St. Jude Medical (STJ) Mike Rousseau on Q4 2015 Results - Earnings Call Transcript

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St. Jude Medical, Inc. (NYSE:STJ) Q4 2015 Earnings Conference Call January 27, 2016 8:00 AM ET


Mike Rousseau - President and CEO

Eric Fain - Group President

Don Zurbay - Chief Financial Officer

J.C. Weigelt - Senior Director, Investor Relations


Bob Hopins - Bank of America

Joanne Wuensch - BMO Capital Markets

David Lewis - Morgan Stanley

Mike Weinstein - JP Morgan

Josh Jennings - Cowen & Company

Rick Wise - Stifel Nicolaus


Welcome to the St. Jude Medical’s Fourth Quarter and Full Year 2015 Earnings Conference Call. Hosting the call today is Mike Rousseau, President and Chief Executive Officer at St. Jude Medical.

Before we would begin, I’d like to remind you that some of the statements made during this conference call may be considered forward-looking statements. The company's 10-K for fiscal year 2014 and 10-Q for the fiscal quarter ended October 3, 2015 identify certain factors that could cause the company's actual results to differ materially from those projected in any forward-looking statements made this morning.

The company does not undertake to update any forward-looking statements as a result of new information or future events or developments. The 10-K and 10-Q as well as the company's other SEC filings are available through the company or online.

During this call, the company may use non-GAAP financial measures to provide information pertinent to ongoing business performance. Investors should consider non-GAAP measures in addition to and not as a substitute for financial performance measures prepared in accordance with GAAP. For a reconciliation of our non-GAAP financial measures to our GAAP results, please visit the Investor Relations portion of our website,

At this time, all participants have been placed in a listen-only mode and the floor will be opened for your questions following the management's prepared remarks.

It is now my pleasure to turn the floor over to Mike Rousseau.

Mike Rousseau

Thank you. Welcome to the St. Jude Medical fourth quarter and full year 2015 earnings conference call.

Today with me on the call today are Eric Fain, Group President; Don Zurbay, Chief Financial Officer; and J.C. Weigelt, Senior Director, Investor Relations.

Our plan this morning is for Don Zurbay to provide a review of our financial results for the fourth quarter and full year 2015 and to give sales and earnings guidance for the first quarter 2016 and full year 2016. I will then offer additional comments and open it up for questions.

Go ahead, Don.

Don Zurbay

Thank you Mike. When listening to today’s call please note that all references to sales growth rates unless otherwise noted are on a comparable constant currency basis, which includes Thoratec sales in both comparable years and is adjusted for the impact of currency.

Please also note, the comparable constant currency sales growth rates in the fourth quarter of 2015 do not include the impact of an extra selling week in the comparable quarter in 2014, resulting from a 52, 53 week fiscal year convention.

This convention which has been referenced on previous calls resulted in five fewer selling days in the fourth quarter of 2015 versus the fourth quarter of 2014 and three fewer selling days on a year-over-year comparison of full year results.

We estimate this variance in selling days decreased our 2015 fourth quarter sales growth rate by 5 percentage points to 6 percentage points. For the full year 2015, we estimate this negatively impacted our year-over-year sales growth by approximately 100 basis points.

Consolidated sales for the fourth quarter totaled 1.447 billion, a 1% decline from the fourth quarter of last year. Fourth quarter sales included 136 million of Thoratec sales, which was above the guidance range we provided of a 125 million to a 130 million. Unfavorable foreign currency translations decreased this quarter sales by approximately 91 million.

For the full year 2015, consolidated sales were 5.541 billion up 4% from last year. Unfavorable foreign currency translations decreased 2015 net sales by approximately 413 million.

During the fourth quarter, we recognized 195 million or $0.69 per share in after tax charges and amortization expense. For further information regarding these items, please refer to details provided in our press release. Comments during this call referencing fourth quarter and full year 2015 results including earnings per share or EPS allowance will be exclusive of these items.

During the fourth quarter of 2015, the federal research and development tax credit was permanently extended including 2015 on a retroactive basis. As a result, during the fourth quarter, we recorded $16 million benefit to income tax expense, which increased EPS by $0.06, representing the cumulative catch-up adjustment of this credit for the first nine months of 2015. Comments during this call referencing fourth quarter 2015 EPS will be exclusive of this item.

Adjusted EPS was $1.02 for the fourth quarter of 2015, compared to adjusted EPS of $1.08 in the fourth quarter of 2014. We estimate that on a constant currency basis fourth quarter EPS increased 11%. For the full year 2015, adjusted EPS was $3.94 compared to adjusted EPS of $4.17 for the full year 2014. We estimate that on a constant currency basis full year adjusted EPS increased 11%.

Before we discuss our financial results for 2015 and offer our sales and earnings guidance for 2016, let me comment on foreign currency. In preparing our sales and earnings guidance for the fourth quarter of 2015, we used exchange rates which assume that euro would translate in to about $1.10 to $1.15 and each 118 to 123 yen would translate in to $1 US.

For the fourth quarter, the actual average exchange rate for the yen was consistent with these assumptions, while the euro was slightly unfavorable. In addition certain unhedged currencies were unfavorable to our expectations. As a result, the impact of currency was approximately 11 million or $0.02 of EPS unfavorable to the midpoint of the guidance we provided last quarter.

