We successfully amended our credit facility and pre-paid $1 billion of our term loan in the quarter and we closed the quarter with $8.2 billion of gross debt in more than $1.2 billion in cash.

Turning to guidance for the fourth quarter of 2007, consolidated revenues are expected to be in the range of $2.050 billion to $2.150 billion. For DES we are targeting worldwide revenue to be in a range of $430 million to $480 million, US revenue of $228 million to $250 million 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 excluding charges related to acquisitions, divestitures and restructuring as well as amortization expense are expected to be in a range of $0.14 to $0.19. The company expects a net loss on a GAAP basis in the fourth quarter between $0.09 and $0.02 a share. We expect to record restructuring related charges of $275 million to $300 million or $0.12 to $0.14 per share in the fourth quarter. GAAP guidance excludes any potential gains or losses related to dispositions of previously announced business divestitures.

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

Jim Tobin

Thank you, Sam. Since Sam has already detailed the CRM numbers for the quarter, I would like to make a few follow-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 in the CRM market. And we are committed to that plan. We knew it will take years not months to fix the underline problems at CRM, but after 18 months we feel we are well ahead in executing the plan.

The changes we have implanted to strengthen our operations, improve quality and reliability and enhance our communications have gone a long way to restoring trust and confidence within planning positions in our patients. The successful resolution of the CRM warning 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 seen some ongoing evidence of this with the full launch of ACUITY and DEXTRUS leads as well as European approval of the CONFIENT ICD. We also saw a continued success in driving market adoption of the LATITUDE Patient monitoring system.

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

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

Exiting the quarter, our US run rate showed marked improvement in September giving us confidence that we are moving in the right direction as some of our new product introductions begin to have an impact.

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

The ACUITY Steerable lead was fully launched in the US early in Q3 and has generated very positive feedback, the adoption rates exceeding expectations. In addition, the DEXTRUS Pacing Lead was launched mid quarter in the US and Europe. This innovative extendable retractable pacing lead has been well received allowing us to attract hundreds of non-BSC and planning positions.

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

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

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

LeVeen also offers clinicians' additional technologies to help manage heart failure patients with frequent atrial arrhythmias. The launch of CONFIENT and LeVeen will give us a fully wireless high voltage portfolio designed to work with our LATITUDE Patient Management System . Both of these products along with ACUITY Steerable LV lead have already been submitted to the FDA.

Plans for the second quarter of 2008 will include the launch of another new product not mentioned before, [Ultruva], our first Boston Scientific branded pacemaker. In the latter half of 2008, 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 of these new technologies will have with physicians and patients. Not only will they advance the functionality and performance of the therapy, but they are built on the solid foundation of our enhanced quality systems. I am confident these products will allow us to restore growth.

All our next generation devices will be compatible with LATITUDE, which continues to offer a strong differentiated platform for remote patient monitoring. More than 65,000 patients are now enrolled on the system, a much steeper adoption curve than any competing system. We are increasingly seeing examples of both referring and planning physicians choosing Boston Scientific devices based on the enhanced clinical benefits offered by LATITUDE. It remains the only system on the market that provides early notification of clinical events for both wireless and Wanda patients.

Our collected event data on LATITUDE patients represents the industries' largest experience with wireless remote monitoring of implantable cardiac devices. The data shows detection of sustained atrial arrhythmias allowing physicians to intervene earlier with treatments as well as events of shock therapy for potentially life threatening arrhythmias.

I'd like to briefly address one of the restructuring changes that we outlined in Wednesday's announcement on expense and headcount reductions. The restructuring moves are intended to allow us to leverage resources, strengthen competitive positions and create a more simplified and efficient business model. Part of the changes will involve integrating the Electrophysiology business with the Cardiac Rhythm Management business.

Our goal is to create a more efficient CRM organization that can better serve the needs of electrophysiologists. This combination will help realize the full potential of our CRM business and will allow us to more effectively support the shared customer base with a broader product offering of implantable devices ambulation therapy.

