Medtronic's CEO Hosts 2012 Investor Conference (Transcript)

| About: Medtronic plc (MDT)

Medtronic Inc. (NYSE:MDT)

June 01, 2012 9:00 am ET


Jeff Warren

Omar S. Ishrak - Chairman and Chief Executive Officer

Michael J. Coyle - Executive Vice President, Member of Executive Committee and Group President of Cardiac and Vascular Group

Christopher J. O'Connell - Executive Vice President, Group President of Restorative Therapies Group, President of Diabetes and Member of Operating Committee

Gary L. Ellis - Chief Financial Officer, Principal Accounting Officer and Senior Vice President


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

Matthew J. Dodds - Citigroup Inc, Research Division

Frederick A. Wise - Leerink Swann LLC, Research Division

Kristen M. Stewart - Deutsche Bank AG, Research Division

Robert A. Hopkins - BofA Merrill Lynch, Research Division

David H. Roman - Goldman Sachs Group Inc., Research Division

Brooks E. West - Piper Jaffray Companies, Research Division

Larry Biegelsen - Wells Fargo Securities, LLC, Research Division

David R. Lewis - Morgan Stanley, Research Division

Derrick Sung - Sanford C. Bernstein & Co., LLC., Research Division

Joanne K. Wuensch - BMO Capital Markets U.S.

Raj Denhoy - Jefferies & Company, Inc., Research Division

Jeff Warren

[Audio Gap]

we're all so familiar with. I thought you'd just take a quick look at that. And with that, I will turn the meeting over to Omar Ishrak.

Omar S. Ishrak

Well, thank you, Jeff, and good morning. Good morning to all of you, and thank you all for coming. I want to welcome you today to Medtronic's 2012 Investor Conference and we have a full room here in New York, and there's also several hundred people joining us in webcast from locations around the globe. I think today will be a good use of your time as we discuss the changes that we're making in Medtronic. Now we will discuss with you today and show you that healthcare is indeed an exciting long-term growth opportunity and that Medtronic is the company that is best positioned to win in it. And let me tell you why.

First, because of our market-leading portfolio and our pipeline, which is full and competitive, and we think that this portfolio would position us well to win in today's traditional MedTech market. But the health care market is changing and it's changing dramatically. And companies with size and scale, as well as breadth like Medtronic, are the companies who are best positioned to succeed and adapt to this changing health care environment. As a consequence of this, we're developing aggressively new strategies which I have touched on throughout the year, on economic value and globalization, which we think are the right ones to address these changes in health care. Through this, we think we can improve our growth profile. And this improving growth, together with disciplined capital allocation, will create shareholder value both today and in the future.

But before I go into -- in depth about our strategies and about FY '13 and beyond, let me recap fiscal year '12, my first as CEO of Medtronic. My most important priority in joining Medtronic as I looked at the business was to improve our execution. We did this early by aligning our businesses through clarity in our organization and by providing operating mechanisms and setting up operating rigor and a sense of accountability amongst the management team. We've already seen some results because of these changes. We've delivered to our financial commitment, primarily because we've delivered our new products on time and they've hit the mark with respect to our customers.

We've also dramatically accelerated globalization, and we have done this by reorganizing our business through 6 separate regions each of -- whose leaders report to me directly. In addition, our global business teams themselves have representation from these 6 regions directly on their operating teams. The results have been a much more intimate involvement from our leadership both at the executive committee level, my direct reports, as well as the business unit leaders and others in the different functions, a much more intimate involvement in global growth and global markets.

As a result, again, we've continued to grow in emerging markets, an impressive 20%. And we're doing this quarter-after-quarter and we expect to enhance this going forward. But equally importantly, because of the intimacy of these markets that our executive team has now developed, there's already been a significant shift in investment in these markets to develop future growth. And then finally, we've done some reallocation and streamlining of our product portfolio, of our product pipeline and our programs to optimize our innovation process and to improve our R&D productivity.

Some examples are, we've reallocated $40 million of long-term research in areas that we didn't think were completely aligned through our growth strategies and we reallocated them into programs that are aligned to our growth strategies and will deliver short-, near- and long-term growth for us. We reduced the number of products, the number of projects so that we can have better, well-funded and more comprehensive programs. And that's the way in which, eventually, we will move the needle in R&D productivity for this company.

Now in terms of financials, as you all know, it was a pretty bifurcated year. While 75% of our business grew at 8%, almost 25% declined by 10%. However, towards the end of the year, as we exited the year in the fourth quarter, we found that both of these markets, these challenged markets in U.S. ICD and U.S. Spine were, in fact, showing some signs of stabilization. And Q4 was especially encouraging because almost 90% of our business grew at 7%. So there are some encouraging signs as we go forward and we hope to build on it as we set our goals in the future.

Now as we set our near-term baseline expectations, and these are going beyond FY '13, we look at 4 key drivers that are here with us today. The first is our leading market product portfolio that I've just talked about and its pipeline that we expect to deliver on, and we've already begun to do so. The second is the stabilization of the markets, of the key markets. The third improved execution, which is critical to our long-term success. And the fourth, emerging market growth, which we think will only continue.

When you look at these 4 drivers, we can triangulate around some growth objectives for us. Let's look at 4 examples. The U.S. DES business, DES product, the drug-eluting stent, and in U.S. Neuro, we launched some new products in Q4, and we almost immediately realized some improved growth. If we simply annualize that revenue that we have in Q4 to all of FY '13, which by the way I think is a conservative way of looking at it, and we assume market stabilization in our key challenged markets of U.S. ICD and U.S. Spine, if we just do these 4 things, then we create a 330 basis point swing at the overall Medtronic growth level.

In addition, if we can continue our 20% growth targets in emerging markets, which we have every expectation of delivering on, and I'm personally committed to, then that itself will deliver another 200 basis points foundation for Medtronic growth. So if you look at all this together, these 4 drivers together, and you look at some of these facts, we can triangulate around a set of near-term baseline expectations, which we'll call our baseline. And through this, we expect to improve our financial profile to deliver consistent mid-single digit revenue growth beyond FY '13 and consistently grow EPS 200 to 400 basis points positive in revenue and continue to return 50% of free cash flow to our shareholders.

Let me make it clear, our guidance of 2% to 4% for FY '13 remains unchanged, and our EPS of 5% to 7% remains unchanged. This baseline, this near-term baseline is beyond FY '13.

But we've got to take this one step further. And we are completely committed to this baseline and that is our first and most important priority. But beyond that, as I mentioned, the healthcare environment is changing. And as I've discussed before, we've put in place certain strategies of economic value and globalization, which we think will yield some results as we go forward. The timing for that is not completely certain, but it is something that will have an impact. And when these strategies do have an impact, we think it is reasonable for us to aspire, in financial terms, to reach consistent mid- to high-single digit revenue growth in the midterm, with a corresponding high-single digit to low-double digit EPS growth through the same kind of productivity programs that we've talked about and will discuss today and will continue to return this 50% of free cash flow to our shareholders.

And let me also point out, and it's important to note, that embarking on these strategies, is as much about protecting our downside because companies who do not adapt to this changing health care environment by embarking on these strategies will be marginalized in the future, so we have to embark on these strategies. And we think if they play out, as we think they will, they have a pretty good chance of delivering some good upside. But let me assure you, my most important priority and our most important priority as of now is to deliver on our midterm baseline expectations. And not only deliver it, but deliver it consistently. And that is pretty critical for us. And I'll lay out today for you some of the ways in which we will embark on this.

Let me take a step back first and describe to you the changes in healthcare that I've already alluded to several times. First, there are underlying demand drivers, and this is no surprise to you, and this hasn't changed and it will not change. There's an increasing burden of chronic disease. The demographics are suggesting an increasing amount of people coming into the health care system. And there's technological and clinical improvements that are ongoing to fulfill these needs. But in addition, virtually every country in the world is challenged in terms of its health care budget so there's a rising cost burden on these governments, which is driving payment reforms and pressure on provider economics. Because of this, there's a broadening of our stakeholders from physicians to administrators and payers and governments, and there's alignment between these stakeholders.

And finally, there's a rise in emerging markets that I've talked about so often. There's a rise in wealth and equally importantly, health care is an extremely important government priority for many regions in these countries. These kinds of dynamics will also drive local competition, and therefore, emerging markets are a huge consideration for us as we go into the future, and it's one that we expect to win in.

Now this is not a hypothetical or long-term conceptual view. And I travel a lot around the world and I travel a lot in the United States, visiting customers very regularly. I must have visited, since my time here, over 150 customers in the U.S. in one-on-one discussions. And I find every time I go out on trips that these changes are happening in front of us. There's integrations happening every week. Providers and payers are partnering or integrating. For example, in the City of Pittsburgh, an area of 2.5 million people, there will soon only be 2 options for health care for the entire population. Highmark integrating investment in Allegheny, a provider integrating with the -- a payer integrating with a provider. Or UPMC, a provider which has decided to become a payer as well. So it will be 2 choices in a city of 2.5 million people. And this type of pattern is being repeated across the United States. I don't know the exact nature of how many will consolidate, but this type of consolidation is happening and we have to adapt our strategies to address this. And at the same time, the cost of health care across the entire developed world is something that is not sustainable and something that we, as partners and drivers of health care have to be very conscious about. And then in the emerging markets, again, the numbers speak for themselves. Within the next decade, China will be the biggest health care market in the world, outpacing the U.S.

So what do we do when we think of these healthcare drivers, which we think are happening in front of us? Well, when you think about it, although they are different in every country in the world and in every system, and we don't quite know how they'll play out, there are some fundamentals which we call the universal health care needs. And if we develop strategies to address these fundamentals, the fundamentals of improving clinical outcomes, of expanding access and of optimizing cost and efficiency, we will win in this market. And so our goal and our mission for the future, our vision for the future is really about transforming global health care by improving outcomes, by expanding access and enhancing value. And we will deliver -- develop a program through which we can systematically deliver on this in a structured fashion, and that's really what I'll walk you through. And Mike and Chris will give you detailed examples of how we are transforming in this way.

There are 2 main strategies that will enable us to transform ourselves as we embark in this new world of delivering on these universal health care needs. The first is economic value and the second is globalization. In both of these cases, we've embarked on programs. And the first one about economic value is the one that I should touch on. Now Medtronic will deliver innovations -- to define economic value, it's something that Medtronic will deliver innovations and [indiscernible] that will improve the financial health of our customers through improved outcomes, expanded access or optimizing cost efficiencies. In other words, all our innovations will be structured and granulized in one of these 3 categories. And once we do that, we can deliver specific economic value depending on who the stakeholders are, and I'll describe that more to you in a little while. But what this means to us is that we have to change ourselves from being a company who's only focused on the physician to a broader set of stakeholders. From just offering discreet products and therapies to one that provides integrated offerings. And finally, just more focus on clinical value, where we have expertise in, to a company that can provide economic value as well in a structured fashion.

Let me describe to this -- this to you point by point, starting with serving a broader set of stakeholders. Our traditional customer has been the physician, and that will remain important. However, there is now also the administrator, the payer, and in cases, the patient. And sometimes, there are combinations of those. For me to explain to you economic value, let me walk you through a set of examples of how economic value translates to these different stakeholders in a different way.

In terms of clinical outcomes, improved clinical outcomes, a physician looks at this so that they can provide better patient care through higher quality of care. An administrator looks at this improved quality as an aspect of differentiation for them by having better quality -- by adhering much better to quality measures. They can also reduce the level of readmissions, perhaps, by having better outcomes. A payer will look at improved clinical outcomes perhaps through the lens of the health care technology assessment and that they probably have to do. They will expect fewer complications as a result of better outcomes.

In terms of access, that's very interesting too. Access often provides more reimbursement codes and, therefore, more revenue for administrators. For payers, on the other hand, they are looking at this much more longitudinally. And they'll expect, through access, they'll get more coverage. Efficiencies too are an interesting way -- are very interesting, in the way they translate themselves into economic value. For the physician, better efficiencies mean that they can do their procedures more easily and more quickly. For the administrator, this means that they will save cost. The hospitals will save cost because procedures will go through more efficiently and perhaps they'll get better utilization and lower cost of service. The payers on the other hand are less interested in this, they think this is the hospital's role. They will expect cost-effectiveness from the hospital from which they can reduce their overall cost. And this will have to be done in volume for them -- for it to move the needle.

So as we look at our different offerings and we frame them in terms of improved outcomes, expanded access or improved or lowered cost or optimized cost and efficiencies, when we look at these different offerings, granularize them in this way, then we've got to translate them into economic value and what it means for each stakeholder. And like I just pointed out, it's different for every stakeholder. And we've got to have a process through which this is done.

At the same time, if you follow this line of reasoning, today, we've got expertise and we've got history in developing discreet products and therapies. And as I mentioned, this will continue. We will develop new therapies and we will expand the indications of existing therapies. But in addition, we will use our breadth to create more value to our customers depending on who the stakeholder is and we will expand from just discrete therapies to addressing -- to creating offerings across the entire care continuum. This is important so that we can match our offerings to the way in which health care is being aligned. And health care is being aligned with these different stakeholders, who have a broader view of what offerings we may have because they themselves are much broader through the partnerships that they're driving.

The discrete products and therapies that I have talked about, there's a whole set of examples here, for which we know how to create clinical value, but not for each and every one of them if we are going to create economic value. Let me take the Aquamantys product as an example. And this is a product used in the operating room, and Chris will describe more about this later, but let me describe to you the basic concept of economic value. The clinical value is that it's got better outcomes and it's a better and safer procedure. And in fact, it costs more money. So it's a higher priced product for the hospital. However, it delivers better blood conservation, delivers better outcomes, delivers better patient safety and possibly less length of stay in the ICU. So when a hospital administrator looks at this and there's a map, which we help him with, it shows that their overall cost profile, in fact, improves dramatically with this product, even though they have to pay more for it on a unit level. This is a real-life example and we've seen success. This is a very successful product, which has grown in the last 12 months or so since we've released it. And we expect examples like that across the entire portfolio, and us being able to frame in that very language, whatever we had in clinical value, the economic value for each of our discrete therapies. And again, Mike and Chris will walk you through several of these in greater detail.

Now we've also got, not only these therapies, but we've got many therapies and many business units that we address. And one particular grouping of our product lines is around the cardiac line administrator because we've got a strong presence, as you all know, in cardiology. We think by approaching the cardiac line administrator through our Cardiac and Vascular Group, which Mike Coyle runs, by approaching that administrator in a systematic and unified fashion, we cannot only provide bundling in a way that makes sense both for them and for us, but we can also add to that workflow solutions, which improves the efficiency of the cardiology department. And again, this is one of our biggest areas that we are seeing immediate benefit because of the economic value that our breadth provides to administrators and providers.

Another way of looking at our breadth is through the lens of a surgeon. We have a number of products and technologies all aimed at operating procedures, say, in the spinal area. By combining these technologies together in a seamless way, our navigation systems, our imaging systems, together with powered instruments, all helping to deliver the implant in a much more efficient way, is something that the physician customer, the spinal surgeon in this case, really cares about. But it's not just a matter of showing up with these products, it's a matter of linking them and then demonstrating how, by using them in an appropriate fashion, they can not only make the procedure better, clinically better, but in fact, they can optimize efficiency of the procedure.

So it's not only compelling to the spinal surgeon, it's equally compelling, like I mentioned in the discrete therapy of Aquamantys in that example, it's equally compelling to the administrator, when you approach the customer with this linked portfolio of technologies. So these are 2 examples through which our breadth can make a fundamental and sustainable difference as we approach the market.

In addition, like I mentioned earlier, our customers in many ways are integrating between providers and payers. Their interest in procedure level products may be less so than integrated offerings because they are looking at their business in an integrated fashion. And so what we intend to do is to take our discrete therapies and go upstream and downstream. Upstream towards patient selection and create offerings and products through which we can provide better patient selection for a specific therapy. And downstream through which we can manage these patients better after the therapy. Two such examples I've described here, one is in syncope management, which we can do by taking the pacemaker, but in addition to the pacemaker, look at the Revel product which is used for diagnostics of syncope, and look at our care link product for managing the patient after therapy is provided. Or in diabetes, where the pump, the insulin pump for Type 1 diabetics is our baseline therapy. But in addition, we can use the iPro, which is a diagnostic device using continuous glucose monitoring for patient selection as to who needs the pump. And then once the patient gets that therapy, the pump in this case, they can monitor that patient through continuous glucose monitoring. And we are building new products such as mySentry, which can provide automatic alerts if a patient's -- or if a Type 1 diabetic's blood glucose goes below a certain level.

So these are ways in which we can create offerings that span across the care continuum and we can expand ourselves from being a therapy provider to being a broad player in health care across the entire care continuum of health care, but grounded always in our therapies. And in that way, we can make the most tangible difference to the providers with something that they can measure, see and count.

Now all of this is only possible if we can provide evidence, if we have data. Concepts around this are not good enough. They are relatively easy to provide, the concepts. We have to translate those concepts to data. And to do that, we need to collect economic evidence. And similar to the expertise that we've built up over the years on creating clinical value, we need to develop a parallel set of expertise in developing economic value.

Now let me also point out very clearly that there is no economic value if there is no clinical value, so these have to be linked together. But the translation from clinical value to economic value and the expertise that is required to develop that is a core skill set that we have to develop and that ability to translate clinical value to economic value in a systematic, structured fashion will be a huge differentiator for us as we go forward. This is not only a matter of collecting the evidence, it also is a matter of adapting that in a granular fashion to the exact need of the stakeholder that we are talking about in the geography that we are talking about. To implement this effectively, we need partners because we don't have patients, the partners of the patients, and they have to realize that economic value and we have to see that economic value in these partners' financials. And as a result, we've started -- we made a lot of progress in engaging different partners in this endeavor. Aetna, who is a major player, is one such partner that we have began some certain programs with already are in the early stages of discussions. The region Lombardy in Italy, a big region in Italy where we've already started several programs on chronic disease management, which when successful we've scaled and implemented in that region because of the economic value. UPMC, Alana Health, Heart Hospital -- Baylor Heart Hospital at Plano, Texas, the Carolinas Healthcare System, the Sangre Clinic [ph], all of these are other partners with whom we are working in different ways.

Let me now shift gears to globalization. In globalization, we have to build on what we have. And what we have are our existing products in premium segments. And what I mean by premium segments is basically our existing products, because we're -- although we're in some areas of multiple tiers of products, we essentially play in the premium segment. And our first priority is to take these products and increase our penetration of these products in the emerging markets, more on that later. But in addition, we need to work on the value segment, which is a greater segment of that population. And finally, when we're successful with the value segment, we think we can take those products and bring them back to developed countries in new ways, which will disrupt health care delivery and give us a competitive advantage in the developed markets as well.

Let me explain this to you a little more. And I've talked to many of you about this before, but it's worth dwelling on because it really is a very important point and a very important driver as to why I believe that this 20% growth profile in emerging markets is completely sustainable on a consistent basis. If all we do is take the products that we have and make sure that we increase the penetration of these products in emerging markets, amongst the people who can afford them, and increase that penetration level to a level that already exists in developed markets, that alone is a $5 billion opportunity.

Let me be clear what I'm talking about. I'm talking about people who need the therapy, there's no question about it, the diagnostics are clear and the therapies have been proven to work, so this is not some new thing. And people who can afford it, so someone who needs it and who can afford it, all we have to do is provide it. If we do that and we do it successfully, and we simply reach the penetration levels of the developed market, which by no means is complete, it's only at 22%. Just that gap alone gives us a $5 billion opportunity. So why hasn't it been done already? It seems pretty obvious. Well, it hasn't been done not because the products need to be lower cost, because these people can afford it already, it's because there's no awareness that these products even exist, that these therapies even exist or that condition requires these therapies. There's no infrastructure in many cases. The hospitals aren't there, cath labs aren't there. In many cases there aren't enough trained physicians. And so we have to break these barriers down one by one for us to be able to realize the opportunity in front of us. And you can see now why a 20% growth level out of emerging markets is a pretty, not only a realistic expectation, it's one that I demand from our teams around the world.

Let me give you some examples of what we're doing to break these barriers down. Awareness, we have a program which we call Healthy Heart for All, which we have introduced in India. And this is a program which looks at heart disease, identifies patients with heart disease through diagnostics and the referral network. And when that happens, this referral happens, these patients get treated with our therapies. And we've built a system around this and employed people to be able to do this. And we started with some pilots and these pilots have been incredibly successful. In fact, in the hospitals, in [indiscernible] area these patients are in, we've seen already a 2x improvement in revenue. And we're expanding this rollout in FY '13 and by FY '16, we'll have 200 such sites with 130 sales reps, our people going out there and promoting these types of -- finding these types of patients and accelerating the usage of these therapies.

Another area is system infrastructure, where the government -- where we are partnering with governments to create cath labs or hospital centers. And in certain countries, with other companies who have cath labs, partnering with them to create an infrastructure. Or very interestingly, in the area of diabetes again, we are working with diagnostic centers in India again. We're replacing professional CGM, which are diagnostic continuous glucose monitoring devices, to identify patients who are candidates for pump therapy, as well as future candidates for continuous glucose monitoring. And if we do that successfully, again, we take the therapy and we focus it by breaking down the barriers. The pilots have been very successful, 10 centers in 2 cities in 2 months. And by FY '16, our aspiration is to install this in almost 3,000 centers touching 100,000 patients, so big hopes here in the area of diabetes.