In preparing our sales and earnings guidance for the first quarter and full year of 2016, we are assuming that each euro will translate in to about $1.05 to $1.10 and for the yen, each a 115 to a 120 yen would translate in to $1 US. Using these exchange rate assumptions, we estimate that foreign currency translations will reduce total reported sales for 2016 by approximately 120 million to a 140 versus 2015 including approximately 45 million to 55 million in the first quarter.

Now for the discussion of sales by product category; for the fourth quarter total Cardiac Rhythm Management or CRM sales were 580 million, a 10% decline from last year’s fourth quarter including 40 million of unfavorable foreign currency translations. Sales results were driven by weakness in the US, which declined due to MRI product gaps in both our low voltage and ICD product segments.

For the fourth quarter, ICD sales were 358 million, an 11% decline from last years’ fourth quarter. US ICD sales were 209 million; international ICD sales were 149 million including 22 million of unfavorable foreign currency translations.

For low voltage devices, sales for the fourth quarter totaled 222 million, a 7% decline from last years’ fourth quarter. In the United States, pacemaker sales were 85 million, in our international market pacemaker sales were approximately 137 million including 18 million of unfavorable foreign currency translations.

Our strong international growth was driven by our competitive pacer portfolio in Europe and Japan, with continued adoption of Assurity MRI safe pacemaker. As a reminder, we launched this product line in Japan during the third quarter of 2015.

Atrial Fibrillation or AF product sales for the fourth quarter totaled 276 million up 4% including 18 million of unfavorable foreign currency translations. Although there was a difficult comparison this quarter, given last year’s US TactiCath launch, our worldwide AF business continued to demonstrate strong growth driven by continued adoption of our flexibility and TactiCath ablation catheters.

Due to this successful launch of these products in 2015, we estimate we gained more than four points of share in the US ablation catheter market. In addition, we experience an increase in sales of our other AF products, demonstrating pull through from ablation catheter sales.

Total sales of cardiovascular products for the fourth quarter 2015 were 327 million, a 2% increase from last years’ fourth quarter including 27 million of unfavorable foreign currency translations. International sales up 6% were driven by the first full quarter launch of all four sizes in our Portico family of Transcatheter valves. We also continued to see strong growth in our FFR, OCT and LAA products.

In the US, sales were driven by growth in CardioMEMS on a year-over-year basis, partially offset by weakness in traditional heart valves. For modeling purposes only, we expect full year 2016 CardioMEMS sales to be approximately 65 million, which is simply the annualized run rate of our fourth quarter 2015 sales number. Given the uncertainty around upcoming reimbursement decisions, we expect to update this estimate on our April earnings call.

Total sales of neuromodulation products in the fourth quarter 2015 were 128 million, up 9% as we continue to take share in the global basis, with the most comprehensive neuromodulation portfolio in the market allowing us to treat chronic pain patients through the pain continuum.

In the US, we saw a continued strong adoption of our upgradable protégé MRI platform. Our international Spinal Cord Simulation business grew over 20% during the quarter, highlighted by approximately 70% growth in Australia.

The geographic breakdown of St. Jude Medical sales in the fourth quarter of 2015 is detailed in our press release. In total, 51% of St. Jude Medical sales in the fourth quarter came from the US, while 49% came from international markets.

We would now like to provide comparable constant currency revenue guidance for 2016. We expect full year 2016 comparable constant currency sales growth to be in the range of 2% to 4%. We expect first quarter comparable constant currency sales growth to be flat to slightly up.

On January 13, we issued an 8-K announcing our new revenue reporting structure. Beginning in April, we will report our revenue product categories in the five following areas of focus: atrial fibrillation, heart failure, neuromodulation, traditional CRM, and cardiovascular.

The gross profit margin during the fourth quarter was 68.9% down 220 basis points from the fourth quarter of 2014, primarily due to a decline of 170 basis points related to the negative impact of currency. This currency impact include certain currencies in markets where we do not hedging contracts. Additionally there was a 50 basis points decline related to the continued weakness in our higher margin US CRM business.

For the full year 2015, the gross profit margin was 69.9% down a 180 basis points from 2014, primarily due to a 130 basis points impact from currency. For the full year 2016, we expect gross profit margin to be in the range of 69.0% to 69.5%. This expectation includes continued weakness in our US CRM business. A 60 basis points improvement related to the suspension of the medical device excise tax and a 50 to 70 basis points decline driven by the negative currency environment.

Our fourth quarter SG&A expenses were 30.3% of net sales, an 80 basis points improvement from the fourth quarter of 2014. For the full year 2015, SG&A expenses were 31.9% of net sales. For the full year 2016, we expect this ratio to be in the range of 31.5% to 32.0%.

Research and development expenses in the fourth quarter and full year 2015 were 12.2% of net sales. For the full year 2016, we expect R&D expenses as a percentage of net sales to be in the range of 12.5% to 13.0%, as we invest in programs that support our innovation strategy.

Other expense was 32 million in the fourth quarter and 88 million for the full year 2015. For the full year 2016, we expect other expense of approximately 150 to 160 million primarily driven by interest expense on our outstanding debt. For the full year 2015, our effective income tax rate was 16.6%. For 2016, we expect the effective tax rate to be in the range of 15.5% to 16.5%.

Moving on to the balance sheet, at the end of 2015, we had 667 million in cash and cash equivalents and 6.4 billion in total debt. During the fourth quarter, we repaid approximately 700 million of outstanding debt. There were no borrowings outstanding under our 1.5 billion revolving credit facility available with the group of banks.

