St. Jude Medical's CEO Discusses Q1 2012 Results - Earnings Call Transcript

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


Welcome to the St. Jude Medical First Quarter Earnings Conference Call. Hosting the call today is Dan Starks, Chairman, President and Chief Executive Officer of St. Jude Medical.

Before we begin, let me remind you that some of the statements made during this conference call may be considered forward-looking statements. The 10-K for fiscal year 2011 identifies certain factors that could cause the company's actual results to differ materially from those projected in any forward-looking statement made this morning. The company does not undertake to update any forward-looking statements as a result of new information or future events or development. The 10-K is available through the company or online.

During the call, non-GAAP financial measures may be used to provide information pertinent to ongoing business performance. Tables reconciling these measures to most comparable GAAP measures are available in the press release or on the St. Jude Medical website at [Operator Instructions] It is now my pleasure to turn the floor over to Dan Starks.

Daniel J. Starks

Thank you, Brooke. Welcome to the St. Jude Medical First Quarter 2012 Earnings Conference Call. With me on the call today are John Heinmiller, Executive Vice President and Chief Financial Officer; Eric Fain, President of our Cardiac Rhythm Management division; Mike Rousseau, Group President; and Angie Craig, Vice President of Corporate Relations and Human Resources.

Our plan this morning is for John Heinmiller to provide his normal review of our financial results for the first quarter 2012 and to give sales and earnings guidance both for the second quarter and full year 2012. I will then address several topics and open it up for your questions.

Go ahead, John.

John C. Heinmiller

Thank you, Dan. Sales for the quarter totaled $1,395,000,000, up approximately 1% over the $1,376,000,000 reported in the first quarter of last year and above the upper end of our total sales guidance range of $1,305,000,000 to $1,390,000,000. Unfavorable foreign currency translations versus last year's first quarter reduced this quarter's sales by approximately $7 million. We will update our currency assumptions in a moment, but the actual average exchange rates during the first quarter were within our previous guidance range.

On a constant currency basis, first quarter sales increased approximately 2% versus last year. And excluding the impact of terminating a contract in Japan, under which St. Jude Medical distributed cardiovascular products manufactured by a third party, first quarter sales increased 3% on a constant currency basis.

During the first quarter, we recognized $29 million or $0.09 per share in after-tax charges, primarily in connection with our previously announced restructuring action initiated during the second quarter of 2011 to streamline manufacturing within our CRM business, which consists primarily of closing down operations at our location in Sweden as well as costs associated with our continuing efforts to leverage our sales and sales support organizations. In addition, we recognized $25 million or $0.08 per share in after-tax charges related to a settlement involving a dispute over the final payments due under a license agreement involving the vascular closure product line. Comments during this call referencing first quarter results and guidance for full year 2012 results, including EPS amounts, will be exclusive of these items.

At the end of 2011, the federal research and development tax credit expired, and it has not yet been extended for 2012. In this circumstance, GAAP requires us to estimate and record our effective income tax rate, assuming that the R&D credit is not extended. For purposes of this conference call and our calculation of adjusted net earnings, however, we are assuming that the tax credit will be extended for 2012 as in past years. As a result, comments referencing first quarter results and our guidance for 2012, including EPS amounts, are presented based on an effective income tax rate that contemplates the extension of the tax credit retroactive to January 1, 2012. To the extent the federal research development tax credit is not renewed, our effective income tax rate for 2012 would be higher than what is being presented during this call.

Earnings per share were $0.86 for the first quarter of 2012, an 8% increase over adjusted earnings per share of $0.80 in the first quarter of 2011 and above our guidance range of $0.82 to $0.84.

Before we discuss our first quarter 2012 sales results by product category with guidance for the second quarter and the remainder of 2012, let me comment on foreign currency. As discussed on prior calls, the 2 main currencies influencing St. Jude Medical's operations are the euro and the yen.

In preparing our sales and earnings guidance for the first quarter and the full year 2012, we used exchange rates which assumed that each euro would translate into about $1.26 to $1.31, and for the yen, each JPY 76 to JPY 81 would translate into USD $1. For the first quarter, the actual average exchange rates for the euro and the yen were consistent with these assumptions.

In preparing our sales and earnings guidance for the second quarter and remainder of 2012, we are now assuming that each euro will translate into about $1.28 to $1.33, and we now expect each JPY 80 to JPY 85 to translate into USD $1. These changes in assumptions regarding currency exchange rates do not materially change our total forecasted sales for the remainder of 2012.

And now for the sales by product category discussion for the first quarter. Total cardiac rhythm management or CRM sales, which include revenue from both our ICD and pacemaker product lines, were $735 million, down 4% from last year's first quarter, including a $5 million decrease due to unfavorable foreign currency translations. On a constant currency basis, first quarter CRM sales were down 3%.

For the first quarter, ICD sales were $450 million, including $4 million of unfavorable foreign currency translation. On a constant currency basis, ICD sales were down 2% from last year's first quarter. U.S. ICD sales were $266 million, down 5% from last year's first quarter. International ICD sales were $184 million, approximately equal to the first quarter of 2011. And on a constant currency basis, international ICD sales increased 2%.

For low-voltage devices, sales for the first quarter totaled $285 million, down 4% from last year's first quarter. In the United States, pacemaker sales were $116 million, down 11% from last year's first quarter. In our international markets, pacemaker sales were approximately $169 million, up 2% from first quarter of 2011.

