St. Jude Medical, Inc. (NYSE:STJ) Q1 2015 Earnings Conference Call April 20, 2016 8:00 AM ET
Michael T. Rousseau - President and Chief Executive
Eric S. Fain - Group President
Donald J. Zurbay - Chief Financial Officer
J.C. Weigelt - Senior Director of Investor Relations
Matthew Taylor - Barclays Capital Inc.
Michael Weinstein - JP Morgan Chase & Co.
Robert Hopkins - Bank of America Merrill Lynch.
Bruce Nudell - SunTrust Robinson Humphrey
David Roman - Goldman , Sachs & Co.
David Lewis - Morgan Stanley & Co. LLC.
Welcome to the St. Jude Medical First Quarter 2016 Earnings Conference Call. Hosting the call today is Mike Rousseau, President and Chief Executive Officer of St. Jude Medical.
Before we would begin, let me 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 2015 identifies 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 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, investors.sjm.com.
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.
Michael T. Rousseau
Thank you. Welcome to the St. Jude Medical first quarter 2016 earnings conference call. Today with me on the call are Eric Fain, Group President, Don Zurbay, Chief Financial Officer and J.C. Weigelt, Senior Director of Investor Relations. Our plan this morning is for Don to provide a review of our financial results for the first quarter of 2016 and to give an update on the sales and earnings guidance for the second quarter and full-year of 2016. I will then provide additional comments and open the call up for questions. Go ahead, Don.
Donald J. Zurbay
Thank you Mike. Earlier this morning, we issued a press release containing our first quarter 2016 financial results as well as a schedule detailing reported and constant currency sales results by business area. This press release is available on the St. Jude Medical website. For participants on today’s call, please note that all references to sales growth rates unless otherwise noted or on the comparable constant currency basis, which includes Thoratec sales in both comparable years and are adjusted for the impact to currency.
Sales for the quarter totaled $1.448 billion, up 2% from the first quarter of last year. Unfavorable foreign currency translations decreased this quarter sales by approximately $42 million. During the first quarter, we recognize a $164 million or $0.57 per share in net after-tax special charges and amortization expense. For further information regarding these items, please refer to details provided in our press release.
Comments during this call referencing first quarter and guidance for 2016 including EPS amounts will be exclusive of these items. Adjusted earnings per share were $0.90 for the first quarter of 2016, compared to adjusted EPS of $0.93 in the first quarter of 2015. We estimate that on a constant currency basis first quarter adjusted earnings per share to increase 9%.
Before we discuss our first quarter 2016 sales results by product category with guidance for the second quarter and the remainder of 2016, let me provide a few comments about currency exchange rates. As discussed on prior calls, the two most significant currencies influencing St. Jude Medical’s operations are the euro and the yen.
In preparing our sales and earnings guidance for the first quarter and full-year 2016, we used exchange rates, which assume that each euro would translate in to about $1.05 to $1.10 and for the yen each 115 to 120 yen would translate in to US$1. For the first quarter, the actual average exchange rates for the euro and yen were consistent with these ranges. In preparing our sales and earnings guidance for the second quarter and the remainder of 2016, we are now assuming that each euro will translate into about $1.11 to $1.16. We now expect each 106 yen to 111 yen to translate into US$1.
Additionally, we have assumed changes in various other currencies that impact our results. These changes and assumptions regarding currency exchange rates increased our total forecasted sales for the remainder of 2016 by approximately $85 million. And we now estimate the foreign currency translations will reduce our total reported sales for 2016 year approximately $35 million to $55 million versus 2015 including approximately $10 million to $15 million in the second quarter.
I will now walk through first quarter results in our new product categories. Heart failure, Atrial Fibrillation, neuromodulation, cardiovascular and traditional Cardiac Rhythm Management or CRM. We issued and 8-K on January 13, detailing the products in these new categories as well as historical St. Jude Medical’s sales for each category.
For the first quarter, total heart failure sales were 374 million which grew 2% from last year’s first quarter. Sale of Heartmate III during the quarter drove strong double-digit year-over-year growth of left ventricular assist devices or LVADs and we now assume the LVAD market is growing in the high single-digits. We continue to expect full-year 2016 cardioMEMS sale to be approximately $65 million.
Atrial Fibrillation or AF product sales for the first quarter totaled $291 million up 9%. Although there was a difficult comparison this quarter given last year’s ablation catheter launches our worldwide AF business continued to demonstrate strong growth. We expect to continue to take share in the AF market this year with the continued adoption of our ablation catheter portfolio and the worldwide launch of our EnSite Precision mapping system.
Total sales of neuromodulation products in the first quarter of 2016 were a $116 million, up approximately 10% as we continue to take share on a global basis with the most comprehensive neuromodulation portfolio in the market. Total traditional CRM sales for the first quarter of 2016 were $366 million down 7%. Sales results were largely driven by weakness in the U.S., which declined primarily due to MRI products gaps in both our low voltage and ICD product segments.