Next I want to offer some comments regarding our EPS outlook for the first quarter and full-year 2016. In preparing our EPS guidance, we have assumed that in the first quarter of 2016, the weighted average outstanding shares used in our diluted EPS calculation will be about 286 million to 288 million shares, and the weighted average outstanding shares for the full-year 2016 will be about 288 million to 290 million shares.

For the full year 2016, we expect the adjusted EPS to be in the range of $3.95 to $4.05. This expectation includes the impact from negative currency translations which we estimate based on our current exchange rate assumptions will reduce our adjusted EPS by approximately $0.25. On a constant currency basis, this represents adjusted EPS growth of $0.26 to $0.36.

To help reconcile the components of this growth, please note the following: EPS accretion related to the Thoratec acquisition in 2016 is expected to be approximately $0.20, of which we plan to reinvest 50%. The temporary repeal of the medical device excise tax has a $0.07 benefit to our EPS, which we also plan to reinvest in the business. The remaining $0.16 to $0.26 of EPS accretion represents 4% to 7% constant currency growth.

The company expects adjusted EPS for the first quarter of 2016 to be in the range of $0.87 to $0.89, which represents constant currency growth of 5% to 8%.

I will now turn the call over to Mike.

Mike Rousseau

Thanks Don. Good morning and thank you for joining us today. As most of you are aware, this is my first earnings call as St. Jude Medical’s President and Chief Executive Officer. Over the past few months, I’ve had the opportunity to talk with many of you. And the main question I get is, what can we expect under your leadership?

So I wanted to start there. First we have a solid strategy in place. We are leading the market in our strategy to surround the patient care continuum in AF, heart failure and neuromodulation. Within these areas, we are bringing to market innovative, relevant technologies that help our customers treat patients throughout key stages of care.

We are positioning ourselves to be the partner of choice in these targeted disease state areas. That is our primary focus and long term goal. Short term, we have some work to do to address current pressures in our business. This is my immediate focus and something our cross functional leadership team has their complete attention on as well.

Cross functional collaboration is key; we are working to fully leverage our one St. Jude Medical structure to move quickly and address key challenges and opportunities globally and ensure we are executing on the basics, innovating in the right areas, getting new products to market and paving the path to get those products in to the hands of our customers in a high quality timely fashion.

So innovation and execution is what really matters. Our people and culture are top priority for me and our focus is on building an energized and accountable team that innovates and executes. We saw in our fourth quarter performance, positive results where we effectively launched new innovative products.

Fourth quarter sales were over 1.4 billion with strong growth in both AF and neuromodulation, as well as in to our recently acquired Thoratec mechanical circulatory support business. The Thoratec acquisition was the largest in our history, and we are pleased with both the integration efforts and sales momentum to date.

At the beginning of 2015, we said that our success would depend on performance in AF, neuromodulation and CardioMEMS. As we close out the year, we achieved success in two of those three areas. We still have work to do to grow our CardioMEMS business. While it is on track from the perspective of patient care, physician demand and economic impact, the technology remains under pressure from a reimbursement standpoint.

Going in to 2015, we were well positioned to grow EPS faster than sales and we delivered this by growing adjusted EPS by 11% on a year-over-year basis with 2015 revenue growth of approximately 4%, and above market growth in key areas including AF and neuromodulation.

Our strong growth in AF, neuromodulation and our recently acquired Thoratec business was offset by underperformance in CRM, which along with currency headwinds put pressure on gross margins. We focused on disciplined expense management and cost saving initiatives to deliver operating leverage and grew EPS quicker than sales.

Building off of our experience in 2015, our plan for 2016 continues to leverage our core strengths, primarily in technologies to treat and manage AF, heart failure and neuromodulation. We continue to see attractive growth rates from our international business due to strong results from a number of new product launches, which we believe is a key leading indicator for future US sales performance.

I’d like to provide an overview of our business in these core areas. Starting with AF, this market is growing in the low teens and is underpenetrated with approximately 2.5% of the diagnosed symptomatic AF patient population receiving ablation. Since growth in this area is largely driven by ablation procedures, St. Jude Medical is well positioned to be the provider of choice for our EP customers with their strongest and most comprehensive portfolio.

Contact force technology is quickly moving to standard of care for RF ablation therapy, and we are uniquely positioned to benefit from this trend, given the strength of data supporting our TactiCath ablation catheter.

In 2016, we expect to make important additions to our EP portfolio, including the insight precision, cardiac mapping system with center enabled catheters and an advance user interface. In 2016, we will have the most comprehensive launch of new products in our AF portfolio.

This system was designed in collaboration with key opinion leaders from around the world and the initial feedback received from the physicians and global thought leaders validates our confidence in this new mapping system.

At our February 5 analyst investor meeting, we will also unveil plans for our next generation Insertable Cardiac Monitor which we expect to be available in international markets in the second half of 2016.

With our heart failure business, our new reporting structure includes CRT products, CardioMEMS and LVADs. We are developing technologies that position us as the global leader in heart failure management. We uniquely enable patient care from early symptoms to advanced heart failure regardless of type.

CardioMEMS is the cornerstone of our heart failure program. We are the only company with an FDA approved remote hemodynamic monitoring device and we plan to continue to develop this new market and expand clinical evidence to drive adoption and reimbursement globally.

