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St. Jude Medical Inc. (NYSE:STJ)

Q1 2008 Earnings Call Transcript

April 16, 2008, 9:00 AM ET

Executives

Daniel J. Starks - Chairman, President and CEO

John C. Heinmiller - EVP and CFO

Eric S. Fain - President - Cardiac Rhythm Management

Michael T. Rousseau - Group President

Joseph H. McCullough - Group President

Angela D. Craig - VP - Corporate Relations

Analysts

Mike Weinstein - JPMorgan

James - Bear Stearns

David Roman - Morgan Stanley

Charles Chon - Goldman Sachs

Robert Hopkins - Lehman Brother

Steve Beuchaw - Wachovia

Michael Jungling - Merrill Lynch

Tao Levy - Deutsche Banc Securities

Timothy Lee - Caris & Company

Bruce Nudell - UBS Investment Research

Kristen Stewart - Credit Suisse

Operator

Welcome to St. Jude Medical’s first quarter 2008 earnings conference call. Hosting the call today is Mr. Dan Starks, Chairman, President and Chief Executive Officer of St. Jude Medical. The remarks made during this conference call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties.

Such forward-looking statements include the expectations, plans and prospects for the company including potential clinical successes, anticipated regulatory approvals and future product launches, and projected revenues, margins, earnings, and market shares. The statements made by the company are based upon management’s current expectations and are subject to certain risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.

These risks and uncertainties include market conditions and other factors beyond the company's control and the risk factors and other cautionary statements described in the Company's filings with the SEC, including those described in the company's annual report on Form 10-K filed on February 27, 2008, see item 1A on pages 13 through 20, and page 20 of exhibit 13 to the company’s Form 10-K.

The company does not intend to update these statements and undertakes no duty to any person to provide any such update under any circumstance. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation.

It is now my pleasure to turn the floor over to Mr. Dan Starks.

Daniel J. Starks - Chairman, President and Chief Executive Officer

Thank you, Jackie. Welcome to the St. Jude Medical first quarter 2008 earnings conference call. With me on the call today are John Heinmiller, Executive Vice President and Chief Financial Officer, Eric Fain, President of our Cardiac Rhythm Management Division, Mike Rousseau, Group President , Joe McCullough, Group President and Angie Craig, Vice President of Corporate Relations.

I want to first ask John Heinmiller to conduct his normal review of our first quarter results along with his typical update for the entire St. Jude Medical business. I will then make a few comments and open it up for your questions. Go ahead, John.

John C. Heinmiller - Executive Vice President and Chief Financial Officer

Thank you, Dan. Sales for the quarter totaled $1.011 billion, up approximately 14% over the $887 million reported in the first quarter of last year. Favorable currency translations versus last year's first quarter increased this quarter’s sales by about $45 million.

At the end of 2007, the federal research and development tax credit expired and has not yet been extended for 2008. In this circumstance, GAAP requires us to estimate and record our affective income tax rate assuming that the research and development tax credit is not extended.

For purposes of this conference call and our calculation of adjusted net earnings however, we are assuming that the tax credit will be extended for 2008, as it has been in past years. As a result comments referencing first quarter results and our guidance for 2008 including earnings per share amounts are presented based on an effective income tax rate that contemplates the extension of the federal research and development credit for 2008 retroactive to January 1, 2008.

To the extent that the federal research and development credit is not renewed, our effective income tax rate for 2008 would be higher than what is being presented during this call. Earnings per share were $0.54 for the first quarter of 2008, a 32% increase over EPS of $0.41 in the first quarter of 2007.

Before we discuss our first quarter 2008 sales results by product category with guidance for the second quarter and the remainder of 2008, let me comment on the currency exchange rates, we are currently using in our outlook. The two main currencies influencing St. Jude Medical’s operations are the Euro and the Yen.

For the remainder of 2008, we are assuming that each Euro will translate into about $1.53 to $1.58 and for the Yen we are assuming that each 100 to 105 Yen will translate into US$1.

Now for the sales by product category discussion. For the first quarter, total Cardiac Rhythm Management sales, which includes revenue from both our ICD and pacemaker product lines, were $632 million, up 15% from last year’s first quarter and above our previous guidance that total CRM sales would be in the range of $600 million to $630 million this quarter.

For the first quarter, ICD sales were $361 million, up 20% from last year’s first quarter. US ICD sales were $236 million, up 10% from last year’s first quarter. International ICD sales were $125 million, up 44% increase over the first quarter of 2007 with $30 million of the increase due to favorable foreign currency translations.

For low voltage devices, sales for the first quarter totaled $271 million, up 10% from last year's first quarter. In the United States, pacemaker sales were $122 million flat with last year's first quarter. In our international markets, pacemaker sales were approximately $149 million, up 19% from the first quarter of 2007 including a $15 million increase due to favorable foreign currency translations. For the second quarter of 2008, we expect Total CRM product sales to be in the range of $650 million to $680 million and for the full year 2008, we now expect Total CRM sales to be in the range of $2.625 billion to $2.700 billion up approximately 11% to 14% versus 2007.

Atrial fibrillation or AF product sales for the first quarter totaled $119 million, up 28% over last year and above our previous guidance about AF product sales this quarter would be in the range of $105 million to $115 million. For the second quarter of 2008, we expect AF product sales to be in the range of $115 million to $125 million. And, we now expect our full year 2008 AF product sales to be in the range of $495 million to $525 million.

Total sales of cardiovascular products for the first quarter of 2008 were $208 million, up 6% over the first quarter of 2007. Within this category of products, sales of vascular closure products in the first quarter of 2008 were $90 million consistent with the first quarter of 2007. Sales of heart valve products in the first quarter of 2008 were $78 million, an 8% increase over the first quarter of 2007. For the second quarter of 2008, we expect cardiovascular products sales to be in the range of $200 million to $215 million. We now expect full year 2008 cardiovascular product sales to be in the range of $825 million to $850 million.