In closing I'll say that I am encouraged by our progress this quarter in advancing our pipeline and achieving meaningful year-over-year sales growth. Although sequential sales were basically flat in Q3, we exited the quarter in good shape. The fundamentals of this market remains strong and I am optimistic that we will see continued improvement and sequential gains next quarter and into 2008.

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

Paul LaViolette

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

PCI procedure activity was stable in the third quarter. We saw a number of signs that sentiment towards the PCI among referring cardiologists was stable or shifting positively. PCI procedures overall were down 11% year-over-year consistent with the second quarter, while the rate of stenting and the number of stents per case were both completely steady with recent prior quarters. We saw a number of factors that contribute to PCI, including multiple measures of referring cardiologists' confidence in PCI, their confidence in medical management and their understanding of stenting data, trend slightly favorably. I'll expand on these issues at our analyst meeting next week at TCT.

We also saw diagnostic procedure rates, which were about 10% below prior year in July narrowed that rate of decline from 10% to 8% to 6% below prior in August to September to October month-to-date. Considering that interventional cardiologists become the primary influence over patient therapies once a diagnostic catheterization is performed, we see this as a potentially positive leading indicator. We would expect our Bellwether products, those accessories used in PCI to follow this trend and we do see some early evidence of that. While we do not yet see PCI growth, we do see shifts in leading indicators, which if they persist would bode well for future market health.

DES penetration in Q3 was 63% in the U.S., 48% in Europe and 68% in Japan, clearly indicating that we have a very steady worldwide DES market. The clinical trail data flow on DES has been quite favorable of late with reversal of mortality concerns in scar one year later and DES mortality benefits versus BMS in the Ontario study published in the New England Journal of Medicine. We expect this data trend 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 other safety measures of drug-eluting stenting equal bare-metal stents. That positive percentage has doubled, since this time last year, following the ESC meeting in Barcelona. It does appear that cardiology community is beginning to clearly understand the superior efficacy and at least comparable safety of drug-eluting stents versus bare following a year of costly controversy.

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

Our bare-metal stent franchise more than doubled as that segment expanded and Liberté grew our market share in the BMS segment.

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

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

Switching to our other businesses, the aggregate Neuromodulation business grew over 30%, while we prepare for a definitive separation of the auditory business and look to fund the pain management business as an integral part of Boston Scientific.

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

Within cardiovascular, we saw accelerating growth in EP offset by increasing competition in neurovascular. Our EP franchise grew on the strength of its leading ablation platform, while neurovascular did lose momentum due to the return to market of a previously recalled competitive coil. We benefited from that recall at that time and believe we will retain about a third of the business gained during that products absence.

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

Our endoscopy business, the largest 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 substantial progress and dramatic improvements in our quality systems. Having completely all legacy BSC locations third-party audits, we believe, we today have an affective quality system. We have received all third-party audit reports and are completing a punch list of required improvements in the areas of execution consistency and evidenced generation. We plan, as we have conveyed previously, to meet with FDA this quarter. During that meeting, we will convey to the agency our specific audit readiness date. In reference to the agency, I will not speculate further about the timeframe that will emerge from that meeting. We will update you as appropriate on our progress in these final stages of warning letter remediation.

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

Sam Leno

Thanks, Paul. We issued a press release on Wednesday afternoon regarding our initiatives to increase shareholder value and I wanted to take a few minutes to describe them and provide some additional context.

The key components of these actions include a substantial reduction in expense and headcount to bring our expenses in line with revenue. The restructuring of several of our businesses, the expansion of our previously announced divestitures of certain non-strategic businesses now include our venous access product line and a continued monetization over the majority of our remaining public and private investment portfolio.

Before I go into details on the expense and headcount reductions, I want to provide some color on the businesses that are being restructured. These actions are design to leverage resources, strengthen competitive positioning and create a more simplified and efficient business model internally.