We were encouraged by the early collaboration with CMS to establish a new technology add-on payment and the transitional APC Pass-through Payment Status that helped to determine payment for hospitals.

I also want to highlight the November 2015 addition of The Lancet, which published a prospective longitudal analysis that demonstrated the long term effectiveness of the CardioMEMS heart failure system. This prospective data from the champion study showed that after a mean of 31 months of follow-up, heart failure patients managed with CardioMEMS had a 48% reduction in heart failure hospitalizations compared to patients managed with the current standard of care.

Despite the evidence that pulmonary artery pressure guided heart failure management is superior to clinical assessment alone and that CMS established new technology add-on and pass-through pathway payments, some of our customers are facing reimbursement challenges which have slowed our growth.

We have a comprehensive plan in place to address these challenges in 2016. We are continuing to work with national payers and regional MACs to educated them on the latest published data and real world experience to ensure patient access to this important technology. And we are now in discussion with CMS to create a national coverage determination for implanted hemodynamic monitoring in order to establish clear coverage guidelines for CardioMEMS and increase access and coverage pathways for medicare eligible patients nationwide.

We plan to update you on our progress during our analyst investor meeting on February 5. Our acquisitions of Thoratec added the market leader in Left Ventricular Assist Devices or LVADs to our heart failure portfolio. We expect the LVAD market to grow mid-single digits in 2016 and we expect to continue taking share.

We have been pleased with the results of our HeartMate 3 launch internationally and the HeartMate 3 US IDE clinical study MOMENTUM is making good progress. A key priority for 2016 is to expand global market access to this technology. We also expect meaningful accretion from the Thoratec transaction in the first year and plan to reinvest a portion of this accretion to drive sales growth.

We continue to be the leader in the CRTD and CRTP markets with our quadripolar patient options. Our MultiPoint Pacing or MPP already differentiates our technology from competitors in markets where it is approved. We continue to expect this technology to be approved in the US in the first half of 2016. Our growth in Europe during 2015 was supported by the continued adoption of MPP.

We now offer the most comprehensive product portfolio to treat patients across their entire care continuum and to help hospitals manage this complex and expensive disease.

Next I’d like to discuss our traditional Cardiac Rhythm Management business, which now includes our core ICD devices and pacemakers. Although we will experience pressure in the CRM market in 2016, this business continues to generate significant revenue and cash flow. We expect the US to continue to be a challenging market for us in 2016, due to our temporary product gap with MRI compatible devices. We anticipate FDA approval for our MRI compatible pacemaker in the first half of 2016 and MRI compatible ICD in the first half of 2017.

We are also expecting approval of our MRI compatible ICD in Japan during the first half of 2016. We have demonstrated successful share recovery in Europe and Japan, where we have been a late entrant in to the MRI compatible market and expect a similar result in the US. In addition, our leadless pacing technology, Nanostim is scheduled to be discussed at the FDA panel meeting on February 18.

We have transformed our Neuromodulation business and are now positioned to establish St. Jude Medical as the global technology leader. We are the only company with a portfolio that has the ability to treat the continuum of care for chronic pain patients with radio frequency ablation St. Jude Medical’s proprietary SCS first waveform with upgradable capability and Dorsal Root Ganglion or DRG therapy.

The chronic pain market is almost 2 billion and is growing in the mid to high single digits. We believe our differentiated technology will drive customer preference for our broader pain portfolio. Through two recent strategic acquisitions, compelling clinical data and a focus on innovative technologies to address key barriers to adoption, we are able to offer unique, proprietary solutions and are changing the landscape of the chronic pain management market.

We plan to focus on establishing DRG as the standard of care for targeted pain syndromes. DRG is currently available in Europe and Australia and we expect US approval in the first half of 2016. The recent 12 months follow-up data presented at NANS in December demonstrate a DRG sustained and superior pain relief and improved therapeutic targeting.

We are working to contract with new customers in Europe and expand the market for this unique product offered only by St. Jude Medical. We also plan to establish St. Jude Medical’s proprietary burst therapy as the dominant spinal cord stimulation waveform to achieve superior pain relief across rechargeable and rechargeable free devices.

Recent SUNBURST trial results demonstrated a reduction or elimination of paresthesia in 91% of patients. That coupled with our ability to upgrade implanted devices with new waveforms upon FDA and CE Mark approvals is expected to drive market share.

We think it is important to look at this market from the perspective of the share capture opportunity for advance waveforms. In regards to the current worldwide revenue mix of tonic devices versus advance waveforms, we see the market as approximately 90% tonic and 10% advanced waveforms.

Given this, we see a tremendous opportunity to take share where our priority BURST technology is available based on demonstrating superior pain relief and pain preference over tonic in the SUNBURST clinical trial and customer experience to date.

Within neuromodulation the DBS market is more than 500 million and is expected to grow in the low double-digits in 2016. We expect our infinity DBS system with directional leads to take market share by partnering with key opinion leaders to generate clinical evidence and support its launch and market adoption, ultimately positioning directional lead technology as the future standard of care.

Let’s now turn to cardiovascular; the structural heart market remains highly competitive, and our continued success cardiovascular depends on our ability to execute on key programs across Transcatheter Aortic Valve replacement, surgical tissue valves and PCI optimization.

The fourth quarter was the first quarter where we had all four sizes of the Portico valve available in Europe. Sales results in the fourth quarter were above our internal expectations and physician feedback on the Portico valve was positive. Given these results and feedback, we believe the Portico valve can be a viable competitor in markets where approved.