Total sales of neuromodulation products in the first quarter of 2008 were $52 million, up 8% from the first quarter of 2007. For the second quarter of 2008, we expect sales of neuromodulation products to be in the range of $51 million to $56 million. We expect full year 2008 neuromodulation sales in the range of $216 million to $231 million. The geographic breakdown of St. Jude Medical sales in the first quarter of 2008 was 53% in the United States versus 47% outside the United States or OUS. This compares to 58% US and 42% OUS in the first quarter of 2007.

A detailed geographic breakdown of this quarter's sales by product shows high voltage at $236 million US, $125 million OUS, low voltage at $122 million US, $149 million OUS. Atrial fibrillation product sales at $51 million US and $68 million OUS, cardiovascular products at $86 million and $122 million OUS, and finally neuromodulation products at $43 million and $9 million OUS. The Gross Profit margin this quarter was 74.2% representing a 110 basis point improvement over the first quarter of 2007 and up 40 basis points sequentially from the fourth quarter of 2007.

For the full year 2008, we now expect gross profit margins to be in the range of 73.8% to 74.3%. Our first quarter SG&A expenses were 36.3% of net sales compared to 37% in last years first quarter as we continue to focus on leveraging investments we have made in our field sales and sales support organizations and market development programs.

For the full year 2008, we continue to forecast SG&A as a percentage of net sales in the range of 36% to 36.5%. Research and development expenses in the first quarter of 2008 were 12.2% of net sales compared to 13.1% in the first quarter of 2007.

For the full year 2008, we continue to expect R&D expense to be in the range of 12% to 13% of net sales, as we continue to balance delivering short-term results with the right investments in long-term growth drivers. Net other income was $3 million in the first quarter. For the second quarter of 2008, we expect the other income and expense line item will range from a net expense of approximately $2 million to other income of $1 million and for the full year 2008 we expect the other income and expense line item will range from a net expense totaling approximately $2 million to other income of $2 million.

For the first quarter the company’s effective income tax rate was 27.3% and for 2008 we continue to expect the tax rate to be in the range of 27% to 27.5%. As a reminder these effective income tax rates contemplate the extension of the federal research and development credit in 2008 retroactive to the beginning of the year. To the extent this is not extended our overall effective income tax would increase. We would -- we have also assumed extension of the federal research and development credit in the earnings per share guidance for 2008.

Moving on to the balance sheet at the end of March 2008, we had 558 million in cash and cash equivalents and 1.416 billion in total debt. The outstanding debt on our balance sheet includes 1.2 billion of 1.2% senior convertible debentures issued during the second quarter of 2007 and 210 million of notes issued in Japan, which are due in 2010 and bear interest at a fixed rate of 1%.

Next I want to offer some comments regarding earnings per share outlook for the second quarter and the full year 2008. We recently announced the acquisition of EP MedSystems which we expect will close in the third quarter of this year. We do not expect this acquisition to have a material impact on our 2008 earnings per share.

In preparing our earnings per share guidance we have assumed that in the second quarter of 2008 the share count used in our fully diluted earnings per share calculation will be about 352 million to 354 million shares, with the weighted average outstanding shares for the full year 2008 at 352 million to 355 million. The company expects consolidated earnings per share for the second quarter to be in the range of $0.54 to $0.56, and for the full year 2008 we now expect consolidated earnings per share to be in the range of $2.15 to $2.20.

I will now turn it back to Dan Starks.

Daniel J. Starks - Chairman, President and Chief Executive Officer

Thank you, John. St. Jude Medicals long-term growth expectations are well known. We target a minimum 15% compound annual growth and earnings per share. To reach this target we focus on a combination of sales growth and improvement in the operating margin. We regularly have said that to the extent we succeed in both sales and productivity gains we will over achieve short-term results expand long-term investments or both.

Measured against these expectations the first quarter of 2008 was another highly successful quarter for St. Jude Medical. We delivered 32% growth in net adjusted earnings per share to a combination of 14% growth in sales and a full 250 basis point improvement in net profit margin versus the same quarter one year ago.

We simultaneously increased our guidance for full year earnings per share and expanded our investment in long-term growth in the form of our announced acquisition of EP MedSystems further enhancing our atrial fibrillation growth platform.

We continue to gain market share in ICDs, pacemakers and atrial fibrillation products on a year-over-year basis and expect to strengthen all of our major growth platforms with new product launches during the remainder of this year.

Of particular note we have just announced regulatory approval of our new Eon Mini spinal cord stimulator for chronic pain applications. Eon Mini will lead probably St. Jude Medical to having the smallest rechargeable spinal cord stimulation on the market at 18cc volume and only 29 grams in weight. We expect a full launch of Eon Mini during the third quarter of this year.

Our first quarter results reinforce our confidence that our long-term growth program is on track and that 2008 will be another successful year for St. Jude Medical.

With that let me turn it back to our moderator and open it up for questions and as usual, please limit yourself to two questions, so we can get to as many people as possible. Jacky, would you open it up for questions please?

Question and Answer

Operator

Thank you. [Operator Instructions] Your first question is from Mike Weinstein from JPMorgan. Please go ahead.

Mike Weinstein - JPMorgan

Good morning and thank you for taking the question. Dan, I was hoping you could give us first a feel for what's playing out in the CRM markets. Now that the Fidelis recall activity has died down and do you sense that there has been some stabilization of market share.

If you can just comment geographically about the US and obviously Japan and then you had strong performances across a bunch of businesses the one business that is likely [ph] disappoint in the quarter was ANS and you lowered your guidance there for the year. So, I was hoping, you could just spend some more time on it. Thanks.