Training, too, we expect to train physicians in a very rapid fashion. Russia is a great example of this, where we're creating training centers and expect to train 5,000 customers using our local academic team in Russia, as well as help from our European team. This is an area where we've got some core expertise and which we will drive.

So what does this all mean? It means that if we can grow 10% -- the 10% revenue mix that we have in 2012 in emerging markets, this in itself translates to 200 basis points of revenue growth that we've already realized in FY '12. If we can translate -- if we can continue this level of growth then by -- in 3 or 4 years, by FY '15 to FY '16, we will increase our revenue mix in emerging markets from 10% of our total revenue to 20% of our total revenue. That in itself will result in an additional 300 to 500 basis points of revenue growth.

Now this is before we have touched the value segment. This is simply that $5 billion opportunity that we talked about, this is existing products, which are already there, and we are breaking the barriers down. If we do that, we think we can get this consistent 20-plus percent growth in emerging markets and through that, double our presence in emerging markets. And then, like I said before, that alone is 300 to 500 basis points of growth.

Now if you go to the value segment, which is a further segment which we can penetrate beyond the segment that can afford our therapies today. And we approach that by lowering the cost of our products, which we are embarking on, a very aggressive cost reduction program, in addition to the infrastructure that we may already have created by deepening the penetration of our existing therapies and by understanding tailored business models through which we can approach this value segment, this then becomes a further opportunity. And it's a very important opportunity because through the experience of developing these value products, we can then take those low-cost platforms, modify them for other markets around the world and including developed markets and help reduce the cost of delivering health care in developed markets, while maintaining the premium segments in developed markets because those will be driven by the fact that the underlying demand drivers will create new needs in technology and clinical value.

So that's our globalization strategy and our economic value strategies, which I've just touched on. These are very important changes. These are changes, and I hope I've shared with you ways in which we will employ -- deploy them structurally and systematically across our whole organization over time, and we expect to see real, tangible, measurable results from them. But to do so, we have to take certain actions, and we've begun to take significant actions in FY '12 in our planning process for FY '13. First, from an economic value perspective, it's already beginning to have an impact in the way we invest in R&D. Like I mentioned earlier, we've assessed all our programs from an economic value perspective. And as a result, we've streamlined them. We've reduced the number of programs by 9%. But at the same time, we have funded the programs that we have more completely and more comprehensively, so that we can, in fact, deliver economic value when these products come out. If we do this successfully, we think these products will hit the mark more often and more successfully with higher yield in the marketplace. They'll be accepted better in the marketplace because we will have evidence, economic evidence that these are right products for the stakeholders that we're selling them to.

Through this, we think we can improve our R&D productivity, and you can see that this is the first step in a big cultural change that we'll have in Medtronic. Equally, in globalization, like I said, we've already started to get the wheels moving. We've increased our investment in emerging markets by over 20% in terms of people and by 19 % in terms of sales and marketing spend. And I hope you appreciate why sales and marketing is the right area to increase the spend because that's how we can break these barriers down that I talked about, and that's where the immediate opportunity for growth is in emerging markets. The lower cost programs, cost reduction, all come as part of our R&D programs and that's a longer-term effort, which will also yield results over time and that will help us address the value segments.

We need tools to do this. So these are our efforts, we understand the initiatives in a fair amount of detail, you understand the real shift that we are making in our investments, but we need tools so that we can not only manage these, understand them and monitor them and make changes as things develop, clear operating mechanisms across the board through which we monitor these. Market assessment and development tools, we've got some proprietary tools through which we understand clinical value of certain therapies. We'll extend that to include economic value. Product cost reduction tools, a real organized emphasis of product cost reduction, which Gary will talk to you about. And capital management, by improving -- by having dedicated programs to improve our cash generation, that will enable us to provide productivity to our earnings and enable us to invest further in the programs that are aligned to our strategies.

So there's a lot of change going on. Lots of early changes that have happened, which I won't repeat. But our goals through this whole period is in the end to become the partner of choice in driving this health care change that's going to occur. And that shifting our business mix eventually from being a discrete therapy provider to one who provides integrated offerings with breadth and across the care continuum. We expect to transform ourselves globally from being a U.S.-centric company with global distribution to a balanced global team and a balanced global strategy. We expect to leverage a unique capability to create local growth schemes with real intimacy with local markets, but at the same time, link them globally. And this kind of structure, local competitors cannot do and big companies without the local growth focus and without a real intention and expertise cannot do either. So that's a unique capability and we really find ourselves in a position to drive this change.

Certain things will not change. We will always be guided by our mission. We will always be focused on quality, that is always going to be the most important thing that we do because it's about patient safety. We will have to always value the physician as a customer and make sure that our expertise in improving clinical outcomes never goes away. We can use our competitive advantage and our breadth, therefore, and this will position us to win in this health care environment and all of these components are, in fact, necessary for us to win.

Which takes me back to our financial expectations and aspirations. I've talked about our near-term baseline, and I'm telling you that that's the most important thing we've got to do. Our guidance for this year, 2% to 4% and 5% to 7% of EPS, going onto our midterm -- our near-term baseline beyond FY '13, it will take us to mid-single digit growth company with consistent 2 to 4 points EPS productivity and returning 50% of free cash flow to our shareholders. Driving upside, as well as protecting downside from the strategies that I talked about because I've tried to make a case to you that unless you participate in this changing health care environment, you will be left behind, so we have to participate. And if we participate and we can lead that strategy as we intend to do, we will win. And if we do that, the results will follow.

And the results, hopefully, will translate themselves into a company which delivers mid- to high-single digit revenue growth and high-single to low-double digit EPS growth, which you'll hear from me today, from us today for the rest of the presentation. You'll hear from Mike. And Mike Coyle will talk to you about a very competitive pipeline that we have in cardiovascular. He'll talk to you about how the breadth of his product portfolio is delivering economic value today and how he's restructuring his organization to deliver that, and how he's making big changes to his investment profile to drive emerging market growth.

Chris will talk to you about the Spine business and why we think that indeed is an exciting opportunity for us. And our capability and our breadth around the world, through that, we'll create a new strategy from Spine and we'll be leaders in that marketplace. But not only that, we will use our breadth with Spine, Neuro and Surgical Technologies to deliver unmatched economic value.

And then finally, Gary will talk to you about the details of our financials, how we optimize our operating margins and how we drive continuous product cost reduction. And most importantly, he'll go into a fair amount of detail with you about capital allocation and the disciplines that we're providing in that because we're indeed committed to returning that 50% back to our shareholders.

So with that, let me turn this over to Mike. Thank you very much for your attention. And Mike, come on over. Thank you.

Michael J. Coyle

Thanks, Omar, and thank you all for coming. My name is Mike Coyle, I'm the Group President of the Cardiac and Vascular Group, and I'm looking forward to updating you on the activities we've done in developing the CVG Group here over the last 2 years since the last time we had an opportunity to talk about the business.

About 2.5 years ago, this group was formed with really 2 objectives in mind. The first was, basically, to take the significant technical capabilities we had within each of our individual cardiovascular device businesses and put them under a single umbrella so we could really attack some of the largest new growth opportunities in cardiovascular medicine that were really falling between the physician specialties, as historically laid out. Secondly, we really wanted to find a way to leverage the size and scale that we had as an organization in our cardiovascular businesses to go forward to, from a commercial perspective to the economic buyer, who is increasingly looking at administrative influence on brand decision making, and looking across the cardiovascular businesses as a single entity.

Today, what I'd like to do is spend time updating on both of those -- our progress in both of those areas by first reviewing the very robust and product pipelines that we have coming out of each of our individual businesses, which I think are second to none in the industry, and really are particularly well positioned in some of the most exciting growth areas of cardiovascular medicine, transcatheter valves, renal denervation, the peripheral drug-eluting balloon space and the atrial fibrillation space. And secondly, do a bit of a deep dive into the changes we've made at the field level to take advantage of the unique breadth and field presence and value-added services capabilities we've had to differentiate the overall Medtronic CVG program with the cardiovascular and line administrator.

And I will also touch on how we are using the group breadth and mass to basically expand therapy adoption in underutilized emerging markets by consisting with the globalization strategy that Omar has laid out.

Let me start first though by painting a picture of how we see the growth profiles of the various businesses in which we participate. The cardiovascular markets are large and very attractive businesses. They have significant unmet needs and still respond very favorably to innovative technologies. In addition, we also see significant unmet or a significant underutilization of our products in emerging markets.

We would estimate that the size of the cardiovascular businesses in which we participate in our fiscal year '12 was roughly $28 billion in revenue and our $8.5 billion in revenue represents roughly 30% market share. In FY '12, the growth profile of these businesses was relatively sluggish at a 1% to 2% overall growth rate, but we see that growth rate improving heading into FY '13 as we see U.S. ICD implants stabilizing, which basically should add another point of growth to that range, in the 2% to 3% range.

As we look at our own revenues, last year, we were generally growing in the 1% to 2% range, although we saw a meaningful acceleration in our Q4 with the launch of the Resolute Integrity product particularly having impact on that growth rate, and so as we look forward to the growth profile for FY '13, we think it follows we will gain the benefit of the improving growth dynamics for the market. We'll also be in a position to take market share in certain segments like the Coronary business, the atrial fibrillation segment and in the peripheral segment, which we think puts us well -- right in the growth range that Gary gave guidance to last week on the 2% to 4% growth range.

The CVG revenues are very much a global business. We have 57% of our global revenues coming from international. And from a Medtronic perspective, CVG represents almost 2/3 of total international sales. While the U.S. market was relatively flat last year, we continued to see strong growth in our international markets and particularly in emerging markets where we averaged 19% growth over the last 5 years. As Omar has pointed out, we see significant opportunity to continue to grow in the high-double digits in this area and are adopting the aspirational 20% growth for the overall group. We think that opportunity is there as, roughly, we would put the market potential for the existing products we have, as standard of care, in the emerging markets at $12 billion, which is basically -- of which we are only getting at 1/10 currently. If we are able to maintain growth at that 20% range for just the emerging markets, that should add -- that should create 2.5 to 3 points of growth in our baseline, even if all the other businesses, or all the other geographies are flat. So we see the emerging markets as a significant opportunity for investment. Omar has already outlined for you how they're going about identifying opportunities to maintain and accelerate this growth, looking specifically for the barriers that are keeping us from getting to standard of care levels of adoption, which are typically flowing into the physician patient awareness category, diagnosis and therapeutic infrastructure and education on our devices and therapies. Omar stepped you through a number of the programs that we have adopted in this area, but we have significantly increased our rate of investment, of headcount in these regions. While we have historically expanded in these regions faster than the rest of the world, the 10% growth in headcount that we had averaged during the FY '08 to FY '11 period was roughly doubled last year with almost an 18% increase in headcount on the field, and this will be something that we'll continue to do in terms of investment in headcount for development of emerging markets. The programs that we are pursuing very much fall into the category that Omar outlined, like the Healthy Heart For All program in India, where we are basically doing pan-CD programs, using the relatively inexpensive headcount requirements to put therapy sales reps in the field to drive awareness of our therapies and drive patients into treatments for implants of drug-eluting stents, pacemakers and our broader product portfolio.

Medtronic is in a unique position to leverage our capabilities in these regions because of the breadth of our product line. As we put field personnel in these areas, we are driving sales across multiple product lines in order to get return. And that question of breadth is really what we're going to spend most of today talking about how we are taking advantage of it. The unique breadth that Medtronic has in our CVG business is not only of benefit to us in emerging markets but also in developed markets. As we look across both the U.S. and European hospital organizations, we're seeing major drives for efficiency being driven at these hospital levels. And in these centers, what we're seeing is a much higher appetite for closer vendor relationships, where we're focusing on not just their clinical needs but also their economic needs. And this is something that really benefits those who have broad product lines and large market share positions to become very close strategic partners in building, not only the product flow into those facilities for the benefit of physicians, but also in addressing the growth, the quality and the cost issues that are being wrestled with at the administrative level for cardiovascular medicine.

When it comes to cardiovascular medicine, there is no company that has the breadth that Medtronic has. If you look across the physicians that we serve, the electrophysiologist, the interventional cardiologist, the vascular interventionalist, the cardiovascular surgeon, and you look at the products and the therapies that they care most about, Medtronic is either a #1 or #2 player in every one of these segments. I showed this slide 2 years ago and when I did, we actually were not in as strong a position as we are today. If you look at the drug-eluting stent or the coronary stent business, when we showed this slide 2 years ago, we were #4 player. Today, we're the #2 player. In the EP ablation and in the peripheral business, we are now the fastest-growing company. So we have continued to build our capabilities in terms of strong presence as the #1 and #2 player in each of these segments. No other company comes close to matching us in this area, which puts us in a tremendous position to leverage that breadth with the emerging importance of the cardiovascular line administrator as a customer in order to differentiate our entire program.

We've built on the basis of that strategy, have spent basically the last 2 years focusing in on how we will reorganize our organization to take full advantage of that breadth. As you know, we have 4 businesses, the electrophysiologist for CRDM, the interventional cardiologist for Coronary, the vascular interventionalist for Endovascular, and the cardiac surgery for our Structural Heart business.

What we've asked each of these businesses to do, over the last 2 years, is basically 3 things. Number one, create a breadth of products and capability that makes them essentially a large market share player in the mind of that physician currently. Number two, have a very robust product flow of new products that are addressing unmet clinical needs that are important to that interventional physician. And then third, create a -- and probably most importantly, to be in a position with that physician to be considered the indispensable partner, taking them to the next major clinical innovation in their space.

And over the last 2 years, each of our businesses has well positioned themselves in those arenas. In our electrophysiology, or cardiac rhythm business, we have obviously a critical mass position in implantables, but also a very robust growth program in AF ablation. In the interventional cardiology area, we have, with the release of Resolute integrity, a leadership position in stents, but also the leadership position in renal denervation for drug-resistant hypertension.

In the vascular interventionalist space, we have the leading position, the AAA and TAA product lines, but also a leading program in peripheral and drug-eluting balloons. And then in the structural heart business, not only a full portfolio of products for surgical intervention but also a leading program in transcatheter valves.

Each of our businesses has now positioned us to be differentiated with the individual physician groups, and that puts us in a position, at the group level, to now go to the cardiovascular line administrator and look at their individual needs in cost effectiveness and the effectiveness of the health care cost administration to basically put together a single broad program for our organization.

So what we're going to now turn our attention to and use as sort of the organizing principle for the rest of this morning's presentation is really 3 things. First, look at the individual pipelines of each of our individual businesses to show that we have very robust product flow coming to each of these individual business specialties. We will then turn our attention to the fundamental growth drivers, those next big clinical opportunities that exist within each of the businesses to drive differential growth, transcatheter valves, renal denervation, atrial fibrillation and peripheral intervention. And then I'll close with an overview of what we're doing at the field level to differentiate with the cardiovascular line administrator for the entire Medtronic CVG program.

Let me start on the pipelines with the Coronary business, which basically has been one of the big differentiators for us, in terms of the accelerated growth profile we saw in the fourth quarter. We had typically been running in the 1% to 2% growth range in the first 3 quarters of the year, jumped to 4% constant-currency growth in the fourth quarter, with a large contribution of that coming from the release of Resolute Integrity in the U.S.

Simply put, Resolute Integrity is a highly differentiated, best-in-class, drug-eluting stent. It is a -- has a proven long-term clinical performance record based on clinical studies of over 5,000 patients out 5 years, has a pristine safety and efficacy record. Unique labeling differentiation in the U.S. with the FDA approval for the diabetes indication. And probably most importantly, a superior deliverability profile based on the revolutionary continuous sinusoid stent design that is in the Integrity product. Everywhere we have taken this product into the marketplace, we've been able to gain significant market share. In Europe, where we started with roughly a 17% market share prior to its launch in September of 2010, we now ended the FY '12 with a 24% market share and expect to grow that further next year. In the U.S., where the product was launched in February of this year, in our fourth quarter, we started the quarter with a 10% market share, ended with full quarter share of 21%, and basically, had exit shares in the vicinity of 23% to 24%.

So as we look forward into FY '13, we expect to be driving 25-plus percent market share in our Europe and U.S. markets, the largest device markets for DES. This is on top of our global 30% market share in the bare-metal stent arena.

When we launch in Japan, which will occur in September of next year -- of this year, we will basically be working from a 10% share position that we expect to be able to grow dramatically. By the time we get to the end of FY '13, we expect to be the market share leader in drug-eluting stents around the world, in stents around the world.

We are obviously off to a good start with the U.S. launch, but we expect to have continued share momentum in that arena. Basically, we have introduced the product to 2/3 of the available account in the U.S. as of the end of the fourth quarter and we will be focusing on the remaining 1/3 here over the next 2 quarters. We'll be differentiating in those accounts, not only with the products themselves, the Resolute Integrity and the Integrity BMS, but also using the breadth of the cardiovascular product lines that we have for multiline CVG arrangements, which I'll discuss at the end of my presentation this morning.

Beyond the U.S., we expect to continue to grow share in the DES segment with Resolute Integrity, with the September launch in Japan, which is the second-largest individual DES market in the world. But also we continue to leverage our share position in other markets around the world due to the clinical evidence that was generated to support the diabetes labeling in the U.S. and the expansion of CE labeling that we achieved just last week during the PCR meeting, the EuroPCR meeting.

Now that we are expecting to put ourselves into a share leadership position in -- with the Resolute Integrity product line, we are working very hard to make sure that we are iterating on the product line going forward to maintain that leadership position, leveraging off of the very novel continuous sinusoid design of the Integrity stent. We have 2 platforms that we are working behind it, the S10 generation of stent and the drug-filled stent. S10 will be our next platform that basically will include thinner stent struts, a higher degree of radioopacity and a better deliverability performance. Beyond that, the drug-filled stent will basically use that continuous sinusoid design to be cored and then used as a -- with laser drilling to create an opportunity for a drug to be leached out without the need for a polymer. This is an opportunity, from our perspective, to address the shortcomings of current technology and the need for dual antiplatelet therapy. It also gives us an opportunity to shift to any drug that we want to use in a product line, which will give us an opportunity to move to generic drugs driving down the overall delivered cost of the therapy. So Coronary is an excellent position not only to take leadership this year but to sustain that leadership position long-term.

The Coronary business is not the only one using new platform innovation to drive market share. In our CRDM business, we also are doing the same on the pacing side. It was a year ago that at the Heart Rhythm Society meeting that we introduced the Revo MRI pacer. This is a product that really was the first of its kind in terms of allowing patients with pacemakers to get MRIs. Over the course of the last 4 quarters, we have driven 4 points of market share in the U.S., driving ourselves now to over a 50% market share for the first time in several years. This is the most significant move in pacing share that has occurred since the introduction of Activitrax and activity-based pacing back in 1985.

We continued to extend our lead in this area with the Advisa family of MRI devices, the second-generation of our MRI systems, that -- those products were released in Europe in the first quarter of FY '11 and we've supplemented that with the release of an MRI passive lead product here just in the fourth quarter of last year in Europe. We expect to bring Advisa MRI to Japan here in the second half of FY '13 and we'll be launching that product in the U.S. in the first half of FY '14. As -- that will be the second generation device in the U.S. market before we expect to see any competitor bring a first generation device.

We are also working on what we consider to be the next major breakthrough in pacing technology, the leadless pacing technology, leadless pacing product. This is a self-contained, miniaturized pacer that is placed directly into the right ventricle by using catheter-based technologies. This is a program that we think will offer significant advantage to customers in terms of ease of placement of device and we think that may have particular value to us in terms of driving pacing adoption in underutilized emerging market countries where there are significant numbers of catheter-skilled physicians, but still underutilization of pacemakers. We think this might be a great opportunity to drive differential growth in those areas.

Turning our attention to the high-power market. We're coming off a strong fourth quarter close where we increased our market share one point both sequentially and year-over-year, that being driven off of the approval of the Protecta device one year ago, released at the HRS meeting. But probably even more importantly, from our Sprint Quattro and Lead Integrity Alert product lines. At this HRS meeting in Boston last month, we celebrated the 10-year anniversary of the Quattro lead. We now have active surveillance data out to 8 years on this product line, demonstrating a 97% lead survivability. And for the small numbers of those devices which have run into issues, our Lead Integrity Alert product was able to capture 3 out of 4 of those and warn the patient and the physician before it becomes an inappropriate shock or a failure to deliver therapy. These capabilities are now resonating in a market where there is significant physician concern about the long-term reliability of high power leads. We put those concerns to rest with the combination of these 2 product lines. And we have been growing our lead to [indiscernible] ratios in the high power arena over the last 3 quarters on the basis of this messaging. And the Lead Integrity Alert has also been benefiting us in terms of growth in replacement share as physicians view that capability as an important capability to have even on certain competitive lead systems.

Our next-generation ICD family, the Evera family, is -- they could be brought to the marketplace in the second half of this fiscal year in Europe, and will be a first half FY '14 device for us next year. This device will include a smaller size, improved physiologic shape and changes to the telemetry scheme will drive a 10% increase in longevity. We'll also be enhancing our Lead Integrity Alert and shock reduction technologies in that platform.