For the second quarter of 2012, we expect total CRM product sales to be in the range of $725 million to $765 million. For the full year 2012, we are maintaining our guidance that we expect total CRM sales to be in the range of $3 billion to $3,080,000,000. We expect to tighten this guidance during our next earnings conference call once we have the benefit of additional information about actual CRM market growth and the rate at which we continue to gain CRM market share.

Atrial fibrillation or AF product sales for the first quarter totaled $221 million, up 13% over the first quarter of last year. Unfavorable foreign currency translations reduced first quarter AF product sales by less than $1 million.

For the second quarter of 2012, we expect AF product sales to be in the range of $215 million to $230 million. We are increasing our full year 2012 AF product sales guidance to be in the range of $890 million to $920 million.

Total sales of cardiovascular products for the first quarter of 2012 were $336 million, up 3% over the first quarter of 2011. Unfavorable foreign currency translations reduced first quarter cardiovascular products sales by approximately $1 million. Excluding the impact of terminating a contract in Japan under which St. Jude Medical distributed vascular products manufactured by a third party, first quarter 2012 sales of cardiovascular products increased approximately 8% versus last year's first quarter.

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

For the first quarter of 2012, sales of structural heart products were $155 million, an increase of 8% over the first quarter of 2011; and sales of vascular products in the first quarter of 2012 were $181 million, down 2% from last year's first quarter. Again, if you exclude the impact of terminating the Japan distribution contract, sales of vascular products increased approximately 7% versus last year's first quarter.

For the second quarter of 2012, we expect cardiovascular product sales to be in the range of $335 million to $355 million. We are increasing our full year 2012 cardiovascular sales guidance to be in the range of $1,355,000,000 to $1,395,000,000.

Total sales of neuromodulation products in the first quarter of 2012 were $103 million, up 12% from the first quarter of 2011. Unfavorable foreign currency translations reduced first quarter neuromodulation product sales by less than $1 million.

For the second quarter of 2012, we expect sales of neuromodulation products to be in the range of $100 million to $110 million, and we continue to expect full year 2012 neuromodulation sales in the range of $425 million to $450 million.

Let me pause at this point and recap our full year 2012 sales guidance. For cardiac rhythm management devices, we are maintaining our sales forecast for 2012 in the range of $3 billion to $3,080,000,000. Sales of our AF products for 2012 are expected to reach $890 million to $920 million. For cardiovascular products, we expect 2012 sales to be in the range of $1,355,000,000 to $1,395,000,000. And we expect sales of neuromodulation products to be $425 million to $450 million. If you add up the sales across all growth platforms, total sales in 2012 are expected to be $5,670,000,000 to $5,845,000,000. Excluding the impact of terminating a contract in Japan under which St. Jude Medical distributed cardiovascular products manufactured by a third party, this guidance range results in consolidated sales growth in the range of 4% to 7% on a constant currency basis.

Looking to revenue by geography, in total, 48% of St. Jude Medical sales for the first quarter of 2012 came from the United States, while 52% came from international markets. As with prior quarters, the specific geographic breakdown of St. Jude Medical sales for the first quarter of 2012 is available in our press release. The gross profit margin this quarter was 74.3%, down approximately 30 basis points from the first quarter of 2011. The gross margin this quarter was slightly better than our expectations, reflecting the higher ASPs or average selling prices associated with new technology, favorable mix and the impact of ongoing efforts to optimize costs. As a result, we are raising the gross profit margin expectation and now expect the full year 2012 gross margin to be in the range of 73.5% to 74.0%.

Our first quarter SG&A expenses were 35.1% of net sales, a decrease of 40 basis points from the first quarter of 2011. The reduction in SG&A as a percentage of net sales results from a number of cost-saving initiatives, including the integration of the AGA Medical business into our cardiovascular United States and international divisions and the integration of our neuromodulation domestic sales organization into our United States division. For the full year 2012, we continue to forecast SG&A as a percentage of net sales in the range of 35 -- 34.5% to 35.0%.

Research and development expenses in the first quarter of 2012 were 12.6% of net sales compared with 12.8% of net sales in the first quarter of 2011. For the full year 2012, we continue to expect R&D expense to stay in the range of 12.5% to 13.0% of net sales as we continue funding our portfolio of new growth drivers to accelerate long-term sales growth.

Net other expense was $23 million in the first quarter. For the second quarter of 2012, we expect the other income and expense line item will be a net expense of approximately $18 million to $23 million. And for the full year, we now expect other expense of approximately $80 million to $90 million.

For the first quarter, the company's effective income tax rate was 21.9%. And for 2012, we expect the tax rate to be in the range of 21.5% to 22.0%. As a reminder, these effective income tax rates contemplate the extension of the federal research and development credit in 2012, retroactive to the beginning of the year. To the extent it is not extended, our overall effective income tax rate would be increased. We have also assumed the extension of the federal research and development credit in the earnings per share guidance for 2012.

Moving onto the balance sheet. At the end of the first quarter 2012, we had $1.1 billion in cash and cash equivalents and $3 billion in total debt and $1.5 billion available under a revolving credit facility with a group of banks.

Before I move onto our earnings per share outlook, I would like to comment on our cash dividend. In February, we announced the approval of our first quarterly dividend for 2012 at the level of $0.23 per share, representing approximately a 10% increase over last year's quarterly dividends. This dividend increase reflects our commitment to rewarding shareholders through value creation and demonstrates our confidence in our growth potential, earnings power and future cash flow generation. We are committed to a quarterly dividend program while continuing to invest in research and development, perform periodic share repurchases and make acquisitions where appropriate and cost effective.