Daniel J. Starks - Chairman, President and Chief Executive Officer

So let me offer a couple of comments and also ask my colleagues to join in on the ICD market. Though we definitely seen the ICD market stabilize, we think that the dynamics are consistent with the expectations, we articulated at our annual investor conference two months ago of this year. So, really everything was very much as expected for a little additional color and comment, let me ask Eric Fain, President of our Cardiac Rhythm Management division to add any additional flavor that you might find appropriate. Eric?

Eric S. Fain - President - Cardiac Rhythm Management

Well Dan, I agree with your comments. I think things are looking as we had discussed at the investor conference. We are seeing things stabilize, especially if you take the entire CRM business as a whole we are seeing the normal sorts of fluctuations that were expected to see and I think that it will reinforce us the way that we are doing guidance looking at the pacemaker and ICD markets combined.

Daniel J. Starks - Chairman, President and Chief Executive Officer

And Michael as you can appreciate we'll want to wait and see the other players in the space report their numbers to really update our market model, but from our field organizations we really just very much as expected.

Let me ask President -- our Group President Joe McCullough to comment a little bit more specifically with respect to the dynamics in Japan. Joe what update would you offer with respect particularly to the impact of the Fidelis recall in Japan and what that we see here in the first quarter.

Joe McCullough - Group President

Sure, the precise impact on the quarter of Fidelis recall is certainly difficult to quantify. As everybody knows the recall had greatest impact in Japan, but we’ve been able to maintain over half of our Q4 gain in the quarter and certainly by continue to focus on strengthening our customer relationships we'd expect to continue to do that.

Daniel J. Starks - Chairman, President and Chief Executive Officer

Yeah, I think Michael we saw a little bit of hangover from Fidelis -- from the Fidelis recall in Japan and then elsewhere, which was what we really anticipated for the first quarter we thought it would take to the second quarter of this year for us to really have a completely normal steady state dynamic, but and we were particularly gratified then to see that compared with the approximate $20 million one time gain that we saw in the fourth quarter of 2007 that we really have continued to.

Although we gave back some of that one-time gain, we've continued to gain share at the same time. So, it's really all very gratifying to us. Let me move on -- I appreciate there is more in the ICD market side that people might ask, but let me move on to your question on neuromodulation.

On neuromodulation, we did lower our guidance were a little bit out of product cycle here until the third quarter of this year. We've got -- we've just received approval on the Eon Mini, but when we get that fully launched into the US market and in to Europe that will really define state-of-the-art.

It will be the smallest, longest lasting, most programmable, highest output, spinal cord stimulator it with accompanied with the broadest lead line and with the additional advantage that it can be implanted at a greater depth in any of the competitive devices, which helps protect against device erosion and also is can be an advantage with smaller patients and also an advantage just from a cosmetic perspective.

So the Eon Mini clearly will define the state-of-the-art at a point, where its fully launched, is the good news the challenge of it is that it will be the third quarter before we launch it depending on exactly, when during the third quarter we launch it will impact total year sales and so we've brought -- and we've lowered the total year range to accommodate launch sometime during the third quarter.

During the second quarter, here we think it will be a little bit challenge, prior to the Eon Mini launch. Again here the good news is that everything I articulated about the advantage of Eon Mini is true of our Eon line as well except for the smaller size. We currently with Eon will be a little bit larger than the two competitors, but we'll continue to have the longest life, most programmable, highest maximum output accompanied by the broadest lead line and expanding distribution.

So, that would be my best update on neuromodulation. The only other thing I could add on neuromodulation that would be helpful would be that although we reported 8% growth in sales versus the first quarter a year ago. First quarter a year ago we continued to have a meaningful amount of OEM business with a significant customer with whom we no longer do business as we announced about a year ago, that we were facing out that customer relationship.

The Spinal Cord Stimulation business in the first quarter year-over-year was up low double-digits. So, a little bit stronger than what we’ve actually reported due to that impact of OEM sales.

Mike Weinstein - JPMorgan

If I can just ask one quick follow-up, the pacemaker business, you articulated the business was really seem to, just kind of a track like it has been you're taking what maybe a little of shares sequentially, but the pacemaker business had a soft quarter in the US, any insights there?

Daniel J. Starks - Chairman, President and Chief Executive Officer

I think you’ll see a stronger number in Q2.

Mike Weinstein - JPMorgan

Okay.

Daniel J. Starks - Chairman, President and Chief Executive Officer

And it will really just come back to the point that we’ve made a number of times that, it's a more reflective of the business to look at the results over a couple of quarters in a row rather than in one quarter in isolation, and we have a nice confidence that we expect a stronger US pacing sales in the second quarter.

Mike Weinstein - JPMorgan

Okay. Thank you.

Daniel J. Starks - Chairman, President and Chief Executive Officer

You're welcome.

Operator

Thank you. Your next question is from Rick Wise with Bear Stearns. Please go ahead.

James - Bear Stearns

Hey, Good morning guys. It's James filling in for Rick. Just wanted to follow-up a little more on the CRM market, it's kind of been suggested by a few physicians that CRTs are starting to play more of a role over the defibrillator only, and I’m wondering what St. Jude is seeing in that regard or if that’s already happening?

Daniel J. Starks - Chairman, President and Chief Executive Officer

Let me ask Eric Fain, President of our Cardiac Rhythm Management Division, if you have any insights you care to offer Eric.

Eric S. Fain - President - Cardiac Rhythm Management

Well, I think we’ve seen that trend over the past years and that continues. The percentage of cases that our CRT versus standard traditional ICDs has continue to track up although the rate of that is leveling up, but I think people are looking for more opportunities to use CRT in appropriately indicated patients.

James - Bear Sterns

Is it something you’re seeing promoted on, due to the reverse trial or you think that something will be even more affected by MADIT up in the few years?

