Boston Scientific Corp. Q2 2008 Earnings Call Transcript

| About: Boston Scientific (BSX)

Boston Scientific Corporation (NYSE:BSX)

Q2 FY08 Earnings Call

July 22, 2008, 08:30 AM ET.

Executives

Larry Neumann - IR

James R. Tobin - Director, President & CEO

Samuel R. Leno - EVP for Finance and Information

Analysts

Lawrence Keusch - Goldman Sachs

Frederick Wise - Leerink Swann LLC

Tao Levy - Deutsche Bank Securities

Bob Hopkins - Bank of America

Michael Weinstein - J.P. Morgan

Joanne Wuensch - BMO Capital Markets

Michael Jungling - Merrill Lynch

Philip Legendy - Thomas Weisel Partners

Kristen Stewart - Credit Suisse

Bruce Nudell - UBS

Larry Biegelsen - Wachovia Capital Markets, LLC

Matthew Dodds - Citigroup

Sara Michelmore - Cowen

Erica Selin - Stanford Group Company

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Second Quarter Boston Scientific Earnings Call. At this time, all participants are in a listen-only mode. Later we'll conduct a question-and-answer session, with instructions being given at that time. [Operator Instructions]. As a reminder, this conference is being recorded and I'd now like to turn the conference over to your host, Mr. Larry Neumann. Please go ahead.

Larry Neumann - Investor Relations

Thank you, Rochelle and good morning, everyone. Thank you for joining us. With me on the call today are Jim Tobin, Chief Executive Officer, and Sam Leno, Chief Financial Officer. We issued a press release yesterday afternoon announcing our second quarter earnings results. Key financials are attached to the release and we've also posted schedules to our website, which you'll find useful. The agenda for the call will include a review of the Q2 financial results, as well as, Q3 guidance from Sam, and an update on the CRM, Cardiovascular, and other businesses from Jim. Jim will also provide some overall perspective on the quarter and then we will take your questions.

Before we begin, we will be making some forward-looking statements on the call today. So I'd like to remind everyone of the Safe Harbor Statement. This call contains forward-looking statements. The Company wishes to caution the listener that actual results may differ from those discussed in forward-looking statements and may be affected by, among other things, risks associated with our financial performance, our restructuring plan, our programs to increase shareholder value, new product development, regulatory approvals, litigation, our growth strategy, the Company's overall business strategy, and other factors described in the Company's filings with the Securities and Exchange Commission.

I'd now like turn the call over to Sam for a review of the second quarter results.

Samuel R. Leno - Executive Vice President for Finance and Information

Thanks Larry. I'll begin my comments this morning about our second quarter results by first discussing revenue. Consolidated revenue for the second quarter was $2.024 billion, exceeding the midpoint of our guidance range of $1.950 billion to $2.075 billion. This represents a 2% decrease compared to the second quarter of last year and a 1% decline compared to last quarter's revenue. As we've discussed last quarter, we completed the divestiture of our five non-core businesses that we previously announced. And excluding the impact of these businesses in both years, consolidated pro forma revenue for the second quarter was $2.005 billion representing a 4% increase over the $1.932 billion in the second quarter last year and a slight decrease versus last quarter's revenue of $2.014 billion. Compared to the foreign currency contribution assumed in our second quarter guidance range, foreign currency contributed a positive $10 million to our second quarter sales results. Overall, the contribution of foreign currency to sales growth to the second quarter of 2008 was approximately $100 million or positive 5%.

Compared to the second quarter of last year excluding divestitures, domestic revenue declined 3%, while international revenue increased 13% and was essentially even to prior year in constant currency. Jim will provide a broader overview of our businesses by major product category, but I'll share the revenue highlights at a higher level, as well as, the DES and CRM market dynamics for the quarter. Worldwide drug-eluting stents came in at $382 million at the midpoint of our guidance range of $360 million to $405 million and down 13% from the second quarter of 2007. Geographically, U.S. DES revenue was $175 million, exceeding the midpoint of our guidance range of $160 million to $185 million and 30% below the second quarter of last year.

International drug-eluting stent sales were $207 million and slightly below the midpoint of our guidance range of $200 million to $220 million and represents an increase of 10% over the second quarter of 2007. Included in our U.S. DES and total sales results for the quarter, is a reduction of approximately $22 million of revenue for the expected returns of customer-owned DES product in anticipation of our new drug-eluting stent platforms being launched in the third quarter.

In the third quarter 2008, we expect to ship new replacement products to replenish customer stock for the return of TAXUS Express, as we launch TAXUS Liberte. These replacement shipments should result in incremental revenue over and above our normal run rates. And excluding this reserve, U.S. drug-eluting stent revenue was $197 million in the second quarter.

I'll now spend a few minutes on the market dynamics in the DES market during the second quarter. We estimate the worldwide DES market in the second quarter at about $1.050 billion with the U.S. market at about $420 million. These estimates include the impact of the sales return reserve that we discussed about. U.S. PCI volume in the quarter was about 251,000 procedures and that's consistent with last quarter but up 3% over the second quarter of 2007. We estimate U.S. DES penetration was 66%, which represents a 3 percentage point increase from last quarter's 63%. This is the second quarter of increasing U.S. DES penetration rates, as well as, stable PCIs both of which continue to demonstrate that the health of the DES market is improving.

Combining stent procedure volume, as well as, stents per procedure, we estimate that the U.S. DES unit market was approximately 333,500 units for the quarter. We estimate our U.S. market share for the second quarter, excluding the sales adjustments made for expected returns, at about 45%. This is down five points as expected from the first quarter share of 50% as result of Medtronics' entrance into the market late in the first quarter. The reduction in sales were expected to return in the second quarter, should be offset by the incremental sales of TAXUS Liberte resulting from replenishing customer stock for the return of TAXUS Express. This is expected to occur in the third and fourth quarters, as we launch TAXUS Liberte and therefore should add to our sales growth in both of those periods. Based upon an assumed adjusted U.S. market of $440 million in the second quarter, which includes adding back our sales return reserve, we estimate that Endeavor gained market share during the quarter to approximately 18% with Johnson & Johnson declining to about 37%. TAXUS pricing in the U.S. was down only 1% sequentially and 6% versus prior year, while stents per procedure remain consistent. While we expect to see some continued price pressure with more competitors in market, we have been able to maintain our premium price on TAXUS versus the competition.

The international DES market remains strong for the quarter with 301,000 PCI procedures in Europe, Middle East, and Africa (EMEA), over 6% over last year. Penetration in EMEA grew 3% to 49% and was approximately 60% in our Inter-continental region. Boston Scientifics' market share in EMEA is in the mid-30s and remains stable in Japan in the mid-40s. Combining this with our U.S. market share, we estimate our second quarter worldwide market share, excluding the sales return adjustment, to be about 37%.

Now I'll share a few comments on our CRM business. Our CRM team delivered a solid quarter, posting the highest quarterly revenue since the acquisition with double-digit sales growth worldwide. Reported revenue of $578 million represents a 10% increase over the $524 million in the second quarter of last year. U.S. CRM revenues were $364 million representing a 10% increase over prior year, while international CRM sales were $214 million, an increase of 11% over prior year. Worldwide ICD sales of $420 million were near the midpoint of the guidance range of $410 million to $440 million and 11% over the second quarter of last year. ICD sales in U.S. were $276 million, that's a 9% increase over last year and at the low end of our guidance range of $270 million to $290 million. International ICD revenues of $144 million were at the midpoint of our guidance range of $140 million to $150 million and represent a 16% increase over last year.

Our other divisions and product categories delivered very good sales results in the quarter. Excluding revenue from our five recently divested non-core businesses, our non-DES and non-CRM worldwide revenues increased 8% over prior year to $1.045 billion. This includes continued strong performances by our Endosurgery businesses with a 12% increase over prior year, including Endoscopy sales of $245... $243 million representing a 13% increase in Neurology sales of $109 million representing a 9% increase. In addition, our Neuromodulation business continued its exceptional performance with 20% growth over prior year and, in summary, because of the strength of our diversified portfolio of businesses, we increased our worldwide revenue by 4% and OUS revenue by 13% over the second quarter of last year.

Reported gross profit margin for the quarter was 70.2%, which is 150 basis points lower than the first quarter of this year and 260 basis points lower than the second quarter of last year. Adjusted gross profit margin for the quarter, excluding acquisition and restructuring-related charges was 70.3%, which is 150 basis points lower than last quarter and 260 basis points lower than the second quarter of 2007. As has been the case since beginning of 2007, revenue mix was a key contributor to the gross profit compared to prior year. The lower mix of DES to total revenue resulting from both decline in the U.S. DES market versus prior year, as well as, our estimated market share in the quarter, contributed to the reduction in gross profit margin compared to last year. The weakening of the U.S. dollar and the resulting settlement of our foreign currency hedge contracts in cost of sales also eroded our gross profit margin by about 100 basis points compared to last year.