Total sales of cardiovascular products for the first quarter of 2016 were $301 million up 3%. We expect sale in cardiovascular to accelerate as we expand our TAVR sale and launch our Trifecta GT tissue valve in the U.S. and European markets.
Turning to sales guidance, we continue to expect our full-year comparable constant currency sales growth rate for 2016 to be in the range of 2% to 4% and expect comparable constant currency sales growth in the second quarter to be in the range of 1% to 3%. The gross profit margin during the first quarter was 68.7% down 210 basis points from the first quarter of 2015 primarily due to the decline of 150 basis points related to the negative impact of currency.
Additionally, there was 60 basis point decline related to the continued weakness in our margin U.S. CRM business. Please note that our gross profit margin the first quarter included the final $7 million of medical device excise tax cost, amortized from inventory the cost of sales. For the full-year 2016 we continue to expect gross profit margin to be in the range of 69.0% to 69.5% this expectation includes continued weakness in our U.S. CRM business, a 60 basis point improvement related to the suspension of the medical device excise tax and a 50 to 60 basis decline driven by the negative currency environment.
Our first quarter SG&A expenses were 31.6% of net sales a 200 basis point improvement from the first quarter of 2015. For the full-year 2016, we now expect this ratio to be in the range of 31.3% to 31.8%. Research and development expenses in the first quarter of 2016 were 13.0% of net sales, for the full-year 2016 we continue to expect R&D expenses to be in the range of 12.5% to 13.0% of net sales.
Other expense was $41 million in the first quarter, for the full-year 2016, we now expect other expense of approximately $155 million to $165 million primarily driven by interest expense on our outstanding debt. For the first quarter, our effective income tax rate was 15.9%, for full-year 2016, we continue to 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 the first quarter, we had approximately $325 million in cash and cash equivalents and $6.1 billion in total debt. During the first quarter, we repaid approximately $400 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 offers some comments regarding our EPS outlook for the second quarter and the full-year 2016. In preparing our EPS guidance, we have assumed that in the second quarter of 2016, the weighted average outstanding shares using our fully diluted EPS calculation will be about 287 million to 288 million share and the weighted average shares outstanding for the full-year 2016 will be about 288 million to 290 million shares.
For the full-year 2016, we now expect Adjusted EPS to be in the range of $4.1 to $4.11, the adjustment this quarter to our annual EPS guidance of $0.06 primarily represents the impact of our favorable currency expectations for the reminder of the year. The Company expects Adjusted EPS for the second quarter of 2016 to be in the range of $1.5 to $1.7.
I’ll now turn it back to Mike.
Michael T. Rousseau
Thank you Dan and thanks again to everyone for joining us today. First quarter results reinforce our confidence that we are focused on the right priorities and are making progress against the objectives we discussed at our Annual Investor Meeting in February. As a reminder, we told to investors that we would successful execute against four key priorities to set the stage for accelerating growth in 2017. Those priorities are: successfully launch key products to drive sales growth, establish U.S. reimbursement for CardioMEMS nationwide, successfully integrate our Thoratec acquisition and execute the plan for recovery in U.S. CRM.
Before addressing each of these items in my comments today, I would like to briefly highlight that year-to-date we have achieved a number of important milestones that support our objectives including 10 regulatory approvals. Some of those approvals include our Axium DRG System, MultiPoint Pacing and Quartet leads here in the U.S..
In Japan we received approval for our OPTIS Mobile System, MRI compatible Ellipse ICD and MRI-conditional labeling on our Quadra Assura CRT-D device. In Europe, we received approval for MRI labeling for Nanostim. The launch of supporting these important product approvals are underway and we are pleased with our progress so far.
For the first quarter, sales grew 2%, which is at the high-end of our guidance range. I am pleased with our ability to continue to drive adjusted EPS growth at approximately 9% constant currency above the high end of our guidance range while at the same time funding innovation to drive future growth.
Our international business grew approximately 4% in the quarter driven by growth in Left Atrial Appendage LAA closure. LVADs, TAVR, Optical Coherence Tomography or OCT, the OPTIS Mobile System with co-registration and the expansion of our Quadripolar lead portfolio. We view the performance of our innovative products when launched internationally as a leading performance indicator for when these products are approved and launched in the U.S.. In addition, our portfolio of commercially available products around the world continues to grow.
I will now discuss our progress in our areas of focus. As many of you know, we’ve been working to expand our heart failure portfolio through recent acquisitions and internal innovation. Our teams are actively working with governments, payers, hospitals and physicians worldwide to expand market access to these proven technology solutions across the heart failure continuum.