Turning to the cardiac heart failure area and the cardiac resynchronization market, we have a number of important innovations that we'll be bringing to the market over the next 2 years that will be driving both clinical effectiveness and cost-effectiveness of these therapies. At HRS this year, we introduced the CardioGuide technology, which is a simple low-cost system that uses standard bipolar fluoroscopy to create a 3D reconstruction of the coronary sinus tree. This assists physicians in identifying where to place leads and which leads to use in their placement.

A second generation of this device, which is in the works, will also include the automatic identification of site of latest mechanical activation, which is usually the targeted site physicians want to use for CRT therapy. Our next generation CRT devices will be built on the Evera platform that I just talked about so it'll have all the size and longevity advantages that I talked about but we will also be bringing to market an adaptive CRT algorithm that will automatically tune A-B and B-B timing intervals to optimize CRT effectiveness on a dynamic basis for patients.

This Viva/Brava system will also be able to accommodate both traditional and quadripolar pacing leads, and our Attain Performa family, which will come to the CE mark countries in FY '14 is basically a series of products that we think will provide improvements on existing designs of quadripolar leads including having steroid-elution at each electrode to provide for lower pacing thresholds and also the tight bipole pacing that will allow us to target pacing sites using the CardioGuide system. This will also have a vector-expressed algorithm associated with it, that basically will automatically tune the device to choose which of the 16 potential pacing vectors are the best ones to be pursued.

Switching to the endovascular market. This has been one of probably the most under-appreciated parts of the CVG portfolio, delivering 22% growth for us over the last 5 years. Last year was no exception. In late FY '11, we introduced the Endurant AAA product, that basically drove 26% revenue growth in the U.S. and 5 points of market share capture. That product will be launched in Japan in the third quarter of FY '12 and we have already iterated on that product line with the Endurant II product, which is now CE marked and released in Europe and will come to the United States here in the first half of FY '13. All of the delivery system improvements that went into the Endurant design were translated to our TAA products in the Valiant Captivia product and this product line is launching this year in U.S., China and Japan, despite significant -- to continue the significant growth drives that we've seen in the endovascular business.

So as you can see, each of our core businesses has a very healthy pipeline of new products that they're going to be bringing to the market place here over the course of the next 2 years, and we are now well positioned to not only sustain but to grow market share in most of our businesses.

I now want to shift attention to the fundamental new growth drivers that each of those businesses has identified for long-term growth and review the status of those individual programs, transcatheter valves, renal denervation, atrial fibrillation and our peripheral business. And let me start with the transcatheter valve opportunity.

Since the acquisition of CoreValve and the release of the Melody product, we have seen very significant growth contributed to our structural heart business from TCV, over 60% compounded annual growth over the last 2 years. This is a very large market opportunity, it was a $700 million market this past year and we expect it to grow to $2.5 billion by 2020. FY '12 was a very productive year for our transcatheter valve program with both product and procedural innovations brought to the market. The CoreValve 31-millimeter product was released, which now positions us as the only company with a full range of products, all deliverable on a common 18 French delivery platform. And we also introduced a direct aortic indication in Europe, which basically gives surgeons an opportunity to have an alternative to the transapical approach and be involved in the placement of transcatheter valves.

In addition, when we bought the CoreValve technology, we realized there was a lot of investment that really needed to be made in clinical evidence generation and we're now beginning to yield very strong performance data from the investments we've made in this area.

Our U.S. pivotal trial is on track for completion with the extreme-risk arm having been completely enrolled in January of this year and the high-risk arm is going to be completing its enrollment in this summer of 2012. This positions us to continue to expect approval of the device in our early FY '15 time frame, which is what we've been telling you for some time now.

In addition, we completed the CoreValve advanced registry study. This is really the first true real-world experience with these product lines that will give us very good pictures of pre-procedural success, long-term outcomes and complication rates rather than the very disparate uncoordinated registries that are currently being carried out.

In addition, we have the initiator of our Japanese clinical study for approval there, and initiated in the European Union, the pivotal study for our Engager Transapical program.

Our transcatheter valve program is not just product development effort but really a complete program development built on 3 pillars, clinical evidence generation, market development and therapy expansion. On the clinical evidence side, we have now formally studied over 9,000 patients involved in various CoreValve clinical studies. In addition to the U.S. pivotal study and the advanced study that I just mentioned, we are now beginning our SURTAVI study, which is a 2,500, 75-center patient study that is looking at intermediate risk patients. We estimate that intermediate risk patients would essentially be double the size of the existing patient population that has been studied to date in our pivotal study. And from a market development perspective, we have taken very careful and thoughtful approaches to the training of centers on the use of this technology. We now have 50 countries that we have gone to for training of physicians in CoreValve placements supporting 27,000 implants and our program supports routes of delivery for being able to implant transcatheter valves that are -- appeal to both physicians and interventional cardiologists, transfemoral, subclavian, direct aortic and transapical approaches.

And from a therapy expansion perspective, we already have very robust programs, obviously, in the aortic and pulmonic segments but we also have active product and clinical development work going on in mitral valve replacement and opportunities like valve-in-valve device replacement.

From a pipeline perspective, we continue to iterate on the CoreValve product line, the next generation CoreValve product, CoreValve Elute [ph] -- Evolut [ph] is going to be brought into the market in the EU here in FY '13. This is a product that involves both the shortening of the cage and modifications to the radial strength of the cage to provide better conformability in anatomies that would include calcified tissue. This positions us also with a new delivery system that will allow for easier placement of the device and complete recaptureability. The 23-millimeter version of this device was actually implanted for the first time this morning in Bonn [ph], and we expect to get CE mark for it later this year. Next year, we will add the 26- and 29-millimeter versions of this to that platform and we also expect CE mark approval for the Engager Transapical system next year.

Turning attention to renal denervation. This, I think is probably the single most exciting growth opportunity that we have within CVG. To be quite frank, it's probably the most exciting growth opportunity I've seen in my 25 years in the industry. It is serving a very significant unmet clinical need in uncontrolled hypertension, the #1 risk factor for stroke and a disease process that costs the global health care economy $500 billion a year. Even with optimal therapy, drug therapy, 30% of patients remain uncontrolled and we think there are -- it is going to be a prevalence of roughly 300 million patients available needing some sort of therapy by 2020. We conservatively estimate that this indication alone is a $2 billion to $2.5 billion market opportunity by 2020, excluding the other potential applications of renal denervation. Medtronic and our predecessor RDN organization are the sole source of the clinical information that has proven the effectiveness of renal denervation in this patient population. Our HTN 1 study shows that this therapy is durable. The HTN 2 study shows it's the first and only randomized controlled study that -- to show the benefits of renal denervation in reduction of treatment-resistant hypertension. And our HTN 3 study, which is the U.S. pivotal study, is now well underway, tracking to complete enrollment by the second half of this fiscal year for us, which positions us for an FY '15 launch of this product in the United States.

From a pipeline perspective, our first product is SYMPLICITY, the product that is in clinical studies in the U.S. This is a single-electrode system that requires multiple burns, sequential burns, to isolate the product, to isolate the vein -- the renal artery. This product is proven to be extremely effective and extremely safe. And safety is one of the items that I want to make sure that we are stressing in the development of our programs because, we think, with this patient population, there will be very low tolerance for high complication rates. We think the SYMPLICITY device has a permanent role in our product portfolio, especially in anatomies that might be difficult to reach. This is a product we are selling today, with 5,000 uses to date and which we expect to bring, obviously, to the U.S. in FY '15.

Our next generation device, however, focuses on the opportunity to shorten procedure times by moving to a multiple electrode system with simultaneous burns. So we have settled on a device configuration that is a simultaneous multi-electrode RF device that we are calling SMERF at this stage in its development. That basically has 4 electrodes on a helical catheter that allow for simultaneous burns but still maintaining the 6 French catheter-sized configuration. This is important because when we've looked at safety profile to date, the #1 complication we've seen in our procedures to date have been groin complications. So those who are pursuing 8 or 9 French solutions to this, we think, are going to run into some meaningful issues in terms of the performance and in acceptance of the device. With SMERF, we believe we can do a 2-minute simultaneous burn and achieve the same thing we're doing with SYMPLICITY with the drag burns.

We expect to get CE mark on this during our FY '14, and we believe that this will be a preferred configuration in most of the device uses longer term.

From an IP perspective, we are -- continue to add to the IP position we have with RDN. We have now over 300 patent assets, meaning applications in any geography and we are basically now in a position where we have 25 issued patents, 20 of which are in the United States. We feel very good about the long-term potential of our -- to protect this technology and we continue to add to our armamentarium of intellectual property. Beyond the product development side, however, we're building significant barriers to those who are falling behind, much as we are doing in the transcatheter valve side through the use of clinical evidence and market development activities. We have begun a 5,000-patient registry for SYMPLICITY that is in 200 centers. We also have feasibility studies going on in new indications, 25 separate funded initiatives in applications such as moderate hypertension, diabetes, arrhythmia management and kidney disease. We also have begun actively enrolling in our definitive feasibility study for heart failure called SYMPLICITY HF. And from a market development perspective, we have very significant activities going on globally, working with both implanters and their referral bases in global training and education. We have worked closely with physicians who are using this technology to establish a referral change which we think will engender significant loyalty to our overall program, as we continue to iterate on the technology. And we are doing aggressive development of reimbursement, with initial successes in Germany, Austria, Switzerland and U.K., as well as Australia, in terms of getting at least partial reimbursement for the system. We are focused very heavily on generating the kind of clinical evidence and cost effectiveness evidence that will justify those reimbursement levels.

On the AF side and within our CRM business, we've seen significant growth since the acquisitions of the CryoCath and AFI businesses. Last year was a big year for us in terms of launching the CryoAblation balloon in the U.S. We now think we have a position of greater than 20% market share in paroxysmal atrial fibrillation procedures because of the significant reduction in procedure times that we see with this technology adding to the cost effectiveness and economic value add of this technology. We'll be launching the next generation of that technology, Arctic Front Advance, here in mid-year FY '13 and we continue to advance the phased RF catheter technologies where we will begin the U.S. follow-on trial to basically address the key top findings on complication concerns here in the first quarter of FY '13.

In the endovascular space, our next generation technologies basically are focusing on drug-eluting balloons. Our core business though is very strong, $150 million business growing at 25%, primarily self-expanding and balloon-expandable stents but we are now vigorously pursuing the drug-eluting balloon application with us having the first CE mark and 85% market share in Europe. At the recent EuroPCR, we showed very positive data in both coronary and peripheral applications for this technology and we are now getting approval for the impact superficial femoral artery application here in the U.S. where we have now begun clinical studies for that application of drug-eluting stents.

So whether you look near-term, midterm, long-term, each of our businesses is extremely well positioned for very productive new product flow out of their businesses that is addressing not only their cores but very fundamental new growth drivers in each of the main businesses.

Now that we've seen how the base line businesses are very well set up to grow within their individual physician specialties, I want to spend some time talking about how we are addressing the commercial presentation of these products as a one cardiovascular organization, which a year ago, in May of -- a year ago in May, we put together under a single U.S. CVG structure to address the changing market dynamics that Omar referenced in his presentation.

As Omar indicated, what we're beginning to see is significant changes in the way decisions are made about purchase of products. It is now the case that therapy and brand selection is being driven every bit as much by cost-effectiveness and economic value as it is by the clinical performance of devices. And what we have seen is that in most accounts, the administration influence on both therapy selection and brand selection has increased dramatically. We, a year ago, decided to address this issue head-on by reorganizing our U.S. field, because what we were noticing was physicians were becoming parts of the clinician -- of the hospital practices that's grown to now 60% versus being about 35% in 2006, and we're seeing a significant alignment of the incentive systems for the interventional physicians with the hospital administration. We also see that the vesting of the strategic authority for decision-making is going across the cardiac and vascular line in most of these major accounts, due to creation of cardiovascular and line administrative positions who basically are making decisions in conjunction with their physicians about what therapies they're going to adopt. And what we are noticing is that in the regions where -- when we look at who's taking share in their regions, it's hospital systems that are basically adopting this model of the cardiovascular line administration. To address that, in May of last year, we structured our U.S. field to basically line up to that approach. We continue to have individual sales reps and first-line sales managers who are focused on individual physician groups in electrophysiology and interventional cardiology, vascular intervention and cardiac surgery. But on top of that, each of these sales forces are reporting into a common Medtronic CVG regional vice president, 15 of them across the country. And in addition to that structure, each of these individual RVPs has reporting to them, an individual leader of, what we call is, the strategic account management function, whose customer is the cardiovascular line administrator, to work with them, to understand their economic needs, what is driving their decision-making process. What we are equipping these sales organizations with is not just the individual products of our individual businesses but value-added services that are focused on exactly the topics that Omar was talking about. How to expand access for therapies in those hospital systems, how to drive optimization of cost and cost efficiency in the hospital system, and how to improve outcomes to drive quality measures to help these cardiovascular line administrators manage reimbursement risks that are coming down the pipe because of quality measures.

These are not theoretical concepts but very real programs that we're bringing forward to help cardiovascular line administrators in managing these economic challenges.

So for example, in the expanding access side, we have very focused programs like Know Your EF and Find the AAAnswers which are programmed to basically co-brand with the hospital to go out into the community to drive appropriate use of technology and identification of patients for both heart ICD therapy, for CRT therapy and for AAA therapy. We have the HVAT [ph] program which basically helps the hospital administrator look at their catchment area and see which therapies are being used at what level and how that compares to other parts of the country, where they can then look at where there are potential pockets of underutilization that they can focus on. These are the kinds of programs that we work with the hospital administrator on in order to help them drive patients into their facility to basically better utilize the fixed planted asset that's in their hospital.

From an optimizing cost and efficiency perspective, we have numerous programs to help them identify where their cost buckets are and take costs out. For example, we apply Lean Sigma techniques that we've worked in our operations component and apply them to leaning out the pacer clinic flow, to basically take them from having to do 2 clinics a week to one clinic a week, or leaning out the flow of patients through the cath-lab to provide better utilization of cath-lab facilities. We have the syncope management program that Omar referred to in which we found, through our clinical evidence generation, that basically, a patient will typically go through the emergency room 3x, get MRIs, get neurological scans before they are ever identified for appropriate therapy in syncope that correctly diagnoses their condition. By using our Revel product and pathways and protocols for syncope management, we've been able to make that first visit be the one that actually results in the patient getting the appropriate therapy.

And then in the improving outcomes side, it's very clear that heart failure rehospitalizations for example is going to be a big challenge for the hospital systems in the United States. Here, we have basically new rules coming in with CMS where patients who are admitted back into the hospital within 30 days are not going to get separate reimbursement for that second admission for heart failure. Working with hospital administrators on pathways and protocols, and using technologies like Optival [ph], we think we'll be in a position to identify who those patients are and make sure that they are treated appropriately without the need for them to come back in that 30-day window.

These are all the types of programs that we are developing, and many, many more that are being deployed through this Strategic Account Management function to the cardiovascular line administrator. And what we're doing is working with them to partner -- to become deeper suppliers across the entire cardiovascular supply network for these hospital systems.

A case study of how these programs, both the combination of our field effort and the creation of the Strategic Account Management function is helping us in terms of driving sales for products is evident through the launch of the Resolute Integrity product line. Traditionally, when we had managed these businesses as separate businesses, we typically would have gotten approval for Resolute Integrity and then put it to our existing coronary-focused sales organization. We did it in a very different way when we got the approval here in February this year. First, 2,500 U.S. CVG sales reps and clinical specialists were trained on the key messages around Resolute Integrity, its clinical evidence support, its deliverability, its diabetes indication. 325 specific clinical support specialists who were -- most of them from the CRDM business, who had very strong relationships with interventional cardiologists because of following their patients with pacemakers but were not responsible for the coronary line, were specifically identified and then given separate incentive systems to help drive the Resolute Integrity into those accounts. We were then able to simultaneously launch with the number -- same number of reps that we had with our Endeavor product line without significantly expanding our direct sales force for coronary, using this field of 325 targeted clinical sales reps, which basically allowed us to cover 30% more accounts with the same number of reps and do it much more quickly than if we had done it sequentially. As it turns out, where we have had new business with Resolute Integrity, 40% of those accounts had been those that have benefited from these CS relationships in the co-promote strategy.

So this new approach to being able to optimize our new product introductions both accelerates the adoption of the technologies and does it in a very cost-effective way. In addition, this broader structure helped us with GPO and IPN contracts from the standpoint that, historically, when we brought a new product, what we would have seen competitors do, is essentially line up GPOs and IPNs to longer term contracts so that when we got the approval, we would have to wait to get in line to be able to have it evaluated for a use in their technology. Because of the breadth of the CVG product line and the fact that we service not only the coronary business but the pacing business, the ICD business, the endovascular business, we were able to get GPOs and IPNs to hold off doing these contract agreements with competitors. And as a result of that, we were able, from the beginning, from the launch in February, to have 75-plus targeted IPNs including Tenet, HCA, HPG, Premier, and Novation on contract, in advance, so that we could immediately begin selling with the product line, which enabled us to basically access at day 1, 3/4 of the PCI volume in the marketplace.

This is the kind of a program that we think is very indicative of how the leverage and breadth of our organization can be used to drive sales. And I think there was virtually no analyst who had the Resolute Integrity revenue line at where it was when we released it here for Q4. And I would attribute this program as being the primary reason for that overperformance to expectation.

So with that, I will wrap it up since I'm just at the end of my time. Hopefully, I've been able to help you understand that we are very enthusiastic about the flow of new products coming across each of our businesses, not only in their core businesses where we think we remain very strong and in a position to take market share, but that each one of our businesses has outlined a fundamental new area of growth where we are making very good progress to drive market share. And our physician loyalty in those segments, we think, is going to be very strong. The new addition to this program, though, is at that cardiovascular line administration level where we think we can drive very significant differential growth in market share, and protect pricing by helping to focus on their cost effectiveness issues, which is at the front and center of what they are trying to address in the new health care environment. And as you can also see, this footprint that we have as a CVG group also assists us greatly in being able to get at the emerging market opportunities, that Omar pointed out as being so significant, and the investments that we make, we can yield across multiple product lines. So with that, I think, Jeff is going to bring us into a break. Is that right? Okay.

Jeff Warren

All right. So we will -- we've got time for a 15-minute break and then we'll reconvene. Chris will talk to you about RTG. Gary will wrap it up with finance. And then we'll, again, have plenty of time for Q&A at the end.


Jeff Warren

All right. We're going to get started. We have 2 presentations in this session. Chris O'Connell is going to talk about the RTG Group and then finish with Gary. And then we're going to have Q&A. And we do have about an hour set aside for Q&A, so there'll be plenty of time to get your questions answered. And with that, I will turn the meeting over to Chris O'Connell.

Christopher J. O'Connell

Okay. Good morning, everybody, good to see you here today and I'm excited to talk about the Restorative Therapies Group so we're going to jump right into it. Key messages for today's meeting, I'm going to talk about the business units individually, but I'm also going to talk about the broader perspective in the integrated offerings that Omar talked about this morning and our new strategies to create economic value and to drive globalization. But from a business unit standpoint, obviously there's a lot of focus on Spine among you and certainly among us in our organization. We believe we have a clear improvement path in what's been a very challenging U.S. market over the past several years. And it's also important to keep in mind the big picture of Spine, which is the global growth story of Spine, which has actually been very successful. Our other 3 businesses, Surgical Tech, Neuromodulation and Diabetes, have all shown strong execution and really behind great product pipelines and I'm going to tell that new product story. But really beyond that, Omar talked earlier about today about creating economic value and adding value to the healthcare system and we have a number of very interesting strategies that will clearly augment our growth and create new sources of value by leveraging our breadth through integrated offerings in Smart Surgery and the neurosciences and by creating new value through care continuums in pain and in diabetes. And then finally, the theme of globalization is very important within the Restorative Therapies Group, not only driving current performance but also driving our investments and where we're shifting our resources for the future.

We participate in markets that total $20 billion today, and by and large, these markets are healthy. We expect them to be healthy moving forward with Spine stabilizing, and the other markets continuing to move along at good growth paces. Overall, this portfolio of businesses or markets will grow in the guidance range, in that low- to mid-single digits in the coming year, and we are very intent upon not only maintaining but improving upon our leading market share positions in each one of these categories moving forward.

But suffice it to say, the market opportunities are very large because of the under penetration in just about every one of these markets, as well as the significant headroom for innovation. In the past year, our story was really a tale of 2 different markets. The spine market, which as you all know, was declined in the mid-single digits while the other, the rest of the portfolio actually grew double digits. I mean, certainly, that great performance in neuro, ST and diabetes was overshadowed by Spine. But then when you look at the business from a U.S. and international perspective, the story is very clear. We're executing very well in big underpenetrated markets outside the United States and that story is even true in Spine. In spine, we had a 10% decline in the U.S. market, which was obviously reflective of the conditions that we faced in the U.S. market recently. But internationally, we are growing very well not only in Spine but clear double digits in the other businesses as well, which by the way have good growth in the U.S. market.