Eric S. Fain - President - Cardiac Rhythm Management

I don’t think that’s been impacted by the reverse trials since the results are just announced and even there it’s – that reserve really focused on a patient population, it’s not currently indicated. So, for market expansion, I think in that patient population the major impact would be we really have to look for the MADIT-CRT results that will be forthcoming.

James - Bear Sterns

Okay, great. Thanks a lot.

Operator

Thank you. Your next question is from Glenn Reicin with Morgan Stanley. Please go ahead.

David Roman - Morgan Stanley

Hi. Good morning. It’s David Roman filling in for Glenn. Just one operational question and one financial question. On the operational side, could you either quantitatively or qualitatively give us a sense as to what lead growth was versus generate growth on the defibrillator side?

Daniel J. Starks - Chairman, President and Chief Executive Officer

David, qualitatively, we continue to increase our so called lead default ratio [ph]. So, to the question underlying the data we certainly see some meaningful strength and competitive advantage in our 7- French high voltage ICD line playing out in the market in the way that we expect it to see.

David Roman - Morgan Stanley

And, on the 7 French leads side, have seen that market stabilize, posted else or is that continuing to bleed?

Daniel J. Starks - Chairman, President and Chief Executive Officer

I don't think we could comment on the market itself to the extent that that would ask for insides into Medtronic device usages for us. Though, given that we now have the only 7 French leads and two such lead lines on the market, we see good growth in our two 7 French lead lines and so to the extent that that defines the market. I guess I have to tell you that we see the market for 7 French high voltage leads continuing to expand.

David Roman - Morgan Stanley

Okay. And, then financially John, it sounds like the share count guidance for the full year is a little lower than what you gave on last quarter's call. Could you give any commentary on what you're spending on either share repurchases or there is something going on the option side?

John C. Heinmiller - Executive Vice President and Chief Financial Officer

Well I think, we just fine tuned our estimates a little bit. We do have a $300 million share repurchase authorization available to work with during the year.

David Roman - Morgan Stanley

And, did you use any of that in the first quarter?

John C. Heinmiller - Executive Vice President and Chief Financial

Officer

No.

David Roman - Morgan Stanley

Okay. Thank you.

Daniel J. Starks - Chairman, President and Chief Executive Officer

You’re welcome. Jackie, go ahead.

Operator

Thank you. Your next question is from Lawrence Keusch with Goldman Sachs. Please go ahead.

Daniel J. Starks - Chairman, President and Chief Executive Officer

Larry, are you there?

Charles Chon- Goldman Sachs

I'm sorry. Hi, this is Charlie Chon on for Larry. How is it going?

Daniel J. Starks - Chairman, President, Chief Executive Officer

It's good.

Charles Chon- Goldman Sachs

Just a quick question on gross margins, gross margins came in better than expected for the quarter, saw some nice improvement there. What exactly happened and what is lending the visibility for the increase in gross margin guidance for the full year?

Daniel J. Starks - Chairman, President and Chief Executive Officer

Let me ask John Heinmiller, our Executive Vice President and Chief Financial Officer, if you have any comments on gross margin and gross margin for the year, John?

John C. Heinmiller - Executive Vice President and Chief Financial Officer

Well, I think we're right on track with where our expectations are to gain improvements in the margins as we talked about in our analyst meeting in February, and we just have a number of manufacturing improvement activities going on along with the product mix. And, so with this first quarter here being off to good start, we're comfortable with now the guidance we've given for the full year.

Charles Chon - Goldman Sachs

Okay great, thanks. And then, just to switch gears, looking at the heart valve segment, I was wondering can you just give us a quick update as to what's driving the growth there, the solid performance there.

John C. Heinmiller - Executive Vice President and Chief Financial Officer

Let me ask, Mike Rousseau, Group President, with particular focus on all of our product divisions to comment a little bit with respect to the heart valve franchise.

Michael T. Rousseau - Group President

Yes, we're seeing a good growth in both our historical business. The mechanical valve side, we're doing better than expected. US and OUS markets are expanding for us on the mechanical side. On the tissue side, we continue to grow our OUS business and have recently launched the epic series, which put anticalcification on the tissue valves and that's allowed us to expand in that space.

Charles Chon - Goldman Sachs

Perfect, thank you.

John C. Heinmiller - Executive Vice President and Chief Financial Officer

You're welcome. Jackie, next person?

Operator

Thank you, your next question is from Bob Hopkins with Lehman Brother. Please go ahead.

Robert Hopkins - Lehman Brother

Hi, thank you and good Morning.

John C. Heinmiller - Executive Vice President and Chief Financial Officer

Good Morning

Robert Hopkins - Lehman Brother

You're raising your EPS guidance for the full year versus the guidance you provided on the fourth quarter call by roughly $0.78. I was wondering if you could break down that increase into as many buckets as you're willing to talk about, in terms of, what exactly is driving that increase and specifically, I'm curious to what degree is the greater currency benefit driving the increase versus operating issues such as cost to good sold and top line. I wonder if you can just talk about that a little bit?

Daniel J. Starks - Chairman, President and Chief Executive Officer

Sure, the -- maybe a starting point let me offer some comments. On the topic of the currency in particular I will defer to John Heinmiller, but the starting point was the increase in our earnings per share guidance is that we really have to be realistic that we've just reported adjusted net earnings per share here in the first quarter of $0.54. It was a solid $0.54 and if you just analyze that over the next -- over the remaining quarters well that brings us up to within the new range that we have provided that would be the starting point.

The second point would be that we really do expect to see some continued growth and some continued expansion in our earnings during the remainder of this year. So, all of that tempered by our ability to continue to expand our investment and long-term growth drivers is what we took into consideration when we expanded the earnings per share guidance, the $0.07 that you have referenced. So, it -- another way to say would be that the business is just solid on track and on the strength of our first quarter results. We are willing to be a little less conservative with respect to expectations for the remainder of the year.