The key elements of this portion of the plan include combining our peripheral interventions and interventional cardiology divisions under one management structure. It also includes integrating the electrophysiology division into CRM under one management structure. And eliminating our oncology division infrastructure and transferring the associated product franchises into other Boston Scientific business units, including peripheral interventions, neurovascular and endoscopy.

The oncology venous access franchise will be combined with the fluid management business, which as you know is being divested.

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

The process of monetizing the majority of our investment portfolio and divesting our non-strategic businesses is progressing well. As of the end of third quarter we have monetized approximately $150 million of our public and private investments and have implemented a plan to divest most of the balance of our public investments and majority of our private investments. We will retain a number of the private investments due to the strategic nature of the emerging technologies represented by those businesses.

We also have an active process underway to facilitate the sale of five businesses, which we have previously identified for divestiture. The goals of these initiatives are to eliminate the distractions, ongoing investments in the non-strategic businesses, restore profitable sales growth and strengthen the company for the future by improving shareholder value.

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

The focus of this analysis was not to compare each business to each other, but rather to assess the appropriate level of investment and profitability for each. We were deliberate in avoiding activities that could negatively impact our focus on quality or on our goal of improving profitable revenue growth. We also looked at competitive benchmarks and assessed our overall company operating income and earnings per share goals relative to these benchmarks. We then established targets for each division, geography and corporate staff functions.

The business is with the largest caps to achieve the performance targets that we set, receive the larger headcount and expense reduction goals and vice versa. We did not target expense reductions for our quality organization and continue to invest in efforts to strengthen our quality systems and to remediate our corporate warning letters as quick as possible.

We will also continue to invest in research and development projects that are strategic, meaningful and remain an important part of our growth strategy.

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

These reductions will be driven by a restructuring plan to reduce headcount and non-headcount related expenses by eliminating the expenses associated with the businesses that we are divesting. The plan assumes that those businesses will be divested as of January 1st, 2008. If these divestitures are not completed by January 1st, then the expenses reduction associated with those divestures will be delayed until they are divested. However, because these divestitures are dilutive to adjusted earnings per share, those expense reduction plays will have no negative affect on adjusted earnings per share.

As you would expect with the reduction of this magnitude, headcount reductions are a key component to achieving these goals. And as such, we are planning to eliminate approximately 2,300 physicians worldwide through our restructuring initiatives which represent approximately 13% of our 18,000 person non-direct labor workforce baseline as of June 30th, 2007.

The reduction activities will be initiated next month and are expected to be substantially completed by the end of 2008. We will not publicly discuss the impact of these reductions on individual businesses or specific operating expense categories. But I can tell you that all divisions, regions and corporate staff functions except for quality will participate in these reduction activities.

Some of the general themes that are common across the reductions include portfolio optimization, work elimination, process reengineering and reducing the spans and layers within our organizational structure. In order to provide more contexts with the reductions, I thought it would be helpful to also provide a bit more granularity. The estimated 2007 combined revenue of the businesses that we are divesting is approximately $550 million.

Using the revenue guidance range that I just provided for the fourth quarter, the current forecast of 2007 full year 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, our aspirations are to grow top line 3% to 5% per year for 2008 and 2009, and earnings per share in a range of 18% to 20% in each year.

This growth and earnings per share includes overcoming the approximate $0.05 to $0.06 dilution associated with the sale of the five previously mentioned businesses. Obviously, we are dealing with a lot of major assumptions when developing these estimates, not the least of which are the volatile DES and CRM markets. Consequently, we cannot provide specific guidance for this timeframe.

We will also not be discussing the specific underlying assumptions that we use in arriving at this ranges. But I did want to give you a sense of the growth expectations at a company of these reductions.

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

Now, that we have finalized and publicly announced our restructuring plans, we will be focused on implementing the more than 750 individual projects and activities that are expected to yield these identified savings. We will hold ourselves accountable for achieving these reductions and will provide periodic update on our progress.

To give you a sense of the rigor and discipline that we are applying there are 15 full time employees devoted together with 100 other employees dedicated with part of their time to tracking, executing and routinely reporting internally through a dedicated project management office and into a steering committee consisting of several members of our senior management team. We are confident that these planned actions are the most appropriate way to ensure success with our goal of increasing shareholder value.