Our reported SG&A expense in the second quarter were $655 million, which was 13% lower than second quarter of last year and 1% lower than last quarter. Adjusted SG&A expenses excluding restructuring-related items were $649 million, which was about the same as the last quarter and $95 million or 13% lower than the second quarter of last year. We continue to track very favorably against our restructuring expectations at the end of the second quarter of this year and these expense reduction programs will continue to drive cost improvements for the company going forward.

Reported research and development increased slightly from the last quarter to 12.5% of sales, with spending of $253 million for the quarter, which was down $22 million versus the second quarter of last year and up $9 million compared to last quarter. The vast majority of the reduced R&D expenses compared to prior year were a result of divested businesses. R&D expenses for the rest of the company were essentially flat with prior year. We are committed to continuing to invest in meaningful R&D projects in all of our businesses in order to maintain a healthy pipeline of new products that will restore our short and long-term profitable sales growth. We remain committed to advancing medical technologies and will invest accordingly in both internal R&D, as well as, strategic external opportunities.

I am pleased to say that we continue to make significant progress in executing the shareholder value improvement programs that we have been discussing publicly for the past few quarters and our overall financial results are reflecting that progress. Our expense reduction initiatives are running considerably ahead of schedule. The reported GAAP operating profit of $303 million for the quarter, and on an adjusted basis excluding acquisition and restructuring-related charges, as well as, amortization expense, operating income for the quarter was $475 million and 23.5% of sales, down 240 basis points in the first quarter of this year, and up 220 basis points in the second quarter of last year.

As I mentioned earlier in the quarter, we reduced revenue for expected returns related to the upcoming launch of our new drug-eluting stent platforms and we estimate that these revenue adjustments reduced our operating income during the quarter by approximately 130 basis points. In addition, our operating income for the second quarter includes planned increases in OUS spending.

I'd like to highlight the GAAP to adjusted operating profit reconciling items in a bit more detail. Our total amortization expense was $135 million pre-tax, which was $23 million lower than the second quarter of 2007 and this is in line with our expectations for the quarter as we discussed during the first quarter call. This reduction, primarily due to divestitures of the five non-core businesses, were previously mentioned. We recorded acquisition-related charges of $16 million pre-tax or $19 million after-tax related to the purchased R&D associated with the company's acquisition of CryoCor Incorporated, that's a company that addresses atrial fibrillation. We also recorded $21 million pre-tax and $15 million after-tax of restructuring-related charges in the quarter, which are primarily related to employee retention cost, as well as, third-party payments in connection with our previously announced expense and headcount reduction initiatives.

These charges, which were communicated during last quarter's earnings call, are lower than previously estimated, primarily due to lower than expected severance costs. The cumulative effect of these items was $172 million pre-tax and $142 million after-tax. Interest income was $118 million in the quarter, which was $28 million lower than the second quarter of last year primarily as a result of our $1.7 billion of debt repayments during the last 12 months. Interest expense was down $13 million from the first quarter as we prepaid an additional $300 million of bank debt in the quarter and benefited from a full quarter of reduced interest expense related to prepaying $625 million of bank debt in the first quarter. Our average interest expense rate was 5.9% for the quarter, and that compares to 6.3% in the first quarter and the reduction is primarily due to lower market interest rates.

Other net expense was $85 million and that includes the loss of $96 million related to the sale of the company's non-strategic investments, which I will discuss in more detail in just a moment. Interest income was $11 million in the quarter, which was $9 million lower than the second quarter of last year and $6 million lower than last quarter, primarily due to significantly lower investment rates. Reported GAAP tax rate for the quarter was 1.5% and the adjusted tax rate was 17.4%. Our tax rates for the quarter do not reflect any benefit for the U.S. R&D tax credit, which expired at the end of 2007. And in addition, our tax rates for the quarter did reflect discrete tax benefits of approximately $10 million. On a year-to-date basis, our adjusted effective tax rate of 22% excluding discrete items was slightly below our expected rate of 23%. We do anticipate that our annual operational effective tax rate for Q3 will be approximately 23% and full-year 2008 will be 21% including our estimated Q4 operational rate of 15% and that assumes that the R&D tax credit will be extended to the fourth quarter with a retroactive effective date back to January 1st of 2008.

GAAP earnings per share for the second quarter was $0.07 compared to $0.21 per share for the first quarter and earnings per share of $0.08 in the second quarter of last year. GAAP results for the quarter included $0.06 related to the acquisition, divestiture, and restructuring-related charges that I mentioned earlier and our adjusted EPS in the second quarter, excluding amortization expense, restructuring, and acquisition-related charges, as well as, a loss on the sale of non-core investments was $0.20 compared to $0.24 last quarter and compared to $0.16 in the second quarter of last year. As a reminder, the second quarter of 2007 adjusted EPS excluded $0.08 per share related to amortization. The $0.20 achieved this quarter exceeded the high end of our guidance range of $0.14 to $0.19. Included in this $0.20 is a $0.01 benefit for the discrete tax items that I mentioned earlier. As many of you know discrete tax items appear from quarter-to-quarter, sometimes they are favorable and sometimes they are unfavorable.

With six months remaining in the year, therefore we are not expecting that these discrete items will affect our full year adjusted earnings per share expectations. Stock compensation was $34 million and all per share calculations were computed using 1.5 billion shares outstanding. Turning to working capital management, DSO was 64 days at the end of the quarter, which is an improvement of three days compared to last quarter and three days below prior year. Significant cash collection improvements in our U.S.

Neuromodulation businesses, Japan, and Italy businesses were the main contributors to this improvement. Days inventory on hand were 122 days and is down one day compared to the first quarter of this year, but down 13 days from the second quarter of last year. And while days inventory on hand for the quarter was essentially flat compared to last quarter, inventory dollars increased over the last quarter due to the inventory bills that were necessary to support new product launches in the third quarter, as well as, planned upcoming new product launches for the balance of the third quarter and fourth quarter. Second quarter 2008 reported operating cash flow was $259 million and that's an increase of $48 million over the second quarter of last year.

Reported operating cash flow in the quarter, includes a tax payment of $188 million related to the sale of our divested businesses. Adjusted operating cash flow excluding the one-time tax item was $447 million, an improvement of $236 million compared to the second quarter 2007. The increase is primarily due to working capital improvements resulting from our focus on improved balance sheet management, as well as, higher operating income and lower interest payments. Adjusted operating cash flow was also $181 million higher than last quarter. This increase was primarily due to annual employee cash incentive payments made in the first quarter and lower restructuring payments in Q2 partially offset by lower operating income.

Capital expenditures were $79 million in the quarter, which is $11 million lower than the second quarter of last year and $22 million higher than the first quarter of 2008. Reported free cash flow was $180 million in the quarter, representing a $59 million increase over the second quarter of last year. Net increase was due to improved operating cash flow, as well as, lower capital expenditures. Reported free cash flow was $29 million lower than the first quarter, primarily due to higher capital expenditures in the quarter. In Q2, we completed the acquisition of CryoCor for an approximate enterprise value of $21 million.

In addition, we were nearing completion of the sale of our public investment portfolio and realized proceeds to date in excess of $200 million. In June, we announced definitive agreements to sell our investments in a portfolio of companies to Saints Capital, as well as, to sell our investments in a portfolio of venture funds and companies to Paul Capital Partners subject to certain closing and other conditions. The transactions will raise pre-tax proceeds in excess of $140 million, the majority of which will be in cash with a portion in a note payable over several years. In connection with these transactions, and monetization of other non-strategic investments, the company recorded a net pre-tax loss of $96 million, which is $64 million after-tax or approximately $0.04 per share. We expect this loss in the second quarter to be partially offset by anticipated gains to be recorded concurrent with the closing of these transactions during the remainder of this year of approximately $30 million pre-tax or $20 million after-tax or $0.01 per share.

We closed the quarter with $7.284 billion of gross debt, as well as, $1.616 billion in cash on hand resulting in net debt of $5.668 billion. Net debt is $1.7 billion lower than it was a year ago, as a result of repaying approximately $1.6 billion of gross debt during the past 12 months, while the same time increasing our cash on hand by approximately $100 million. In the second quarter, we reduced net debt another $161 million by prepaying an additional $300 million of bank debt partially funded by cash on hand at the start of the quarter.