On the topic of foreign currency translations and particularly John is there any color commentary that you could offer with respect to foreign currency translation and that impact on earnings per share?

John C. Heinmiller - Executive Vice President and Chief Financial Officer

I would really echo Dan’s comments and I think as we saw the sales results in particular in the ICD business and in CRM business come in here in the first quarter and then look to as Dan mentioned the first quarter, being a good start to this year and how that annualizes and then in the first quarter really the currency came in right where -- right within the range that we had talked about in providing some insight into how we developed our outlook here in the fourth quarter.

And then the currency obviously has become even more favorable and we'll have to see we've tweaked our outlook here on currency going forward and baked that into our thinking and we are cautious about that but primarily the core fundamentals of the business just being on track gives us the confidence to raise that guidance.

Daniel J. Starks - Chairman, President and Chief Executive Officer

And Bob I know that you've commented on the natural hedge that we have that impacts the differences in currency translations for the benefit of others on the line. I just want to remind people that when we look at FX impact on earnings per share we need to take into account that we manufacture in Sweden, we manufacture in Canada, we manufacture in Brazil; unlike some of our competitors we really have a larger percent of our business in international division activities outside the United States with all of those activities at currencies other than the US dollar. So there's a number of factors that offset the US dollar impact on earnings per share.

Robert Hopkins - Lehman Brother

Thanks and then just one quick follow-up on that. You guys obviously gave the very specific top line benefit from currency in the quarter on a year-over-year basis. I was wondering on the bottom line impact in that $0.54 that you announced. So can you tell us what the currency benefit was in the quarter on the EPS side you gave it to us on the top line just wondering if you can also give it to us on the bottom line?

Daniel J. Starks - Chairman, President and Chief Executive Officer

Let me add, John do you have any comment to that.

John C. Heinmiller - Executive Vice President and Chief Financial Officer

Well, I think what, again I would repeat Dan's comments on how that natural hedge that we have in all of the operations that we are managing throughout the world and those expenses are getting translated back and we really don’t break it down where we net that all down to earnings per share.

Robert Hopkins - Lehman Brother

Okay. And then lastly, do you know when you should expect to hear on the tax credit. Is that something you should hear about in the next couple of couple of weeks?

Daniel J. Starks - Chairman, President and Chief Executive Officer

Go ahead, John.

John C. Heinmiller - Executive Vice President and Chief Financial Officer

I was going to say that, when you look back at the tax credit, it was first enacted in 1981 and then has been extended retroactively in each year where it expired 13 times since then. And we see some legislation starting to come out the Senate Finance Committee along these lines. So we would expect given that history and given the election year that we are in that this will get extended and it will be retroactive to the beginning of the year. But we anticipate that it will probably be more towards the end of the year and so to the extent that we are going to have on a GAAP basis, a wind fall if you will in the fourth quarter that’s when it happens, we thought it was more meaningful to reflect that during the year and that’s why we've shown the adjusted earnings per share.

Robert Hopkins - Lehman Brother

Thank you very much.

Daniel J. Starks - Chairman, President and Chief Executive Officer

Jackie, next question.

Operator

Thank you. Your next question is from Larry Biegelsen with Wachovia. Please go ahead.

Steve Beuchaw - Wachovia

Thanks and good morning. This is Steve Beuchaw [ph] for Larry. Given that we have you all on the line, you just announced the EP MedSystems deal. I thought I would take the opportunity to ask you to give us your perspective on how you think that business contributes, not so much in 2008, but more longer term and more strategically to your AF business and then I have one follow-up.

Daniel J. Starks - Chairman, President and Chief Executive Officer

Sure. Well, there is really a lot to say about the EP MedSystems. It’s a perfect strategic fit with us, from a number of perspectives. First -- as people appreciate, we have a strong focus on the long-term growth opportunity available in the atrial fibrillation market. We have the leading program in that space. We're investing more to develop the potential of the atrial fibrillation market than any other device company is.

It makes sense for us then to take appropriate steps to get as much benefit as we can, for all of the investments that we are making to develop the atrial fibrillation space. The two new growth drivers in the EP MedSystems program, represent about -- that EP recording system market segment and 2D ICE segment represent about 7% of the total developed market in the AF and broader EP space.

So, what we've done with this acquisition, is we positioned ourselves to fully participate in a 7% segment of the market that we have not previously participated in, long-term that just makes all the sense in the world and so we're thrilled to be able to announce the acquisition that we've come to terms with our new colleagues here at EP MedSystems.

Additionally, when we think about what does it take to make the atrial fibrillation procedures more user-friendly and to help us speed adoption to the extent that we can provide as much of the technology as possible, make sure that it all interacts and works well together. That can only be helpful to physicians and ultimately helpful to the ongoing development of the market and ultimately more beneficial to patients.

So, those were a couple of high level comments there is then and addition we look at the part of the value proposition that EP MedSystems has created and the good news is EP MedSystems has some very high quality, competitive leading technology in components of the EP recording systems, the WorkMate platform and also two dimensional ICE ViewFlex II and upcoming ViewFlex II PLUS ICE catheter system.

The bad news is that the EP MedSystems is really just under resourced and so with there is in 2009, we expect to really be able to leverage our international infrastructure only about 24% of EP MedSystems. Global sales currently come from markets outside the United States versus our 47% here in our first quarter.

So, in the same way that with our acquisition of ANS and our bring you the neuromodulation platform in to St. Jude Medical, we think that there will be some low hanging fruit that we can spend the remainder of 2008 preparing to capture leveraging our international infrastructure with these two new growth drivers in 2009.