So let me jump right into Spine. Certainly, since we met 2 years ago, a lot has changed in the markets and a lot has changed in our strategies. Our formula to win in Spine is really threefold, number one, innovation and I'm going to get into several important elements of innovation. Number two, globalization, so becoming more of a local player in more parts of the world. And then third, by reallocating our resources aggressively to take cost out so we can not only improve our profitability but we can also invest in things that will matter to grow the business. So as I go through the Spine strategy, I'm going to start in the U.S., and I'm going to talk about the 3 major segments, Core, BKP and INFUSE.

So let's start with Core Spine. And we define Core Spine by being the core fusion products in addition to the Other Biologics, so we are most comparable to all the other Spine businesses out there. And as I said, when we met 2 years ago, this was a growth market. U.S. spine market was growing about 7% and obviously it's been a big challenge since then with a number of different factors, from economic slowdown, a reduction in elective procedures, there's been some price pressure in certain segments, where there's less differentiation. Clearly, a little bit of peer pressure and I'm going to talk about that. But we do believe that this market is beginning to show the signs of stabilization, and we've been seeing that over the past couple of quarters. And certainly, as the market stabilizes, we're very excited to stabilize our own business. And we have seen that pattern. We saw that pattern in the fourth quarter. Obviously, we came down with the market over the past several years. We certainly lost a little bit of share, particularly to the -- some of that unaddressable segment that I alluded to on the previous slide, the physician-owned distributor segment, which we do not participate in. But we do see all that changing and our strategy in Spine is really driven by new technology, both at the individual differentiated technology level but also in procedural innovation and I'm going to get into that in some deal today. But it's also important to say that we tried to provide industry through the leadership in addressing the payer challenges and the payer push back that's talked so much about and we think we're making excellent progress in that regard.

So let me start where we left off last time which is really talking about the core technology as the foundation of our innovation strategy. And clearly, our goal is to differentiate, to protect price and to enhance value through our discrete product offerings in some of the big Spine segments. The biggest Spine segment is the thoracolumbar segment. It's not only the biggest part of the spine market but it's also been the source of our biggest decline. You're all familiar with the Solera story, which is our new pedicle based posterior system for thoracolumbar and this is a very exciting technology that is beginning to make a bigger and bigger impact on our business. Right now, Solera is only about 45% rolled out in the United States. And really, perhaps the most significant part of the Solera system which is the larger rod diameters, the 5.5/6.0 sets that are really used for more complex spine and deformity are even less rolled out than that. It's really been the Degen set that came out first. Only about 20% of our posterior thoracolumbar business is the Solera system, and really, but where we have it, we're growing at market leading rates, so especially this part time of the year when we enter the deformity season, the scoliosis season, if you will, having more and more influence from a larger rod diameters from all the value that Solera brings to the table is becoming a bigger and bigger advantage.

On the cervical side of the business, we've been doing very well on the posterior cervical segment, with the VERTEX SELECT system where we've been growing the business. But our gap in the past few years has been on the anterior side and the plating systems. But now that we have the Atlantis Vision Elite system in the market where we're getting nice price uplift and showing nice sequential growth as we roll this out, only about 100 sets right now but continuing to grow division, the lead program, we're beginning to capture more and more better performance and market share in the cervical arena as well.

Let me talk about the Other Biologics and the interbody systems, which are also important segments of the market. As you remember, a little more than a year ago, we acquired a company called Osteotech, which is the global leader in DBM, demineralized bone matrices, for bone grafting, but also brought us a very important tissue processing capability, and tissue processing facility for a wide range of allografts and other bone grafting products. This acquisition has really been doing very well. We've beaten, meet, met or exceeded our acquisition economics, this is annualizing at over $100 million a year and playing a very important role in our portfolio and we expect it to continue to grow. Maybe our biggest gap in Spine in recent years has actually been our interbody portfolio, and I'm very pleased to announce formally today the acquisition of a company called AMT. We quietly closed this deal about a month ago. This is a German interbody company, it's a very, very innovative company that has what we believe is the world's best technology for expandable cages. AMT also brings us a wide portfolio of interbody systems in new shapes, new geometries and new materials that we really think it catapults Medtronic from being behind in this area to being best in class. And when you take this small company and their great technology and you put it in the bag of the industry's largest sales force, good things are going to happen. And we expect to generate really from a company that's been pretty much a start-up, more than $20 million of incremental revenue just in this fiscal year. The only thing we're limited by at this point with AMT is just the number of sets we have out in the field. We're investing aggressively to improve that and to get more and more surgeons access to this device. It's very important to say that when you have the right interbody device, which we now have through AMT, we can also pull through a lot of the core fusion equipment at the same time.

So aside from differentiated technology, this is where our story begins to change and what we're most excited about pointing forward into the future, and that's procedural innovation. Procedural innovation spine is when you bring together all the components necessary for a total procedural solution from the fixation technology to the interbody that I just spoke of, to the access tools, and obviously the biologics where we're the clear market leader. And this is an area that as the market moves from just discrete technology components to integrated procedures, Medtronic has significant competitive advantage.

Let me give you one example and there are many, but one is called MAST MIDLF. This has been a very quiet project that we were incubating over the last year or so. We launched it into the market and what MAST MIDLF is, is a interbody, posterior interbody fusion with cortical bone screws through a midline laminectomy incision and a specialized retractor set and an entire training program that goes around it. You've all heard about minimally invasive spine surgery, and the reality is a lot of minimally invasive spine surgery is fairly challenging to do and it really has not crossed over into the mass market. Think about MAST MIDLF as minimally invasive for the masses. Surgeons can take a familiar approach with some direct visualization with dramatically reduced invasiveness for the patient to lead a high-fusion success rate with great patient outcomes like less blood loss, less pain, shorter hospitalizations. Great clinical value, great economic value. And the early results from MAST MIDLF have been awesome. We only have 100 sets in the field but we've trained nearly 200 surgeons and that's on top of the large number of surgeons who have been previously trained in cortical bone screws which many believe have significant advantages over pedicle based systems and interestingly enough, more than half the surgeons that are using this system are competitive and we are pulling share with MAST MIDLF. And there is more behind it.

Let me comment briefly on the payer pushback, which I know has been a big topic and try to maybe demystify it a little bit. When we talk about payer pushback on fusion, we have to keep in mind there is a big fusion market, everything from complex spine, to tumor, to trauma and obviously degenerative spine, but most of the pushback is really focused on a pretty narrow segment of the market, which is the axial back pain segment, which in the U.S. market is only 7% of all spine procedures but sometimes a lot of other spine surgery gets pulled into that conversation inappropriately. Medtronic has a massive reimbursement and health economics department not just within spine but all over the company, that's been a tremendous advantage in this, not only working with surgeons in preauthorization where we had a lot of success, but also working to blunt decisions that get made by HTAs that don't take into account all the right facts and analysis where we can bring new data to bear to really clarify the situation to make sure that payment remains for these important procedures. So it is about alleviating near-term payer pressure, but it's also about expanding evidence and we have a much higher level of activity in looking at the evidence out there, collecting and doing the right analyses and submitting papers for publication that are at really an all-time high. Particularly focused on degenerative disk disease because we think there's an important story to tell for clinical and economic outcomes that already there's a fair amount of data to support. And then there's the education process as well. Finally, we're taking an industry-leading role to pull together the societies and we already have a number of societies on board to try to create guidelines along with expert consultants, and we're working with a lot of urgency to get guidelines more available in the spine field than they've been and we think that's going to make a big difference over time in the payer equation in the United States.

Let me shift to Kyphoplasty here. We're very pleased that this business has began to stabilize. In the fourth quarter, we actually showed some modest growth in the U.S. Kyphoplasty business. We are focused on fundamentals in leveraging the evidence we have, in rolling out new products such as the Xpander II, the new inflation syringe that we have, as well as the new cement system. And we are also innovating with new products. We have a product called InflateFX now in the market, which is actually a BKP-like product used to repair tibial plateau fractures in the extremities category, in the trauma category. So this technology is very extensible. We have faced reality from a cost structure standpoint. We've taken some very aggressive measures to really take out the overall company infrastructure of Kyphon while leaving behind a very powerful R&D engine. So what we have in Sunnyvale is 40 of our best engineers who have been given the charge to innovate in the area of interventional spine. We also have retained our channel in Kyphon, which is a great sales force not only in the U.S. but in many parts of the world that is very focused on emerging customers such as the interventional radiologist. So we really like the Kyphon product line. We really like it as a platform to do more and less -- for less invasive therapies, to treat spine, that's a very important strategy for us going forward.

Let me address INFUSE and really talk about the U.S. situation. Obviously, INFUSE has been one of the most significant events in the company in the past year, and clearly, is the number one source behind the declines we've seen. It accounted for 60% of our decline in the most recent quarter. We are pleased to see some degree of stabilization in INFUSE as comparisons get a little bit easier and as we continue to clear -- try to clear the air about INFUSE. We fundamentally believe in this product. This is a very, very innovative product that we have, it is -- there is unmatched in the bone grafting category. Interestingly enough, about the reduction in usage is we're not seeing a smaller number of accounts use INFUSE. We're just seeing more selective use around indications. I mean we're seeing smaller kid sizes. But we've really tried to take the high road in answering any safety questions that are out there by conducting, by commissioning 2 independent systematic reviews through Yale, we're very proud of the stance we've taken at INFUSE to not get embroiled in the debate, per se, but really to have a completely independent group look at this. But you also need to keep in mind that when the questions came up about INFUSE, we immediately went to the original data set that we submitted to the FDA and just to double confirm, which we did, that the data that we submitted to the FDA was perfectly valid and said what we -- exactly what we thought it said and certainly the FDA has supported that every step of the way. So we're excited for what's to come there with clarity on the Yale studies. We're also very pleased to see last week the DOJ dropped their 4-year investigation into marketing practice on INFUSE, which yet takes away another overhang and another set of concerns on the business. And really to the point of our belief in this technology, which is widely recognized as being revolutionary, we see a bigger future for it, and so we continue to invest in new technology such as our INDUCTOS launch which is the brand name in Europe that we're launching in Europe to a lot of success. We're also investing in a new carrier and new indications for the BMP-2 molecule.

So let me shift to international where the story in Spine really is quite different. We've had a lot of success internationally in the Spine business, extremely strong growth in the emerging markets, greater than 20% on average and very solid mid-single digit growth in the developed markets. I'm going to talk about 3 main strategies with regard to international Spine, one is localizing, two is building on very innovative and creative strategies like our Weigao joint venture and really driving that reverse innovation that Omar talked about earlier today and third is just core blocking and tackling, building resources, building capability in our sales and marketing channels around the world.

Spine is arguably the most globalized business within Medtronic by having 4 independent R&D centers outside the United States, as well as 4 manufacturing centers outside the United States. And the whole idea with these local manufacturing centers like the new product development office that we put into Europe, one that's going into Japan now, in China and even in India is to become more local, to become more responsive to local surgeon needs and local preferences and to become faster in innovating in these markets. And let me give you one great example which is one of the first true examples of Medtronic that what we call reverse innovation, which is where we take innovation, we take resources from the emerging markets to target a value segment in a developed market and to bring that technology in and take a low-cost position.

This is called Compact Cornerstone. Cornerstone is a interbody device for cervical spine repair, that's been in the market for years, 8 to 10 years. And so instead of thinking about innovation, think about renovation. Our European engineers took this product and said, look, we can create a value segment in the European market by tweaking that device, by making it even better, by making it lower cost and by totally rethinking the entire instrumentation set around this implant. Then we have our partners in China at Weigao, building the product and now shipping it back into Europe, where we can now use our scale and our low-cost position to exploit a value segment of the market. And what's great about this, is it also shows you what we can do in other developed markets even potentially in the United States as demand builds in the value segment.

Let me also talk about China. We have a business in China that's more than $100 million in spine and orthopedics. You're all probably very familiar with the Weigao joint venture that's now 4 years in and this has been a very successful strategy. The formula is clear, get there early, get local partners, invest heavily and be local and you'll grow. We're growing this business at greater than 20%. The CAGR over a 4-year period is even bigger. And we're not just in the premium spine segment, but we also have a significant position, a number one position in the value spine segment, which is the more rapidly growing segment of that business. And in addition to that, we're getting a lot of great learnings in the orthopedic segments. We're in orthopedic trauma in the value segment and we're in joints, hips and knees in the value segment as well. We also have a third line, a trauma line and a spine line in the economy segment. This is a very important priority to the company and to me personally. I'm now sitting on the Board of Directors of the publicly traded Weigao Corporation, which is a Hong Kong listed company and I'm personally leading the negotiations that we're engaged in, where we'll hopefully extend this joint venture into the future. Weigao has been a good partner. We've had good success. We think we can do even better going forward into the future.

Just finishing out on Spine, I wanted to make a point on costs and how aggressively we've been attacking costs. We certainly have faced the reality of some of the structural changes in this market, and we've not accepted a reduction in profitability or a reduction in investment. So we've actually taken our overhead costs down significantly so that we could not only maintain our profitability but actually invest in growth initiatives such as R&D, clinical trials, expanding these product development offices like I said, and continuing to find ways to grow this business and set us up for the future through things like procedural innovation that I talked about earlier. But we're gaining a lot of efficiencies and we're really reallocating resources to the things that we think are going to make a big difference going forward.

So just to summarize Spine. There is certainly a lot of wood to chop here, but we feel very confident about the path forward. We really like the spine market in the long-term, we think there's massive unmet medical need in the Spine business. We're very proud of our #1 position and we intend to build upon that. We are seeing signs of stabilization both in the market, as well as in our own business and we are focused on returning to market growth and we're confident we're going to get there. We have been fundamentally rethinking this business. We've been making a lot of change in the organization, in the business, in our strategies, to try to really move the market away from some of the traditional things to some of the more forward-looking strategies like that reverse innovation, like globalization, like procedural innovation and a lot of things that I talked about.

And then finally, it's very important to say that we believe Medtronic adds significant value to the Spine business through some of the things I mentioned, some of the things I'm going to talk about. As we look at broader integrated offerings to move beyond individual niches, individual technologies, to true clinical and economic value, a true breadth, and that's in -- and spine is very much at the cornerstone of Medtronic strategy in doing that. And really, just a final point on spine, is we continue to take the high road in this industry, that's had a lot of questions and we really see a lot of heads turning. We really see a lot of surgeons and a lot of parties outside Medtronic continue to reinforce us and really we see gaining competitive advantage through the scientific, ethical and transparent leadership we've been providing in this industry.

Let me shift to Surgical Technologies which has been one of Medtronic's highest performing businesses. This is a terrific story. ST franchise has grown significantly. This past year, it grew 19% in total and 11% organically, with great performance in our core businesses of ENT and neuro surgery, behind strong new product flow and a great business model that really blends the best of capital, disposables and service. But we've also built upon that to acquire some very interesting companies in the last year, PEAK Surgical Technologies and Salient Surgical Technologies to really accelerate our growth, get us into some new markets, and further differentiate Medtronic's overall portfolio.

And let me talk a little bit about that Advanced Energy category, which is what we're now calling PEAK and Salient. The Advanced Energy market is large, and what we now have are very advanced surgical tools for cutting which is the pulse plasma technology from PEAK, as well as hemostasis which is the TRANSCOLLATION technology from Salient Surgical Technologies. Omar talked about the Aquamantys, which is the Salient device, earlier today. This is a revolutionary device using Salient-cooled multipolar energy to dramatically improve procedures in fields like orthopedics, spine and ENT. Take for example some of the innovations in the joint reconstruction business, the anterior hip or the idea of a tourniquetless knee. These types of procedures can't be performed without advanced hemostasis technology, which is what the Aquamantys is all about. So we can make pretty dramatic changes in the overall efficacy, clinical efficacy and economic outcomes for hospitals and physicians even though we bring a new technology into the market where we can generate a lot of revenue. And so we think that this whole area of Advanced Energy has a lot of potential, we're in the fastest growing segments to the market and truly has the potential to deliver on that joint promise of clinical value and economic value.

Let me talk about neuromodulation. Neuromodulation is a great story now. It's accelerating. We've seen some days of lower growth in neuromodulation but this story proves that when you have the right technology, a new technology, you can dramatically accelerate your business. So we're now in the market in the U.S. with RestoreSensor, which we had previously launched in Western Europe and we are also in the market this year for the first time with the bowel indication of InterStim, both of which have accelerated our growth and differentiated Medtronic. We're also doing a lot of good work in the core process of unlocking referral channels in deep brain stimulation and really in the broader field of neurology, through more aggressive tactics in the referral chain. In fact, our DBS business is now growing initial implants faster than they have in some years because of the effectiveness of our market development programs.

Let me take a little more depth on the RestoreSensor technology which really is revolutionary technology. It's as important to the field of neuromodulation as the Activitrax adaptive pacing was to the pacing business decades ago. With RestoreSensor, you're really automating pain management by adjusting stimulation based on a patient's posture. We all know the spinal cord floats, and applying the same level of stimulation to that spinal cord no matter what the patient is in -- position the patient's in doesn't necessarily provide the best outcome, so we've gone out to prove and we have through very rigorous pre-market trials that adaptive stimulation not only improves pain, but it dramatically improves convenience because the patient doesn't have to adjust their stimulation depending on what position they're in. We've made a big impact with this technology, just since our late January launch, we've gained 6 points of market share sequentially. We are ratcheting up our growth in the segment. We're improving the market growth overall. And most importantly, we're really turning the heads of many surgeons who may have gone away from Medtronic for a period of time but we're getting a lot of competitive conversions back. In fact, half of the physicians that have implanted the restore sensor have been competitive.

Let me make a few comments about diabetes, which continues to roll. We've had very steady performance out of our diabetes business, very strong performance over time, double-digit performance. And really, in the short term, right now, our performance is being driven by the international business where we launched the Veo and Enlite systems, that's the semi-closed loop system with the low glucose suspend. We're now calling that technology and rebranding the technology as we get ready for the U.S., the MiniMed 530G pump, and that's going to really be the next big catalyst in the U.S. business where we bring technology that's changed the game internationally back into the United States with FDA approval, sometime in the next year or so.

We're also going to be launching internationally the next-generation pump. I've talked to you in the past about the NGP [ph], which is a totally new durable pumping platform, it will be known as the MiniMed 640G, and that's actually going to come to our European market later this fiscal year. We also continue to innovate on the CGM side. We've got as rich of a pipeline in CGM technology as we've ever had. The Enlite Sensor is making an enormous difference internationally. It's dramatically smaller, more accurate, much more convenient and more comfortable for patients and that will be coming to the U.S. market along with the MiniMed 530G. We also continue to work on our patch pump program. We're excited about that. The patch segment of the market has been a niche and we're looking forward to making that a bigger play over time. We remain very excited about our technology. We're in the final kind of design, review phase of that program, and we continue to move it forward. But I would also say that our bigger priority is really marching towards the artificial pancreas. In fact, you may have seen a press release earlier today or later yesterday from the JDRF who has decided to enter into a significant multimillion-dollar partnership with Medtronic to advance the technology on the sensing side. They're so excited about our ability to do dual sensors with the glucose oxidase sensor as well as the optical sensor that we acquired several years ago, to the present [ph] deal, to put that together into a redundant sensing system, which is going to be required if we're going to truly close the loop and deliver on the artificial pancreas.

So just a little more on the MiniMed 530G, which is the previously known as the Veo Enlite system. As you can see from this chart, when this product was launched, internationally, it literally doubled our growth rate both in pumps, as well as in sensors. And this really, this device, which suspends insulin delivery automatically when a patient goes too low, is really half of the closed loop and gets us about half way there to our ultimate dream of developing the artificial pancreas. It all started with the Bolus Wizard and then the integrated system and really this is something only Medtronic can do because it does take an integrated system from the ground up, a pump sensor algorithm all developed together with all the safeguards and all the efficacy and all the features that Medtronic can bring to bear. So we're very excited about bringing this to the U.S. This is going to dramatically accelerate the U.S. when we get it. I am pleased to say we have filed our PMA with the FDA for the MiniMed 530G. It will likely take a year, which is typically what things are taking these days, but when this comes to market, it's going to be great for patients and great for Medtronic.

So just to finish off on the business unit side before I get into the integrated offerings. This is a picture of the overall pipeline by business near-term, midterm and long-term. And without going through the details here, we've invested very steadily in all these businesses. Everything that's going to drive our business in the near-term, which is this current year, as well as fiscal year '14, is either in the market or highly certain to come to market soon. But beyond that, we have a full pipeline of technologies in all businesses whether it's moving to less invasive therapies in spine, like the DIAM device or moving into brain sensing, in neuro, the diabetes marching towards the closed loop and bringing the patch pump out at some point in the midterm and then a lot of things in neurosurgery, ENT and Advanced Energy and Surgical Technologies, we're very excited about this pipeline.

So let me shift here to the bigger picture and the bigger story for Medtronic and the Restorative Therapies Group, which is really leveraging our breadth to create economic value in this changing environment that Omar talked about earlier. It's leveraging our breadth through programs like Smart Surgery and our neuroscience strategy and it's expanding into the care continuum in areas like pain and diabetes.