While our success with MPP and HeartMate 3 are driving growth, we continue to actively address challenges with reimbursement for our CardioMEMS heart failure system and in late January, we applied for national coverage determination from CMS. We expect formal acceptance of our submission in Q2 and anticipate this could be a nine to 12-month process before we have a final decision.
Clinical evidence supporting strong effectiveness of the CardioMEMS heart failure system continues to grow with more than 30 key publications in abstracts published today. We are pleased that the general of the American College of Cardiology recently accepted for publication data that was presented at the 2015 HRS Meeting. This retrospective analysis of the CHAMPION trial data shows monitoring pulmonary artery pressure is able to prompt therapeutic changes that improve heart failure management and intern reduce hospitalizations.
As importantly, we continue to see real world commercial experience data that is as strong as or stronger than our initial CHAMPION data. For example, real world data recently presented at the American College of Cardiology annual meeting showed improved quality of life metrics and improvements in exercise capacity for patients monitored with our CardioMEMS device. We believe real world data combined with growing body of clinical evidence in support of CardioMEMS continues to demonstrate the tremendous value this important technology offers for improving patient care and reducing overall costs.
To increase our focus on expanding the market for CardioMEMS and LVADs, we have leveraged the legacy Thoratec sales structure to form a combined dedicated U.S. Heart Failure Organization. Our first quarter sales give us confidence that we are on track to achieve our previously issued sales guidance of $65 million in 2016.
We closed on our acquisition of Thoratec about six months ago and our integration process is essentially complete. This important milestone is a full quarter ahead of our initial expectations. As Don mentioned, LVAD sales in the quarter were strong. Much of this success can be linked to our integration efforts that have included a strong focus on clinical and sales execution and the improved clinical experience that our customers have observed with HeartMate 3. Customers have also shared that they have enjoyed a seamless transition without disruption over the course of this integration process.
Since its launch in October 2015, we have implanted HeartMate 3 in centers across 15 different countries internationally and are now implanting in all four of the largest heart failure centers in Germany, which make up approximately 20% of the European LVAD market. Access to these accounts can be attributed to the strong relationships that St. Jude Medical has cultivated over the years.
There will be a number of presentations later this month at the International Society for Heart and Lung Transplant meeting supporting both HeartMate II and HeartMate 3. Including HeartMate 3 CE Mark 12-month data and real world experience in the Kazakhstan study.
Turning to our CRT portfolio, we recently received FDA approval for our MultiPoint Pacing or MPP technology for our Quadra Assura CRT-D and CRT-P devices along with two complementary Quartet left ventricular leads further the strengthening our differentiation in the treatment of heart failure.
MPP is a first-to-market technology provided only by St Jude Medical, which we believe will become the next standard-of-care in CRT therapy and builds upon our success as the leader in CRT therapy options. In addition to MPP, we intend on adding a feature to our CRT portfolio called Sync AV, which is in response to the growing importance of CRT optimization. We expect this technology to be available to customer in the U.S. during the second quarter of 2016.
Our European experiences have shown that MPP can provide improved acute hemodynamic response as well as an improved chronic responder rate for CRT therapy. Recent data presented at ACC demonstrated optimization of LV pacing sites by means of hemodynamic and electrical delay plus MPP resulted in statistically significant improvements in the New York Heart Association class, Heart Failure Packer Index and remodeling versus standard CRT therapy.
We will present data at the upcoming Heart Rhythm Society meeting in May as we were recently informed that the results from our IDE trail have been accepted to be presented as a late breaking clinical trial session. We also recently completed enrolment in our 1800 patient more CRT MPP study, which will provide the largest data set regarding the ability of MPP to reduce the percentage of patients or non-responders to CRT.
Other studies are also expected to be published in the near-term that demonstrate MPP’s effectiveness in improving the response to CRT at one-year. With MPP we have continued to advance CRT therapy by delivering better outcomes for patients and physicians. We believe this is an important next generation technology that differentiates St Jude Medical and will allow us to grow our market share in this important segment as well as in CRT-P where we are already the clear market leader.
Moving to our traditional CRM business, first quarter dynamics were similar to those experienced in the fourth quarter of 2015. While we continue to experience challenge in this business particularly in the U.S., we continue to believe our compared position will improve throughout the year. In Japan, we launched our MRI safe ICD, which drove strong high voltage performance in that geography and we expect our pending launch of MPP to continue to strengthen our CRM business in Japan.
Turning to our U.S. High Voltage business, I would like to highlight that we are still on track to begin our global IDE trial to the MRI safe ICD with first implants in Europe later this month and remain on track for U.S. launch during the first half of 2017. Earlier this quarter, Nanostim received its CE Mark for MRI compatibility. St Jude Medical has long been at the forefront of leadless pacing technology.