Those are couple of comments that then as soon as I start to wrap it up more thoughts come to mind. The another way to think about the value of this acquisition for us is that EP MedSystems core technology strength has been primarily in the EP recording system side. I think that as EP MedSystems is being very strong with the raiser of they have not really had a competitive raiser blade line so to speak as EP Catheter line which obviously is core strength to St. Jude Medical.

Another synergy we build to bring to this is that the -- we'll be able to leverage the EP MedSystems ICE Transducer Technology with our broader catheter -- catheter control technology. So, there is just so many different ways that this that we're creating value by bringing the EP MedSystem and the St. Jude Medical programs together.

Steve Beuchaw - Wachovia

Thank you. And then one follow-up regarding international ICD market growth, in the US we saw a meaningful disruption not too long after recall of the Fidelis lead in November, December. And from what we've seen that seems to reasonably well cleared it up -- cleared to [inaudible] already here in the first quarter.

In the international markets it sounds like what you're saying is that, there was more of a lag to the impact of Fidelis. Can you give us a little bit more color on what it is you're seeing that gives you that impression and how it is you are confident that we can see a rebound in growth rates once the first quarter '08 impacted Fidelis, where is off and I'll drop. Thanks.

Daniel J. Starks - Chairman, President and Chief Executive Officer

Yeah, our comment of hang over was really restricted to Japan and in Japan keep in mind the couple of things, one that and Medtronic's quarter is different three month period than the quarter at St. Jude Medical and the quarter of Boston Scientific. So, that complicates our Q1 results and the kinds of conclusion that you can draw about the market that would be the first thing.

Second thing, is that the Medtronic Quattrode lead line as I recall a little was not on the market in Japan for our full quarter, I believe. They came into the market during the quarter if I'm not mistaken and so that's really what we're referring to by way of hangover in Japan, but Japan only.

Jackie, go ahead with the next question.

Operator

Thank you. Your next question is from Michael Jungling with Merrill Lynch. Please go ahead.

Michael Jungling - Merrill Lynch

Thank you, Gentlemen. I have three quick questions. Firstly, on the EBIT margin, if I use my calculations it appears that foreign exchange may have given you an EBIT margin benefit of around 1.5 points and about an underlying margin expansion of 130 basis points. I was just wondering, whether these calculations are broadly correct.

Secondly, on the Unity platform, can you give us some details as to what percentage of your total CRM units are on the Unity platform at the end of Q1 of 2008, and what it was for the fourth quarter of 2007? And, finally on hedging, would you consider taking out some hedging contracts for the next twelve months? That’s all I have. Thank you.

Daniel J. Starks - Chairman, President and Chief Executive Officer

Michael, you asked all good questions. Your questions will be better than our answers. We are not going to directly answer your question about Unity as a percent here for Q1 versus Q4. We don’t breakout our sales results with that kind of specificity. And, I will say that the Unity, the uptake on the Unity platform has been very positive and strong and that undoubtedly is a factor in our productivity gains and undoubtedly a factor.

And I think it will really be more of a factor going forward as you see the speed of iteration and the capacity that’s in that Unity platform for us to continue to add additional technology. But, as far as breaking out specifically, we’ll keep that to ourselves. On the topic of considering hedging, we always consider all possibilities here that one would put on a checklist for our business and we’ll certainly consider it.

With respect to EBITDA and FX impact, I think we’ve really said about as much on FX as we can. John, is there anything more that that you could offer up on the FX side, I think you pretty said as much as possible in answer to the previous questions about FX impact on earnings per share.

John C. Heinmiller - Executive Vice President and Chief Financial Officer

Yeah, I think, we’ve been experiencing a favorable FX environment here for sometime. And, so that’s been in our historical results. And, this quarter the exchange rates were in line with where we established our outlook. The improvement was only about 2% on a sequential basis from the fourth quarter. So, it really is like I say, there is not a whole lot more to say about it then that.

Michael Jungling - Merrill Lynch

And, maybe a quick follow up on sales growth. Do you have any idea what the impact was to sales growth as a result of the unequal selling days in Q1 of this year versus last year?

Daniel J. Starks - Chairman, President and Chief Executive Officer

No. I am sorry, Michael, that’s the direct answer, I can't give you any data on that.

Michael Jungling - Merrill Lynch

Okay. Thank you.

Operator

Thank you. Your next question is from Tao Levy with Deutsche Banc. Please go ahead.

Tao Levy - Deutsche Banc Securities

Hi, good morning. I just have a couple of quick questions here. It look, when I do the quick math, it looks like your, the top end of your revenue guidance for the full year is coming in a little bit, yet you commented earlier on your earnings guidance is going higher.

Is that more a reflection sort of improvements on the operational side, where you got may be gross margins a little bit better R&D, maybe a little bit less than you are expecting just to get you to that $0.07 increase on the upper end of your guidance?

Daniel J. Starks - Chairman, President and Chief Executive Officer

I would just wait another quarter Tao to draw any additional conclusions. What the message that we are giving with our guidance change is that we are just acknowledging that Q1 was a very strong quarter and that it bodes extremely well the starting for the remainder of 2008, and so we're just -- we're giving that up so to speak.

With respect to revenue, it may very well be that that we’re not intending to give a message at all that revenue has -- our revenue outlook has weaken. So, to the extent that you read between the lines to potentially draw that conclusion, that's -- that reflects on poor messaging on our part. That's not our massage at all. The sales results here in the first quarter were encouraging to us -- the sales growth of our businesses is very nicely on track.

We brought up the lower end of our sales guidance on CRM, which was intended to message strength and confidence. We raise the sales guidance for the year on AF and on our cardiovascular business. Again, expressing confidence in stronger outlook than one quarter ago, offset little bit by the -- on the neuromodulation side, which really is just a blip due to product cycle timing and not a reflection on the core strength. They’re core growth drivers of the business and anyway all of the that is intact and all remains very promising for robust future sales growth. So, so --

Tao Levy - Deutsche Banc Securities

No, no that's really helped. I just said, we just – I wasn't sure about those two dynamics, such as they weren’t making sense, but now it seems like, maybe we'll see some better revenue guidance on upper end in future quarters just given the strength in Q1?