Next, I would like to offer some comments regarding our earnings per share outlook for the second quarter and the full year 2012. In preparing our earnings per share guidance, we have assumed that in the second quarter of 2012, the share count used in our fully diluted earnings EPS calculation will be about 316 million to 318 million shares with a weighted average outstanding shares for the full year 2012 at 318 million to 320 million. The company expects consolidated earnings per share for the second quarter to be in the range of $0.86 to $0.88. And for the full year 2012, we are raising our consolidated earnings per share guidance range to $3.44 to $3.49.

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

Daniel J. Starks

Thank you, John. We would like to devote the next portion of our call to updating everyone on the key themes we reviewed at our Annual Investor Conference on February 3 of this year. First, I would like to update everyone on the progress we have made implementing new growth drivers to accelerate sales in our cardiovascular division or CVD business. Let me start with new growth drivers, which already have been released to the market. Tissue valve sales increased by more than 50% on a year-over-year basis during the first quarter, driven primarily by the success of our Trifecta line of pericardial stented tissue valves. We are adding to this momentum by beginning to launch our Trifecta line of heart valves in Japan this month. We expect our tissue valve revenue to continue growing at a strong double-digit rate during the remainder of this year.

Our optical coherence tomography or OCT product revenue increased more than 75% on a year-over-year basis during the first quarter. This extraordinary growth was driven partly by the success of our new ILUMIEN hardware platform, which combines both OCT and fractional flow reserve or FFR capabilities into a single system. We estimate that we already hold approximately a 15% share of the $500 million market for intravascular imaging with our OCT technology, even though our clinical trial programs and other market development efforts supporting the expanded use of OCT products are still in their infancy. Here again, we expect our OCT revenue to continue growing at a strong double-digit rate for the foreseeable future.

Revenue associated with FFR products also continued to grow at a strong double-digit rate on a year-over-year basis during the first quarter. The new normal in today's environment of health care reform, emphasis on comparative effectiveness and focus on health care economics creates an environment in which our FFR program is delivering the right products to the market at the right time. We already have demonstrated to customers in our landmark FAME trial that our FFR technology both reduces the cost of health care and improves patient outcomes. We expect customer demand for our FFR products to expand when data from the FAME II clinical trial is presented in preliminary form at the EuroPCR next month and in more complete form at the European Society of Cardiology Scientific Sessions later this year. We expect the FAME II trial to support the growing consensus that St. Jude Medical FFR technology is a must-have for a state-of-the-art cardiology cath lab program.

Turning to new growth drivers within our CVD franchise which are not yet on the market. Both our Portico line of transcatheter aortic valve replacement or TAVR products and our EnligHTN line of renal denervation catheters remain on track to begin limited market release in Europe before the end of this year. Market development and launch of full product families in all major markets will take time, but we expect our TAVR and our renal denervation programs, together with our programs for left atrial appendage closure, PFO closure and percutaneous mitral valve repair, to become big enough to move the needle and help accelerate St. Jude Medical's sales growth on a sustainable basis for years to come.

Next, I'd like to offer an update on our cardiac rhythm management division or CRMD business. We need to wait for our competitors to report to fully update our market model. But before we have the benefit of this additional information, we think market growth dynamics were relatively stable during the first quarter. We, therefore, continue to expect the global CRM market to shrink at a low single-digit rate on a constant currency basis during 2012. We also continue to expect to gain approximately 1 point of global market share in our CRM business during the year. As with market growth dynamics, we will need to see our competitors' results to calculate final CRM market shares for the first quarter. But based on our preliminary data, we think we continued to gain share during the first quarter and that our strong product portfolio positions us to continue gaining CRM market share the remainder of this year.

The highlight of our CRM business during the first quarter was the new business we captured with our Unify Quadra quadripolar CRT-D system. Our U.S. field sales organization has reported that a broad cross-section of clinicians already refers to our quadripolar CRT-D system as the new standard of care in CRT-D therapy. We estimate that in the first full quarter of market release, we gained approximately 5 to 6 points of share in the de novo CRT-D segment of the U.S. ICD market. We expect to build on this success in the second quarter by initiating launch of our new Ellipse line of ICDs in Europe.

The Ellipse product line represents a significant advance in ICD technology and is worth a few minutes of additional comment. First, Ellipse is the world's smallest high-energy ICD. Second, Ellipse has a unique shape with an angled header and rounded edges, designed to improve the way leads wrap around the device once connected, which can result in a smaller incision for the patient and help mitigate the small but well-known risk of lead-to-can abrasion.

Ellipse introduces 2 new technologies: The SecureSense RV lead noise discrimination algorithm, which is expected to help physicians more proactively lower the risk of lead-related complications, and an expanded ShockGuard technology, which, together with the new SecureSense algorithm, is expected to reduce inappropriate therapy by as much as 74%. Ellipse also includes expanded ST segment monitoring capability, our CorVue congestion monitoring algorithm and all of the industry-leading feature sets provided in our current Fortify line of ICDs. We just announced CE Mark approval of the Ellipse line of ICDs and began launching the product in Europe earlier this week. Both our Ellipse line of ICDs and our Unify Quadra line of quadripolar CRT-D devices can be combined with our state-of-the-art Durata high-voltage ICD lead.

As a reminder, the safety and reliability of our Durata high-voltage lead is supported by the most robust voluntary post-market surveillance monitoring in the history of the ICD industry. This includes over 10,000 patients implanted at almost 300 sites, with over 24,000 patient years of follow-up over the more than 5 years these registries have been running. Data is collected on case report forms at each scheduled and unscheduled patient visit with additional information documented for any adverse event. We also employ a dedicated field monitoring organization to ensure that the data from the clinical site is accurately and completely submitted. Because of the size and scope of these actively monitored registries, they represent the 2 commercial experience with our current generation high-voltage leads.