In the first half of 2008, we prepaid the remaining $300 million of bank debt due in 2009, and $625 million of bank debt due in 2010. And as a result, our next debt maturity is not due until 2010. We announced our initiatives to improve shareholder value at the time of our third quarter earnings call last year and we told you that we would provide updates each quarter. I am pleased to say that we are well ahead of schedule reducing targeted expenses. We previously disclosed that we would exit 2008 with a run rate annualized savings in operating expenses of between $475 million to $525 million, and that we plan to achieve 90 plus percent of those savings in 2008. We also announced that we would be eliminating 4,300 positions, with 2000 associated with the businesses identified for divestiture and 2,300 from our ongoing businesses.

Our savings initiatives are running ahead of schedule as evidenced by our second quarter operating expenses, while also overcoming the adverse impact of operating expenses of a weakening U.S. dollar of approximately $30 million. With respect to headcount, our divestitures were completed during the first quarter of this year and the associated 2,000 positions have transitioned out of the company as planned. With respect to our restructuring reductions, we are tracking well ahead of schedule in our original timeline through 2008 second quarter with 85% of the positions already eliminated.

Turning to the sales guidance for the third quarter of 2008, consolidated revenues are expected to be in a range of $1.950 billion to $2.060 billion and that would be up 2% to 8% from the $1.914 billion recorded in the third quarter of 2007 excluding divestitures. And if current foreign exchange rates hold constant through the third quarter the contribution from foreign currency should be approximately $70 million and 4% of the growth. For DES, we were targeting worldwide revenues to be in the range of $375 million to $420 million with U.S. revenue of $205 million to $225 million, while OUS revenue is expected to be in a range of $170 million to $195 million. Included in our U.S. DES and total sales estimate for the third quarter is the incremental sales we expect to have to replenish customer stock for the return of TAXUS Express.

Of the $22 million in revenue reserved in the second quarter 2008 for expected returns of customer-owned DES product, in Q3 2008 we expect to ship new replacement product and recognize revenue of approximately $16 million, which will be incremental to our run rate.

We expect the balance of replenishments to occur in the fourth quarter of the year. For our defibrillator business, we expect revenue of $410 million to $440 million worldwide with $280 million to $300 million in the U.S. and $130 million to $140 million outside the United States. We are also reaffirming our full-year sales guidance of $8 billion to $8.2 billion, as discussed during our fourth quarter 2007 earnings call in February of this year.

For the third quarter adjusted earnings per share, excluding charges related to acquisitions, divestitures, and restructuring, as well as, amortization expense are expected to be in a range between $0.14 and $0.19 per share. This range includes the impact of the replenishment sales for the TAXUS Express returns I addressed earlier. The company expects earnings per share on a GAAP basis in the third quarter of 2008 to be in a range of $0.18 to $0.23. Included in our GAAP EPS estimate for the third quarter is approximately $0.12 per share of gains associated with the third quarter receipt of a $250 million payment from Abbott as result of the U.S. FDA approval of XIENCE as well as $0.01 per share of gains related to the sale of the company's non-strategic investments, and $0.02 per share of restructuring-related costs, $0.07 per share of amortization expense. We are also reaffirming our full year adjusted EPS guidance of $0.83 to $0.84 per share. Prior to this earnings call, the research analyst consensus adjusted EPS estimates as noted on First Call were $0.19 for the third quarter and $0.22 for the fourth quarter as a result of seasonality with the fourth quarter being traditionally greater in sales and earnings than the third quarter and taking into consideration the expected U.S. launch of many new major products throughout the third quarter including PROMUS, TAXUS Liberte, TAXUS Atom [ph], COGNIS and TELIGEN , all of which will continue to ramp up throughout the balance of the year, we would expect consensus adjusted EPS to show a little lighter mix of EPS expectations in the third quarter and a little more in the fourth quarter. That's it for guidance. Our third quarter earnings call will be at 8 A.M. Eastern Standard Time on October 30th, 2008. Now let me turn the call over to Jim for a more in-depth review of our businesses.

James R. Tobin - Director, President & Chief Executive Officer

Thank you, Sam. I'm going to take you through the non-financial aspects of the business and then I am going to share some overall perspective for the quarter.

Let me start with CRM. This quarter marked a major milestone in the evolution of Legacy Guidant into Boston Scientific CRM. The FDA approval of COGNIS CRT-D and TELIGEN ICD, we have entirely new platforms that are built on the foundation of our improved quality processes and standards. We were very pleased with these earlier than expected approvals, which reflect the hard work and effective coordination of our teams. The full EU launch began last month. Full U.S. launch is August 4th. Our European customers reacted enthusiastically to the new features and these two devices are already accounting for more than 20% of our defib [ph] sales in that market. During Q2 alone, we received approvals for six major new CRM products, bringing the total to 12 new approvals for the year so far. We've never been better positioned to leverage our competitive advantages and grow this business.

In May, we received U.S. and European approval for our first Boston Scientific branded pace maker ALTRUA. The ALTRUA family represents our most advanced pacer delivering capabilities to allow physicians to tailor therapy to individual patient needs, while maintaining small size and battery longevity. Launch of the product has begun both in U.S. and Europe and initial reports are positive.

Also, in May, we announced approval of our ACUITY Spiral Left Ventrical lead for use for CRT-Ds and CRT-Ps . ACUITY Spiral features a spiral fixation design and the smallest LV lead tip profile in the industry. It is designed to offer greater flexibility to place a lead in veins of all sizes even difficult to access ones and has shown excellent fixation performance. In addition to our new product introductions, we continue to make steady progress in the area of clinical trials. This quarter, we completed enrollment in the Landmark MADIT-CRT study, which is designed to examine whether CRT therapy can slow the progression of heart failure in minimally symptomatic patients. While we are encouraged by the results of the reverse trial, we anticipate more definitive results with MADIT-CRT, which has a much larger patient base. We believe this study has potential to drive expansion of CRT-D indications.

In addition to MADIT-CRT, we are initiating eight other new clinical studies this year. These studies are designed to support a range of objectives including new product development, enhancement of existing therapies and expansion into market segments. One other restructuring initiatives we announced last year included a plan to integrate our Electrophysiology business into our CRM business. This integration is proceeding smoothly. The overall EP market continues to grow at 15% to 20% , while the Afib [ph] segment is growing even faster. With three new EP catheters planned for launch next year, we expect to take a larger share of this market overtime. An important part of our long-term strategy in the Afib market will be implementing technologies from CryoCor, which we recently acquired.

The integration of CryoCor is progressing well and we plan to use their power console to deliver cryoenergy to Boston Scientific's proprietary cryo balloon catheter, which begins clinical trials next year. I'm very encouraged by the performance of our CRM group this quarter. The business grew double-digits, while the market grew high single-digits, so we probably took a little share. Six product approvals in one quarter is impressive and early approvals for COGNIS and TELIGEN were added bonuses. With next month's launch of these devices we are setting the stage for a second... strong second half in CRM.

So let me turn to Cardiovascular and other businesses. One question I know is, on your minds is the status of the corporate warning letter. We continue to make progress in our efforts to improve quality and resolve the warning letter. It has been our practice, we will not comment further on the details of that progress, but it is consistent with our expectations. We believe approval of TAXUS Liberte is probable in the third quarter, but that's up to the agency. In the DES market, we saw two encouraging signs during the quarter. PCI levels grew worldwide and penetration rates increased in the U.S. and European markets. So we believe the recovery is continuing and the market is strengthening. We are encouraged by these two important metrics and we are confident that the DES market will continue to move in the right direction. As you know, we received FDA approval for our PROMUS Everolimus-Eluting Coronary Stent System on July 2nd. While we've just launched this product we are off to a good start and we are optimistic about its potential. Our sales force is the most seasoned DES team in the industry. They are well trained and enthusiastically executing on our two drug offering. Initial physician feedback has confirmed expectations that PROMUS is a highly desirable platform. PROMUS and one approved TAXUS Liberte and TAXUS Atom [ph] represent improving technology, over what has been available in the market and we are pricing these products commensurate with the value they bring.

Finally, we are experiencing positive interaction with Abbott in terms of our supply agreement. We are the only company to offer two distinct drug platforms and there is no question in my mind that this gives us considerable advantage in the DES market. Going forward, our focus will be to maintain leadership in this market. I am confident that our stent platform, which continues to deliver new products, positions us very well to do just that. As I said, we anticipate the probable launch of TAXUS Liberte in the U.S. this quarter. In addition, TAXUS Atom [ph], the first 225mm DES in the U.S. and our instant restenosis indication expansion are also pending approval and are probable this quarter.