Daniel J. Starks - Chairman, President and Chief Executive Officer

We'll do our best.

Tao Levy - Deutsche Banc Securities

I know, maybe you give, I would love to get some comments maybe on pricing of the ICD market, that will be helpful, and also any thoughts on sort of the new implants versus replacement on ICDs both in the US and is that different from what you're seeing outside US? Thanks.

Daniel J. Starks - Chairman, President and Chief Executive Officer

On the topic of the ICD market and our market analysis. Let me ask the President of our Cardiac Rhythm Management Division, Eric Fain, if you have any comments on. Eric, particularly, may be taking Tao's second question first on the topic of new implants versus replacement. Do you have any color that you can offer that way?

Eric S. Fain - President - Cardiac Rhythm Management

Sure Tao, in terms of your question of international versus US, certainly in the US, the replacement side is a larger percentage and that just reflects the history of ICD implants and the maturity of the market in the US versus the international -- the international side. And, for the remainder of this year, we would continue to see the replacement side of things being the driver overall.

And, on the topic of average selling prices for ICDs, we don't offer a lot of insight. It’s something we pay a lot of attention to. It's, as I -- we tend not to comment publicly on all of our analysis on ASPs. It’s partly a function of the geographic mix and partly a function of all of the generations of technology, we're we so often not really comparing apples-to-apples, we're more comparing apples-to-oranges on ASPs, when you mix all of that in the view, when you average all of that out and smooth it, that we've indicated that we expect to see pressure on those total global average selling prices somewhere in the range of 2% to 3% a year on a sustained basis and our experience in Q1 was consistent with that.

Tao Levy - Deutsche Banc Securities

Okay. Thank you very much.

Operator

Thank you. Your next question is from Tim Lee with Caris & Company. Please go ahead.

Timothy Lee - Caris & Company

Thanks for taking the question. Just to -- actually I had a quick follow-up on the FX side. Given where your current rates, I mean, how should we think about the top line impact for the full year? I mean, is that a reasonable thing that we can get a 4% to 5% benefit for the year?

Daniel J. Starks - Chairman, President and Chief Executive Officer

Tim we are always perplexed with exactly what to do on FX outlooks. We are impressed that when we worked to predict where the FX translations will be several quarters out, we are impressed by how long we tend to be. So, it's just, currently the impact is in the range that you have indicated, and but we are not very good at forecasting FX rates very far out.

Timothy Lee - Caris & Company

Fair enough and just a quick follow-up on the ICD side as well. I know a lot of --- your expenditure on sales force they came off, often not competes here at the end of last year. So, are we starting to see any tangible revenue contribution from those reps that are now fully functioning or can we see more of a step function here as the quarters progress. Thank you.

Daniel J. Starks - Chairman, President and Chief Executive Officer

So, the, just to kind of dissect the words a little bit. On seeing contribution we would better be, on step function no. So, the kind of address both of those we have indicated regularly that we did not expect to see a step function on the benefit of the field expansion, and on the benefit of the exploration of non-compete agreements.

We -- there are so many factors that are coming into confluence with the strength of our new products with the selling cycles associated with the flow of new products during the last two years and again here during this year with the progress we have made on contracting and with the selling cycles that relate to the commencement of new contracts and with the expansion of the field organizations.

So, putting all those things together, we have been disciplined in telling people, please don't expect to step function and we expect instead to see look to our guidance and our guidance will take all of those factors into account to the best of our ability. As to getting productivity from any member of our field organization, when I say we better be, we really expect productivity and accountability from everybody in our field organization and that includes the people that we added during the four quarters that ended the first quarter of 2007.

Timothy Lee - Caris & Company

Great, thank you.

Daniel J. Starks - Chairman, President and Chief Executive Officer

So maybe if it's helpful again I'd say that the fundamentals of our ICD business are as expected and on track and support our optimism that we will continue to take market share.

Timothy Lee - Caris & Company

Thank you.

Operator

Thank you. Your next question is from Bruce Nudell with UBS. Please go ahead.

Bruce Nudell - UBS Investment Research

Thanks. Good morning and thanks for taking the question. Dan I have couple of market questions on high-power f. Just to put a finer point on I think it was Tao’s question. Are de novo implants in the US market flat or shrinking or growing a little bit?

The second ICD market question is could you estimate for '08, what you guys foresee OUS on an operational revenue basis for ICDs? And the third question pertains to AF and I'll wait till you guys answer the first two?

Daniel J. Starks - Chairman, President and Chief Executive Officer

On de novo. Bruce, our comments would – you would really have to be limited to our own experience. Our de novo implants are increasing and that's to the extent that that reflects on our gain of market share and the extent to which that reflects some growth into market is something that would be beyond our comments, but our growth in de novo implant is clearly increasing.

And on the topic of international ICD market growth, maybe I could deferred to Eric and latter I could answer maybe I'm just offer a couple of comments and ask Eric if you have anything to add.

Bruce, the way that we think about the ICD market is globally and then also as an integrated market with the pacing component of the mix. And so, we've really stopped breaking out separately in our comments and expectations and guidance specifics on international versus US ICD versus pacing.

We said generally that we expect to see double-digit growth in the teens market growth internationally for all of the reasons that I think presented in our Investors Conference in February. The implant per million -- as I can't remember all of the data Eric might have it fresh.

But in some of these major markets the implants per million are less than one versus something like 600 implants per million here in the US and in every single international market the implants per million are far lower than in the US even to the extreme of less than one per million.