We look forward to bring Nanostim, the world’s longest lasting leadless pacemaker with the industry’s least invasive and small smallest system to the market to ensure broad patient access to this important therapy. We continue to work with FDA regarding on Nanostim leadless pacemaker and continue to expect FDA approval of Nanostim in the second half of 2016.
In the U.S. we remain in discussion with FDA regarding approval of our Assurity MRI pacemaker which is a smallest and longest lasting device in the market. Based on these discussions, we now expect approval and launch of our Assurity MRI pacemaker in the second half of 2016. We think not having an MRI compatible pacemaker until the second half of 2016 will cost us approximately $15 million to $20 million in 2016 revenue.
However, we are not changing or total sales guidance because we believe continued improvement in the U.S. field execution and our strong expected product cadence and our broader electrophysiology business will offset that gap.
The CRM market remains an important area of our business and is a vital part of the care continuum for the patients who suffer from verity of cardiovascular dieses. I want to emphasize that we think about our traditional CRM products in context of the overall electrophysiology business, because that is how our customers make purchasing decision. Both our sales organization and our customers are excited about the strength of our entire electrophysiology pipeline that is expected yet this year.
For instance, while sales of our next generation Confirm insertable Cardiac Monitor or ICM will not be reported in our traditional CRM category. Once approved, we believe this product will be a driver for our CRM business. As a reminder, we believe this next generation Confirm will be a disrupter in the market and a significant differentiator for St. Jude Medical.
We anticipate this device will be the first commercially available Bluetooth enabled and smartphone capable ICM. We are on track to submit for U.S. and European regulatory approvals in the second half of 2016. So while our traditional CRM business continues to be under pressure, particularly in the U.S. We are continuing to work on getting MRI compatible low voltage approved in 2016 and high voltage products to market in the first half of 2017.
At the same time, we are continuing to grow other related segment of our business. In electrophysiology this pipeline includes our next generation Confirm Insertable Cardiac Monitor, MultiPoint Pacing, EnSite Precision, Nanostim and Sync AV product launches, which are all on track and will allow us to continue the contract compatibly with hospitals. Offset traditional CRM's share loss and that a stage for traditional CRM share recapture in 2017.
Turning to our AF business, where comprehensive product portfolio is again a key differentiator for St. Jude Medical. We saw a 9% growth in the quarter. We are excited about our AF position, given the strong cadence of new launches and consistent double-digit growth across our TactiCath and FlexAbility Ablation Catheter. We expect to continue our successful limited launch of EnSite Precision in Europe and will initiate a full launch in Europe during the second quarter.
In the U.S., we filed our regulatory submissions associated with EnSite Precision in the first quarter and expect to initiate a full launch of our new EnSite Precision System in the U.S. in the second half of 2016. This will be the largest and most comprehensive launch in the history of our AF portfolio and stands to revolutionize the cardiac mapping segment with a flexible, precise and automated mapping system.
To-date, more than 600 procedures have been performed with EnSite Precision in Europe with existing EnSite users as well as by [KOLs] (Ph) who have a historically favored competitive systems. Feedback on the use of EnSite Precision has been overwhelmingly positive in regards to stability, reliability, speed and unique features including the auto map system. Included in this launch will be a series of sensor-enabled catheters that will allow further penetration of our proprietary Mediguide platform.
We continue to view our AF business as a highlight in 2016 as we gain share with the successful launch of EnSite Precision and continued adoption of both TactiCath and FlexAbility. We expect to leverage a strong portfolio of new products in conjunction with our CRM business to strengthen our contracting position with U.S. hospitals.
Our first quarter neuromodulation results represent another bright spot in the quarter as we continue to successfully execute against our strategy of surrounding chronic pain with Spinal Cord Simulation or SCS, as well as DRG and radio frequency ablation. We grew 10% in the first quarter and believe we took share with our innovative SCS platform.
Plans are underway to establish St. Jude Medical’s proprietary Burst therapy as a new standard, advanced wave form in SCS and to achieve superior pain relief across rechargeable and recharge-free devices. We saw a strong growth in our international SCS business with continued adaption of Burst therapy, growing approximately twice the international SCS market growth rate. We remain on-track and are preparing to bring our Burst technology to the U.S. in the second of 2016.
We are pleased with the progress we are making with the launch of Proclaim, the only upgradable recharge free device in the market, which is expanding the SCS market as the adaption of this technology is moving more quickly than originally modeled. In fact, we are noticing a significant shift in our SCS product mix to Proclaim, this momentum signals to us that physicians are highly interested in implanting products that provide them the ability to upgrade software platforms to instantly access new technology upon regulatory approval and that customer realize the benefits of a device that does not require recharging.