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

Jim Tobin

Thanks, Sam. I'm going to provide some brief perspective on the quarter and then I have some thoughts on the restructuring plan we announced on Wednesday. You've heard the numbers now, so you know sales were at the mid point of our guidance and our earnings exceeded guidance. Looking beyond the numbers though, this quarter had a better feel to it, the best way I can express it is to say that, the quarter represented the beginning of a turn for us. There are several positive developments that stand out. We became number in the DES sales worldwide with TAXUS in Japan putting us over the top. Japan approval was the missing link in our selling TAXUS worldwide and now that we are 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-digit year-over-year growth in CRM and I continue to feel optimistic about our ability to grow, based on a robust new product flow into next year.

We also announced our decision to retain our Endosurgery group and to split up the Advance Bionics business. Endosurgery has been a steady and a reliable performer with strong growth and I have every confidence it will continue to play that role for us. The pain management business has posted impressive growth numbers and it has enormous potential.

But let me talk for a minute about the expense and headcount reductions we announced on Wednesday. These are sizeable reductions and rightly so, they will bring our expenses in line with revenue and they will help us achieve three things; restore profitable sales growth, increase shareholder value and strengthen Boston Scientific for the future. We will make these cuts, but we will do so in a way that preserves our ability to make the investments in quality, R&D and capital and our people that are essential to our success over long haul.

In the end, these reductions will create greater value for our customers and their patients as well as for our employees and shareholders. We faced challenges in the past and we've addressed them effectively. We will do so this time as well and these reductions along with the sale of non-strategic assets and the restructuring of some of our businesses are the right solution.

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

Dan Brennan

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

Question-and-Answer Session

Operator

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

Rick Wise - Bear Stearns

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

Paul LaViolette

Well we did indicate that the pricing year-over-year was down in that 4% range, which is highly consistent with the same trends over, I would say the last eight quarters, so really no dramatic change and it's hard to predict what will happen when new competition enters. A lot depends on how the market perceives the efficacy of those products. We have that same range, 4% to 5% going forward in our outlook and of course we can predict what competition will do, so I think we've demonstrated great discipline. We have price premium for TAXUS and I think that will be our goal going forward.

Rick Wise - Bear Stearns

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

Jim Tobin

Yeah thanks Rick. You know the lead situation is a tough one really for the market. This is not going to help restore confidence in the marketplace as a whole, and it's going to represent another 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 to market growth. Our role in this is to make sure that patients get the leads when they need them. So, we are focused on making sure that anybody that needs a procedure that we have leads to fill as much of the gap as possible. We've dialed-up manufacturing as much as we can, so we will be in position to help serve the market as we go forward. But I don't view this as a big positive. I see it as probably a short-term effect for us and probably short-term negative for the market. So, that probably balances out for us. But this is isn't something that 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 question now from the line of Bob Hopkins with Lehman Brothers. Please go ahead.

Bob Hopkins - Lehman Brothers

Thanks very much. First a question for Sam on the numbers that were provided looking out or the growth rate that were provided looking out at '08 and '09. So, I think you said off of a 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 wondering is the '07 EPS base from which we are working from around the 70 kind of set number that you are suggesting for full year 2007?

Sam Leno

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

Bob Hopkins - Lehman Brothers

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

Paul LaViolette

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

Bob Hopkins - Lehman Brothers

Thanks, very much.

Sam Leno

Hey Bob, let me go back to answer the first part of your question. As you know, we did change how we view adjusted earnings per share so what we said, we'd disclose virtually everything caps 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 would call normal operations with tax contributing $0.02 and $0.01 of that coming from the gain and the disposal of investments. So, as you and others working models through you want to continue to give consideration for those significant events that we view is really non-operational but won't be disclosed in this following.

Bob Hopkins - Lehman Brothers

So, Sam. What is then the '07 range 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 need to take the reported earnings for the first nine months and add what you believe 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 question now 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 me now?