So, there is so much potential in the global markets for growth in the mid-teens on a sustained basis even with extremely modest penetration that we think long-term we will continue to see double-digit teens of international market growth.

To us for our business and I appreciate that you're particularly a student of the analytics on the ICD market. We think about a little bit differently just in that, to us its all about our business. We're a little bit self centered that way.

In our business, that we look at what are we -- what can we expect from the growth of the global pacing and global ICD market. As core growth upon which we then need to layer our share gains. And we expect something in the range of mid to upper single-digit global pacing in ICD market growth as a basis for our long-term growth expectations and although there is a lot of different ways to get there. Everything that we see still reinforces our confidence and expectation that we will see at least that level of global pacing in ICD market growth.

Bruce Nudell - UBS Investment Research

That’s fine, I guess the other question I had is at the Analyst Day, you folks put out AF at $400 million in 2007, $1.5 billion in 2012. Is it inappropriate to think of that as that differential as largely being a ascribable to AF procedures at a $4,000 per case price point, or is there a lot more in that revenue delta?

Daniel J. Starks - Chairman, President and Chief Executive Officer

Couple of things, one is that it would be important for everybody to be precise on the context and words and qualifications from my presentation at the February meeting. And so I -- we did not put out guidance for $1.5 billion of AF. We again, that I appreciate that if some would be a little bit casual in -- I don’t mean you Bruce, but if some would be a little bit casual in paying attention to exactly the context and exactly what that presentation was working to help provide insights for, I can see how a person would talk that way, but that was not the point of my comments. And, so I wouldn't want to then offer a specific bridge to get there because that wasn't the point I was making in the first place.

So, that's one thing. The second thing would be that we indicated that we expect the growth in our Atrial Fibrillation business to be partly a function of expansion of product lines as well as a function of continued growth and market development into the unmet need of patients suffering from Atrial Fibrillation.

And so, on the topic of expansion of product lines, we've now provided an example of that. A one quarter ago, the market space we were in was a $100 million less than it now is or it will be at the point where we will close on our acquisition of EP MedSystems. The EP recording spaces market segment is one we didn't previously participate and it’s a little bit over at $50 million developed market.

We can imagine how that segment will continue to expand as more and more of cardiology practices around the world, particularly outside the United States, add electrophysiology components to their cardiology practice and then add Atrial Fibrillation ablation procedures to their electrophysiology practice and what impact that will have on opening new EP labs, and what impact that will have on the demand for EP recording systems beyond today's demand.

Similarly with respect to the two dimensionalize [ph] market that was, that's another, may be a little bit less but almost $50 million segment we were not in a year ago, a quarter ago that we have now made clear we are entering. So, you have to add product line and market segment expansion as well as market development growth as well share gain together to anticipate the opportunity for the growth in our Atrial Fibrillation growth platform.

Bruce Nudell - UBS Investment Research

Thanks very much that’s very helpful.

Daniel J. Starks - Chairman, President and Chief Executive Officer

You’re welcome. Maybe, we will take just one last question. Jackie is there another question on the line?

Operator

Thank you. Your final question is from Kristen Stewart with Credit Suisse. Please go ahead.

Kristen Stewart – Credit Suisse

Hi, thanks for taking my question. I have – I guess wanted to get a little bit more details on the cardiovascular business. I know you touched a little bit earlier on heart valves. I am little bit surprised given the waiting outside the United States. That guidance wasn’t raised a little bit more. Can you just talk a little bit about what’s going on in Angio-Seal, and kind of the expectations for heart valves going forward since you came in, little bit above where your first quarter guidance was on a consolidated basis?

Daniel J. Starks - Chairman, President and Chief Executive Officer

Kristen sure, that the, on the topic of our guidance and the extent to which we raised guidance, we just keep in mind that it’s very competitive market. That we continue to not yet have complete line of stented tissue valves with respect to the valve side of the business. There may very well be additional entrance into the vascular sealing side of our total cardiovascular business.

We don’t have really good clarity as we participate in a small way in a number of these interventional cardiology procedures. We perhaps have a little less visibility than some in total procedure growth and pressure on procedure growth in the stent space in particular which varies on use of vascular sealing device.

So, I think -- and then generally we don't look to our cardiovascular growth platform as being one that in the near term ought to draw a lot of attention for additional contribution to growth. We've generally said that for the time being, we think it's realistic to talk in terms of something above 5% growth on that platform.

The results of the last few quarters have been consistent with that expectation. The challenge for us in our cardiovascular division really is to add additional growth drivers in a sensible way. We -- and until we have added additional growth drivers in a sensible way I think we just want to hold the expectations down for growth contribution from the cardiovascular platform.

Kristen Stewart - Credit Suisse

Did you breakout what the apex implications for cardiovascular. I don't know if you have it specifically for heart valves or Angio-Seal or can you tell us what the US or US breakouts are?

Daniel J. Starks - Chairman, President and Chief Executive Officer

I actually don't have those notes in front of me and so I can't remember if we broke it out or not exactly. And so I'm sorry that I just have to say the transcripts are reflected on. I apologize and maybe in some follow-up we can clarify what the date is that we provided I don't have it at my finger tips.

Kristen Stewart - Credit Suisse

Thanks very much.

Daniel J. Starks - Chairman, President and Chief Executive Officer

You're welcome. And so I'd like to thank everybody for joining us today and turn it back to our moderator Jackie for concluding comments. Jackie, please go ahead.

Operator

Thank you. Today's call is being recorded and will be available for replay beginning at 12 PM Eastern time. The dial-in numbers are for the US 800-642-1687 and for international 706-645-9291 and enter the pin number of 38025359. Thank you. This does conclude today’s teleconference. Please disconnect your lines at this time and have a wonderful day.

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Source: St. Jude Medical Inc. Q1 2008 Earnings Call Transcript
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