Our Axium Neurostimulator System for DRG or Dorsal Root Ganglion stimulation expands our chronic pain portfolio in the almost two billion chronic pain market to treat patients who suffer from complex regional pains syndrome and positions DRG therapy as a clinically validated market expansion story. The recent 12-month follow-up data on DRG presented at NANS last December demonstrated DRG stimulation sustain superior pain relief and improve therapeutic targeting.
Since our commercial launch in the U.S. a few weeks ago, we have received strong enthusiasm from the Clinical Community and are on-track to complete approximately 100 cases in the first month. We have implanted a successful training program with initial case experiences going very smoothly providing life-changing results for patients.
We have begun to implant our innovative Infinity DBS platform in Europe with the first case is happening earlier this month. We continue to expect FDA approval in the second half in 2016. We believe our Infinity platform is the first platform engineered to fuel patient independence with an app based, Bluetooth, wireless communication platform and our directional lead technology.
This is a first of its kind technology providing a more patient centric intuitive technology for patients battling Parkinson’s disease, essential tremor and dystonia. We continue to be excited with the potential that our neuromodulation business offers as these products are launched and adopted worldwide.
Turning to our cardiovascular portfolio, we continue to execute on our innovation strategy with a focus of bring-to-market new technology that will allow us to take share while supporting market growth in our more traditional business segments. We remain encouraged by the momentum of our Portico TAVR System, which continued from last year to the first quarter. We saw implants per week increase throughout the past two quarters, a continue to receive positive reviews regarding Portico’s ease of delivery, hemodynamic performance and reduced need for pacemaker implants relative to next generation valve.
The IDE study continues to enroll and we are targeting complete enrolling in the study in the second half of 2016. Additionally, our next generation tissues valve Trifecta with Glide Technology just launched this month in Europe and with an expected launch in U.S. during the second quarter. In regards to our PFO closure device, we look forward to the FDA Panel Meeting that has now been schedule for May 24.
Recall that last year’s Transcatheter Cardiovascular Therapeutics Conference. 10-year follow-up respect data showed in the attempt to treat arm of the study that when subsequent strokes were restricted to cryptogenic stroke there was a 54% relative risk reduction in recurring cryptogenic stroke to the PFO closure group as compared to medical management. This compelling data was statistically significant.
Our HeartMate Percutaneous Heart Pump or PHP device addresses a large growing market and provides meaningful enhancements to the available competitive offerings. Enrolling patients in this IDE study continues to be a high priority for us and we are gaining traction, as we are adding several high volume centers in the U.S. In addition, we continue to have good discussions with the FDA regarding our Renal Denervation IDE study and we continue to expect to begin that study later this year.
During the first quarter, we demonstrated our ability to execute against our strategy, delivering our investment in innovation and drive market demand for our products. With 10 product approvals and major product launches in key regions in the first quarter, we are off to a good start in 2016. We are on-track to do what we said we were going to do in terms of delivering sales and adjusted EPS growth.
We continue to gain momentum in heart failure with our recent launch of MPP and strong results from our HeartMate portfolio. In AF, we are demonstrating strong growth with continued share gain in ablation catheters and an unprecedented opportunity with the launch of EnSite Precision. Our neuromodulation business continues to be a bright spot with above market growth due to our innovated product portfolio. We have a path for traditional CRM share recapture and believe our expected product cadence in our electrophysiology business sets the stage for momentum in 2017.
This is a challenging but exciting time for St. Jude Medical. I believe that we are focus on the right objectives. As the healthcare environment continues to evolve, we are building new capabilities and expanding our comprehensive solutions to the treatment of expensive epidemic disease. Our focus on innovation and execution is driving results and we have never been better positioned for worldwide market leadership in atrial fibrillation, heart failure and neuromodulation.
Thank you for joining us today and with that, I would like to open the call up for questions.
[Operator Instructions] Your first question comes from the line of Matthew Taylor with Barclays. Your line is open.
Good morning. Thanks for taking the question. I guess I wanted to see if you could give us a little bit more color on your expectation for the arc of the recovery in CRM and just how important the different product approvals are at MultiPoint, MRI Pacers and MRI high-voltage and why the delay in the pacer here.
Michael T. Rousseau
So Matt I’ll start with importance of the product cadence and how that’s going to impact us through the year. The thing to remember about our traditional CRM business is you have to look at in context of the overall EP business and that’s the way the EP is looking at this business. So product launches across EP are just critically important and of course MPP would be a great example.
We’ve talked a lot about MPP and we really need to work to make sure that this technology is fully appreciated by our customers and frankly by the street. It’s not simply iteration of Quadripolar Technology, the MPP was developed to really solve significant problem that the EP has in the CRT-D and P space which is the non-responder group. This in some standards they will tell you it’s as high as 30%.