And let me start with Smart Surgery. Smart Surgery is kind of a name we're using to call the process of surrounding individual procedures with enabling technologies to perform better outcomes clinically and economically. This is not a new strategy. We've done this very successfully for years. If you look at powered and navigated sinus surgery, for example. We've really brought the field forward in sinus surgery with Smart Surgery. We have also done that in cranial surgery with navigated cranial surgery where we've been the standard of care for some time. Now we've been quietly building up this armamentarium of enabling technologies through a lot of the acquisitions we've done and through internal investment, so that we have a much broader range of options that generate value for all stakeholders. And let me give you a few examples. One is the navigated DLIF. Many companies are out there trying to do approaches to direct lateral interbody fusion, but when you introduce the O-arm plus surgical navigation plus nerve monitoring, you really change the game. Because now for the first time, we are navigating interbody devices laterally in 3D, with O-arm navigation and all of our navigated instruments. This provides safer placement, more accurate placement and reduced radiation for the surgeon. In fact, our studies have shown that fully navigated spine surgery actually reduces revision cost by up to 70%. This is early, it's been very enthusiastically received, and again, it's something only Medtronic can do. And when you change the game from different approaches that might be out there to fully navigate it in 3D, you can see how exciting this becomes.

Another example is POWEREASE. I've talked about POWEREASE a little bit in the past, but POWEREASE is now in the market. 2.5 years ago, we got our Surgical Technologies and our Spine businesses together to integrate power, nerve monitoring and advanced imaging to dramatically change the physical and time components of how spine surgery is done. So now with this device, that's very exclusive to Medtronic and only usable with the Solera and TSRH 3DX posterior systems, we can literally reduce work by 80%, 90%. We can reduce time by half and we can improve control by almost half as well. I feel so passionately about this technology, I've actually brought a set with me and anybody at lunch who'd like to see it demonstrated, can see it. And it's not just for tapping the pedicle and driving pedicle screws but also for popping off set screws and cutting rods, which are things that cause surgeons a lot of pain over time through repetitive motion and extra work and this technology is already making a big impact in the marketplace.

Let me talk about our neuroscience strategy. When you take a step back and look at different areas of medicine, the neuro-related service lines are among the fastest-growing service lines out there. In fact, Medtronic is clearly the number one company positioned in the broader neurosciences, which is often described by our customers, not just in terms of the activities the neurosurgeon does, but by related fields in peripheral nerve disease like ENT, like pain centers, like stroke and like -- and bridging into other areas like interventional radiology. In fact, of the top 100 accounts for the Restorative Therapies Group in the United States, 60 of them now have branded neuroscience centers, and our goal is to really come to these neuroscience centers really with a single integrated story, a single integrated set of product lines, some of these advanced technology solutions like I've been describing with Smart Surgery to not only advance the science but to build our brand and drive additional revenue. One example of that, is if you go to the top 100 DBS accounts in the U.S., and we get our spine market share just to the average for the U.S., we'll actually accelerate our Spine business by 2%, just by doing that. So we're very excited about what we have to offer, and clearly, it's about Medtronic adding value to these procedures through many of these technologies coming together and advancing the science over time.

A lot of people ask about orthopedics and what is your view on orthopedics? Well, the first thing I'd say is we're already in the field of orthopedics. We do a lot to serve the orthopedic surgeon and our question in orthopedics is exactly the same as it is in the neurosciences, which is how can Medtronic through its breadth and depth of technology and its expertise add value. We're #1 in orthopedic spine, of course. We have a strong presence in China where we've been learning a lot, and I described that earlier. I mentioned the Aquamantys system earlier. That's -- the majority of that business and that sales force is focused on things like total knees and hips and in terms of generating significantly improved patient outcomes and we also, as the #1 biologics business in the world, sell a lot of our biologics products into the orthopedic field and I mentioned the extremities repair balloon as well earlier. Suffice it to say, we look at everything over time in this industry. We view orthopedics as an attractive adjacent segment but we're very, very selective and our bar is very high in terms of can Medtronic add unique value. We know we do that on the neurological side. We believe we're beginning to do that in orthopedics and we're playing a -- I think an important role in moving this field forward as well.

Let me talk about the 2 pain -- the 2 care continuums that really build off of what Omar was saying earlier today about taking a broader presence and using our channel breadth, our technology breadth and our expertise to both innovate as well as to accelerate patient flow throughout the appropriate care continuums. If you look at pain, there's no company that's doing more in advance pain management than Medtronic. We have a wide scope of surgeons that we call on, whether it's PM&R, whether it's neurology, non-surgeons, neurologists, anesthesiologists, neurosurgeons and, yes, even orthopedic surgeons and we have the widest range of technology as well, all the way from pain pumps on the most extreme side to less and less invasive therapies upstream. In fact, we continue to be very excited about our Sciatica program, which is an injectable program in our biologics area to really disrupt the steroid injection market over time. We love our interventional therapies that exist today, and obviously, we're in the FUSION and the pain stim business. Our initial focus in this area is to leverage our channel breadth to accelerate referrals to get the right patient to the right therapy to the right physician at the right time. But over time, we see the ability to facilitate development of guidelines to help shape how patients flow through the care continuum. And in the process, add clinical value to all stakeholders, as well as economic value.

Let me also talk about another important care continuum which is probably our most developed care continuum at Medtronic, which is diabetes, lifetime diabetes care. We started out as a pump company, we developed the CGM market, and now, we push in both directions, we have the world's only diagnostic device, the CGM's iPro which can provide advanced screening of unstable glucose patterns and really get more patients to the right therapy faster earlier in the care continuum. We also are doing a lot at the other end. We've had CareLink for diabetes for some years, where doctors can remotely access device data out of -- both pump data and CGM data from a patient's home.

But in the last several months, we've also launched the mySentry program. This thing is revolutionary, it's pictured on the slide, and what it is, it's an in-home monitor for loved ones to be able to be tracked much more seamlessly by their caregivers who -- to really be alerted to unstable changes and bad events. So if you're a parent with a child with diabetes, you get up several times in the middle of the night to check glucose levels to make sure that you are not headed towards a hypoglycemic event. Now, we have a device that can automatically transmit bad trends in glucose, a drop in glucose, to alert through this home monitor, through this almost a bedside alarm, if you will, any changes that are happening that need to be alerted. So we're not even reimbursed for this device yet. And yet, we've already sold a large number of these things to patients who see such value in that connected care solution in the home environment, and we're just going to do more and more.

As you know, we also have the industry's largest customer service arm that not only brings expertise to patient management over their lifetime but also brings scale and that's actually very, very difficult to replicate. This has not only created high customer loyalty with Medtronic but I think is the #1 reason why we actually have higher market share today in our diabetes business than we did even 10 years ago when we acquired MiniMed. And that's been a great, impressive achievement given all the competitors that have come into this market, to have higher market share today than we did when MiniMed was acquired.

So really just to finish out the story and put it all together. If you think about the big themes of Medtronic, of economic value and globalization. Within the Restorative Therapies Group, we have a lot of strength we believe today in both discrete therapies, as well as premium market segments, our traditional focus, but also moving very aggressively into integrated solutions like the ones I've discussed, as well as globally into the value segments. We're trying to have a balanced portfolio that's compelling to not only compete effectively in today's market but also to position ourselves very effectively for the changes that Omar talked about earlier today, and to further distinguish Medtronic and leverage our breadth to do things nobody else can do in the fields we participate in.

So really, in summary, I feel good about the direction of our businesses, both on an individual basis, as well as the broader integrated offerings that we're developing throughout the Restorative Therapies Group, to leverage our breadth, to add new value to the healthcare system. It's going to help us grow, it's going to help us drive good performance and it's also going to help us deliver on our mission of changing more lives for the better throughout these fields. So with that, thank you very much for your time, and I'd like to introduce our Chief Financial Officer, Gary Ellis.

Gary L. Ellis

Thanks, Chris, and I really, again, I want to express my welcome to all of you in the room today and thank you for coming and listening to our story and hearing what is changing at Medtronic. Obviously, hopefully, from the standpoint of what you've heard now from Omar and Mike and Chris, you can see that we clearly still have a very, very strong product portfolio pipeline. But more importantly, as we've talked through these different strategies on globalization and economic value, and even what's happening in the healthcare environment, you can see the changes we are making in the organization to address that and I think that's important to understand that this is not the same strategy that we had 2 years ago when we presented to you. Yes, we are still focused on technology. But the fact of the matter is the markets are changing and Medtronic is changing to try to address that in our strategies we've laid out. But you can also hopefully are going to walk away from the meeting feeling a sense of optimism that we are seeing improving trends and that some of these new products we've been talking about here are starting to have an impact on the marketplace and then as we play out the overall strategies on the globalization and economic value that, that has the opportunity to actually continue to make sure Medtronic is the market leader, but more importantly, that we win in this changing environment overall.

So my role is actually to come up here and explain to you how all this fits together, what that does to our financial results, and what it means for as far as how we're going to continue to increase on our shareholder value to the investors. So as far as creating shareholder value, the key 4 themes that I want to discuss and spend a little time on today in my presentation, is to focus on improving long-term sustainable revenue growth. I mean I hope you get a sense as we talked about what's going on in our markets, as we talked about what's happening in the emerging markets going forward and the new products that we have seen over the last year here and I'll talk about that in a minute, and the improving revenue growth expectations and performance, and we expect that to continue to improve as we move forward. Now we continue to leverage the size and scale to optimize our operating margins, and I'll highlight that and talk a lot about what we are doing to focus in the operating margins which are still continuing to be some of the highest in the industry, but we still think there's opportunity to improve on that area. That also, obviously, relates into the fact that we continue to deliver earnings and strong free cash growth and that will lead to the disciplined capital allocation and I'll talk to you about what our focus is there and how we intend to continue to improve in that area.

So let me first of all talk a little bit about revenue and what that has been. Obviously, it's been a challenging period for all of us in the industry for the last couple of years here, for MedTech in general and for Medtronic, it has been a tough environment, the macroeconomic slowdown, especially in developed markets, clearly had a significant impact, a negative impact specifically in the ICD and spine markets, as you saw, that continue -- that had a very dramatic impact, especially in the U.S. marketplace in general, but the good news is that we are starting to see those markets stabilize and I'll talk more about that in a minute, and we are starting to see the new products starting to translate into incremental growth and you saw that in our fourth quarter here where it's just one quarter, but we were pleased to see the momentum that we were -- we are starting to gain as we exited FY '12.

And as you saw on one of Omar's slides, and I'm just going to reiterate it because I think it's important for everyone to understand is as challenging as FY '12 was, it was a year of really bifurcated growth. The fact of the matter is 75% of our businesses are growing 8%. So there is still strong growth out there in many of our markets and we continue to see strong growth in those areas. Clearly, where the area of concern was last year, in a very, very challenging environment was in the U.S. ICDs and U.S. spine markets. Again, the good news is the ICDs, especially as we saw in the fourth quarter, the market in general, in Medtronic in total, we started to see that business stabilizing and just not having that negative decline of 10% clearly will have a significant impact on our growth rates as we move forward into FY '13. We also started to see it starting to stabilize in Spine, and Chris has obviously just walked through how we expect that to continue as we go through FY '13 but we also saw the market starting to stabilize somewhat in our Q4 for the spine markets. But the key element here is the other businesses and this is in the blue continued to generate and were pretty consistent all year, generating about 8% to 9% overall growth. And so that's important, the 75% of the business continues to do very well and based on some of the new platforms we're adding, we expect that percentage only to increase.

It's the same story if you look at it geographically. The reality is the largest part of our market, obviously the U.S. market, about 55% for the full year was down about 53% in Q4, but that market has been flat, and that was -- actually it was in a decline for several quarters in the year but we saw a positive in the fourth quarter as we saw, again, the anniversary of the U.S. ICD issue and Spine starting to improve a little bit. So the U.S. market, we did see a slight improvement in Q4. It's actually a slight growth and in our marketplaces, but overall, we've had about 45% of the business, and actually 47% if you look at it in Q4's numbers, that was growing. The developed markets, international developed markets were growing about in the low-single digits, 3% for the full year. And the emerging markets, as we talked about, was growing 20% for this last fiscal year and we expect that to continue and grow as we go forward.

That's led for the last 5 years basically to emerging markets continuing to lead the growth overall. I mean as we talked about that, that's been what our history has been the last 5 years and we expect that trend to continue. This just highlights that. So the last 5 years, the 5% growth we've seen as a company, again, we've seen 20% CAGR for the emerging markets during that period of time, and we expect that to only continue and potentially escalate as we move forward with our focus in that area.

International developed has grown about 8%, and the U.S. market over -- actually over this period of time was up about 2%. We know it was obviously low here in FY '12, but as I mentioned, we're starting to see that starting to stabilize a little bit. So overall, the international development -- developed markets continuing to grow, and that is because we are still seeing strong growth in several countries from some of the new technologies that are being introduced. Germany, France, the U.K., we continue to see strong growth in those markets. Southern Europe has been a little -- because of the economic challenges there have been a little softer. But overall, in general, the international developed markets, we're still seeing good low-single digit growth in those marketplaces, and that's led by some of the new technologies and the strong growth in some of these developed markets as we continue. In the emerging markets, I think, we've clearly hit that very hard today, and I think it's important for everyone to understand how important that is to our overall growth rate as we go forward. Just that one component is a very key element of our growth rates moving ahead. We've shown that we've done that, we can do that over the last 5 years, and we think we can continue to do that, as we move ahead.

As a result of that, we financially, the good news for FY '12 is we did meet our commitments as far as what we expected at the beginning of the year. We knew that FY '12 was going to be a difficult market, especially in the U.S., and so we gave 1% to 3% constant-currency revenue guidance. We actually ended up at 3% for the full year. Adjusted earnings per share, $3.46 was right in the middle of the range that we had provided at the beginning of the year. And again, we continued to generate strong free cash flow with about $4 billion of free cash flow generated in FY '12.

That obviously is on top of the last several years here and this just highlights the revenue growth over the last period of time but more importantly in the revenue graph, the one I want to highlight is the fact that you can see what's happened with the international mix, where it went from about 38% back in FY '08 and we went up to about 45% for FY '12 and actually ended the year closer to 47%, 48%. So the point is the international growth is driving a lot of the growth within Medtronic and we expect that to continue. That's obviously continues to generate very strong free cash flow, overall, in the $4 billion I mentioned in FY'12 and I'll highlight here in a minute, as we go forward, we think we can accelerate that based on some of the focus we have on working capital and the organization.

Gross margins have been relatively flat for the last 5 years and this highlights kind of the FY '12 number versus what we saw kind of on average for the previous 4 years. I mean there's a plus or minus kind of 50 basis points that occurs in each one of those years depending on FX rates and some of the products. But overall, we've been maintaining gross margins. Our operating margins have also been relatively flat during that period of time. We have achieved some leverage but the fact of the matter is with some of the acquisitions, even with PEAK, Salient and Ardian for example on this last year, they had a negative impact of about 70 basis points on our overall operating margins. And we're obviously -- so we're covering that but we obviously expect those acquisitions to start to have an impact and deliver more operating leverage as we move forward, and I'll highlight in a minute what our expectations are for our operating margin improvement in the next year.

Which leads me back to this slide, which is our -- what is our guidance? What's our commitment here for FY '13? As we indicated in the earnings call last week, basically, we're looking for revenue growth next year of about 2% to 4%, which is slightly up obviously for what we saw here in FY '12. And we're optimistic about what we saw in Q4 where we obviously had a very strong fourth quarter and momentum was building but also we're trying to be somewhat cautious here with the European Euro situation continuing and some of the things going on across all of our various markets. We don't want to get ahead of ourselves and make sure that we are seeing the stabilization we think we're seeing in the U.S. marketplace, so we're saying a 2% to 4% constant-currency growth.

On the other hand, adjusted earnings per share, we're expecting to see some leverage on that, and we're going to drive 5% to 7% earnings per share growth to $3.62 to $3.70. Cash flow, we're expecting a significant uplift. We're actually increasing our free cash flow by 10% next year. So that's on top of earnings growth of 5% to 7%. So the difference is obviously where there is several initiatives underway across the company to improve overall working capital, especially inventory. Our inventory turns are not going in the direction we want, and so we are -- there is a significant effort across the company to continue to improve on the inventory levels and improve on overall working capital, which we hope will improve the U.S., o U.S. mix issue that we also have in our cash flow which I'll talk about in a minute.

Now where is that revenue outlook, what's in our guidance, what's our assumptions that we're looking at it as we go forward with this? It basically assumes in each one of the CVG and RTG that they both grow about 2% to 4%. But as you can imagine, there's different issues in each one of the businesses. Overall, as Mike mentioned as he went through his presentation, we are expecting that the market will improve slightly in FY '13 versus FY '12, especially with the U.S. ICD issue. And as a result, the market improves more in the 1% to 3% range as far as an overall growth and across most of Mike's businesses.

On the other hand, we expect to continue to take share in this market based on the strength of obviously Resolute Integrity, the CoreValve products that outlines there out there, Symplicity, the Arctic Front, so there's still several product lines that are going to continue to drive, taking share in the FY '13 guidance. Similarly, on the RTG side of the equation, we're expecting the markets to kind of grow on that 2% to 4% range, with a slight improvement, obviously, in those numbers from what we saw in the U.S. spine, not much but a slight improvement in those marketplaces. But basically, that we maintain share across all those businesses. Now that means that some -- obviously some businesses will actually gain some share but -- and especially as we see some of these new products launched, we'd actually hope that there's an opportunity to gain share in almost all the businesses in RTG. So in general, from the FY '13, with the market growing about 2% to 3% and again a slight improvement over what we saw in the current year, not dramatic, so just a slight improvement based on this annualization we saw in the U.S. ICD market, we're expecting our revenue to grow 2% to 4% versus the performance we had here in FY '12 of 3% overall. Now I want to make sure this is clear, this is the guidance. We talked about in the presentation about some of our midterm kind of baseline assumptions and I'll talk about that myself in the presentation but the guidance continues -- or for just FY '13 is the 2% to 4%.

Now how are we going to get through on the operating leverage? And let me kind of walk through and do a little bit of an earnings per share walk through and show you -- talk a little bit of few of the headwinds and some of the opportunities we see as we move through FY '13. First of all, just to put perspective, as you know, we divested of our Physio-Control business, and so we basically, by losing the operating earnings from Physio-Control, as we've mentioned when we did that divestiture, we did buy back shares to offset that dilution, and as a result of that, you can see that the operating earnings are basically offset by buying back additional stock as we exited that business overall. The revenue growth, in general, will drive obviously a large part of the earnings as we move forward, and we are expecting that the R&D and gross margin as a percentage of revenue will remain about flat with the current year. And so as a result, there is no headwind there, but there is actually no opportunity at least that we are reflecting in the current numbers.

We are expecting SG&A -- that we are going to get to see some improvement in that line item and then as we mentioned on the call, 30 to 50 basis points of SG&A improvement, which should give us the opportunity to actually some leverage on the operating drop into the bottom line. Now that is for the current year is also being utilized to offset some of the medical device tax, which is a headwind we're dealing with and we have baked that into our numbers. We have 4 months of the medical device tax baked into our assumptions right now. And as I indicated previously in the earnings call, that's about $125 million to $150 million annual impact so you can assume about $40 million to $50 million of the 4-month impact is baked into our numbers at this point in time.

We also have a little bit of a headwind in the corporate tax. We had some benefit, obviously, in the corporate tax rates for the current year. And as we talked about with the sale leaseback and we can't count on right now the R&D tax credit, we had renewed, so that's not baked into our numbers, so that is a headwind that we are facing as we move through the current year. And that's all -- these are being obviously offset with the leverage we are going to get from continuing to do our share buyback program to 50% of our free cash flow going back to shareholders and about half of that in dividends and I'll talk about that more in a minute. So we are expecting to leverage the bottom line such that we are going to grow 2% to basically 3% faster than what we talked about in the revenue growth.

Now that's again the guidance, and I want to highlight though that what we've talked about and you heard in Omar's presentation, what we believe this will lead us to is that we can continue this through FY '13 and continue the improvement that we just talked about in those numbers that, that can lead to a near-term baseline expectations of getting us back to kind of a mid-single digit revenue growth as we see these products anniversary, we see some of the new products in the marketplace. And so over the near-term here, that we can get back to mid-single digit growth as a company. And that's not FY '13 but as we get past FY '13 that we can still continue to drive operating leverage as an organization, especially if we get back to kind of that mid-single digit growth, the ability to drive operating leverage even increases with the higher revenue growth. And that we will continue the share repurchase program that we have in place at this point in time and continue to buy back shares to also provide some leverage on the bottom line. That on top of the dividend itself, which we will continue to -- at a minimum continue to grow at the rate of the earnings growth, gives us the ability to actually return back to shareholders about a double-digit return is what we're expecting.