To add to the robustness of our post-market surveillance program, we have also recently announced that an independent board of physician experts will analyze the registry data, and the results will be reported on an ongoing basis in our biannual product performance report.

To summarize my comments about being well positioned to continue gaining CRM share during the remainder of 2012, our high voltage device program now offers the only quadripolar CRT-D system on the market with the only quadripolar lead, the only 7 French high voltage lead on the market, the smallest high-energy ICD and the only ST segment monitoring technology, all surrounded by the most extensive post-market safety monitoring program in the industry.

We have also recently launched the Accent MRI conditional pacer system internationally as well as begun our IDE study in the United States with very positive feedback, especially on lead handling.

We fully expect to continue gaining CRM market share as all of this information and technology becomes widely available to the clinical community on a total global basis.

Moving on to the remainder of our business. Our fastest-growing revenue during the first quarter was revenue from the portfolio of our atrial fibrillation or AF division. On a constant currency basis, revenue for our AF portfolio grew approximately 14% year-over-year. We expect this revenue to continue growing at a double-digit rate for full year 2012 due to momentum in the market and a strong flow of innovative new products. We are especially excited about the value our next-generation EnSite technology will bring to physicians in terms of ease-of-use and improved accuracy of advanced mapping technology for the EP cath lab. Launch of our next-generation EnSite technology just began earlier this month. This new technology, therefore, did not impact sales in the first quarter, but we expect our next-generation EnSite technology, our emerging MediGuide technology and the ongoing launch of new ablation catheters to support strong growth in revenue for our AF portfolio the remainder of this year.

Turning to our neuromodulation business. We need to see our competitors' quarterly results to validate our data, but based on our preliminary information, we think dynamics in the spinal cord stimulation or SCS market in the United States may have improved slightly during the first quarter and, accordingly, have raised the forecast for our SCS business during the remainder of this year. The improved outlook for our SCS business is offset, however, by the reduction in sales we expect from our decision to remove our Brio line of deep brain stimulators from the market in Europe for the next few months while we make improvements to the product line.

Taking these 2 dynamics together, the outlook for our neuromodulation business in 2012 is unchanged from the sales guidance we provided one quarter ago.

To summarize the highlights of our first quarter. During our Annual Investor Conference on February 3, we said 2 of our priorities for 2012 were to accelerate sales growth and leverage earnings per share. Measured by these expectations, our first quarter results were highly successful. We exceeded the high end of our sales guidance for the quarter and leveraged 1 percentage point of sales growth into 8% growth in earnings per share. This enabled us to exceed the high end of our earnings guidance for the quarter and supported the decision our Board of Directors made during the quarter to declare an increase to St. Jude Medical's quarterly dividend.

To conclude our prepared remarks, I would like to mention, particularly for all of our employees that are listening, that St. Jude Medical was recognized as one of the world’s 50 most admired companies last month for the first time in an annual survey conducted of 3,855 executives, directors and analysts by FORTUNE Magazine. On behalf of St. Jude Medical, I am also honored that we were named the most admired company in the medical equipment category. This is a huge event in the life of St. Jude Medical and our more than 16,000 employees who are providing innovative medical devices to help patients who suffer from cardiac, neurological or chronic pain diseases. This recognition tells us that the priority we place on patient care, customer needs, the value of innovation, respect for and development of our employees, social responsibility and all of the other components of the culture and character of St. Jude Medical are being noticed and are having an impact on a total global basis. We are humbled by the recognition, but especially by the opportunity, for a St. Jude Medical device to help save or improve a life somewhere around the world on average once every 3 seconds of every business day.

With that, I would like to turn it back to you, Brooke and open it up for questions.

Question-and-Answer Session


[Operator Instructions] Your first question comes from Mike Weinstein with JPMorgan.

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

Dan, you guys reiterated your CRM guidance for the year. Your 2Q guidance appears to bracket at least our forecast for the quarter, but I think a lot of people are curious to hear your comments about the health of the business, not only off of what was a very strong first quarter for the U.S. ICD business, but in light of all the issues in the last few weeks surrounding Riata and the debate back and forth between the company and the various constituencies out there. Has that impacted the business over the last few weeks? What are you willing to share at this point about the state of the business in the second quarter?