We are also working on a next generation tissue heart valve that builds off of the success we have had with Trifecta. This will be another new product that we expect to discuss at the February analyst and investor meeting. We also expect an FDA panel on PFO in the first half of 2016.

To summarize, we have an extensive pipeline with innovative and differentiating technologies. As Don mentioned earlier, our 2016 guidance calls for comparable constant currency growth of 2% to 4% which we believe factors in growth opportunities in heart failure, atrial fibrillation and neuromodulation as well as the challenges in CRM and CardioMEMS that we have identified.

Our 2016 EPS goal guidance demonstrates continued operating leverage, while allowing us to sustain investments necessary to deliver topline results. I believe our overall strategy of surrounding AF, heart failure and neuromodulation is the right strategy. In 2016, we will continue to build a winning culture with a sharp focus on innovation and execution to grow our business and drive shareholder value over the long term.

With that we are ready to take your questions, and I’ll turn the call over to the moderator.

Question-and-Answer Session


[Operator Instructions] our first question is coming from the Bob Hopkins at Bank of America. Your line is open.

Bob Hopins - Bank of America

I’ve just two questions, first question is on US ICDs and the second question is on the Q1 guidance. First on US ICDs, you know as there’s gotten a lot of discussion, the magnitude of the declines in the US ICD business definitely surprised many. In fact we rarely see double-digit declines in US ICDs for any company in any quarter.

And so Mike, I was wondering if you could give your views on what’s go on, is this simply share loss because you’re off cycle or how confident are you that there aren’t other issues at stake here in terms of sales force turnover or contracting powers from some of your larger competitors and then I also wanted to see if the timing on MRI safe ICD in the US a little bit relative to the guidance that you just gave.

Mike Rousseau

Bob, so first you’re right, the vast majority of the CRM low voltage issues are really around this product gap. We began to really feel the pressure in Q3 and the other point you made I think is also relevant and that is around the idea that it put us in a negative position as it relates to contracting.

A couple of points on the contracting side; it is the premium to your product, there is a price premium associated with that product. So not only do we not get to participate in that tier, but we have the added impact of negative gross margin in a very high gross margin product line. So there’s some other issues coming in to play here with CRM.

The road to recovery I think is on track with the FDA in the first half and we’re going to remain with that guidance that we expect to have the low voltage MRI safe product in the first half. Along with that, we now have a level of confidence that we’re going to receive the high voltage MRI product in Japan in the first quarter. So we’ve been able to tighten up those timelines in Japan.

So the road to recovery is going to really require several different points. Of course filing a product gap is primary, and we are working on that and we have plans on how we want to execute in that area.

The sales force is stable, we’ve not had turnover outside of our normal ranges, and we think the product gap has just built up overtime and hit an inflexion point where we’ve really felt the impact.

When we look at the product cadence and we’ll share that with you on the 5th in New York, we think that MPP will be a catalyst. In the international market, we think that the opportunity for us to update and bring our next generation of an implantable cardiac monitoring system will do two things, one is it will be a boost to the sales force and/or marketing strategy in Europe and at the same time give us the experience and put us in a good position to have a fast launch in first half 2017 with that product line.

So it’s a combination of approvals, it’s a combination of new technologies. It’s again strengthening our position in the contracting environment. The final point that I make about contracting and the opportunity that will present itself is the AF portfolio and the cadence of AF products. You know that’s the same call point, same channel. The electrophysiology community is looking forward to the new AF products and I’m sure we’ll get in to that both here on the call as well as in New York we will lay out that line and what our strategy is going through ’16 and ’17.

But the overall impact for us in the market will be from a total EP perspective. And so when I look at and we plan around our recovery in CRM, it includes the entire EP portfolio.

Bob Hopins - Bank of America

And just quickly to follow-up, can you guys give us a sense as to what businesses are slowing in Q1 relative to Q4, because it looks like excluding Thoratec, you’re actually guiding legacy St. Jude sales being down year-over-year in the first quarter, which is a deceleration from the fourth quarter. So either Don or Mike, what businesses are you assuming slow in Q1 relative to Q4?

Mike Rousseau

So I’ll start and Don may be you could add in here. Bob, we have difficult comps in AF that we think will sort themselves out as the products get launched through ’16. We see the neuromodulation business as continue to grow and see a lot of strength in that space again gathering momentum as we bring new products in to the space. LVADs your point is correct, we do see continued strong growth in LVAD space. CardioMEMS it is a product that could get a lot of momentum depending on how successful we are in clearing some of the reimbursement hurdles in the space.

And CV its puts and takes. I tell you that there we have some legacy products that will run at or slightly below the market, at the same time we’ll begin to see some level of contribution from the TAVR business as well as increased sales in LAA. We’ll talk about LAA and our plans on the 5th relative to the US market and continued penetration of OCT.

And then finally, working our way through the CRM space, we think that again the Q1 will be our most difficult quarter because of all those factors with us picking up momentum and sales growth through the rest of the year. Don you want to add anything to that?

Don Zurbay

No, Mike covered it I think as he said we are really expecting Q1 to be the most challenged quarter. We really tried to set our guidance in a way its achievable and as we worked the leverage the P&L, we’re still getting 5% to 8% constant currency growth on our EPS guidance. But we’ll be challenged here as we get through the first quarter.


Your next question comes from the line of Joanne Wuensch with BMO Capital Markets. Your line is open.