Now how are we going to do this on the leverage because the component on the revenue you've clearly heard from Mike and Chris, what gives us confidence so we can get back to that --kind of that mid-single digit range growth over the near-term, but what's going to drive the operating leverage from this point forward, not past in FY '13 but even past that. The biggest item, obviously, in even maintaining gross margins flat is with the pricing pressures in the marketplace is that we have to continue to take product cost out to make sure we can maintain our margins. We've been very pleased well over the last 5 years that we were very successful in our program to reduce $1 billion in free cash -- excuse me, on operating, on product costs over this last 5-year period of time and a lot of that obviously came from supply chain optimization, consolidating manufacturing facilities, et cetera. But we also have been focused on design for reliability and manufacturing and new product architectures, which are actually also start to have some benefit, but there's been minimal benefit obviously in the current period of time because that takes time for those things to work through the approval of regulatory processes, et cetera. You can see going forward, we've set another objective to deliver another $1.2 billion in product cost as we move forward. The plans are well laid out by business. They know where they're going to go get this. Our expectation is that we can actually deliver above this, but our commitment is again $1.2 billion. And again, a large part of it will come from just optimizing the manufacturing sites and consolidating that. You saw that from even some of the restructuring we did this last quarter where some of that is just consolidating, closing down some manufacturing locations to consolidate and reduce cost but you can start to see a larger portion of the savings coming from the design, the new products, and actually focusing on the new products, having a lower product cost in general, and then you'll start to see that benefit coming through in the next 5 years as we focus on this. And again, I think that's probably the area where we'll see increasing focus as we've tried to use economic value now as we start to prioritize our R&D projects.

So that's product cost. We believe that's at a minimum necessary just to maintain our overall gross margins in this time frame, and we've basically assumed pricing will continue to be under the same amount of pressure that we've seen over the last couple of years here. At the same time, we are going to continue to focus on SG&A leverage. And as I mentioned in the -- my comments, we're expecting 30 to 50 basis points of improvement in FY '13, that's in our guidance, and that will continue obviously as we move forward. A lot of this obviously gets back to there's headwinds again in opportunities in this line item also. Obviously, we're going to have increased salary and incentives as we move forward. Pension costs are going up as you see the discount rates dropping. Emerging markets, we're making a significant investment. Omar talked about that in his comments. So as a result of that, we are making investments in some of these areas while at the same time, we are seeing improvements, we're expecting bad debt to actually lower next year. We had some higher bad debt in diabetes this year, we're not expecting next year. The restructuring we talked about that we did in the fourth quarter, we expect to save about $100 million to $120 million. And then there's just other things throughout the organization, whether it's reduced legal costs as we go forward, whether it's reduced corporate overhead costs. As an organization we continue to be focused on driving those. And that on top of the revenue growth, we think we'll continue to generate leverage of again the 30 to 50 basis points and putting us down in more around the 34.3% range or lower as we move through FY '13.

R&D, as I mentioned in my first -- one of my slides, we are expecting to kind of remain right around 9% of revenue spent on R&D. But that doesn't mean that there's not a shift going on in R&D and that there's not a change occurring in that line item also. The fact of the matter is, what this tries to highlight is even over the last 3 years here, you can see that there's been a major shift in how much of the R&D dollars are actually being spent on clinical. In fact, the R&D uplift that's occurring during this period of time has been related to clinical trials and clinical costs and the actual R&D or product development cost has actually been relatively flat in general. And so the biggest cost uplifts have been clearly incurring in clinical. That's actually led and you can even break that down farther. What we're seeing is basically we're seeing an uplift in clinical research and now as we talk about economic value, research around generating the economic value concepts that we talked about, that's increasing them, so our expenses related to those items are increasing. So are the investments we're making in emerging markets as you heard Chris talk about, as he shows even in spine, some of his R&D, to some of these emerging markets, there is more R&D dollars being spent on emerging market-specific items. There's more R&D dollars that are more focused on new product platforms versus just incremental improvements in the products overall. And so as we do that, as we focus our dollars in those areas and increase them, as Omar mentioned in his comments, where we have seen a decline is the incremental product development. So we're seeing fewer products -- or excuse me, fewer programs, as Omar mentioned, and -- but increasing cost on the ones we are spending them on because there are more platform changes versus just incremental product development.

The last item I'll talk about before I get into some of my discussions about cash and capital allocation is obviously the tax rate. We've seen significant improvement over the tax rate over the last several years, obviously being driven by the stronger international revenue mix and some of the global manufacturing strategies we've put in place. There was also, obviously in the last couple of years, been a benefit from this Puerto Rico manufacturing tax credit that kind of offset something above, up in the other income and expense line item. But in general, this has been a positive for us and actually leading to some of the leverage we've been able to achieve as an organization over the last several years. That is becoming more of a headwind but we're going to have to get the operating leverage going forward because that is especially not knowing for sure whether we'll have the R&D tax credit, gives us a range right now for FY '13, of 19.25% to 20.25% and so depending on where we're at within that range, it's flat probably at best, to maybe a slight, actually, a headwind depending on what happens with the R&D tax credit.

So the growth is not going to -- our leverage can't come from the tax going forward, it's going to have to come from the operating earnings -- or excuse me, the SG&A and the overall operating leverage itself. But at the same time, we are going to continue and we do expect significant free cash flow to continue as an organization. We generated about $17 billion of free cash flow over the last 5 years. Our expectation is that actually we'll based on just earnings growth, and our focus on working capital that that could be about $25 billion over the next 5 years. And as I mentioned in FY '13, we're expecting that to be about $4.4 billion, again, a good portion of that is tied into our expectations that we will make progress on the working capital, which is a significant increase focus under Omar's leadership in that area so we're having high expectations, we'll make progress in that area.

Now we still expect to return 50% of that back to shareholders. And we're going to do that -- obviously continue to do that in the form of dividends and shares outstanding or share repurchases. This slide just highlights what we've seen as far as dividends per share, and the growth we've seen in dividends per share over the last 5 years here. We're going to continue to be -- driving dividend growth. We expect that to increase at least at the rate of the earnings growth going forward and it's important for us that we continue to drive dividend growth. At the same time, we are focused on and we've split it evenly right now kind of between dividends and share buybacks. In share buybacks, we actually bought back about 37 million shares in FY '12. And actually, over the last 5 years, we've bought back over 141 million shares of stock, so we've bought back almost 10% of our shares over the last 5 years, and we expect that trend to continue as we move forward.

Now as we talk about the capital allocation, I just want to kind of break out the various components and then discuss what we are expecting in each one of these areas. Obviously, the $4 billion of free cash flow for the current year, this chart just highlights the fact you see the amount related on dividends, share repurchase was a little bit higher because of the Physio-Control acquisition -- excuse me, divestiture and use that amount, but you can see it in the acquisitions were in here, and basically the excess is in -- been outside the U.S. There's the excess international cash, so we still have very strong free cash flow flexibility and we're generating excess cash. But as you know, and we talked about this and we've been very transparent about it, the issue that we are continuing to have is that there is a U.S. international cash imbalance that we have as an organization that we can manage through but obviously reduces our flexibility as we move forward. And this just highlights right now international cash flow is about 60% to 65% of that free cash flow is international, again, about 35% to 40% being in the U.S. in general. We're returning 50% of it back to shareholders in the dividends and share repurchases and so you can just see how this is out of line, which has to use U.S. cash. The reality is we're in a situation that we have been borrowing every year basically to make sure that we can continue that program. Now that's not been a huge amount but it clearly is additional incremental borrowing and so we're borrowing while the cash basically accumulates outside the United States. We are working very hard on this to try to figure out how to improve this and how to improve the overall imbalance. Obviously, the best way is to do this was just to improve U.S. operating results, with the U.S. market improving slightly, and Resolute Integrity, the market launch, that will help because it drives obviously, the U.S. cash improvement. But on the other hand, we are also expecting that as we talked about, international is going to be -- continue to be a big part of our driver -- our growth driver so this will continue to be an issue as we move forward. We are -- the working capital initiative is obviously more focused in the U.S. We believe it will be focused in those areas, that we can actually drive a lot of this improvement on the working capital will be in the U.S. and that will actually help, and we are focused on shifting expenses outside the United States. I mean you heard Chris talked about the R&D that's being shifted in Spine. You've heard Mike talking -- our focus on the emerging markets. We've talked about the increases in expenses in those areas and so as we shift our dollars in marketing and R&D and some of the things outside the United States that will also have a potential to help this U.S. -- o U.S. imbalance. And obviously the ultimate answer is if we could ever get resolution on repatriation on patch strategy overall and we continue to work with that with our Washington office but we'll have to wait and see how that one plays out, but this is an area I want to make sure everyone's aware, we're focused on, we're driving it. We still believe that we can continue the 50% commitment that we have on this item, because we still do have a strong credit rating and we still do have the ability to -- if we need to, to continue to borrow and do that share repurchase aspect or at least a portion of that, that's not the long-term answer that we want to continue with, but the fact of the matter is, we do have that flexibility if that's the only answer as we move forward, but the key long-term answer is to improve our U.S., o U.S. cash imbalance.

The rest of it, as far as the amount that we are investing back in the company obviously is continuing to be invested in emerging markets where there's opportunities and part of that gets back to making the acquisitions, the products or technologies like you saw this last year with like Salient and PEAK and previously with Ardian.

I want to just highlight a little bit as far as what we do as we look at any type of acquisition, and I shouldn't even say acquisition, the same framework that I'm going to discuss here, we basically go through our entire portfolio at least once a year, if not twice a year, and put our entire businesses through each one, the same framework to make sure that it still makes sense to be part of the overall portfolio of Medtronic. But overall, the framework, the investment framework that we look at is really strategic operationally and financially, how does the -- how would then a potential acquisition of our product and technology fit into the overall equation. And then -- but then there's 3 basic questions we ask, is it an attractive market across all those 3 areas, can we win in those 3 areas, can Medtronic be a winner in those markets and what value does Medtronic bring to the whole equation. What value do we bring to that market place or to that product line. These are the basic structure that we go through on everything and I want to highlight, again, this is what we do internally and for external acquisitions, so we put everything through the same rigor and process. So as a result of that, some of the M&A guidelines we have laid out for our group is that there are obviously mid-teens risk-adjusted hurdle rates they have to achieve and those can vary by obviously what risk they are taking on but basically we're looking for mid-teens. It can be obviously higher than that if it's a riskier, a longer-term investment, then we're expecting obviously over a 20% risk-return adjusted.

We expect clear financial value proposition. We've indicated minimal to no net earnings per share dilution, and I want to make sure I'm clear on this. What we're saying is not to say that a transaction itself, it might not be dilutive but that if it is, it's a trade-off we make internally. So we make an acquisition that has some dilution related to it and that's for a product or technology, so that means we need to offset a product or technology that we don't do internally obviously to make sure that we are delivering the earnings per share that we've committed to our shareholders on.

And our focus right now on more tuck-in types of acquisitions, things that, again, and they're around the product and technology side of the equation because we are -- we do think we have the right portfolio in general as far as businesses that we want to be involved in. And obviously, the key element and the biggest one that I would say that we've really increased the focus on, especially under Omar's leadership, is just the business team accountability. Everyone is held very strongly accountable to what we're doing here in this area.

We are focused as a company on enhancing returns. And return on invested capital, we look at basically 2 different ways. One, obviously, with the cash included, and one excluding cash. And the way -- reason we do that it's obviously a big part of what's happening to us is because of this U.S., o U.S. issue, we have more debt on our books than you would probably have just from a standpoint of invested capital. So it's more of a one's gross debt, one's obviously net debt in the invested capital calculation.

And you can see on both these, basically, the return has been relatively consistent, down slightly because obviously we have some of the acquisitions that we've done over the last few years. But based on our expectations for those acquisitions and how they're going to start to perform transcatheter valves, Ardian, PEAK and Salient, as those things start to really play out, you can see we expect to see some improvement in return on invested capital of over the next several years 200 to 300 basis points over what we've experienced here in FY '12.

So let me end with just a couple of comments, one on the key financial priorities. Operational growth, we expect to continue on the guidance. I want to make sure we're clear, 2% to 4% constant-currency guidance for FY '13. Earnings per share of 5% to 7%. Near term, we think we, based on the products and the things that are happening in the marketplace, we think we've adjusted ourselves enough to give ourselves based on what's going on in our market. So we would put in the potential risk in that area, but we think we can get this back to mid-single digit growing company on the revenue, and obviously, upper-single digits in earnings per share.

We are committed to the capital being returned to shareholders, and we're working on improving that free cash flow generation. But we expect that we'll be able to continue to maintain the 50% of free cash flow back to shareholders. We're very disciplined on acquisitions, and I walked you through kind of what that relates to and how we focus on those and how we look at them. And the capital structure, clearly, we're continuing to be focused on improving our overall return on invested capital and at the same point in time, maintaining a very, very strong credit rating.

So the last slide I'll have is kind of the one that Omar ended his slide with. So that's the guidance what we have for FY '12. We do believe, based on the products you saw and the strategies we've put in place and the changes as we work going forward, that these products themselves and these markets we're in can deliver over the near term, that it can improve to consistent mid- to single-digit revenue growth. That's what we believe.

We also believe that as a result of that, we can leverage the bottom line to continue to drive earnings per share faster than that. The 2 growth strategies, and they are different from what you've seen previously, it's maybe some of the same words you've heard previously. But basically, there's a significant increased focus in this economic value and globalization strategy that if we believe if we do this right, we can win in this changing health care marketplace, as we have historically that we can be the leaders, we can win.

And as a result of that, it protects us on the downside as Omar mentioned in his comments, but it also gives us the potential of having some upside potential. And so mid-term financial aspirations, if we can do this right, we could think we can actually get back to mid- to high-single digit revenue growth and obviously continuing to leverage the earnings per share, such that we can even drive faster earnings per share growth.

So it's an improvement message. We're making progress. We're not where we want to be yet, but I want the group to understand we think that the strategies we've laid out gives us the ability to really accomplish our overall aspirations here.

So with that, let me end, and I think Omar is going to have one last wrap-up slide before we open it up for Q&A.

Omar S. Ishrak

Thanks, Gary, and we'll do the Q&A in a minute. But I thought I'd just wrap up what you heard today, and this is the slide I started with.

Look, I hope you've heard our product portfolio, about our product portfolio from the people who run it. And that our pipeline is there. It's full, and it's competitive. And that's the basis of everything that we do because without those products and clinical value that those products create, we really don't have anything else. So that's very important.

Now how we leverage those products going forward depends on the health care environment we face, how we leverage the breadth across them, how we extend them and how we win in these discrete therapies in their own right. Make no mistake, in this environment, we have to -- there is going to be change. And people have to do different things, and we are doing different things. And the way I see economic value and globalization are these are the 2 bets that we're making. That's how I see it.

You may or may not have heard the language before, but the comprehensiveness with which we're dealing with these, the structure that we're creating around them and the investment that we're already making in those areas is different from anything that we've done and in areas like economic value that anyone else has done. This is new.

The ability to translate clinical value to economic value in a comprehensive basis across our entire organization, across all phases of our business, is something that is brand new. And we intend to learn how to do that, and we intend to be experts in it because I think and we think that in this health care market, that is absolutely essential to win in.

The other thing that I want to make clear, absolutely clear, look, our highest priority right now from a financial perspective, irrespective of everything else you may have heard, the highest priority right now is to deliver on the guidance that we've talked about. That's our highest priority. We will do that and show you that we can do that before we think of anything else. Now obviously, we can make certain investments in certain areas, but that is our highest priority.

Following that, it's simply to sustain that level of growth -- the higher end of that growth, which is the mid-single digit number in a consistent basis quarter after quarter. And we believe that if these bets pan out and they are bets, then there's room for upside. That's the way I want you to think about it. Right now our priority is our guidance. We will do that. We will deliver. We've got to show you that we can deliver, and we got to prove that to you. We understand that completely.

Second, we're going to make it consistent. That's all we're saying, consistent in the upper end of that range. And then at the same time we're making these bets, which we have to because of the way health care is changing. And if these bets pan out, we'll grow faster.

So that's basically our summary right now. And then through all of this, so that there's no mistake, is the discipline in our capital allocation process. We put our entire portfolio through that discipline that Gary talked about, not only in terms of acquisitions but in terms of what we have when we started that process. Is the market attractive? Can we win? Can Medtronic add value? Those have to be clear answers. And based on that we'll take action, and we are taking action based on that.

So that's what I have today. I'd like to open this up for questions. So let me start with our [indiscernible] we'll wait for mics first. Ryan, you want to start? Mike?

Question-and-Answer Session

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

Mike Weinstein, JPMorgan. And it's 2 questions, Omar. One on, you put out a target of emerging markets representing 20% of the company's sales in FY '15 and '16. And maybe you can just explain that because we assume that emerging markets rose 20% for the company compounded that rate over this period, and goes from 10% today to 20%. In order to get to the 20% of your sales in FY '16, you'd have to assume that 90% of the company your developed markets decline at about 1.5% rate over that period. So are you assuming that you make acquisitions in emerging markets that accelerate that rate to 20%? Because I know you're not assuming the rest of the company declines at a 1.5% rate.

Omar S. Ishrak

Well, yes, that's true. And to some degree, those are like aspiration type of numbers and targets to shoot for. The financial plan is that is not the first step in the financial plan. That's built up ground up. We -- and the percentage of sales from a certain region is dependent on what happens in the other regions, too, like you just pointed out depending on the flows. So there's a certain amount of sort of approximation, if you like, in that number. And frankly, we also assumed a little higher growth rate than the 20% to be able to get there in that time frame, and that's why we were fuzzy about the time frame as well. So getting to 20% of revenue mix from 10% of revenue mix is a directional objective, and there absolutely will be acquisitions as well. We intend to make the growth rate -- our intention is to get the growth rate higher than 20% if we can. But the financial strategic plan that we're looking at, that isn't the starting point. The starting point is what the markets are growing at, what our products can do and then we can go from there.

Gary L. Ellis

And let me just add, let me add a comment to that because, Mike, maybe we said and you sit down and walk through our numbers because our numbers would tell us that if we grow 20% in emerging markets, if you just did that up through -- by FY '16, it's 20% and developed markets are flat. And we're actually said that we're going to grow greater than 20% in emerging markets. So I mean we'll -- that's why we were a little fuzzy on the FY '15 and '16 because we do expect that we're going to get close to that 20% range. But the reality is we are not expecting developed markets to be declining. We're expecting to see some growth at least at low-single digits in the developed markets.

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

Okay. Let me step back on the big picture question that probably everybody has. So you've been here a year, as a lot of people have been in this room who've been to prior Analyst Meetings if you went back 4 years ago the FY '08 meeting, it was a different MedTech environment. The company was talking about 9%, 11% revenue growth. It turns out, if you fast-forward to today, it's like 3% over that period organic. And so you guys came here today and you talk about revenue growth acceleration starting after FY '13. And there's going to be a healthy dose of skepticism. Organic growth last year, if you take out, back out acquisitions and most of the presentations didn't, but organic growth was 1.7% last year. Organic guidance this year as we back out PEAK, Salient and today's Fidelis, is somewhere around 1% to 3% for this coming year. So there's an implied acceleration in FY '14 and beyond that you guys are talking about today. And what gives you the confidence to do that? Because knowing that 12 months from now or 11.5 months from now, you're going to have a fourth quarter earnings call, which you're going to have to give guidance for FY '14 and people are going to hold you to this idea of a step up in growth in FY '14 off of whatever happens in '13.

Omar S. Ishrak

Well, look, first, I appreciate the skepticism and it's deserved. When it comes down to it, like I said earlier, the 2% to 4% is something that we have prove to shareholders [ph]. And it's a little step up, it's not a huge step up from what we've been doing. And we do expect some of these acquisitions that we did, although they had inorganic benefit, they are growing themselves. So they're growing incrementally themselves faster than our average growth rate. So they really add to it. So we think we can do the 2% to 4% and that's what we're committed to. And we'll have to do it. And all we are saying beyond that is consistency more than anything else. Consistency at the upper end of the range, that's all we're saying. And through everything we're doing, through all the products that we have and through the work that we're doing in globalization and economic value, through all of that, through the diversification that, that will bring and the pipeline of products that we have, we feel we at least have a reasonable chance of being consistent in delivering in the upper end of the range. That's our immediate focus, okay, and that's the way we're thinking about it.

Matthew J. Dodds - Citigroup Inc, Research Division

It's Matthew Dodds, Citigroup. I'm going to follow up Mike on emerging markets because it is the biggest piece. Just a couple of areas of clarification for you. When you look at all the training you're doing, you're doing a lot more than any other implant companies. How much stickiness or loyalty do you think you're going to get from that over a longer period of term? And then where is your distribution model in these emerging markets? Is it skewed more to direct or distributor? I know it's not going to be 100% one or the other, but where do you think longer term that's going to be? And then just one clarification point of the 20% to 30%, is China in that range on the longer-term plan?

Omar S. Ishrak

China absolutely is in that range. Okay.

Matthew J. Dodds - Citigroup Inc, Research Division

But not over or below. It's in the 20% to 30%.

Omar S. Ishrak

It's in the -- well, yes, I'd [indiscernible] we wanted to be higher. But right now we're -- the way I hold the teams accountable for is that look, I don't [indiscernible], there's so much I can do. But literally, every emerging market has to be at 20% plus, and 20% is the minimum every quarter. And that means China, that means India, that means Latin America, that means Central and Eastern Europe, all these guys. And some go up a little higher than that, but the minimum is 20%. And we're going to deliver that, and that isn't there [indiscernible], but that's what we're talking about. Your other questions. First of all, the distributor mix. The distributor mix, we would prefer direct. Now in some countries, this takes time to grow. But the nature of our business is such, especially [indiscernible], you've got a very heavy position involvement no matter what because in the end, I can say what I want of our play, you can always value physicians to users and they have to get trained. And so, so that aspect of it, direct has got some advantages. Now we're going to be just pragmatic about it because in some places, you just simply can't ramp up the expectation of that time frame. The distributors there who already have that expertise and who can give us immediate revenue benefit, well, we'll use them. But in all these cases, I'm going to be revamping our programs there, we're going to watch the distributors carefully. And usually, we need to understand our long-term strategies with the distributors because if we really intend to be big, like if China becomes our biggest market in the world, that's not going to happen through 1,000 distributors. We'll have to be a lot more direct, and so there's going to be a lot more investment in those areas.