An acute MI indication for TAXUS may follow pending the outcome of the Horizons trial, which we plan to announce at TCT. Left main, multiple vessel and diabetic indications may be sought pending the outcome of the Syntax trial, which we plan to announce at ESC. The TAXUS Element clinical trial remains on track to complete enrollment this year and PROMUS Element will begin its IDE trial next year. These two next generation platforms will set a new standard of DES portfolio performance and are key part of our leadership strategy. We will provide a comprehensive update on our DES performance in market share, during our third quarter earnings call in October.

Looking briefly at other CV lines, we grew 6% year-over-year across non-stent franchises in the U.S. Our U.S. leadership in balloon dilatation continued with 65% share and this performance will be strengthened by the Apex balloon launch, which we expect this quarter. Our IVUS platform, iLab continues to be readily adopted by Cathlabs worldwide as evidenced by 7% year-over-year growth globally and our U.S. symbolic protection franchise grew an attractive 17% over the prior year. In summary, we believe we are very well positioned as the only company with a two drug offering, a long a list of franchise strengths in improving market fundamentals.

We believe our relative strength as the overall CathLab leader will increase over the next two years. Turning to Neurovascular, we remain the market leader there, though our growth has flattened recently due to Cordis re-entering in coils in [ph] our first ever competition in adjunctive aneurysm stents. Despite this short-term pressure, we retained 46% share in this space. This position combined with our 11% growth in the market and upcoming coil and stent product launches makes us optimistic about our prospects. In Peripheral Interventions business, we are number two in the growing market and number one in multiple product categories. We have approvals pending in carotid, renal, and biliary stents and we expect gains in balloons and wires from new product improvements.

Endosurgery had a very strong quarter with 12% growth including 13% in Endoscopy and nine in Neurology. Endoscopy delivered another quarter of strong balanced growth. U.S. growth was driven by our biliary, hemostasis, dilatation franchises. The strong biliary growth was due to the continued utilization of our SpyGlass Direct Visualization System, the world's first single-operator system that enables direct visualization of the bile ducts. Hemostasis growth was driven by the continued adoption and utilization of our Resolution Clip. Our balloon dilatation franchise grew 6% led by the continued utilization of our CRE Controlled Radial Expansion Balloon Dilators, which are used to dilate strictures throughout the GI tract. Endourology or stone management grew 3%, while Women's Health grew an more impressive 17%. The recent launch of clinical, the BSE's first Pelvic Floor Repair Kit, drove the first pelvic floor business to a 15% growth rate.

Meanwhile the hydrothermal ablation business continues to gain share in grew at 22% compared to the prior quarter. Our Endosurgery business has strong platforms, large growth markets in leading positions, but as a result of Project Horizon during the past two years, we also have some short-term growth challenges as we refocus our engineering teams back to our pipelines. I want to close my comments by highlighting Neuromodulation, which continued its double-digit growth, up [ph] 18% in the U.S. and 20% worldwide. This growth is the result of the clinical advantages of our Precision System, estimated market share gains, and increasing success in side-by-side patient therapy evaluations using our OMG device. Launch of Medtronics' RestoreULTRA device in the first quarter created a buzz [ph], however, we believe our technology advantage with our Multiple Independent Current Control, will allow us to dampen the overall impact of this launch.

This strong showing in the spinal cord stimulation market is a positive indicator of our future in neuromodulation.

So let me close with some overall perspective on the quarter. We are pleased with the quarter, especially with our expense management and working capital initiatives, which resulted in strong earnings leverage and improved cash flow. Our restructuring plan is working. We are doing what we said we were going to do and we are getting the operational results we expect. We reduced SG&A and R&D expenses by more than $100 million below [ph] the last year's level and we paid down $300 million more of debt. We also sold the non-strategic assets in our private investment portfolio. So we made progress in Q2 on a number of fronts that benefited the bottom line and increased our financial flexibility. There is also good news in virtually all of our businesses.

In CRM, the news was particularly good, we increased sales 10%, we saw some modest share gain. We were encouraged by the high single-digit growth in the size of the worldwide market. There is no question this market was aided by currency, but there is also no question of market growth. Product approvals, I mentioned earlier, were also good news. In DES, we were encouraged by the market dynamics there as well. Procedures grew year-over-year and penetration continued to increase. The approval of PROMUS was a major event reinforcing our status as the only two drug company. Endosurgery returned to its normal double-digit growth posting a healthy 12% year-over-year increase. And Neuromod recorded double-digit growth as well delivering a 20% increase over last year. When we pull all this together it makes us very upbeat about the second half of the year and especially the fourth quarter as new product introductions pick up steam.

In Cardiovascular, we've already launched PROMUS and we hope to launch TAXUS Liberte, TAXUS Atom [ph], and our Apex balloon. In CRM, it would be tough to overstate the importance of next months' COGNIS and TELIGEN launches. The DES and CRM markets have both stabilized and both are strengthening. The improvement in these markets along with the new products and some built-in advantages like two outstanding sales forces should help us do what we know we have to do, which is to grow. In DES, we are targeting to hold share in a growing market with more competitors and in CRM, I'm confident, we continue to take share in a growing market with our cadence of new product launches.

As I conclude my remarks, I would like to leave you with one observation. With this month's U.S. launch of PROMUS and next month's U.S. launch of COGNIS and TELIGEN, we are now seeing the power of the Guidant acquisition for the first time. The last nine quarters have been a race to the starting line. Now for the first time you will see what all the fuss was about. And with that, let me turn it back to Larry who will moderate the Q&A.

Larry Neumann - Investor Relations

Thank you, Jim. Rochelle, can we now open it up to questions and in an effort to enable us to field as many questions as possible in the remaining time, I'd ask that participants ask no more than two questions at a time and then return to the queue if you have additional questions. Thank you.

Question and Answer

Operator

Okay, certainly. [Operator Instructions]. Our first question comes from the line of Larry Keusch of Goldman Sachs. Please go ahead.

Lawrence Keusch - Goldman Sachs

Yeah, hi, good morning. Jim, I guess two questions for you and... on PROMUS and TAXUS for the next quarter. Looks like based on your guidance you are, sort of, looking for somewhere between 45% and 50% share in the market. So that would perhaps be up from where you with TAXUS, if we did our math right, and you take the reserves into account. Can you help us understand, how you are thinking about the mix of TAXUS versus PROMUS and then you made a comment earlier in your prepared statements that you are pricing PROMUS relative to the value that you perceive it to have. There have been some scattered reports of potential very low prices on PROMUS, I'm just wondering, if you could speak to how you're thinking about pricing that out in the marketplace?

James R. Tobin - Director, President & Chief Executive Officer

The pricing comments are wrong. The mix piece I think will... it's just too early to tell. It depends on a host of factors and I really don't know how that's going to come out. So I can't give you a lot of guidance here. As for as, where we are pricing overall, I think actually we are seeing premiums on both TAXUS and PROMUS.

Lawrence Keusch - Goldman Sachs

Okay, great. Thanks very much.

Operator

Okay. Thank you. The next question comes from the line of Rick Wise of Leerink Swann. Please go ahead.

Frederick Wise - Leerink Swann LLC

Good morning Jim. Good morning, Sam.

James R. Tobin - Director, President & Chief Executive Officer

Hey, welcome back.

Frederick Wise - Leerink Swann LLC

Oh, thanks so much, appreciate that. A couple of questions, if you transition accounts to PROMUS, that you're currently using TAXUS, maybe help us understand how you transition them back to Liberte or is that miss the whole point because you really kind to go after CYPHER accounts with PROMUS, and maybe you could talk as well over to about how you are going to incent [ph] sales force to maximize market share, which I assume is still the marching order of the day, that's what Paul used to say, or has that changed, just giving all the margins differentials?

James R. Tobin - Director, President & Chief Executive Officer

As far as, sales force I am seeing [ph], there is virtually no difference between TAXUS and PROMUS. We want to sell to market what it wants to buy. As far as transition from TAXUS, one TAXUS to another TAXUS and back, it's really too early to tell how all that is going to shake out. We're doing fine and that's basically... it's way too early to comment really on how this is all going to play out.

Frederick Wise - Leerink Swann LLC

Just a follow-up on the CRM front, I think that you are talking in the U.S. a slightly higher sequential number, 280, 300 range versus the... if I'm looking at it correctly the 276 you did in high-power. Is that... how much of that is new product, how much of that, Jim, is just, in your view, the improving market environment?