So the idea that there is now a technology that will help reduce the amount of non-responders is significant, not just in patient in care but also as it related to the cost of care. Secondly, there is a technology that we’re introducing Sync AV and when you take the combination of optimized location, optimization of the management of the device as well as optimized timing we think the results can be even more promising that we’re seeing now. So HRS will be an exciting time for the paper has been accepted there and that’s where the initial data will come out.
The other second factor is more CRT that’s going to be the largest study ever and over the years if you look at technologies like Quad where you begin to change the way medicine is practiced and actually set the standard-of-care. It often requires multiple studies and multiple trials. MPP will have two significant trials with more CRT just completing and now going through the process of follow-up and over 60 publications and papers drafted about single site performance of the products.
So we think that that cadence of products are going into the second half will be extremely important for us to offset the delay in our labeling for MRI. And as we pointed out, we think that delay is approximately five million a quarter and with the cadence of products that we anticipate coming into the market, we’re confident that we will be able to offset that. As it relates to the delay, we've been working closely with the FDA on this and remember this is a full PMA requiring review from both the former and device side. We believe that the we've been working very closely with them over the last several months particularly and think we’re on a good track to meet the requirements that they have outlined.
I would say that you know as we looked at the submission, we’ve high confidence that we will get to the results that are required and we decided it would be prudent to move the time out and make sure that this submission is appropriate, on-track and will be successful. And so that’s the delay that we have, we think it’s a manageable delay, when you would look at the overall product cadence and we also think that we will in fact achieve the labeling this year.
Okay. Thanks for all the color.
Your next question comes from the line Mike Weinstein with JPMorgan. Your line is open.
Thank you. A couple of question, unfortunately the new categorization and disclosure doesn’t help a lot in some of the business. So can you may be give us a little bit more color on the Heartmate performance on the Thoratec performance this quarter and then second could you just talk about the day that we’re going to see at ISHLT?
Michael T. Rousseau
So I’ll cover the performance that we’re seeing in the field the Mike and then I’ll switch it to Eric to give you update on the study itself and what we’re looking forward to at the meeting.
And Mike you guys said double-digits, but again that’s a general comment, it’s just not specific enough, would you help you read?
Michael T. Rousseau
Okay. So I could characterize that as high-teens Mike to help you with your modeling and the performance of Heartmate 3 in the study has been not only very well received, but I think is really setting the standard here and we’re looking forward to the data being presented and clarifying just how good the performance of the product has been. As it relates to building out our sales force specifically targeted in Europe, we’re moving from a independent to direct on a country-by-country basis. That process and progress is ahead of schedule.
We specifically targeted Germany as the most important market in Europe and the sales team over there has really executed at very high level and now in the four key sites are contracting where in Europe be a tender process is being developed and we think that we are on-track to continue to take share in Europe as well as the U.S.
The last comment I would like to make about the Thoratec integration, the hard part of acquisitions is always in the outcome associated with the integration. And it's really been a very successful integration with excellent results, both internationally, U.S. and in the division itself. In the U.S. we’re so pleased with the performance of that team that we thought it would be a good idea and we are seeing the early results of actually combining our CardioMEMS team in with that heart failure group led by that senior executive, Ed Rieflin, who has done a great job in transition.
The results so far have indicated that our implant rates continue to improve giving us confidence that we can achieve the target of 65 million by year-end. So I think we are on a good track from both the product standpoint, the combination of heart failure and access to the top labs and sales forces around the world that are very focused at launching new technology and taking share.
So with that let me turn it over to Eric, he has got laryngitis, but he is going to...
Eric S. Fain
Hey Mike, let me know if you can hear me.
My goodness Eric, you don’t sound too good there.
Eric S. Fain
No but here let me help you out with the study. So there is two main abstracts for HeartMate 3 at ISHLT. So as you know one is from Kazakhstan that has 39 patients and then the CE Mark study that has 50 patients at 10 centers. So just a big step back, there were no stroke events in the Kazakhstan study and total nine stroke events in the CE Mark study at one year follow-up.
Since the presentation is still upcoming, I don’t want to give too many details, but I recommend that everybody attend the sessions and read about that to get a better idea of the details. Surrounding the strokes as we've looked at the individual events, we don’t see any systematic trends that are concerning also keep in mind that CE Mark study represent very initial experience with HeartMate 3 and there is always a learning curve with all devices, but especially LVADs and getting a feel for the appropriate implant techniques. Yes, I would also say that just in our commercial experience, we are monitoring that as you might imagine very carefully and we don’t see any signals that would raise any concerns.
Okay just two quick follow-ups guys, so the push out and the timing for the MRI compatible pacers, does that have any impacts at all on the timing for MRI compatible ICDs and CRT-Ds in 2017? And then two, when you guys talked about moving confirm - downsizing Confirm Loop Recorder to a much smaller device at the Analyst Meeting. You can talk about changes to the detection algorithms. I know when Medtronic with Confirm revealed to LINQ, they had to modify their detection algorithm, because of the different size of the device. So could you just spend a minute on that? What are you doing to the existing algorithms that have been published on and whether there will be any changes required to get to a much smaller device? Thanks.