Matthew J. Dodds - Citigroup Inc, Research Division

And is the margin spread lucrative in some of those countries that you can capture?

Omar S. Ishrak

It looks like it. It certainly is lucrative. And in fact, if we can capture the distributor margin, there's probably some room there.

Matthew J. Dodds - Citigroup Inc, Research Division

And in the training, how sticky is that training?

Omar S. Ishrak

That's a good question. Even if you assume our fair share, we get good numbers.

Michael J. Coyle

Maybe I can take a shot at that one, Omar.

Omar S. Ishrak


Matthew J. Dodds - Citigroup Inc, Research Division

Go ahead, Mike.

Michael J. Coyle

When you look at, for example, the approach to how we're doing with the development, one of the things we start with on the CVG side is that we do have high shares, especially in the Pacing and the ICD sides at a starting point. And looking at how to be that, be sort of the anchor store for our development activities where we know that investing in people to go do that and create awareness and drive referral channels, that alone will pay for the investment that we're doing, and we have confidence about stickiness because of our share position that already exists in the country. But then what we try to do is overlay on top of that now that you've spent the money and you've put people out there who are doing these things, can you expand the program so that the same cost associated with those people can move other parts of your portfolio that may have lower share positions, may be at more risk for the stickiness? But you may also be able to create a share position that then becomes a virtuous cycle, so that would be one. Number two, I think one of the programs that Omar talked about with the Healthy Heart For All initiative really yielded some very interesting results as we tried to sort of dig into what are the barriers to adoption of these therapies and then how do we overcome the barriers. When we were looking at Pacing, for example, in India, everyone went in thinking well, they don't use these devices, they won't pay for it. What it turned out was there was a significant component of just lack of diagnosis of the patient, that there wasn't tools for being able to identify these patients who are feeling lethargic or syncopal are actually getting identified. And we actually developed a low-cost diagnostic in conjunction with an outside party to do a pilot program that then became a revenue stream in and of itself to this overall program. So I think these are the kinds of things that Omar's really spurring the thinking on to make us really get very granular about the barriers that exist there and how we can actually turn them into an advantage for ourselves that becomes a sustainable event.

Omar S. Ishrak

So Gary, did you want to say anything other than...

Gary L. Ellis

No, that's fine.

Omar S. Ishrak

All right. We'll do this, and then we'll go to that other room.

Frederick A. Wise - Leerink Swann LLC, Research Division

Rick Wise, Leerink Swann. Question for Omar and a question for Mike after if I could. Omar, just, you highlighted the $5 billion opportunity by penetrating emerging markets, and you talked about the economic value standard. What percentage of your current portfolio meets that economic value standard that you really could translate? And is this going to require some radical remixing of the portfolio? Or is this coming of the source that margin ASP and margin pressure as you do this? Is that a concern long term?

Omar S. Ishrak

No, I think there's a number of issues. First of all, if you take our present product portfolio and then see which is delivering economic value to our customers and which aren't, we haven't done this thing comprehensively. But to the degree that we've seen it, almost always the products that are successful are delivering economic value, almost always. And if they're not delivering, if they're not successful, there's usually no economic value for it. Now we will do that and understand the equation, and then like I said, it's not that simple because you've got to translate that in a very granular fashion depending on who the stakeholder is. Today, it's mostly -- it's moving from the position of the administrator so it's fairly simple to do, but we have to do it at that level. Second, your other question as to what does that mean in the end. Well, you probably find that today, most of our economic value is around improving outcomes and a little bit around procedure efficiency. I think in the new world, we're going to rebalance that a little bit to more of expanded access to these more new reimbursements. We need to look at expanded access to populations who don't get care today. We have very little presence there. We've got to balance it into procedure efficiency as well as cost efficiency. And therefore, our R&D programs have to be balanced in the same way. You have to look at a balance between improving outcomes, things that expand access and reduce cost. And in areas where there's no economic value present through procedure efficiency or improved outcomes or expanding access, we have to use innovation to lower cost. Because -- and that way we can do it without compromising the margin. It's our absolute intention to do this without compromising our gross margins. And that's why we've got such a heavy cost-reduction program in place. But don't minimize what we can get by translating improved outcomes in the expanded access into clear economic value propositions for our customers.

Frederick A. Wise - Leerink Swann LLC, Research Division

And Mike, just a question for you. Omar's highlighting the need to make bets; there's no bigger bet probably than R&D right now. I came back from Paris though sort of excited by the Wild West atmosphere there and excited over innovation. But I came up with 3 concerns for you. One, just the huge onslaught of competitors. Two, speaking to a number of physicians involved in your trials around the world, they're saying that the trials are rolling incredibly slowly. They can't find qualified patients to enter those trials in. Is that a concern for the trial timing? And just related to that, doesn't the SMERF design suggest we should be concerned about your mid-decade launch if, here's the thing, we really need a multielectrode, a multi-burn approach to make this work. Just your general perspective.

Michael J. Coyle

Sure. So first, I do think the important thing, and as I mentioned in my prepared remarks, is this is a procedure that really is going to have to have a very good safety profile. And so starting where we are with the single electrode approach, burning in the helical pattern is the right place to be starting, sitting at a 6 French design. And that is a platform on which we want to go to market first because we think it basically has the best chance of being successful without introducing any product safety issues. A number of other competitors are taking a different approach. They're going with very large products, essentially taking stiffer EP catheters, applying them into the vessels, they're looking at certain parential [ph] burns. As we have evaluated various approaches, we haven't been really excited about that for safety reasons. And we've also had a number of international cardiologists say to us those are nonstarters in terms of the starting points of the French size of the device. And so we've taken the thought process, and we're going to develop what we think is the right answer to this rather than simply try to throw something out there because we're worried somebody appears to be going faster than we are. SMERF is the answer to that from our perspective. 6 French device, over the wire delivery, simultaneous burns done in a way that we think won't induce spasm in the vessel and that is moving very rapidly through our system. In terms of the clinical trial enrollment that you're discussing, no question. There is an issue with enrollment in randomized clinical studies, which is really the U.S. study, the HTN-3 study, because the FDA really wants to factor out drug effects in these studies and that's a very difficult thing to do in this patient population. But that's not going to be any problem for Medtronic. That's going to be a problem for anybody who follows into this space. So being out in front and solving it first, we think, is going to give us an advantage. So on the one hand, I hear people talking about they're concerned about the commoditization of this market. I take a deep breath and stand back and basically say, "Well, let's see how these other products do, whether they perform from a safety and efficacy perspective the way we need them to be done." I mean I would point out that not a single competitor has shown data beyond 3 months. There's a reason the FDA chose 6 months for the follow-up period for the safety endpoint here from the experience for which we know stenting. That's where you start to see complications associated with the procedures. So as far as I'm concerned, a lot of noise out there, a lot of activity taking place. We are watching all those developments and seeing what we can learn from it, but we also think we have the right 2 platforms to be pushing this ahead forward. And at the end of the day, if this works the way it appears to be working, sustainable benefit, very significant reduction in treatment-resistant hypertension, this is going to be a very large market. And so being there and our leadership position is going to provide a very nice return for us. And the fact that we went in and bought up all the seminal intellectual property, if I look around historically at things like the ICD market and the Palmaz-Schatz stent positions, that turns out to be a very nice return on your investment, just that component of the program. So I feel like this is a bet very much worth laying and one that all the clinical evidence today would say is going to be a successful bet for us but it's still early.

Omar S. Ishrak

I'm going to go this side of the room.

Kristen M. Stewart - Deutsche Bank AG, Research Division

Kristen Stewart from Deutsche Bank. Omar, I just wanted to take a step back and just kind of the longer-term targets that you have talked about. To what extent are future acquisitions embedded in your, I guess, aspirations that reaccelerating back to this kind of mid-single digit revenue growth forecast?

Omar S. Ishrak

I think, and I'll let my partners here comment on this as well, especially Gary. But look, to the extent that we have acquisitions that fall under the criteria that we talked about, that we can cover them, that there's no EPS dilution, that they fit strategically, that we have business team accountability and all that stuff that we talked about and the financial value proposition, we will perform those. And they're within the, at least, the near-term aspirations that we talked about. And long term, almost certainly we'll have to do something. And in places like emerging markets and so on, even to deliver on the globalization and the methods of value creation in the longer term. And economic value, almost certainly, we'll have to do some level of acquisitions. Exactly what I love and really, right now like I said earlier, Kristen, our focus is this year. That's the most important thing we've got to do, and I'm not banking on any acquisitions, any serious acquisitions for the 2% to 4%. Other than, look, again, as I said, if it meets our criteria, which basically doesn't affect our guidance at all other than maybe perhaps make it better, but that's our priority. And then after that, try to make it consistent, consistent at the higher end of the range. That's our focus right now, and we think that we need to place the bets to make it consistent. And the bets really play out. If these are absolutely the right bets, then we might get some upside. That's the way we're thinking about it.

Gary L. Ellis

Just maybe I'll add just a comment to what Omar said. I mean again, in the baseline, in the near-term baseline, no, our assumption is that there's not a lot of acquisitions in there. I mean obviously that's basically our existing product portfolio...

Omar S. Ishrak

Other than that AMP [ph] thing that we talked about, stuff like that.

Gary L. Ellis

Right. But basically, there's no incremental. We're not assuming incremental that are going to drive that. Now that doesn't mean we're not going to do some things. It doesn't mean we're not going to make other acquisitions. But that's all based on the current product lines and as we've laid them out. And again, I just want to reemphasize. I mean I know how people get frustrated with this and say, "Well, where are you at?" Again, 75% of the business was growing 8%. If that continues and if we can get spine and ICD stabilized, and I'm not saying that's a minor point, but the fact is we clearly are starting to see ICD starting to stabilize around the world. And if spine is successful and we're able to get -- that market starts to stabilize, if those are just flat, you're growing in the mid-single digits just with the other businesses we talked about. So again, I understand that there's a lot of skepticism especially after what we just went through in the industry and as a company. But the fact of the matter is that's what the baseline is based on. It's the assumption that our growth platforms that we've laid out from Mike and Chris today, that those continue and we see those going forward and we stabilize our ICD and our Spine businesses.

Kristen M. Stewart - Deutsche Bank AG, Research Division

Okay. And then just, I guess, also kind of acquisition related. Chris, I think you had mentioned that you guys had some experience within kind of the hip and knee area. I believe it's within China within hip and knee. I think you had made some reference to that. And can you just expand upon what you have there? And then just kind of as you think broader, you had mentioned expanding more within orthopedics. It seems to be the steam that comes in and comes out of Medtronics' strategy through the year. So I guess, where do you stand now with that, Omar, because it just seems that there obviously are a lot of ways to get in, that you're talking more about tuck-in. But is that an area where you would lay down a pretty substantial bet to really make a broader splash?

Omar S. Ishrak

Well, I'll let Chris get to it. The main thing I'll say there, Kristen, is that I'm not bending on my rules. You know the rules are, right? Okay, the rules are no EPS dilution. And as for that strategy, there has to be a business team which is accountable, there has to be a financial value proposition. If we don't meet those rules, I don't care what the story is. If we meet those rules, then I'm going to be very careful and selective that we can actually meet those rules and there's no holes in there. And then we'll go from there. Now orthopedics, the point is that we think that all the stuff we have around spine, we can win. That's an additional play. That's not central to what we have to do. Now we've got some presence there which we might want to leverage, but we aren't bending the rules that I talked about to get there. So Chris, you want to add...

Christopher J. O'Connell

Yes, I would just reiterate a few points. Broadly speaking, we do see the orthopedic field as attractive with the demographics and underpenetration of these therapies. And our goal has been to learn and to contribute and to add value to segments where we can. To clarify, the China play with our partner, Weigao, they have a line in the value segment in both knees and hips and orthopedic trauma that we've been able to participate directly, and we obviously control those distribution channels through the joint venture. And so we're able to learn about channels, about surgeons, about technologies. We are building from our position of strength in spine. And obviously in markets like that, there's a very heavy focus in spine on the orthopedic surgeon side. In a market like the United States, it's more half and half between neuro spine and ortho spine. And again, it's really about where does Medtronic add value, and we are adding value in Biologics. We're adding value in navigation. We're adding value in Advanced Energy, the TRANSCOLLATION technology I talked about earlier. But obviously, we have a very high bar. We have very rigid rules, and we're going to certainly take our time on expanding these platforms.

Kristen M. Stewart - Deutsche Bank AG, Research Division

And just, sorry, just the EPS dilution, no EPS, is that on a cash basis? Or is that kind of fully loaded GAAP basis?

Gary L. Ellis

It's on a GAAP basis.

Kristen M. Stewart - Deutsche Bank AG, Research Division

And it may or may not include additional share repurchases to offset the deal alone, is that correct?

Gary L. Ellis

Again, as we said on the -- the transaction itself could be dilutive as we go forward. But we will have to offset that as a company and whether that's through other operating, reducing R&D in another project or having another result somewhere else, or back to situation if additional share buyback to offset that, that's a possibility...

Omar S. Ishrak

If we have cash.

Gary L. Ellis

If we have the cash, that's obviously something we would have to -- we look at all the options. What we're trying to say is that we take the ownership for the commitment on earnings per share very, very strongly, and we're going to hold firm to that and if we can...

Omar S. Ishrak

We can work with another window, so that this is not a matter of pushing air and pop [ph] start somewhere else. It's a closed window. And if we can work within that, we'll do that. But you can imagine, I mean, there's so far you can go with that kind of stuff. So there's a little bit of it that is not going with the key [ph]. I'm going to go in this direction first.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Bob Hopkins, Bank of America. Two questions, one for Mike and one for Omar. First, just back on the aspirational goals and the top line of mid- to high-single digits. I mean you are a $16 billion-plus revenue company right now. I think one of the concerns at least that I have in trying to understand what you're saying is if you really think the $16 billion revenue base can be mid- to high-single digits, does that mean that the spending infrastructure that you're putting in place right now is to support mid- to high-single digit revenue growth?

Omar S. Ishrak

No. We're not doing that, and again, don't get focused on that. Get focused on the 2% to 4% for this year and a mid-single digit consistent, which is the higher end of that range. That's what we're focused on, and spending is for that purpose. Now when you put spending in, you get different levels of return. If our bets hit, you will get a high level of return. Look, think of economic value. We're creating new markets in our own way. We're used to -- this room is used to and we're historically used to creating new markets in clinical areas. If we go ahead and find ways to truly reduce procedure efficiency, that's a new market for us. And if that thing hits, now I have no idea. I mean we've got hopes. But if that thing hits, that will be incremental growth for us, and that's our extra money. So that's what I'm saying. So we're not planning to spend as though we're growing at 10% or something, not even close, okay. So it's 2% to 4% revenue, 5% to 7% EPS, and then consistency after that is what we've got to get to. That's what the team is focused on. Do you want to add anything there or say anything there?

Gary L. Ellis

No, I mean I completely agree. I mean obviously, first of all, if we were investing at those levels, we wouldn't be seeing the operating leverage. I mean there's no way we could do that in this environment. So I mean, the fact of the matter is Omar is actually absolutely right. Our assumption is we're funding to achieve kind of our guidance for the current year, and we're funding obviously to drive what we think can happen in that kind of that baseline kind of scenario at that consistent result. But after that, we're hopeful that some of these things start to have a better return, so that maybe that gives us additional flexibility. But right now, that will have to play itself out based on what the results in that...

Omar S. Ishrak

We're not going to spend over ourselves. You have a question for Mike as well.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Yes, I do. I think it's an important one. I want to drill down a little bit on the value proposition that you're suggesting to hospitals because I think what's easy for us to see is that you've got a breadth and depth of products, that you can go into a hospital unlike any of your competitors and you can offer a bundle and you can get a volume discount. We all can see that. But what you're talking about is something different. You're talking about a true value proposition at the hospital that can avoid what we in this room all fear, which is more severe price declines over time. So specifically, what is the real value proposition to the hospital that you're talking about here other than just a volume discount?

Michael J. Coyle

The 3 columns of programs that I showed really circle in on the 3 value propositions. The challenges I hear when I sit down with the cardiac and vascular line administrators who are basically thoughtfully looking at their practice, their business and growing it, is that one, they've got fixed costs, then they've got escalating labor costs and they want to drive volume through those facilities. So how do they get appropriate selection of patients coming into the facility? So we can help them in a number of ways. What I showed you was market development programs where identification of patients who should be candidates for ICDs, who should be candidates for the CRT therapy with the new RAFT indications, who should be candidates for AAA, reaching out into the community with them, giving them the tools that we've already developed for this, allowing them to brand it as part of their area and then essentially, creating demand that's coming into their facilities. That would be one. Number two, giving them the data to help them do the planning. One of the things that we found with the cardiac and vascular line administrators is that many of them are very new to this whole area and saying, "So where are the opportunities?" So things like the HMAP program that I showed you that basically looks at, here is the incidence of disease in these regions that we've seen. Here's the rates of procedures being done, where are there mismatches between what appropriate use would say you ought to be looking at and what you are looking at and maybe that feeds a market development program. So those types of access programs. Another one that was on that list was essentially the development clinics, where basically as transcatheter valves come into the market and the reimbursement system forces fewer and fewer places to actually be concentrated in being able to execute these procedures, we're helping hospitals think through, how do you position yourself to be in a position to provide both surgical valve interventions and catheter-based valve interventions? Because if you don't, you're going to not only not get the transcatheter valves, you're going to lose the surgical valves you get because of the way the referral chain works. So these are items that we sit down with the line administrator and work through what are the programs that we can help you with. Same thing on the cost-efficiency side. Now I talked about pacer clinic flow. How many days a week do you have pacer clinics taking place? If you used remote technology and triaged those patients more effectively, you could take that from 2 days down to 1 day. That's an opportunity for you to do more procedures in days that you would have otherwise been doing follow-ups. Same thing with flow of patients through your cath lab. How do you utilize your cath lab facilities to have the most high level of utilization of the lab itself versus set-up time and take-down time? We work with them in mapping out their entire procedures of how they do that, and then help them to basically change procedures. And what we learned in one place, we take to the other place. What we do when we sit down with the line administrator is basically say, "We can help you with these programs. These are things that we can do for you that other partners won't do for you." We can establish a value there. You want us to bill you for that, we'll go ahead and we'll bill you for that. The reason we know this stuff is because we're doing it all over the country. If you don't want to be billed, but you'd rather increase the share commitments you make to these product lines, look at Resolute Integrity. The best-in-class stent, and yet it's sitting down in the 10% market share in your account. There's a big opportunity here for us to be able to capture that value. And so that's the method that just -- the sand part of the story, the strategic account management part of the program fits into.

David H. Roman - Goldman Sachs Group Inc., Research Division

David Roman, Goldman Sachs. I hate to jump on the skepticism bandwagon, but I'm sort of hearing 2 messages from you. One, we're changing the way we're doing business and focusing on economic value, while at the same time talking about innovation and underpenetration rates that we've been hearing about those 5, 6, 7, 8 years. And just really trying to understand, how do you marry the 2 of those together? So one hand I'm hearing you're -- we want to be a high-end innovator. It's like saying Whole Foods and Costco are the same thing. Are you going to be a one-stop shop that provides products across the hospital system, or are you trying to be a high-end innovator? And how do you balance the 2 together? And then I have a follow-up for Gary.

Omar S. Ishrak

We're going to do both because the issue here is that if you simply are someone with -- be a jack of all trades and with nothing there and #5 positions in everything, it doesn't matter. You can show up with breadth, no one is going to pay attention. So the reason that -- the thing that excites me about Medtronic is I walked in, and I found it absolutely amazing and highly impressive, is the fact that we truly do have market-leading products and positions across the board. And it's not only just in numbers. When I go out there and talk to physicians, they acknowledge it intuitively, that you guys are market leaders. There's not a fight as to who is the market leader or whether we have market-leading positions or not, just in the way they think about us. When you have that, you've got to have that, then incrementally, you can build programs because you can leverage those technologies. Like I've said several times today, there is no economic value without clinical value. You've got to create the clinical value first. Once you have the clinical value, the translation to economic value isn't at all obvious. And because it isn't obvious, we've got a bit of a mess out there today in terms of cost of health care, in terms of all kinds of things. So the translation from clinical value to economic value is a structured effort that has to be created and that understanding, that science has to be created and you've got to do that.

David H. Roman - Goldman Sachs Group Inc., Research Division

So it sounds like you're still talking more about changing the way Medtronic is executing, not really changing the business strategy of Medtronics. I think a lot of these things have been in place in some time, the businesses you've had you've had for a long time. You're essentially saying you're going to move the deck chairs around differently and this is going to be a more systematic defined approach to selling the same product...