James R. Tobin - Director, President & Chief Executive Officer

I haven't [ph] broken it out that way. I am optimistic about our new product platforms. I think they are great and I think a lot of people think they are great, based on what we are seeing in Europe already. So there is some market growth, there'll be some share gain in this space as people try in new products and I haven't actually thought about, which is which.

Frederick Wise - Leerink Swann LLC

Okay. Thank you.

Operator

Okay. Thank you. Next question comes from the line of Tao Levy of Deutsche Bank. Please go ahead.

Tao Levy - Deutsche Bank Securities

Hi, good morning. If I could just ask a quick question on the warning letter, it seems like obviously you are still assuming that to be lifted here shortly just giving your comments regarding TAXUS Liberte. So I want to make sure that that's still the case and any surprises there on the positive or negative side?

James R. Tobin - Director, President & Chief Executive Officer

We've been talking for months and months now about mid-year, defined somewhere between May and August, I think, and that's basically still the case. We're hopeful that sometime during Q3 we will see that warning letter restrictions lifted and that will result in a renewed flow of new products and so nothing has really changed there from what we have been expecting and hoping for quite some time.

Tao Levy - Deutsche Bank Securities

And in the past you had also mentioned that with that lifting you start shifting resources that way from dealing with the warning letter. Has that started to happen already or you just... it's just you don't want to do that until the official lifting happens?

James R. Tobin - Director, President & Chief Executive Officer

The resources come in two flavors in this regard, one is just the outside health that we've had for a couple of years here and we're kind of past that stage, so the tens of hundreds of millions of dollars we've spent that way have begun to diminish. As far as our own engineering core goes, there is still process validations ongoing. There is still a lot of work to be done, you are never done and we are still finishing up the last parts of various aspects of this. But we are beginning to see the opportunity to shift some of our engineering resources back into the VIP space. And the idea has never stopped. So we have a large inventory of good ideas that now we can start to implement.

Tao Levy - Deutsche Bank Securities

Thanks a lot.

Operator

Okay. Thank you. Next question comes from the line of Bob Hopkins, Bank of America. Please go ahead.

Bob Hopkins - Bank of America

Hi, thanks and good morning. Just a quick question. Are you guys going to be breaking up PROMUS sales going forward?

James R. Tobin - Director, President & Chief Executive Officer

No.

Bob Hopkins - Bank of America

Okay. Any further color on that, or just not until you get to a certain critical mass or never?

James R. Tobin - Director, President & Chief Executive Officer

As best we can see right now, we will not be breaking it out because they can move quarter-to-quarter. What we care about is total the share, that's our focus and how we sell and how we look at the numbers internally as well.

Bob Hopkins - Bank of America

Okay. And then, I believe, on the Abbott call a couple of days ago, while they have made... there was.. earlier there was a suggestion that they are winning the majority of the PROMUS XIENCE head-to-head contracts that are out there. Could you comment on that a little bit and just talk about how you think we should think about the split between XIENCE and PROMUS, I mean the overall combined share of the two is going to be whatever is going to be, but how should we think about the split between overall share between XIENCE and PROMUS? Thanks.

James R. Tobin - Director, President & Chief Executive Officer

It's way too early to make any comment by us or by them for that matter. So... my basic fundamental position is we're doing fine.

Bob Hopkins - Bank of America

Okay and then, you mean, going forward you have a, I mean, is there a reasonable set of expectation as we look through this uncertain period in the beginning here, I mean, look through maybe 2009 and beyond, about a split, I mean, in your mind is 50-50 reasonable or 60-40?

James R. Tobin - Director, President & Chief Executive Officer

Well, it's way too early to tell and there is a lot of dynamics at play and it's... the roll out, each of our roll outs is, I mean, they are doing it differently from the way we are doing it and we will have enough inventory to support up to 50-50. I think that the game has to play out before you find out whether that's how it really came out or whether it's something less than that. It won't be more than that.

Bob Hopkins - Bank of America

Okay. Thanks.

Operator

Thank you. The next question comes from line of Mike Weinstein of JP Morgan. Please go ahead.

Michael Weinstein - J.P. Morgan

Thank you. First question is for Sam. Sam, the gross margin has obviously slipped this quarter and going into the launch of PROMUS in the United States and might [ph] be some decline of TAXUS, so that should mean more negative mix shift within the DES business. Can you give us your own thoughts on how gross margin plays out from here?

Samuel R. Leno - Executive Vice President for Finance and Information

Sure, I can give you more of the qualitative factors. First of all in the second quarter if you heard the description of what's going on with our operating profit margin, we did take a reserve for the ultimate write-off of inventory that we both have on hand of TAXUS Express, as well as, inventory that we'll take back from our customers and that was in excess of 100 basis points of margin both in... primarily in operating profit and it's a mix of between gross profit and operating expenses. So that goes away going into third and fourth quarter. So you get some uplift from the absence of that. And then the mix will play a role depending on how well we do with PROMUS.

If we do very, very well that will have a greater downward pressure on overall gross profit margin but operating profit margin gets diminished as well, but not to the same degree because the sharing of profits without that takes place within gross profit for us. So that's something at least to work into your models, but I'll say in the mix issue, we also have the ability, we believe, to do it very well with Liberte and that should push the margin back up a bit. We have already begun, as Jim mentioned, to focus a lot of our engineers in value improvement programs overtime that will be uplifting to us.

And we routinely plan and we're developing our operating plans for 2009 now to take 5% or more out of standard cost every year with value improvement programs and 2009 should be no different. So we have all those mix issues we're dealing with as well. The benefits that we'll get on gross profit margins on a very successful launch and market acceptance of COGNIS and TELIGEN should help us as well. So it's not just the downward pressure from PROMUS mix that will be the deciding factor, it's everything else that goes with it as well.

Michael Weinstein - J.P. Morgan

And just to clarify the 130 basis points that you called out in your opening comments, that's the write-off of obsolete inventory for TAXUS?

Samuel R. Leno - Executive Vice President for Finance and Information

That's both the returns of about $22 million that we expect to take as well as the write-off of the associated inventory that will be returned, as well as, the write-off of on-hand consignment inventory that we have for TAXUS Express, as we flip [ph] from TAXUS Express to TAXUS Liberte.

Michael Weinstein - J.P. Morgan

That should [inaudible] one question that I could refer for Jim. Jim, could you just give us your thoughts on, I guess, A, the timing of your next generation drug with XIENCE [ph], you mentioned TAXUS Element and PROMUS Element, the timing in Europe and in the U.S. And then B, outside of drug-eluting stents in the CRM, what has you, at this point, most excited about the Boston Scientific pipeline and I'll drop. Thanks.

James R. Tobin - Director, President & Chief Executive Officer

Next generation timing, basically, I mean, we're expecting TAXUS Element next year in Europe and couple years later than that in the U.S., but that product is real and it's a terrific product. The PROMUS version of that will go into trials next year and we expect to be able to deliver that product in Europe late next year in time to make the deadline for supply, that is late November of next year. So we're pretty optimistic that Element will be our platform in Europe next year and then, of course, it follows couple of years later than that in U.S. As far as what's exciting beyond that the list of things is long, because 80% of our R&D is focused in the CV space, most of what were we looking at is CV, this Apex catheter is, I mean is just a terrific catheter, is just a wonderful device and having the only small vessel in the U.S. stent out there will be a big deal, we get... I mean I am out in the marketplace a lot and you'd be surprised how often people say when are you going to have that small stent. So there is a bunch of stuff, it's not going to be one, it's not another TAXUS on the horizon, but there is a bunch of stuff that is about of pop out here that, I think, will create a whole new level of excitement.

Michael Weinstein - J.P. Morgan

Thanks, Jim.

Operator

Okay, thank you. The next question comes from the line of Joanne Wuensch of BMO Capital Markets. Please go ahead.

Joanne Wuensch - BMO Capital Markets

Thank you, very much. You talked about the timing of getting PROMUS Element in Europe, could you walk us through the timing of getting it in the United States, and can you give us an update on your conversations with the FDA regarding how many patients you might need and number of years to follow up to get that product approved? Thank you.

James R. Tobin - Director, President & Chief Executive Officer

Well, Joanne, the EU version of PROMUS Element will be late next year. The U.S. version we expect to have in the market in time to meet the deadline of June 30 of '12. I would except we'll actually... we'll probably beat that. As far as, what it's going to take for follow-up, the Agency's guidelines have been pretty definitive at this point, you need a third of the patients for two year and other two-thirds heading to two years and there's got to be good data and all those kind of things. So we know what we need to do there and we expect that will work.