Michael T. Rousseau
So Mike I’ll take the first question and then will let Eric start if he can't finish, I’ll try my best to finish for him, but on the HV timing, we don’t see any impact from one versus the other. As a matter of fact, we think that we are going to start here in weeks and that trial is clearly defined, we've done a lot of work to make sure that we're prepared to execute on that study. Remember it's a scans, so we have to go collect a number of scans.
One of the thing about the size of the trial is actual rate of scans for these patients are somewhere between 3% and 5% and so as the MRI labeling has become the actual use and the importance in the market is at that 3% to 5% rates. So there is going to be a lot of scans required to meet the threshold and that’s why the timing.
Eric S. Fain
So Mike, I mean on the Confirm, it's the same algorithms, we did not need to change that at all, based on the work that we've done with a designs, so we are going forward with the same algorithm that we had in the original Confirm.
Okay thank you Eric, feel better.
Eric S. Fain
Your next question comes from line of Bob Hopkins with Bank of America. Your line is open.
Thanks good morning. Can you hear me okay?
Michael T. Rousseau
Yes, good morning Bob.
Great good morning Mike. So two quick questions here, first just getting on the pipeline and I appreciate the update you guys gave on a bunch of different products. One thing I heard there was on EnSite Precision in the U.S., it sounds like time line for that has maybe slipped a little bit. Could you talk about the reason for the slip and confidence that you will have an approval in the second half? Just want to understand what would happen there?
Michael T. Rousseau
Okay. So Mike, it’s actually six separate submissions and with a lot of moving parts as it relates to how that all fits together. So it’s a complex submission, it’s been thorough, we’ve met extensively with the FDA and we think that we’re on-track, it is the delay and we don’t think it will be significant, but delay is really around the review of the six systems and how they all come together. It’s a software, hardware, some peripheral changes and some new catheters that are also involved here that are sensor-enabled catheters that are brand new to the industry.
And so that’s the challenge and again we’re working very closely with the FDA, it’s just significance in the size of the overall submission. So we’re literally talking about a completely updated system across the Board and so therein lies the delay in the process, but we’re still confident that will be in the market with the full release in 2016.
Okay. Thank you for that and then the second question I wanted to ask was back on the traditional ICD business as you guys are breaking it out. Obviously, from a year-over-year perspective it’s still pretty week, but you did see in the United States a sequential improvement in the traditional ICD business. And so, I was wondering if you could just talk about what drove that sequential improvement, because it actually is a sequentially normally, seasonally weak quarter for you and yet you drove a little bit of upside in the business relative to Q4. So can you just talk about what the drivers of that improvement were in Q4? And maybe just talk about some of the changes in the business that you have made that made you think you are on the right track. So I’m talking now besides the pipeline?
Michael T. Rousseau
Yes. So the international numbers were strong driven to a large extent by the expansion of MPP and the execution of that sales force has been very good in that space and I would characterize that as a true international upside. So Europe, Asia and Latin America all had a pretty strong performance and in the markets where we had MPP we clearly have an advantage and growth.
In the U.S., it came down to a series of changes that we made both organizationally, refocusing or the field and resetting the expectations around what we want to achieve in 2016. And one of the big factors in the National Sales Meeting we conducted was laying out the pipeline and getting people ready to go into market with significant series of new products.
And so this is always exciting to the EP community, when they have an opportunity to meet with our sales reps and our sales management and we lay out the product cadence and talk about how we can bring that technology into their site. And one of the areas is probably most exciting is the lab. The fully integrated lab.
So when you think about the technology require to do that, it is unique St. Jude Medical. We are the only company that can provide a full highly advanced, the most advanced EP lab in the world and going and then talking about our product portfolio in that context re-energizes the electrophysiologist and reminds them of the innovation St. Jude Medical’s bring into the market.
So I think that probably as helped us from an execution standpoint and again, we absolutely believe that in the context of these product approvals and the achievement of that MRI labeling. If you looking Japan for instance, where they received the labeling, they are up high double-digits in the aftermath of the approval that label. So we think as we get towards the end of 2016 and we develop a momentum going into 2017. We will be a share recapture story in the traditional CRM space.
Great. Thanks Mike.
Your next question comes from the line of Bruce Nudell with SunTrust. Your line is open.
Good morning. Thanks for taking the question. Mike, just to start off on, people have consternation about the prospects for CardioMEMS reimbursement, given the local intermediary responses. Could you just kind of explain your level of confidence regarding the ultimate. And perhaps explain why the local reimbursement path has been rockier than you might expect, given the quality of the data?