Joanne Wuensch - BMO Capital Markets

Couple of questions, the CardioMEMS, I understand the guidance being an annualisation of the fourth quarter delivery, can you walk us through what steps over any period of time it will take to increase your comfort and what we should be looking for to increase our comfort that this will be reimbursed and will be ramping throughout 2016.

Mike Rousseau

So a quick update here on where we are and what our plan is around the CardioMEMS product line. As you know we got off to a quick start last year, and about mid-year we had a negative determination at First Coast, which then spiraled in to several articles resulting in [Novata] beginning a process to make a determination.

All of that has caused a lot of unrest in the customer base on two levels, and it really is around the fear of reimbursement. The physician feedback and patient outcomes have been outstanding, and the performance of the product actually in the field is better than we had expected and better that what we had seen in the champion trial.

So the product line itself is on track. The business dynamics and the market dynamics and this is also feedback directly from our customers. This is the product that they’ve been looking for in trying to get at not only the expense but the quality of life issues of managing this disease. So we think CardioMEMS is an important clinical advancement and will in fact change the way heart failure is managed.

The process that we’re going through is first, we continue to work with the local MACs. We are making sure that they have all of the most current data, the latest data from [Lansing] was very encouraging from a real world perspective, 31 months of follow-up with a 48% reduction in hospitalization. This is significant data, and again bringing the real world perspective in the play.

At the same time, we’ve had ongoing discussion with CMS, and so the strategy is really to make sure that our customer base in informed, make sure the local MACs are informed and up-to-date with the latest data and that we’re going through the process which we will update on February 5 with CMS to apply for national coverage to make sure that we can begin to plan and begin to work with heart failure centers around the country in getting their programs up and going without a concern that they would make both time and cost commitment to find out that they could end up in a negative reimbursement situation.

So we have short term strategy, again education of the heart failure community and the MACs as well as the work that we’re doing with CMS. We think the timeline for these things will be first quarter, working its way with a submission will take anywhere from 9 to 12 months with CMS.

Joanne Wuensch - BMO Capital Markets

As a follow-up, can you give us an idea of how the Thoratec integration is going? That was really the result of a bright spot in the fourth quarter. Thank you.

Mike Rousseau

We had high expectation in the acquisition, it’s a space that we’ve been interested in for some time. And now that we have gone through this phase of integration, we are very excited not only about how quickly we’ve been able to integrate and how rapidly the cultural dynamics came together for us, but how excited we are as a company Thoratec and St. Jude Medical on how we can advance the therapy.

And we have the opportunity really to not only advance the current state-of-the-art but the future products that we’re working on as well as some of the speed to market dynamics that we’re working on. We have high confidence that Thoratec is going to prove itself out as an excellent strategic acquisition for us.


Your next question comes from the line of David Lewis with Morgan Stanley. Your line is open.

David Lewis - Morgan Stanley

Just a couple of margin questions; the first one for Don and the second one may be Mike or Don. So Don just beyond serum mix in ’15, what other factors drove the gross margin pressure kind of across the quarters, first to fourth and what provided the confidence heading in to ’16 that you can see gross margin improvement off of fourth quarter levels.

Don Zurbay

Well I think that as we’ve talked about the main issues, really the weakness in our US serum business. But beyond that there’s a mix component here, the strength in our atrial fibrillation and to some extent neuromodulation businesses, which have a gross margin profile that’s slightly lower than the corporate average put a little bit of pressure on the margin.

And then there were a few other minor factors, but that was the main thing. In terms of confidence I think for us it’s really just getting back to the product case that Mike talked about getting strength back in US serum is going to make a big difference in the margin as we move forward through the rest of the year.

David Lewis - Morgan Stanley

And then from Mike or Don, I just see taking a look at R&D last year in the second half of ’15 R&D was actually down on an absolute basis over the second half of ’14 and that’s with Thoratec in the fourth quarter. So what were the drivers of that, and what are the implications on growth, and the bigger question really is, I appreciate the top line’s under pressure but are you investing enough in ’16?

Mike Rousseau

I’ll start David and Don can fill in here. It’s a great questions and an important point that we spend a lot of time as we develop as planned, and that is the level of investment that we’ll need to make to support the product launches that we have teed up to be able to bring and/or advance some of the products in the pipe, additional investment in our clinical trial program as these products come in to the market place.

So we are planning an uptick if you will in R&D, a total spend through this year. But Don what would you add to that?

Don Zurbay

Really on the back part of the year, particularly in the fourth quarter the main issues David were just timing of some expenses and programs.

David Lewis - Morgan Stanley

Mike just a quick follow-up to Joanne’s question, and I will jump back in queue. The pursuit of the NCD is absolutely the right decision for the business and for MEMS. Is there any concern that the pursuit of the NCD is going to sort of delay some of the LCD decisions in 2016?

Mike Rousseau

David, we been working very closely with them. They are on timelines, that they’ve given us, and so our expectation is that during Q1 we could come to some decision points on what we’re going to do locally.

The new data is very encouraging and our expectation is that we’ll know one way or the other here in the first half and your point regardless we are going to push through and get a clearing event here and get focused strictly on the market.


Your next question comes from the line of Mike Weinstein with JP Morgan. Your line is open.

Mike Weinstein - JP Morgan

Mike just to clarify, are you going to wait to decide whether you’re going to file for an NCD until you hear from [Novata] is that what you’re saying?