Joanne Wuensch - BMO Capital Markets

And you made a comment on the relationship with Abbott in regards to supply... if their fight [ph] has been good, can you extend on that in any way, I mean, should we read into that that you had anticipated it to be negative and are surprised or just everything is going, hey okay and no worries?

James R. Tobin - Director, President & Chief Executive Officer

No, we had expected it to be okay and it is okay. They've been very helpful with expediting product for the launch and that sort of thing we... I mean, I am happy with the way that relationship is playing out, people are really working as a team on both sides.

Joanne Wuensch - BMO Capital Markets

Many thanks.

Operator

Okay, thank you. And the next question comes from the line of Michael Jungling of Merrill Lynch . Please go ahead.

Michael Jungling - Merrill Lynch

Thank you and good morning. I have two question please. Firstly, one for Sam on the EBITDA margins. The first half of 2008 seems to have come out about 29%, a nice increase from the same time last year and very close to very well one cardio company. In this context of additional DES competition, how sustainable is this EBITDA margin over the intermediate term and the second question I have is in relation to your dual DES strategy in Europe, in some European markets where you saw both TAXUS and PROMUS, for instance, in Spain there appears to be shifts of giving a PROMUS to a distributor. Can you give us an indication why there was a need to do that? Thank you.

Samuel R. Leno - Executive Vice President for Finance and Information

Yeah, let me address the EBITDA margins first. When we announced our restructuring plan to take out roughly $500 million of expenses out of a combination of SG&A and R&D in the third quarter of last year. That's pure EBITDA margins and you'll see the benefit of that occurring now as we've continued to record substantial reductions next [inaudible] year-on-year. We are not completing those programs yet, they will continue to roll into next year offsetting some of the improvement we get from EBITDA margins or gross profit margin... pressure, which we are all aware. But as we go forward we also said that as we looked at 2010, we had a number of goals in mind. One is to get down to a debt-to-EBITDA ratio of 1 to 1.5 times and that we would get there in combination with both reducing debt down as well as straightening our margins to be more competitive with the likes of Medtronic and St. Jude and others that are competitive medical device companies.

We think we are well on the track to do that. So without being specific as to any given quarter we see if we look at the next two years and the next eight quarters we see and expect that we'll continue to be able to improve our EBITDA and operating profit margins to achieve those goals.

James R. Tobin - Director, President & Chief Executive Officer

And as far as using... as running PROMUS through a distributor in Spain. The Spanish market is unique and the Spanish management asked basically to try and experiment with this, sort of, mix distribution model and why not? But it's a one-off situation it's... we'll see how it goes but so far it's gone pretty well.

Michael Jungling - Merrill Lynch

And is this perhaps a benchmark of trying to use a distributor for the other European markets, i.e. is this perhaps a better way of selling two stents and one sales force?

James R. Tobin - Director, President & Chief Executive Officer

I think it works in Spain just fine. It's not our plan to do that anywhere else.

Operator

Okay. Thank you. The next question comes from the line of Philip Legendy of Thomas Weisel Partners. Please go ahead.

Philip Legendy - Thomas Weisel Partners

Hi, good morning. I wanted to follow up on some of the comments you made about the Abbott supply agreement. Would you just remind us what the specific terms and deadlines are for you to transfer the technology to your own platform and then maybe talk about any alternatives you might have considered if the next generation stent takes longer in the United States than you have expected?

James R. Tobin - Director, President & Chief Executive Officer

Well, we don't expect it to take longer than we expect. So I think we are in good shape there. The dates that are relevant here, in the U.S. and Japan it is the same date, it's June 30th, 2012. And in the EU it is November 21st, '09, rest of world is December 31st, 2010. Those are the geographies and dates that we are looking at and based on everything we know we expect to be successful in meeting those dates.

Philip Legendy - Thomas Weisel Partners

Okay and just to be sure the PROMUS Element then is the stent that will completely put you on board and allow you to satisfy the requirements there?

James R. Tobin - Director, President & Chief Executive Officer

That's correct.

Philip Legendy - Thomas Weisel Partners

Okay. And then I wanted to ask a few on Japan, first I don't know if you... I didn't hear you talk about any expected timing for the launch of PROMUS in Japan? And then also just wondering if you would comment on the market in general, J&J had a strong performance there, wondering if you are seeing a rebound in that market or any color would be appreciated?

James R. Tobin - Director, President & Chief Executive Officer

Okay. As far as PROMUS Japan goes, we hope to be there before June 30th, 2012. But it's... that's still quite a ways out. As far as the market itself goes, it's interesting the penetration of coated stents in general is actually a little higher there than the rest of the non-U.S. And we're seeing the market... modest growth but it's not run away. Our share there is less than we see typically in other international markets where we are only up against just J&J. So it's sort of 45, 55 there, which is down from our peak but it came down to 45 and it has been consistent there for some period of time now, maybe measured in months more than a quarter. So we're not happy about the fact that we are number two in Japan, but it's not like we're 20% or 45%.

Philip Legendy - Thomas Weisel Partners

Okay. Thank you.

Operator

Okay. Thank you. And the next question comes from the line of Kristen Stewart of Credit Suisse. Please go ahead.

Kristen Stewart - Credit Suisse

Hi, thanks for taking my call. I just wanted to go back on the results for the quarter, when you had given your initial guidance for drug-eluting stents in the United States, I believe you had included $40 million of a sales reversal. So if I adjust for the 22 that you did take, it actually looks like the number came in a little bit below what your adjusted guidance range would have been? Can you just talk a little bit about if there is anything in the quarter that really surprised you relative to where you were forecasting?

Samuel R. Leno - Executive Vice President for Finance and Information

No surprises, we just did a better job than we thought we could do managing how much inventory would be out in the pipeline when we achieve the expected date of launching Liberte. So what we have now is a benefit of being three months smarter than three months closer to the launch. We've just done a better job. If you recall when I gave those comments coming into the second quarter, I said the $40 million of sales reversal and the subsequent write-off of the inventory would cost us about $0.03 in the quarter. Because the sales reversal was a bit lighter that's... it probably gave us a penny stronger performance in this quarter and that's a takeaway then from the third quarter because we said.. if we took $40 million back in this quarter, replenishment of that would take place with the $40 million in the subsequent quarters. So as we look at the two periods Q2 to Q3, that is a trade-off. So the good news is that we did a better job this quarter and the bad news is that will probably cost us about a penny or so in the third quarter.

Kristen Stewart - Credit Suisse

And, I guess, if I go back, I guess, maybe I am just confused on the math but your guidance in the U.S. was 160 to 185 inclusive of a $40 million reversal. So if I back that out I come up with 200 to 225, you came in at 175 including a $22 million, so if I normalize that out, you are at 197?

Samuel R. Leno - Executive Vice President for Finance and Information

That's correct.

Kristen Stewart - Credit Suisse

So, I guess, I am wondering what drove the deviation from the 197 relative to the 220 to 225 that you were expecting to see, excluding that sales reversal?

Samuel R. Leno - Executive Vice President for Finance and Information

Well, it's clearly.... we came in a bit light on our expectations on the effect that the Medtronic would have coming in late in the first quarter, picked [ph] a little more share than we thought. We think that's temporary, as PROMUS now has been launched in this third quarter, and as Liberte is about to be launched, so it's... they are all estimates. And this one was a little bit light. We had some that were a little bit heavier.

Kristen Stewart - Credit Suisse

Okay. And then just thinking about your guidance range, would it be appropriate to assume that the difference between kind of the low and high-end is mainly a function of your model and the assumptions that you're making with respect to the mix of PROMUS and TAXUS or am I kind of off on that?.

Samuel R. Leno - Executive Vice President for Finance and Information

I know it would be probably an oversimplification. Clearly the mix of... first of all the total market share is measured... the mix of total market share that we enjoy on average for the quarter and exiting the third quarter will play a role in our ability to achieve either end of that spectrum. But there are so many other issues, the launching of COGNIS and TELIGEN and how well we do with that, launching of the new products that Jim mentioned, how well we do in Europe as we get more and more focused especially in the CRM side in different major countries of Europe, how well we do in Japan. So, no, I would think that would be a little oversimplified.

Kristen Stewart - Credit Suisse

And then, Jim, just real quickly on kind of timings for the next generation pipeline, it's pretty clear you feel comfortable with meeting the deadlines, that early portion [ph] supply agreement. Just in the event that you don't make that and... are you correct in thinking that you can still manufacture PROMUS in-house but still have to split those profits with Abbott?