Omar S. Ishrak

Well, there's a number of things. First of all, there's 2 aspects to this, maybe 3. One is certainly translate the commercial messaging to one which is more related to the financial health of our customers. We've never done that. Nobody else has done that. If you want to call that selling in a different way, fine. That's one aspect. Second aspect is to broaden our product offering across the care continuum. We have an integrated offering to share a payer provider. A payer provider doesn't care about procedure efficiency. They care about longitudinal care. And so we've got to have an offering that speaks that language in terms of longitudinal care. Patient selection, therapy and patient management, altogether in one commercial package with technology and how you sell it. The third way is how do you group all of this stuff together so they work together to make a difference in the hospital chain. So you have -- and there's several differences here in the way we put things together and in the way we translate them into economic value depending on who the stakeholder is. There's a big change. This is not writing a manual and saying, look, I didn't mention it. We just got through a meeting of 300 vice presidents we have in the company, and we talked about economic value, what is it, do we understand it, how do we granualize it, how do we operationalize it. So that's how big a deal this is to us.

David H. Roman - Goldman Sachs Group Inc., Research Division

And Gary, you talked about 10% increase in free cash flow, a lot of that tied to improvements in working cap. I think if I go back and look through the balance sheet, it used to be inventory turns north of 2.5. It's now hovering closer to 2 to 2.25. I think it's been in that range the past couple of years. What changed that brought down the inventory turns, and what specifically is going to drive it back up? And is it getting back to that north of 2.5 number that's really the key inflection point there?

Gary L. Ellis

You're absolutely correct. I mean first of all, the inventory turns have somewhat slowed down. Now part of that is back to the fact of, even as we have some of the new product launches, that obviously has impact on that. So for example, even with the Resolute Integrity launch, as successful as that is and it's been great, but obviously, we had to significantly increase the amount of inventory that we were going to be out there as a result of preparing for that launch and getting it in the marketplace. Because obviously that's a consignment market, just think about it from that perspective, but we have 10% share and now we're going to 25% share. Obviously, we're going to be in more accounts with just more inventory. So that's what's driven some of it. But I think the key element there if we're completely honest with ourselves, is we haven't focused on it as much as we needed to. And even at 2.5, I would argue that, that is not best-in-class. Might be best-in-class in the industry, but it's not best-in-class in any other industry you might look at. And so the reality is that it's going to take time because you don't just make changes on this real quickly, but we do expect that we're going to start to see this inventory turns improving. I mean we've talked about it, and we have an objective internally that over the next 4 or 5 years that we improve on that by over 50%. So I mean we think we can get back up to potentially above 3, where we've never been. But it's going to take time. And so we've clearly got that baked into our current year expectations that we're going to be driving inventory levels down and improving the turns. But it's not just a one-year effort. We're expecting to do that over the next 5 years.

Michael J. Coyle

And this is the first year going -- FY '13 going forward, right. There's actually a working capital charge that is going to be put on to the individual businesses for basically missing these targets. And so that will tend to focus the attention as it rolls into their compensation plan.

Omar S. Ishrak

This is a pretty big area of focus for us. So the cash generation is something and the inventory control is new for this organization. Let me go on that side for a second, maybe back there.

Brooks E. West - Piper Jaffray Companies, Research Division

Brooks West with Piper Jaffray. Omar, I wanted you to flush out one of Gary's slides, the aligning investments with strategy. You're an engineer. You've got a reputation as a product guy. Can you talk about projects within Medtronic that you decided to either end or curtail? And on the flip of that, can you talk about some product that you'd like to hang your hat on as being involved with some of the funding?

Omar S. Ishrak

Yes, I'll try to think on this line and give you some meaningful ones. Yes, there was an interesting program, which was in the ventures area called Hepatitis C. And this was a drug delivery program in the Hepatitis C, and this does not fit into our strategy, into where we're going. At the same time, we couldn't really translate it to economic value, for what it was doing and who would buy it and who would pay for it. So that's the program we canceled, so that's one clear example. There are probably others, I've got to think on the fly, there are several others, in fact, and I'll ask Mike and Chris to pipe in. Few of them are my favorite. I don't think it's any secret that I'm a little biased towards emerging markets. So on the programs that we're doing in China or in India, for example, this Healthy Heart for All, the device that we're making there to do the early diagnostics and link it to the referral chain and then management beyond that, which we didn't talk a lot about in detail, but there's a whole monitoring structure that we're creating around it, products around that area, something that I'm personally engaged in. There are several others. I got -- there's even some spine ones that are in emerging markets that I think has the potential for disrupting in developed markets. So those are some examples.

Brooks E. West - Piper Jaffray Companies, Research Division

Let me follow up then with an emerging markets question. Chris, you talked about Weigao. There's been some speculation that you guys might actually just buy that. I think you do have an option. I know you're in the middle of -- but is that on the table? And then broader maybe for Omar, do you have a preference to go in JV first and then maybe look at acquisitions? Or are you at a comfort level now with your emerging markets strategy where you might just start with an acquisition?

Christopher J. O'Connell

Sure. That's a good question. We do have a purchase option in the deal. It's the first joint venture is a 5-year joint venture. We're getting close to year 4 of that, and so we are beginning with those discussions. I think our view at this point is that we've learned a lot from Weigao and they've learned a lot from us, and therefore, the partnership has been very effective. And I would say that's a very nice approach going forward. And so while that purchase option is there, I look at the opportunity to strengthen what we have already for a longer period of time.

Omar S. Ishrak

And on the question on comfortable. Look, it's my preference and our preference in general to do the acquisition, we're comfortable enough to do that. The bigger challenge is can we get the target to agree, and sometimes the only way of getting it done is through some sort of a JV and then we work our way up to a full acquisition. So there could be a structure like that. But this is not a -- we're not dabbling at this. We're doing this seriously. It has to meet our rules, like I talked about. I'm not going to bend that. But as long as it does that, we really would prefer the acquisition because then we can just move more quickly. Even if we keep the local knowledge and all that, but we can move more quickly, align it to our strategy. And in the end, those are going to be our home markets as well. So our preference is to go direct and acquire completely. I'm going to go here first and then I'll go back.

Larry Biegelsen - Wells Fargo Securities, LLC, Research Division

Larry Biegelsen, Wells Fargo. Just very quickly for Gary, the R&D tax credit is not in the guidance. How much is that worth if reenacted?

Gary L. Ellis

Well, that's correct. The R&D tax credit is not in the guidance overall. I mean obviously, it depends on when that comes in and what the impact is. You will have a catch-up, obviously, even for the 4 months of FY '12. That's potentially the numbers going forward. So I mean if you went through the whole calendar year, basically a calendar year impact, we'd probably have an impact of almost 75 to 100 basis points on the overall tax rate.

Larry Biegelsen - Wells Fargo Securities, LLC, Research Division

Okay. And then Omar, let me just -- I wanted to just focus on near term. You grew 3% in fiscal 2012. In your slides, you had a 330 basis point swing in the factors that you laid out. If you annualized Q4 and you said that was conservative, the slide said your internal estimates are higher. I guess my question is the 2% to 4% guidance for fiscal 2013, how much of that is conservatism versus just cautiousness on what you're seeing in markets like Europe?

Omar S. Ishrak

I think that's appropriate. I think a lot of it -- look, if you just did the math and assumed everything was rosy, you'll probably end up with a higher number. But because -- I mean I read the papers today, and everything is -- unemployment is up and Eurozone crisis, and there are uncontrollables here. And we're trying to bake in as much of that as possible, and the internal word that I use is that we've got to be able to soak a body blow of 25% of our business down at 10% and still be able to deliver the guidance. That's the way we're trying to plan it. So if this is -- I mean if all that stuff doesn't happen, if there's no body blow anywhere, everything's great, then yes, sure, there's some room for optimism.

Larry Biegelsen - Wells Fargo Securities, LLC, Research Division

Just very quickly then, Mike, on RDN, the acceleration in the growth. I mean it's been $9 million, $10 million per quarter. When does that start to accelerate the RDN sales growth in Europe?

Michael J. Coyle

Our guidance for next year was $60 million to $70 million, which would be essentially double what we did this year. So I mean I recognize that it's up a small base in the context of the CVG revenue, but that's not a small growth number.

Omar S. Ishrak

The middle of the room here.

David R. Lewis - Morgan Stanley, Research Division

David Lewis, Morgan Stanley. Mike, I want to come back to you and some of your comments you're making. Omar has talked about size matters, value bundling. In your presentation, you talked a lot about changing sort of the selling model going more to the C-suite of hospitals. And I guess the one piece that was missing a little bit was that if you're going to go more to the C-suite of the hospitals, it seems to me that reps, at individual basis, become less relevant. So the piece that we missed this entire morning I feel like is why can't you cut SG&A cost based on selling differently to these hospitals? And could you help us quantify when that can happen and quantify how big that could be to the company.

Michael J. Coyle

Well, I think the important thing is to make sure that the model is going to work, right. I mean from my perspective, putting in place the overlay of the strategic account management function for the year was meant to set us up to see can we in fact use it to accelerate growth. I would say the early results are in, and they look pretty favorable. So to your point, now the relative role of what's contributing to the overall sale of the product, I mean we have to do some deep dives back and see what the relative contribution was to the ultimate share capture. Obviously, going to a model where -- and historically when a new product came out, you would put large incentives for overperformance growth strictly at the rep level is something that will become less and less prevalent in the future if we're in a model where the entire organization has a role and contribution in there. But I'm going to suggest that every one of these product lines may come down different in that area. That in fact in the endo area, where we have very service-intensive -- that the rep themselves is supporting the case and is in fact considered by the physician to be integral to the successful completion of that case is different than a drug-eluting stent, where getting the physician comfortable at the beginning and then turning them loose is a very different model. So to your point, I think there is opportunity to actually look at where we're spending money and taking cost down. And in areas where we've had, for example, contractions in the market, in the CRDM area, we have in fact taken out sales support, support staff that from a finance/HR perspective that were supporting those regions. And so we have been cutting SG&A in those areas. It's just going to be a question of -- the first thing for me is protect the revenue, grow the revenue and then figure out how you can get the savings on the SG&A.

Gary L. Ellis

And just to add to Mike's comment, I mean I think one of the things we've talked about before on this area is, again, as he indicated, it's the difference between is it service or sales, and each business is different in this regard. But the service component, the C-suite sees as much value in the service component as what physicians have currently. I mean I'm not saying that that's going to stay the same going forward. But back to the point on CRDM, a large part of what's being done there now, even with the contraction we've done, is we've scaled back as much as we can quote on the true sales. But the service component is still a very large obligation we have going forward. And right now, even the physicians obviously appreciated that value. The C-suite still also appreciates that value. And as long as you're willing to compensate us for it, obviously, that's where we're at. So you can't just do away with the service component. Someone's got to take that on. You're right on the sales side. That's where you have the ability to potentially scale back. And even with the Resolute Integrity launch, I mean when Mike went through his numbers, the fact is we didn't have a bunch of sales reps to double the sales -- or double our market share. We basically took the existing group and used our existing sales organization to drive that. So there clearly is leverage on the sales side.

Michael J. Coyle

And just one point I want to make sure I was clear about, this really isn't the C-suite in the CVG structure. It's an administrator who's been put over the cardiovascular service lines who's looking very strategically at that business, looking at how they drive revenue, how they take off cost cuts, how they drive their quality measures. To me, the thing that has been missing up until now is you had the C-suite who is at 90,000 feet looking over this and couldn't get involved in brand decisions because they were too far away from it, or you had the materials manager who didn't really care about the broader issues. It was if I can get my price lower this year than it was last year, I get my bonus. We now have somebody in these, especially in these centers who are growing their market share, who's really thinking thoughtfully about what they need to attack. That gives us an opening to provide value and leverage our brand.

David R. Lewis - Morgan Stanley, Research Division

That's very helpful. Then Omar, just one quick question for you on, I appreciate you providing the detail on the amount of R&D reallocation of $40 million given the value segment focus and emerging market focus. But that's still 3% of your overall spend. So if you look back a year ago when you started and wanted to reshape R&D, is 3% sort of the target you had in mind? Do you think that's an appropriate target that should have been higher? Can it go higher? Does it have to get higher to meet the goals you've set out today?

Omar S. Ishrak

I think the reallocation process has to continue, has to continue and we'll have to do further streamlining. But these are foregrounds you have to understand. Some of them have to meet certain milestones before we can even evaluate whether they'll work or not. So there's certain things that you've got to let play out. But over time, the portfolio will change to adjust to the priorities of the marketplace. That's where we have to get to. And if you make economic values a screen in deciding whether you do a certain program or not, that will automatically adjust, and that's going to drive this change. So it will automatically flush out, do you have the innovative capability to change outcomes? And can you deliver on that? Will people pay for it? Do you have a model through which people will pay for it? Or is it better instead if you cannot do that and you cannot have enough confidence that you can do that, you turn your innovation engine towards using technology to lower cost because price is your play then, but not giving up margin. So that rebalancing process, I think we're just started, frankly.

Michael J. Coyle

And I would just add to that as well, the $40 million ventures piece, that's just one component. But if you look in the individual business units, there's a lot more. So take just that spine example I gave earlier. We've had a 65% increase in R&D offshore in spine in the last year alone. So pouring money into the European PDO [ph] already producing products like CAPSTONE, like CORNERSTONE, Compact and several other systems that are in the market. This is happening business by business. So if you actually added it all up around the company, it's a lot bigger.

Omar S. Ishrak

Okay. I'll head back here I think.

Derrick Sung - Sanford C. Bernstein & Co., LLC., Research Division

Derrick Sung, Sanford Bernstein. Omar, going back to your economic value strategy. It sounds like right now you're recognizing the changing environment, you're just starting down the path of economic value. And everything that you've said makes sense. I guess what I'm trying to understand is the other companies here in the industry are also kind of at the place where you are. Others are, if they haven't already, maybe you're talking about it first, others are also realizing the changing environment. And what specifically is it that gives you a competitive -- a sustainable competitive advantage that others can't follow? Because it seems almost commonsensical that you have to set [ph] the whole industry needs to go down this direction.

Omar S. Ishrak

However, it's that much commonsense, people would have done it by now. But it isn't that simple. I'll tell you why, a number of things. First of all, we have some inbuilt expertise which others don't. We've got a reimbursement capability and an understanding of the way in which payers work and a pretty detailed data capability because of our clinical value-creation experience. It's just that we haven't comprehensively and systematically in a granular fashion translated into economic value which is exactly relevant for a specific stakeholder. We haven't been to that. Now in addition to that, we need to also create a little more capability to translate, and more comprehensively, to translate procedure efficiency into how exactly it makes a difference for a hospital. Where is the savings? Is it utilization rate? Is it that we have to get rid of manpower? Is it that simply the cost is lower of the device? So getting it done at that level of granularity, doing it systematically, doing it for a uniform language through a common process, I think that is a new science. It literally is a new science. Now others can do it. But if they think that this is a chart that someone shows up there and makes a speech, I think they'll be wrong. This is a whole new science that we have to create, and I think we have the basic capabilities to do it because we have this experience how to create markets through clinical value and you've got to translate that into economics. And we've got some real experts and some are in the room who can understand that equation. We've just got to make it relevant to specific stakeholders. Do you guys want to add to that? I know you've been through, going through this change yourself. So what do you think, maybe Mike or Chris. Chris, do you want to say something to the way we charge it?

Christopher J. O'Connell

I think our advantage -- Omar is absolutely right. There's a -- Medtronic has shaped the economics in the -- in our device health care system more than any company. Whether you talk about our expertise at the CMS level throughout the payers, as Omar said, and then the ability to bring all of the different types of technologies to bear to solve real clinical problems that also translate into economic problems. I think this is a breadth advantage, and it's something that we have the ability to mobilize also on a global scale. So I'm very optimistic about this. We're talking in these terms consistently throughout the organization, and it's exact -- it's hitting the sweet spot of where our customers are headed and what they're worried about.

Michael J. Coyle

I think the other thing I would add to this discussion is that when you look at what this marketplace is with a high-technology position preference traditionally of medical devices, it's more complex than simply other economic value marketplaces from the standpoint that at the end of the day, if you fall too behind on technology, your broader arguments won't hold because the physician will at some point step in and say, "Clinically, I can't use this in my patient." So what I think Medtronic is uniquely positioned to do is to look across these individual physician specialties, provide near-term product load that is highly differentiated, getting them through clinical-evidence generation and through investment in the next generations of technology, a level of loyalty that when you lay over on top of it, the economic value creation across the multiple service lines, it creates a stickiness or a sustainable competitive advantage when you have had your small dips in time when you're a little bit behind and you're waiting to catch up, you hold your share of position. And I think that's the situation that I see building certainly within the CVG story.

Omar S. Ishrak

I think we'll take 2 more questions, one from here and one from here.

Joanne K. Wuensch - BMO Capital Markets U.S.

Joanne Wuensch from BMO Capital Markets. Two questions. First, I hear the word -- I hear economic benefit. I understand the concept. What I don't understand is how do you measure that and how do you make sure that the dollars and cents that you're putting into it through human resources and SG&A and R&D to get better measurable products translates to dollars for you. The second question I have is for Chris. I think I saw a slide up there that said something about an INFUSE indication expansion, if I read that correctly. What is that, and where are we on PODs?

Omar S. Ishrak

Well first, how does it -- so how do we measure it? It's just like any other investment. You guys see the return in terms of increased sales as a result of that. And there you can ask, "Well, would you have gotten it anyway?" Well, if you have offerings, there are integrated offerings that we sell in a different way to a different group of customers like a payer provider network, and that's incremental. And so we're structuring measurements like that to see that this investment results in this sale because this investment has created commercial messaging of this sort and commercial focus of this sort. So this granularization and understanding of who the customer is and how it's in their financial benefit to get that, we can measure it. I mean there are certain simple types of examples like some of these pilots that we're running. Because of those pilots, in those hospitals, we're getting twice the revenue. If you hadn't done those, you wouldn't have gotten it. And so there are very clear measurements that we have that tell us whether we're in the right track or not.

Michael J. Coyle

So one that we mentioned, one specifically we point to is as we created these strategic account management functions in 15 regions across the U.S., there was a total of 60 accounts that were slotted as targeted strategic account management sales accounts. They had a 5-point spread in their growth rate over the non same accounts over the course of last year. So that's the kind of way we would look at it and then look at the contribution margin after we take out the cost associated with that.

Christopher J. O'Connell

Yes, sure. So on INFUSE, you're probably well aware that there are 3 labeled indications for a new GUC anterior fusion, open tibial fracture and CL map. And we've always had the strategy to expand indications so we can actually train and educate and promote the labeled indications. And so we have an active program in TLIF. We have a number we have amplified that we're still in discussions with FDA on, posterolateral. And so we, over time, do see the expansion into more labels so we can have a broader commercialization, training and education opportunity. And then I think you mentioned PODs, yes. I'd say in the last few years, there's been a sharp rise in position-owned distributorships. We have a very clear view on this model that there are significant conflicts of interest involved. We do not participate in any way, shape or form in these. And we think that the increased scrutiny that the PODs are under, particularly with recent investigations ordered by the Senate Finance Committee and even the Justice Department, are really slowing the momentum of these. And I think ultimately, we do see these going away because we don't believe they have a place in the market and we don't participate in any way.

Omar S. Ishrak

Question from there.

Raj Denhoy - Jefferies & Company, Inc., Research Division

Raj Denhoy from Jefferies. I wanted to ask a question on the economic value. When you start thinking about serving an increasingly integrated payer mix with both providers and purchasers, is there a time when Medtronic would consider going at risk for dealing with patient populations for some of these things like diabetes, heart failure or these large chronic diseases? Is that something you'd consider over time?

Omar S. Ishrak

I think we'd definitely consider it. I mean if you saw in the details of examples, there's already at least one manufacturer who's actually acquired a provider system. I'm not sure we'll do that, but things like that are happening. And so we have to look at ourselves very broadly as to what our offerings are. But you've got to walk before you run here. So the first step is integrate the offerings and at least learn how to do that, and the integrated offering sales to an integrated customer. What is the nature of that? Do we share some risk with that customer potentially? We've got to understand that, and we've got to be financially responsible around that. But this is, again, a dynamic environment where we've got to learn. And as these things play out, our customers' view of us will change, our view of them will change. And the more we can mirror our thinking to theirs, the better it will be. We're not going to do anything stupid here, but to the degree that they make sense, we have to be dynamic enough and fluid enough to be able to change the nature of our offerings so it fits the marketplace that we're in. Any of you want to add something to that?

Michael J. Coyle

No, I mean I think you answered it exactly right. I mean obviously, as you probably all saw, we're shaking our heads yes because I mean that's something that we're continually contemplate and look at. And I don't know whether it's all the way to exacting an acquisition, as Omar said, of a provider or whatever. But the interaction with them, the idea of saying, do we somehow take on more risk associated with this, I would argue in many of our platforms, that's what we are, in effect, almost having those conversations already with the hospitals, the providers as we go forward.

Omar S. Ishrak

Yes, and some actually, we are exploring outside the United States, pilots where we're looking at a much more comprehensive management of our department. But good partners. So it's something we've got to look at, and then as the market changes, we've got to change.

I think we've run out of time here. Thank you all very much for your attendance and for your questions. I hope you find it useful, and we'll join you for lunch. Thank you. Thank you very much.

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