Mike Rousseau

No, we’ll run these in parallel Mike and we’ve made the decision that we’re going to move forward with an NCD and at the same time we want to work very closely with the MAC to see if we can get a earlier positive decision.

Mike Weinstein - JP Morgan

Can you peel the onion a little bit on CardioMEMS, there’s two regions where you’re not getting covered right now, but the other regions you are. Can you just talk about the performance in the regions where you are getting covered?

Mike Rousseau

Yes, actually its one region with no coverage and one region pending, and the pending point is what has really created the headwind as everybody waits to see what’s going to happen relative to stocking orders and there’s a lot of work and time that gets consumed in putting your program up in place and so there’s a hold if you will in that area and that would be Novata which is about 12 states.

And then First Coast is mostly Florida, so it leaps out of the state but obviously a significant state and place. So the outcome of that is large populations, large heart failure centers and areas that we had focused in initially. So our fastest growing areas were in Florida, Texas, up the east coast and in to New York, New Jersey, Pennsylvania and these have all been impacted. So that’s what we are seeing here is really the largest most populated areas are being affected most, and this is also where we had our largest foot print.

That’s why we are so focused on continuing our efforts to make sure that we are getting the data in front of the right people and helping them make their decisions based on the clinical outcomes.

Mike Weinstein - JP Morgan

My other question is in areas where reimbursement is not the issue today, can you talk about the traction you’re getting.

Mike Rousseau

Well it is mixed. We have areas that are in fact growing and the programs are growing and our implant rates are actually up. There’s concerns about will other MACs decide to begin a process or not, and we’ve been trying to work through that. So I would say that in those areas where we were not directly affected, we’ve actually had implants increasing and continue to open centers.

Mike Weinstein - JP Morgan

And then last question is more of a structural question, there appear to be across the industry number of examples where companies that have consolidated structures and particularly across product lines and previously distinct end markets in to similar organizations in order to cut costs have resulted in decreased productivity, more R&D challenges and the companies that have maintained these centralized structures across business units that have their own separate independent R&D sales channels and so forth end up flourishing.

So my question is that since you would have structure right, would this push over the last several years to one St. Jude where you’ve consolidated CRM and neuro and you keep consolidating within cardiovascular. Is the structure right across the organization?

Mike Rousseau

Mike the first thing is that there’s a time element associated with change in organizational structure. I think probably the most appropriate way for you to make an assessment is as you come out to the February 5 meeting and you look at our cadence, across the key areas in which we are focused, with the level of experience you have and the background in looking at product pipelines in time of the market, I think you would be able to make an assessment of exactly how well we are or are not doing in the product development area in our ability to bring innovation in to the space.

The idea of being able to focus specifically in certain areas and make sure that we are investing in the areas that matter most versus those areas that are most important for each individual product division is an advantage.

So I think agility, I think ability to rapidly move assets to course correct and you’ll see some of that. We have not disclosed all of the things that we’re working on and we will give you a better view on the 5th on our ability to do that.

As it relates to the selling organizations, in fact when you look at our sales channel and you look at the point of sale and/or the point of service, it’s more of a focused product line approach or for lack of a better term a more traditional selling process. Where the opportunity presents itself is several levels up, where in a consolidated way we can sit down with different buying groups, whether they be IDNs or national systems and speak to them about the entire St. Jude Medical portfolio.

And there’s a leverage point that gets created there. So the understanding of how the structure actually works in the real world is important. So the idea of are we managing R&D effectively, are we getting production to the market that are relevant and important, can we be agile about making high level decisions. I use Thoratec as another example, where we were able to put that deal together very rapidly and get it done because of our structure really facilitating rapid decision making.

So, on the 5th it would be interesting to have a discussion may be post meeting and see what your feelings are about what our product cadence looks like. But from a sales channel and distribution standpoint, we are probably more traditional than you might think.


Your next question comes from the line of Josh Jennings with Cowen & Company. Your line is open.

Josh Jennings - Cowen & Company

First on CardioMEMS, I know we’ve had some discouraging conclusions from the California Technology Assessment Forum and First Coast in Florida that the clinical data supporting pulmonary artery pressure monitoring is promising but inconclusive and we’ve had some feedback from some select clinicians as well on that point.

So just curious about the strategy to build out the body of clinical evidence, and we’ve heard that there may be single center publications coming, there may be collaboration between high volume centers to capture in your word outcomes that are in the works. Is St. Jude planning on sponsoring any other trials or you’re going to rely on the post approvals study, and when can we see early results from the post approval study and not willing to bolster reimbursement, there’s been clinician adoption.

Mike Rousseau

Yeah Josh they are great points, and I’ll start and let Eric Fain who is heading up a lot of the - in fact heading up our clinical strategy around CardioMEMS. And I’d start with, we will continue to support clinical studies. There are multiple opportunities for us to develop the clinical evidence and we plan on doing that.

I’d as Eric also to include in his remarks an update on the latest clinical trials for alternative methods of managing heart failure. So Eric why don’t you share some insights.

Eric Fain

Josh we will continue and are in the process of having discussions to add additional clinical trials support. We are focused on the post approval study. It’s actually been unusual in terms of post market study and that it’s not just focused on safety and it incorporates in real world affecting the state as well, looking at rates of hospitalization, looking at patients as their own control. So it’s a fairly robust study in term of, as you compare it to other post approval studies. But we are also in the process of looking at additional studies using CardioMEMS.