James R. Tobin - Director, President & Chief Executive Officer

I haven't thought about that for quite a while I'd have to sit down with the team and figure out what that alternative looks like. That's not even something that I spend time on, so I really... I don't have the fact base in mind on that I could get it, but let me clarify one point on the timing of PROMUS in Japan. What I was talking about with regard to 2012 is PROMUS Element, the current version of PROMUS, the XIENCE version... the XIENCE version of this thing is scheduled for Q2 '09. So middle of next year and PROMUS and XIENCE would be launched pretty much the same time.

Kristen Stewart - Credit Suisse

Yep. Okay, thank you.

Operator

Okay, thank you. And the next question comes from the line of Bruce Nudell of UBS. Please go ahead.

Bruce Nudell - UBS

Good morning. Thank you. Good morning, Jim. I had a question for you with regards to the U.S. ICD market dynamics, could you give us any clarity on the unit growth rates for... first time implants as opposed to replacements, whether they are negative, positive, or flat? And I'll have a follow up. Thank you.

James R. Tobin - Director, President & Chief Executive Officer

I didn't think to ask for that detail. So I don't have that data right in front of me.

Bruce Nudell - UBS

Okay. And then turning to the ex-U.S. markets for high-power devices, what would you say the unit growth rates are?

James R. Tobin - Director, President & Chief Executive Officer

Well, they are not as high as dollar growth rates because of currency in force, but pricing has been relatively stable. So I mean it's down modestly. So I think we are looking at high single-digit maybe and in Europe and in the rest of the world.

Bruce Nudell - UBS

Thanks so much.

Operator

Okay, thank you. And the next question comes from the line of Larry Biegelsen of Wachovia. Please go ahead.

Larry Biegelsen - Wachovia Capital Markets, LLC

Thank you very much for taking my question. I just... I have two questions. First for Sam, using the midpoint of your full-year adjusted EPS guidance, you expect the year-over-year growth to be negative 10% in the second half of '08 versus growth of about 30% in the first half of '08. In addition, you expect the second half of 2008 to be about 10% lower than the first half of '08, now why is that and what would derive your 18% to 20% EPS growth guidance in 2009, if your EPS growth is declining sequentially and then I just had one drug-eluting stent question after that, but [inaudible] please Sam?

Samuel R. Leno - Executive Vice President for Finance and Information

First of all as we've talked about the end of 2007, you have to go back to that, we had some items that occurred in the back half of the year that weren't in our original expectation we set that 18% to 20% growth in EPS on an assumed 3% to 5% growth and pro forma sales. So I tried to make that clear when we ended the year in our February call to close out Q4 that the base that we are comparing to is more of an operational base of $0.67. At $0.67, if we would achieve $0.83, $0.84, that's really at the very top end of our 18% to 20% guidance. As we look at next year, the benefit that we've got in terms of our topline growth this year came largely from foreign currency. We are assuming in our guidance for next year that foreign currency rates that will not move, we don't guess the foreign currency rate, so next year there is a 3% to 5% growth in sales, has got to be all pure operating performance.

Pure operating performance, the continuation of our expense [ph] reduction program, the continuation of driving our debt loads down pretty quickly and the benefit we get from interest expense, the benefits we'll get from having all of our engineers focused on improving product cost, which we haven't been able to do with the warning letter and the effort that they had to put for to get the warning letter behind us. The benefit of this tremendous growing [ph] with new products that are being launched in the back part of this year continue to pick up steam throughout next year and a lot of those products have high margins. So it's not a big leap of faith to think that we can achieve, it's still an aspirational goal because we haven't given specific guidance for next year yet, but it's still not a big leap of faith to think that the 3% to 5% growth in sales, and 18% to 20% growth in earnings per share is quite doable.

Larry Biegelsen - Wachovia Capital Markets, LLC

That's very helpful. And for Jim, it looks like you are estimating that the time from study initiation to CE Mark Approval for TAXUS Element is about 30 months assuming you started the Perseus Trial in mid-07 and I think you said today you expect CE Mark Approval sometime in 2009. For PROMUS Element, it appears that the timeline from the study initiation to CE Mark Approval is less than ten months... 12 months if I heard you correctly that you are starting the study in '09 and you expect CE Mark approval by the end of 2009. Can you give us some insight to how you can reach approval for one stent so much faster than the other and in the past you've talked about if there is a PROMUS gap, you could fill that with the inventory and a 12 to 18 month shelf life, is that still the case? Thanks.

James R. Tobin - Director, President & Chief Executive Officer

Well, yes the inventory flex so to speak is still available to us. The timing on the trials and our regulatory strategy around all that is something that we haven't detailed, but there is a plan.

Larry Biegelsen - Wachovia Capital Markets, LLC

Thank you.

Operator

Okay. Thank you. The next question comes from the line of Matthew Dodds of Citigroup. Please go ahead.

Matthew Dodds - Citigroup

Very good morning. Just that one question if you look at the CRM numbers OUS and you back out the total currency it looks like overall it was down modestly for pacers and ICDs. And Jim, I am just wondering is that still a function of Japan changing distributor or is it the border base?

James R. Tobin - Director, President & Chief Executive Officer

The numbers actually come about flat in constant dollars but yes the biggest hole we have in our bucket on the CRM international space at this point is in Japan, we're still fighting through that change in distribution model there. It hasn't gone as well as I would have hoped and so we've got some quarters yet before that's all annualized through. So that's a drag on us, no question about it.

Matthew Dodds - Citigroup

And when did that start last year.. when do the comps get some where [ph] there, is it Q3?

James R. Tobin - Director, President & Chief Executive Officer

[inaudible]They notified us early last year, it actually started in third quarter, as I'd believe. So we have a got another really... I mean it's... it wasn't just a turn-off spigot kind of situation. So there is a couple more quarters of difficult comparisons before we get to... we sort of get re-based and have apples-to-apples.

Matthew Dodds - Citigroup

All right. Thanks Jim.

Operator

Okay. Thank you. The next question comes from the line of Sara Michelmore of Cowen. Please go ahead.

Sara Michelmore - Cowen

Yes. Good morning and thanks for taking the question. Just a few clean-up items, Sam, you had mentioned when you were doing your discussion of gross margins about the FX hedging contracts. What is your current hedging position?

Samuel R. Leno - Executive Vice President for Finance and Information

To be more specific with your question, we hedge a multitude of currencies and hedge contracts are very different when currency [inaudible] we tend to average in, and in some of our contracts that we have averaged in we go out as far as about 30 months or so, everywhere to short-term contracts that we purchased quite sometime ago. So the rates vary... the settlements rates vary from month-to-month based on when the contract was put in place.

Sara Michelmore - Cowen

But you still have contracts in place that sounds like through the end of the year and into next year?

Samuel R. Leno - Executive Vice President for Finance and Information

Well, absolutely. We use hedges not to bet [ph] against currencies but just to manage the volatility. And our view is if we have in the short-term, in first 12 months of our intercompany cash flows, which is what we are hedging, closed to fully hedged and your two and your three are a little less so but still we are averaging in all the time, if we do a good job of managing and consistently bring in the average contracts overtime, we'll be able to built the effect of the changing dollar into our operating plan and be able to compensate for any movements that we see coming because we know what they'll be into the balance of allowing [ph] a plan to offset that.

Sara Michelmore - Cowen

Okay that's helpful. And just back on the script margin question that was asked earlier I think in the last quarterly call you talked about us.... at least conceptually thinking about the gross profit margins staying in the low 70's for the foreseeable future and it sounds like [inaudible] down dynamics as well as some offsetting dynamics and I just wanted to double check if that was still kind of how we should be thinking about things?

Samuel R. Leno - Executive Vice President for Finance and Information

I think I addressed that in one of the earlier questions, is so much of it depends in the product mix, if we do so well in PROMUS and poorly in TAXUS Liberte and TAXUS Express, which we don't plan on doing there would been an adverse mix if we do well in everything that will benefit us, because we have other things going out that we can control... like taking product cost out through the FP [ph] programs and product mix that will overtime benefit us coming from other parts of our portfolio. So I think for the foreseeable future I don't see any huge swings in gross profit margins. It should move incrementally or decrementally based on all those issues that take place in any one quarter, but over the long haul we do expect our gross profit margin to increase and everything that will benefit us plus we have other things going that we can control by taking product cost out through the FP [ph] programs and product mix that will overtime benefit us coming from other parts of our portfolio. So I think for the foreseeable future I don't see any huge swings in the gross profit margins. It should move incrementally or decrementally based on all those issues that take place in any one quarter, but over the long haul we do expect our gross profit margin to increase.