Daniel J. Starks

Yes, quite a bit, Mike. We're willing to share quite a bit. So first, on the health of the business, the business is actually doing very well. And so as we've indicated with a number of the metrics mentioned in our prepared remarks, on the CRM side of the business, we actually have a lot of very positive early indicators with respect to our U.S. ICD business, in particular. A couple more points I could mention is that we actually -- as we measure the total number of active accounts in comparative quarters, we actually had a few more active U.S. ICD accounts in the first quarter of 2012 than we did in the first quarter of 2011. So that's one very positive metric. The CRT-D, as a percent of mix, continued to increase in our portfolio, another strong positive. Another very strong positive indicator I'd point to is the sequential quarter gain in our U.S. ICD business. So on a -- although there are limitations to the value of sequential quarter comparisons, given the changes in the size of the market on a year-over-year basis, today, I think, the sequential quarter comparison in the U.S. ICD business is particularly interesting, and that shows that our U.S. ICD revenue was up 12% on a sequential quarter basis, another strong positive. On the -- another metric I could share with you is that we keep track of lead-to-port ratio in our ICD business. And again, this is encouraging data in our lead-to-port-ratio. As we look at on a total global basis in our high voltage business, our lead-to-port ratio in the first quarter of 2012 was actually higher than it was in the first quarter of 2011, so a strong positive. And then particularly, keep in mind when we look at lead-to-port ratio, we need to be aware of the mix of replacement devices, which do not take new leads typically. And in our mix are -- the percentage of our ICD revenue, which is replacement device revenue, continues to increase as we benefit from the replacement market tailwind that we've talked about extensively in past times. So even with the replacement market tailwind and a higher percent of our total revenue consisting of replacement devices, our lead-to-port ratio continued to increase on a total global basis, so another strong positive. Another point I would make could be average selling prices were consistent with what we've seen in past times. Certainly not worse. So we've said in the past that on the CRM side of the business, average selling prices have decreased on a year-over-year basis, ranging from low single digit to mid-single digit. We saw ASPs behaved in that same range here year-over-year during the first quarter. So, all in all, there were just a number of very strong positive indicators in our business, and really, in all of the major growth platforms of our business. On the topic of various constituencies, and let me just -- there've been discussion of the Hauser manuscript, and let me start out -- let me address that as I know I'll certainly draw a question on it. Let me just start by saying that very sincerely we have a lot of respect for Dr. Hauser's contributions over the years to raising awareness about medical device safety issues. We have far more in common than not. We're both focused on patient safety. We're both focused on getting as much accurate information about medical device performance as possible to physicians to help them make the best decisions for their patients. Unfortunately, the Heart Rhythm Journal published a manuscript submitted by Dr. Hauser which contains important errors which were not identified during the peer review process and were widely circulated, and really, this just put everyone in an awkward position. Keeping in mind that this information is about life-saving medical devices, it's important for us to continue to inform patients with the most accurate information that we can and continue to inform physicians. So we're now working with the Heart Rhythm Journal to address this issue in a way that'll be most helpful for patients and physicians, and we think that it's important for us to do so. So there might be other things you would ask about, Mike, but those are -- that touches on a number of points at least.

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

Yes, and so let me just follow up with a couple of items. So the commentary on the lead-to-can or lead-to-port ratio, I know it's pretty hard to get this on a real time basis, but how would you feel that, that is holding up as a trend, not only in the fourth -- in the first quarter, but into the second quarter? Is there any way to view that on a real time basis? And then second, Dan, can you just make some comments about your expectations for the presentations coming out at HRS, the ones you're aware of?

Daniel J. Starks

Yes, on predicting lead-to-port ratio going forward, I -- that's a factor that we include in our forecasting exercise, and so we do have a prediction for it. But really, I think it's a good idea to look at the data, and the smallest window to look at the data that we find helpful is a quarter. And particularly, in the CRM space in particular, the ICDs and pacers, we really think that it is far more valuable to put the data on really all respects: data with respect to market growth, data with respect to market share, data with respect to lead-to-port ratio, to put it into a 6-month bucket rather than a single-quarter bucket. Because quarter-to-quarter, there really can be just a lumpiness in the data that if a person starts to extrapolate, it really is more misleading than it is helpful. So as you ask about kind of real time as we track this as the quarter progresses, we do track it, but it's not -- that's not enough data for us to extrapolate or want to draw attention to. I think we have some customers who have reduced their level of some of our ICD leads, their level of use of some of our ICD leads, and so I would want to acknowledge that on the one hand. On the other hand, on the big picture with all of the new technology in our product line and on a total global basis, again, it really is quite striking as a person says, okay, so day-by-day there are all kinds of important events that happen. But in the big picture, what's important and what are the major trends of the business? And there, I think, the idea that our global lead-to-port ratio actually increased in the first quarter of 2012 versus the first quarter of 2011 shows -- really is a very strong testament to the health and stability and growth opportunity of our high voltage business going into the second quarter. And on the topic of HRS, let me refer that question over to President of our Cardiac Rhythm Management division, Eric Fain, and ask you Eric, what insights could you offer about what we expect to see at HRS.

Eric S. Fain

So based on the published sessions and the abstract titles, we expect there'll be a couple of dozen of presentations, both oral and posters. And a number of them are presenters that are on topics that have been previously given or published, and we'd expect those to be updated in a number of cases. There'll also be talks or presentations on single-site experiences, on Riata patient management or lead extraction. And then, there will also be presentations on Durata that'll cover the performance of the lead in our perspective actively monitored registries, and it will provide an opportunity for us to update the data that was last presented and posted. And finally, as has been the case over the past few months, we expect a variety of views expressed, and we'll be making ourselves and our lead experts available for as many discussions with physicians as possible to provide them with the most up-to-date information so they can best manage their patients.


Your next question comes from Bruce Nudell with Crédit Suisse.

Bruce M. Nudell - Crédit Suisse AG, Research Division

Dan, just looking at what you guys reported in the U.S. ICD market and assuming plausible range of share for you guys, looks like it's a $900 million to $950 million quarterly market this quarter, which implies definitely sequential stabilization. We did an analysis the other day, and it was very preliminary, of course, but it really indicated that maybe units last year weren't down on an implanted basis as much as people thought and that destocking played a role in what looked like pretty awful market dynamics. Could you hazard a guess as to where the implant rates might be this year relative to last year?