As Mike mentioned and to your point just of the ICER, CTAF analysis, one of the things that has happened in the last quarter in addition to the publication of The Lancet data which showed very good durability long term and great compliance by both patients and physicians in driving that 48% reduction in heart failure hospitalization over a period of time that averaged 31 [sponsors].

There’s also the presentation at AHA of the BHF trial which was looking at basically taking best practices from every other thing that people could think to do in trying to keep patients out of the hospital and from being readmitted. So that study just is a reminder enrolled over 1400 patients and they were patients who were being treated for decompensated heart failure episodes and the patient who are randomized to either get usual care or again, kind of using all strategies that people have tried to use in the past which included free discharge, heart failure education, regularly scheduled coaching telephone calls from registered nurses as well as remote monitoring of weight and blood pressure and heart rate and tracking of symptoms.

And after doing all of that and performing this study at all of the expert academic heart failure centers in California, they found no difference in heart failure readmission rates at six months, no difference in the 30-day readmission rates and no difference in mortality at six months.

So you had now the long term data coming out of CHAMPION showing great real world results and then now another large study looking at alternative therapies. And really what I’d say is the best practice in California at the academic heart failure centers which is really the focus that we are also providing the inputs to the CTAF ICER analysis, although they didn’t have the opportunity to really consider those results at the time of their report.

But again you just see all the big trials and big misses in everything to try to keep patients out in the hospital and the only thing that’s been shown to be effective is CardioMEMS.

Josh Jennings - Cowen & Company

Thanks for all that details. Just a quick follow-up Mike on your comments around contracts for the CRM business with MRI product gap. Can you give us a little more detail just on how the contract situation or hurdle, how we should think about it rolling in to 2016, and once you get the MRI safe low voltage devices on the market, does that open you up or all these CRM contract mostly bundled with high voltage and low voltage any further details on how we should think about that contracting situation in your face in Q4 rolling in to 2016 will be helpful.

Mike Rousseau

So the contracting cycles are constantly opening and closing and RFPs are constantly being changed in format a lot of due to consolidation in the market as well as new products coming in to this space likely less spacing. The opportunity for us is on any RFPs that are in cycle will be able to now bid at that premium level and those that are not in bid if we are on contract we will typically will have to go through a process before approval, but if we are on the contract we’ll be able to come in to the space. So it’s going to be a mixed bag as you work all the way through ’16 but those cycles are typically to a larger extent are run through the 12 months cycle.

We’ll have some of the larger accounts open off cycle again if there are technologies that come in to play and technology that I think will give us an opportunity is going to be leadless technology as we begin to look at market timing in the US. We have at [pay] right now as first half ’17, but we’ll see how exactly things roll out with the FDA.

We have time for one more question [Stephanie].


Your last question comes from the line of Rick Wise with Stifel. Your line is open.

Rick Wise - Stifel Nicolaus

AF, Mike you’ve had a real success story with AF over the last year, it has been an area of meaningful growth. We are sort of lapping anniversarying that TactiCath FlexAbility launch. May on that side of the business, where do we go from here? I mean your share of I’m saying this probably incorrectly was I think gut down in to the mid-teens. You’ve gained 400 basis points of US share where are you now, how much more is there to go now?

And may be just as you talk about that, do we think about the products we’ll probably hear more about at the analyst day like the insight mapping system etcetera as sustaining the kind of AF growth we saw in ‘15 accelerating it is incremental.

Mike Rousseau

So the launch in the interest of time it’s a significant launch with what I would call our new platform coming in to the market. So we’ll be in the market with a combination of impedance and magnetics with the first center enable catheters. We just literally have done our first cases in Europe this week. The outcomes were excellent, the physician feedback is incredibly positive and the important thing about putting a new hardware, new software and new tools in the hand of the [EPE] is the opportunity to build off that platform.

So our expectation is that we will return to share capture, you point of the comps and anniversaying TactiCath and Flex is on point. And we think as we roll out these products, we will gather momentum in the EPE community.

Again it’s not a single product line, it is a platform technology that literally changes the way that we can map and manage AF cases. So there’s a lot of opportunity here on the clinical side, a lot of opportunity on the tool development side to really have an impact in patient therapy.

So we’ll have a very comprehensive over view on the 5th and I think that at that time you’ll be able to model how our AF business will unfold.

Rick Wise - Stifel Nicolaus

And just quickly Portico, just remind us where are you in US enrollment and what might be a reasonable US time Mike for completing the US trial enrollment and possibly potentially gaining approval. Thanks very much.

Mike Rousseau

First I would remind everyone that in Europe we do have all four sizes, we have the IDE underway. Eric if you want to make an estimate here on enrollment.

Eric Fain

Rick it’s hard to judge, we certainly have been focused on getting all the sites back up and running. As we’ve seen with another situation with a pause it just takes some time to kind of take the momentum back that we had before. So we’ve done that, I’ll tell you that we’ve also added additional sites that weren’t participating in the past.

For the most part the investigators are stuck with us and remain fully [reserved] we have a technology that’s competitive in the market place and so I hate to say at this point give you a line to say when it will be complete. But I will tell you that of all the clinical trials that we have going it’s our top priority and focus for driving enrollment.

Mike Rousseau

So with that we’ll conclude our questions, and I would like to first thank everyone for attending the call and then of course look forward to seeing everyone here on February 5th as we get ready for our analyst day. Thank you.


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