Sara Michelmore - Cowen

Okay. That's great and if I could sneak one last one in for Jim. Jim, Abbott and St. Jude have a co-marketing agreement between the interventional and CRM products and I am just wondering if you could just talk about bundling or bundling position, how important is that for you as the competitive differentiator in the U.S. market? Thanks.

James R. Tobin - Director, President & Chief Executive Officer

That's a good question. It is very [ph] interesting, because our fundamental approach is to sell to people the way that they want to buy. There are a few minority of customers in the U.S. who have sufficient control of their docs to be able to even talk about bundling EP products with interventional products. It's just doesn't [ph] happen that often, but when it does happen we are in a terrific position to respond. We have deals like that out there and I view the St. Jude-Abbott thing as essentially the frenzied move to try to position themselves the same way we and Medtronic are already positioned.

Sara Michelmore - Cowen

Great. Thanks.

Operator

Thank you. The next question comes from the line of [inaudible]. Please go ahead.

Unidentified Analyst

Thanks for taking my question. Just have a quick question, Jim, how are you planning to position Liberte in the context of PROMUS, is there some sort of bundling messages here or is that a more... these are specific and case specific kind of approach?

James R. Tobin - Director, President & Chief Executive Officer

There is... I mean every lesion is different, every situation is different, essentially we are going to have two very deliverable platforms. One with Everolimus, the other with Paclitaxel and the way these products get used varies from account to account and so it is hard to generalize, but we essentially... I mean more deliverability is better than less and Liberte will stand toe-to-toe with XIENCE on deliverability and then you have a choice of what drug you want to use for what reason under what circumstances and that will vary widely depending on how people read the data and what they want to do with products. So we are in great shape from being able to offer to offer to the marketplace, sort of, take your pick.

Unidentified Analyst

You know just a quick follow up, so far have you gotten any feedback from physicians about that having both stents available and then also what kind of... with your relationships with your accounts, any early feedback with the, post the XIENCE approval?

James R. Tobin - Director, President & Chief Executive Officer

Well, I mean, as I said I am out there a lot, and I talk to people a lot and what they seem to appreciate is that they can pick one vendor, they can just... they can deal with us, they can get whatever they want, use it the way they want it. It's a great position to be in and so, the commentary that I get around the two drug offering is all positive. I haven't had one person say why are you doing this? So I know I've heard that from analysts, but I've never heard that from a customer and it seems to me their vote [ph] counts more.

Unidentified Analyst

All right. Thanks.

Operator

Okay. Thank you. And the next question comes from the line of Jan Wald, of Stanford Group. Please go ahead.

Erica Selin - Stanford Group Company

Good morning, this is Erica Selin in for Jan. I have a set of questions on the Endoscopy. Looks like it was a good strong quarter and I'm wondering if... it looks like you think you'll be able to return to the [inaudible] growth or feel continue to see the volatility we've seen recently in that division?

James R. Tobin - Director, President & Chief Executive Officer

No, I think we put that... the Endosurgery business through a not hold [ph] backwards middle of whenever was middle of '07 talking about divesture or not, and all those sort of stuff. And I think that sort of put a hedge and they'll get along a little bit there but they've overcome all that, they are rolling, things are hitting the right direction. It is always a challenge to get to double-digit growth in businesses that are as diverse as this. I mean we are... and we lump it together as Endosurgery, but it is hundreds of products, so we are going to be around that low double-digit number I think going forward I think it will be fairly consistent. It's just so many different things that it is hard to put your finger on what's exactly driving it.

Erica Selin - Stanford Group Company

That's all. Thank you very much.

Operator

Okay. Thank you. And we have a follow-up question from the line of Rick Wise, of Leerink Swann. Please go ahead.

Frederick Wise - Leerink Swann LLC

Thanks for letting me to stick a couple of more in. Sam, just... you've done a great job of debt reduction, maybe talk to us a little bit about your second half debt reduction goals and maybe of the implications for interest expense on a quarterly basis. I assume that continues to move below the, I think, it was a $118 million this quarter?

Samuel R. Leno - Executive Vice President for Finance and Information

Yeah, clearly our debt reduction is a long-term issue, that's why we didn't announce any interim goals, couple of sales [ph] though we have them, the debt sales that were still shooting to get to what, [inaudible] the EBITDA by 2010 by the end of 2010. Somewhere along the way we believe we'll have all the metrics necessary maybe in before 2010 but hoping by 2010 necessary to regain our investment grade rating. That's not a big deal, it just means it's a little less expensive with interest, but will also going to be paying down debt pretty rapidly at a time when interest rates seem to be falling.

So that's the long-term you... we don't talk about what our short-term goals are from quarter-to-quarter because there are issues now, for example, interest payments happen twice a year. They will happen every quarter so one quarter you'll have an interest payment, one quarter you won't and we have issues that move around like that. We paid bonuses once a year in the first quarter, so the movement from quarter-to-quarter isn't as relevant I don't believe as our long-term goal reducing our debt down to levels that would get us to 1, 1.5 times debt-to-EBITDA.

Frederick Wise - Leerink Swann LLC

If I could just push a little bit but it is not unreasonable to think that at least the second quarter level are lower in the second half, might be a...?

Samuel R. Leno - Executive Vice President for Finance and Information

I won't comment on the third or fourth quarters.

Frederick Wise - Leerink Swann LLC

Okay. I tried. Last, you mentioned in your commentary, Sam, about operating profit including plant increases, and no U.S. spending, if I heard you correctly. Maybe I'm just not clear, what's the color on where you are spending at... what's involved in the distribution and manufacturing and what positive benefit, should we expect in that? Thank you very much.

Samuel R. Leno - Executive Vice President for Finance and Information

Well we were looking at... what we are doing is and still are looking at targeted ways to make investments particularly in OUS and those areas where we think there's going to be a specific sales benefit for us in both the short and long-term sort of way to think about that is we are not just taking expenses out, because we said we would, we are taking expenses out because we want to make sure that we free up the expenses that don't drive revenues, so we can reinvest in those areas that do drive revenue. So the expense investments that we talk about you can assume that are all specifically designed to drive revenue both domestically and internationally.

Frederick Wise - Leerink Swann LLC

Thank you very much.

Larry Neumann - Investor Relations

Thanks Rochelle. We've got time for one more [inaudible] and then we'll be available following the call for additional questions.

Operator

Okay certainly. And the final question comes from the line of Michael Jungling of Merrill Lynch, please go ahead.

Michael Jungling - Merrill Lynch

Great. Thank you for allowing me to ask a few more questions. Firstly, Sam on CapEx in the first half of this year, CapEx running at 3% and in the past Boston has spent about 5% of CapEx to sales, can you give us an indication why it is so low? And then secondly on the Q3 EPS guidance of $0.14 to $0.19, if it implies an EBITDA margin of 23.5% in the low end and 27% on the high-end, is this large variance of 3.5 points solely driven by the uncertainties or how the market shares pan put in drug-eluting stents? Thank you.

Samuel R. Leno - Executive Vice President for Finance and Information

Let me answer the last one first. This is very similar to the question we had just a few minutes ago. The $0.14 to $0.19 range is in part [ph] that. Clearly there is a wide variety of outcomes that could happen in terms of total market share in the quarter for DES and the mix between PROMUS and Liberte and TAXUS Express. But clearly that's not the only large moving part of our forecast. We do provide a guidance that doesn't require all the stars to be lined up perfectly in order to achieve it, which is why we have a range and there are just so many variables that we feel obligated to include a range because at any given point some items could happen well and some parts of our forecast could not turn out as we expected, as we saw in some of the low-end performance of the specific product link items we gave for Q2.

So it's just a wide variety of moving parts. On CapEx, we said coming into the year that we are targeting to spend about $450 million in CapEx, the movement from quarter-to-quarter depends largely on how cash flows out of major projects. So what we are doing is working on all the projects that would get us to $450 million. Timing just seems to be an unusual issue for us. We are now backing up to 450, although with six months to go, it doesn't look like to me that we are going to spend $450 million in CapEx for the year. I'll be surprised if we spent in excess of $450 million right now.

Michael Jungling - Merrill Lynch

Okay. Thank you.

Larry Neumann - Investor Relations

Welcome. Thank you everybody for joining us today. We appreciate your continued interest in Boston Scientific. Before you disconnect, Rochelle will give you all the information regarding the replay of today's call. Thank you.

Operator

Okay. Thank you. And ladies and gentlemen this conference will be made available for replay after 11:00 A.M. today until Tuesday, August 5th at midnight. You may access the AT&T executive playback service at any time by dialing 1800-475-6701 entering the access code 928-885. International participants dial 13-203-653-844 and again the access code is 928-885. And that does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference service. You may now disconnect.

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