Sam Leno

Yes, Mike.

Jim Tobin

Hi, Mike.

Michael Weinstein - JP Morgan

Okay, sorry about that. Let me ask a couple of questions, just to clarify some items here. First, the third quarter performance, couple of items that caught me was one step down in your SG&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 quarter ahead of the actions you are taking? And then, I am going to follow up with the couple of revenue items. Thanks.

Sam Leno

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

Michael Weinstein - JP Morgan

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

Sam Leno

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

Michael Weinstein - JP Morgan

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

Sam Leno

Let me give you my broad perspectives then I'd ask Paul and/or Jim to join as well. Clearly, the reason I went into painstaking detail on how we decided to target each of our businesses and corporate staff functions, is because we believe there is an appropriate level of operating profit margin that should come in each of our businesses, driven in large part by what each divisions, product portfolio should be able to deliver in gross profit and therefore operating profit. And looking at the trends of our businesses and where we flattened out in sales, in the aggregate, the changes that we saw at the top line really caught us a bit flat 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 going back and had full view prior to the flattening of the sales curve and saw those sales about to flatten and take actions, then it would have been a lot less noticeable, because we'd have done that in a normal course. But we didn't do that and as a result we continued to grow expenses assuming that we'd have a quick rebound in a two big markets and we didn't.

So, a lot of the expenses that we are taking out are things that we added to our infrastructure, we thought we would gain for a much higher sales base. When we take those out that doesn't affect our ability to grow the business in the future, which got ahead of ourselves on investing in expenses. In terms of what the decline in expenses mean to us going forward and our ability to invest appropriately in both R&D projects and sales and marketing efforts, let me ask Paul and/or Jim to come on that.

Paul LaViolette

Yeah. Mike, I think 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 and we will do so going forward. We are very focused on preserving technology and persevering our commercial infrastructure, which is I would convey, our content is pretty powerful. When you look at the portfolio of investments that we have been preserving, subsidizing, many of them had payback potential in 2011, 2012, some well beyond that.

So, we clearly focused on streamlining our investment portfolio with more focus on the short and mid term. And recognizing that the risk associated with these very long-term investments is high and accepting the fact that the ROI on them is accordingly much lower.

I think when you look at our company overall, which you have seen in the past couple of years is a company that's grown very rapidly from the $3 billions scale to the $8 billions scale, while investing aggressively in warning letter remediation and integration of two very big deals with Guidant and Advanced Bionics. And not really taking a breath anytime along the past 36 months to actually grow more appropriately into our scale and to put efficient business processes in place.

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

Michael Weinstein - JP Morgan

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

Sam Leno

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

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

That kind of growth will return when the pain of DES market readjusting itself is annualized in. So, we'll get back to reasonable growth in the legacy business and then have growth engines with CRM and Advanced Bionics and the reason for that is simply that there is a new product pipeline in both of those businesses as well as DES. So, if you look at from a macro point of view, we didn't expect that CRM or the DES market to go backwards when we are doing all this and we got, we have to annualize that in but basically the strategy that we put in places working and as I tried to point out in my remarks about CRM when you have got five new pulse generators coming in the next 14 months. The likelihood is that you are going to see increased competitiveness for the product lines and that translates to growth.

So, that basically is the story and obviously if we are planning on that sort of thing happening we are not going 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 to go back to your first question. I don't think we publish pro forma results from last year because as you know we acquired Guidant in the middle of April last year. But let me just give one number for the audience because it's probably important in modeling a response to your question. When indicated that the drop in expenses in the third quarter of this year from the second quarter from 744 in Q2 to 711, it doesn't approve with that seasonality but indeed the vast majority if it is. Last year on a pro forma basis, our Q2 '06 total SG&A base, was $757 million dropped into $712 million in the quarter. So, we had a very similar reduction if you add back in the Guidant expenses from last year, two to four year base.

Dan Brennan

Great. Okay, Kent the next question.

Operator

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