Daniel J. Starks

Bruce, first, on the topic of destocking, our data is entirely consistent with yours. So we think you're exactly right that the revenue, in particularly the last quarter and in our numbers at least this quarter, the revenue needs to be viewed in the context of meaningful destocking at a number of hospitals around the United States. So we -- so first, directionally, we absolutely agree with you. Our data is the same. And we're not going to start to talk about -- we're not going to start breaking out quarter-end quantity purchases from customers separately in our reported numbers, and so I don't want anyone to think that, that's what we're going to do. But I can say, just to give people a sense, just to work to help people see what's going on with customer working capital and their efforts to continue to improve management of the working capital, we mentioned a quarter ago, and we touched on it just very lightly, but a quarter ago in this call, we said that we thought that we saw customer destocking. But we were the first to report, and we wanted to listen to other companies' experience. We wanted to see other companies' numbers and kind of validate were we imagining things or were we truly experiencing destocking at the customer level. And it's now apparent to us that last quarter, there was a meaningful level of destocking across-the-board in a way that hadn't been seen previously. Now this quarter, in our own numbers, we've seen that again. So even though our ICD number, here in the U.S, ICD number is very positive and encouraging, on a year-over-year basis, the volume of quantity purchases at the end of the quarter were down almost a full 1/3. Very, very striking. And we make an effort to keep very close to customer inventory levels with the idea that, that'll help us avoid any unpleasant surprises from time to time, and we don't want to be caught offguard by changes in customer inventory management or -- and we think that customers’ shelf stock at the end of the first quarter is really at the low end of what we've seen recently, both in ICDs and in pacers. So you're on a warm trail. We think your data are correct. And we think that actually the level of implants are more favorable than what's seen in people's reported revenue, both with ICD…

Bruce M. Nudell - Crédit Suisse AG, Research Division

And just one follow-up for Eric. There was a CRT recall this quarter or last quarter and with externalization with silicone leads and you guys have done a very good job of explaining all the design mitigation that you've done in the RV leads with regards to reducing tension and also protecting with Optim. Could you talk about the comparable sort of design changes, if any, other than Optim or whether you believe Optim, in the CRT segment, will be sufficient to make those leads very robust and not have any negative consequences associated with inside-out movement within the CRT leads themselves?

Eric S. Fain

Sure. So the 2 main things, I think, to focus on are, one, as you mentioned, is the Optim material itself is the primary thing I'd focus on. And just in our experience across-the-board in all of our lead families, the Optim installation has shown extremely great, I think, very strong abrasion resistance both on the bench, both on our clinical performance. I think also the point to look at would be that in those QuickSite and QuickFlex leads, the only places, and it's a low rate as we've reported, but the only places that there's been externalized conductor has been in that distal silicone segment. We haven't seen anything in terms of externalized conductors in the -- over the lead body itself, which is made of the polyurethane material. So I think we have plenty of good evidence and good experience to be able to have confidence that, that really is the answer. We've also looked at return leads with Optim and have seen no signs at all of any wear or abrasion in the distal segments of those leads. So everything -- all the information that we have available to us and with good numbers and with bench data supporting our clinical experience points to design changes really mitigating that issue.


Your next question comes from Bob Hopkins with Bank of America.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

So a question for Eric. I just want to ask about the HRS meeting upcoming again, a little bit more directly. Eric, on Durata, do you know of any presentations, anecdotal or otherwise, single center or otherwise, that will show any data on Durata of externalized cables or higher failure rates in a single center experience? Do you know anything like that, that may be presented at HRS at this point?

Eric S. Fain

No, I'm not aware of anything like that.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Okay. Because obviously, that's an important question. People are keying off HRS as a gathering of most of the majority of your customers, and I think to me, anyway, that's going to be the most important issue. Do we see anything new on Durata, and it sounds like the answer is no from what you know today.

Eric S. Fain

Yes. I mean there will be -- there'll be presentations that will be on Durata, and in particular, there's 2 presentations, one that's focused on one aspect, the OPTIMUM Registry, and another on our DF4 registry. And then there'll be an opportunity to present our combined registry data, and so that's the main information that's going to be presented for Durata.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Okay. And then, Dan, just to follow up on Mike's other question. The LV recall, I believe, was very early April. The press releases and all the back and forth on Dr. Hauser's analysis were also April events. And you've kind of answered this previously, but I guess my question is just gauging your confidence that those events that happened so recently, just within the last couple of weeks won't have an incremental negative impact on your market share outlook for the rest of the year. I just want to try to gauge your confidence given that you didn't change your guidance for the full year.

Daniel J. Starks

Sure. Well, our confidence is -- we have a normal level of confidence with all the -- subject to all the typical qualifications on forward-looking statements, Bob. And that may not be terribly helpful to you, but that's probably the best I can really do. We take everything into account. We update our data here, and we caucused as recently as this morning, but we regularly caucus here on the day before our call, and we make sure that the data that we're working with hasn't changed in any meaningful way that we can detect. And we want to make sure that as of the time of the call, we're being as up-to-date and as transparent as possible. And so everything that we’ve said with respect to what we think about the health of the market itself and what we think about the -- our opportunity to continue gaining market share is offered with -- really with our very normal level of confidence. And we've -- the qualifiers that we've particularly mentioned here are that there's a lot of moving parts, and there's always strong competitive efforts surrounding everybody's activities in the marketplace. And so we're in a tough business with -- so there's never certainty in any of our predictions, but we have our normal level of confidence here that -- and supported by a number of metrics. The point is always not just who are we talking with inside our business and what is it that they're saying and what's our experience with kind of the predictive value of inputs we get. We also work to look at what are some of the hard metrics that we could offer as points of credibility that, although they're not definitive, they would offer some confidence that we have it right and that we know what we're talking about. And sure, the future's always unknown, but at least we know what we're talking about. And so having more active customers, a higher number of active implanting centers in the first quarter of 2012 versus the first quarter of 2011 in the U.S. ICD business, that's a pretty -- that's an important statement. And we said that dating back to early last year, we said that the -- we think the CRT -- that the quadripolar CRT-D technology is very innovative and it's important to customers and it's important to physicians, and it will come to be important to patient outcomes, and it'll come to be important on a comparative effectiveness basis to benefit health care economics. And that's the kind of experience we have from this technology on the market in Europe and that we've always expressed our confidence that this technology is the right technology, again, at the right time for patients in the United States who need CRT-D therapy. And the early -- this first quarter experience is entirely consistent with that. The idea that we would again -- there's always some margin for error in our internal data when we don't have the data from the full market. But if we've gained about 5 or 6 points of market share in the CRT-D segment in the United States in a single quarter, I can't think of a time that in my experience here that we've seen that kind of market share shift in a single quarter in the CRM space. So the business is in good shape. And again coming back to the themes of the Investor Conference and looking at things in a patient way and looking at things from the big picture perspective, we think our growth program is on track. We think we have a lot of new growth drivers that are going to make a difference to patients and will be very helpful to physicians across all of our growth franchises. And so we obviously overachieved sales. We overachieved adjusted earnings per share, and we've raised our outlook here on the earnings per share for the remainder of the year. And then to the extent that you don't see more bullish comments from us, it's because we have -- as again, we started out at the beginning of this year, and we said if we make a mistake, we want to make a mistake on the side of being conservative. And so we've offered our guidance here for the second quarter with that same philosophy, and we've offered our updated guidance for the full year with that same philosophy. So I hope what I've said is helpful to you.


Your next question comes from Rick Wise with Leerink Swann.

Frederick A. Wise - Leerink Swann LLC, Research Division

Let me turn to some of the other products that you’ve mentioned, Dan. OUS ICDs were a shade weaker than I expected. I know you said adjusted up 2% x currency. Was that just drawing down older inventory in advance of the Ellipse? Or is there something new happening there? And maybe you could talk to us a little bit about how Ellipse might change the outlook there for the rest of the year and update us on the U.S. timing again.

Daniel J. Starks

Okay, the easiest starting point is your last question of updating -- offering an update on the U.S. So we're not changing our guidance with respect to FDA approval of Ellipse. And so we said that we expect approval sometime this year and that the approval process is really not transparent enough for us to be more specific than that. So we'll leave our -- we're not going to change that guidance. So we have pretty high confidence that approval will come during this year, but we're not sure exactly when. We hope it's sooner rather than later, but we really don't know. On the topic of impact that Ellipse will have here in international markets, I mean, we're very optimistic on the one hand. But at the same time, we would caution people to be a little bit patient. Remember that the uptake of new technology in Europe is paced differently than the uptake of new technology in the United States, and that's been with every technology we’ve put into the market. So it's partly the impact of tenders in Europe different than in the United States. It's also because when we get CE Mark approval for and begin market release in Europe, CE Mark does not get us into all of the major markets in Europe. And we always mention as people want to just get calibrated, a market as large as France, for example, the CE Mark is not enough for us to begin to launch Ellipse into France. And then there's probably just a little more conservative bent as well in Europe on uptake of new technology. So we think that -- over time, we think that this Ellipse product line is really just a perfect complement to our Unify Quadra so that we really have now state-of-the-art, best-in-class on the CRT-D segment. And this -- everything -- I think, virtually, and it may be my ignorance is showing here, but to the best of my knowledge, everything that people would point to in our current ICD line as being things where they'd look at a competitive device and say, well, here's something I like about it, I think we've got everything that we really want to have in the Ellipse line for a very competitive traditional ICD product lineup. So it is the smallest volume device. It's smallest volume with a high output. It's got a great feature set. We've continued to work to design for quality and design for reliability, and we've made improvements in this generation that obviously were teed up quite some time ago to help mitigate the risk of lead-to-can abrasion. So there's -- but again, be patient, and we don't expect dramatic changes in a single quarter from the Ellipse product line in Europe. With respect to the market, generally, in Europe, it is a bit of a soft market. The European austerity measures and economic uncertainty are clearly having an impact, continuing to impact the robustness of the European health care market, and we see that reflected in our numbers.

Frederick A. Wise - Leerink Swann LLC, Research Division

Okay, turning to guidance. You said in response to Bob that you highlighted your typical and understandable conservatism in providing guidance for this year. But can you talk a little about maybe CRM guidance sequentially? I mean, you probably pointed to the sequential improvement. Are you being -- are you being a tad more cautious than usual perhaps looking at second quarter, given some of the near-term headwinds? I might have thought you would have been a little more optimistic giving -- given the EnSite launch, Ellipse launch, Trifecta launch, less -- more favorable currency or less unfavorable?

Daniel J. Starks

Well, the best answer I can give you, Rick, is to say that we really think there is value to erring on the side of being conservative if we're going to err at all. So our experience is that if we are conservative and beat the conservative expectations, we're well rewarded for it. There's -- particularly in the CRM business and in the ICD business, I think we've all seen a reasonable amount of volatility in market dynamics here over the last few years. So that's -- the CRM transparency is not as good as transparency in some of the other parts of our business. And so you notice, we've got a little bit wider ranges in our guidance, and so we're being realistic that the transparency is limited. But we'll be happy to be talking a quarter from now and find out that our guidance was conservative. And from -- so that'd be -- we would call that a good day.


Your next question comes from Kristen Stewart with Deutsche Bank.

Kristen M. Stewart - Deutsche Bank AG, Research Division

Just wanted to, real quick, John, just get the FX impact for pacemakers from you. I didn't get that, and I have a follow-up, obviously.

John C. Heinmiller

It was about $1 million.

Kristen M. Stewart - Deutsche Bank AG, Research Division

Okay. And then just on the cost of goods sold side and just kind of gross profit margins, you did say that you raised your gross margin expectations for the year. It looks like restructuring costs came or the onetime charge came in a little bit higher perhaps than what you guys were thinking. And for the full year, I see that you're now expecting, I think it's like $0.18 or $0.19 versus the $0.12 you had talked about last quarter. Just trying to get a sense, are the restructuring programs costing more? Or are you just maybe pulling forward some of the benefits that you were expecting to receive in 2013 into 2012 to kind of help the earnings outlook this year?

John C. Heinmiller

I don't think there's -- really, the -- on the gross profit margin, in our prepared comments, it's a combination of the strength in the average selling prices, the benefit of the mix of some of our new technologies and the impact that we're having to optimize costs. And all of that added up to a better first quarter than we had originally in our forecasted model for the year and gave us the confidence to increase the gross profit margin a little bit for the full year. And there's really -- as we work through the costs associated with shutting down our operations in Sweden and some of the other efficiencies that we're working to get out of our sales and sales support organizations, those numbers are -- essentially are what they are as we work through that, and there really isn't any way that we pull that forward or there's an adjustment that's different than any of our expectations. We really just work through it as we deal with it.

Kristen M. Stewart - Deutsche Bank AG, Research Division

All right. I think at the analyst meeting, you guys had said there's about $150 million in cost savings in 2013. Is that still what you guys are thinking about?

John C. Heinmiller

Yes, I mean, that comment that we made in the earnings -- or that came out in our -- is still the same. That's our goal, and we're working to achieve that.

Kristen M. Stewart - Deutsche Bank AG, Research Division

And then just from an EPS perspective, you'd commented in the prepared remarks that the change in currency going forward didn't have a material impact on your revenue guidance. Could you just remind us how much of EPS is negatively impacted by currency this year and if there was any change from FX from an earnings perspective to guidance?

John C. Heinmiller

Yes. I think that, that again would stay relatively in the same ranges that we had last quarter. I don't have that right in front of me. But if you look at the currency impact, we think of it as about 50% of the revenue impact flows through to the operating profit line. And then that translates into about every $4.2 million of operating profit is $0.01 of earnings per share. And so with those data points, I think you can work that out. And the euro got a little bit stronger or the dollar strengthened a little bit versus the euro and went the other way versus the yen. It netted out where our guidance ranges overlap enough to where it really wasn't a material impact to our revenue for the outlook for the rest of the year.


Your final question will come from Brooks West with Piper Jaffray.

Brooks E. West - Piper Jaffray Companies, Research Division

Dan, wanted to ask a question on the impact of the Trifecta launch in Japan. Obviously, that's been a great product for you guys in the U.S. It continues to be a great product. Can you just maybe help us size the opportunity in the Japan market for that product? And then I have one follow-up on the FAME II trial.

Daniel J. Starks

Brooks, you have asked me a question where I do not have the data in front of me to answer it, so I apologize that I don't have -- I didn't prepare on the size of the Japan tissue valve market and the pericardial stented tissue component of that. So I apologize, but you've caught me unprepared.

Brooks E. West - Piper Jaffray Companies, Research Division

Let me just ask you then 2 follow-ups. Just the timing on the RESPECT trial. And then on FAME II have you seen an uptick in your FFR business maybe as a percentage of PCI cases? And then can you talk through -- obviously we’re going to get data readouts over the European cardiology meetings, but I know one of the goals behind that trial was to elevate FFR to a level 1 guideline. Can you just talk about, best-case scenario, what that time line might look like?

Daniel J. Starks

Yes, let me start with the RESPECT trial, and just to make sure that everyone listening who doesn't follow us so closely is calibrated, the RESPECT trial is our -- is the PFO closure trial of evaluating the benefit of closing a PFO stroke in patients at high risk of cryptogenic stroke. So that's -- and we actually are not sure yet when those data will be presented. But the target at this point and probably the best guess is that it's going to be at the TCT. And so that'll be a great forum for it. And there's just a lot of data preparation and then some other regulatory work that we think it's important to complete before the data are presented to make sure that everybody's on the same page and that we can offer good visibility as well on what we expect on the regulatory front. So think about that as the likely TCT, but put a little bit of a question mark on that. And on the FAME II, everything is building here in the right direction. And what I think we -- what people will see at the EuroPCR is a review of the trial design and a presentation of reasons that the trial was stopped early. It'll be -- people will need to wait for the European Society of Cardiology, though, to really get a complete data presentation of the results of the trial. So timeline-wise, I think that for the FAME II trial to be fully factored into professional association guidelines, it will be after the ESC. And so a person would expect a normal time lag, and that would start to direct people to think about the possibility of changes in 2013, not in 2012.

And we've gone 10 minutes past our normal stopping time. I realize there are more people with questions. I'm sorry we didn't get to everybody. But I hope our call was informative and that our Q&A that we did get to was helpful. And with that, I'd like to turn it back to you, Brooke, and ask you to offer your normal concluding comments.


Today's call is being recorded and will be available for replay beginning at 12:00 p.m. Eastern Standard Time. The dial-in numbers are (855) 859-2056 and, international, (404) 537-3406. And enter the pin number 63662948. Thank you. This does conclude today's teleconference. Please disconnect your lines at this time.

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