Michael T. Rousseau
Yes and you really characterized the issues well there Bruce and I’ll start first with where we are on the NCD process. We’ve had very positive discussion with the CMS organization, we put together with their guidance and with the guidance of several different advocacies and constituents, physicians and ACC and so forth, the heart failure community have all stepped up and are participating in this process and the data as I know, you know the data continues to get better.
And what we’re caught in here is not unusual I think on a go forward basis, it’s our understanding that CMS is very busy, it’s one of the reasons that our submission hasn’t been accepting yet, is that the local max are becoming more and more restrictive as it relates to cost management. And innovation is now going to either be delayed or go through a more torturous path to get to the patient community.
And the local max, not all of them, but some local max look at an annual budget and they are managing with an annual budget, when you look into value preposition of a product like CardioMEMS it’s two, three, five, 10-years of value working against a system that’s looking at a annual prospective. So if you want to put in context why we have the problem, well that’s the cause of the problem.
The idea that we will go through the process one point that we just learned is that CMS has extended the add on payment in their latest ruling. So they remain committed and positive about the technology and we think that we will have to go to this process and quite frankly unless there is some changes from a legislative prospective, other companies are going to go through the same process as it relates to reimbursement.
On the more positive side I would say that the some of the private payers are starting to show interest and are beginning the work with us as well as the VA and so we not completely abandoned those areas Novitas and FCSO. So there are still people that are committed to the technology and are using it. So the fact is that we’re going to go to the process, we've scheduled a number that we think as achievable and again I talked about positive implant rates, a nice reduction in stock shelf that ratio is now crossed over.
And we’re feeling positive about the standards that are open beginning to your CardioMEMS in their normal course of treatment and that was the goal. And so we’ll build the beach head, we will work to achieve the NCD and I think that the we will truly end up with the stand-of-care in heart failure management with CardioMEMS.
And my follow-up pertains - maybe you could answer this in a portfolio context, because that was the theme I thought I was detecting in your commentary regarding both AF and neuromodulation, but could you just speak to generally how you feel about the strength of those portfolios versus the cryoablation results you saw at ACC as well as very strong performance in the marketplace with their high frequency and just how competitively you're responding to those entrants?
Michael T. Rousseau
Yes, good question Bruce, and spot on, quite frankly. The strategy we refer to often is surrounding these disease states where we want the deepest and broadest portfolios and we are certainly on track to achieve that. In AF, we will be first to market with advanced sensor-enabled catheters. We have both the FlexAbility and the TactiCath and I would like to remind you that we do not have TactiCath in Japan until the second half of 2016 and we do not have TactiCath or FlexAbility in China until the end of the year, beginning of 2017, depending on how the regulatory process rolls out.
So the results have been to a large extent in Europe and the US and we're talking about mid-teens growth in the ablation segment with right now a pause, if you will, on the capital side as physicians and hospitals are waiting for precision, but the depth and breadth of the AF and the ability to sit and meet with physicians. I had a team and I got to meet some personally about a week and-a-half ago and just how impressed they are when they come in and we have an entire lab and they are working in an entire suite and every component that they require to do an AF case including all of the tools and at this point I would say we have the most advanced tools are all there and will be introduced into the market this year and next year.
So on AF, we're extremely positive. We do think the EP does look at their specialty as device and AF in many cases and so there is the pull-through opportunity. There is the collective contracting opportunity and so there is areas for us to exercise strategically across that - the broadest platform available in the market. It's a real success story for us, because we have not fully launched the entire portfolio and if you look at our growth in with Burst, you are talking about high double-digit growth in Europe with Burst technology.
The platform, both the rechargeable and the recharge-free technologies, the peripherals are now on a smart technology, so patients are using and doctors are using iPads and iTouch, all far advanced from a Bluetooth capability of any of our competitors. The DBS system and the opportunity to get into the DBS system with another breakthrough technology in the infinity lead where we can steer the energy and provide the physician more options and opportunities to work with patients, a lot of excitement about that launch yet this year. So we think those two portfolios are exactly define our long-term strategy.
Thanks so much.
Michael T. Rousseau
You are welcome.
Your next question comes from the line of David Roman with Goldman Sachs. Your line is open.
Thank you and good morning everyone. I had one question on the commercial strategy, then one on currency. First on the commercial strategy, Mike, you talked a lot about wrapping different disease states around to drive your sales organization, but maybe you could go into a little bit more detail on CRM. And specifically what I'm wondering is when we look at the share loss that you guys have experienced during this MRI product gap, it's the most share that's ever moved since the recall where as Boston Scientific has not experienced the same amount of share shift. If there is anything that's changed in the commercial landscape and whether your competitors are being more successful with bundling across multiple specialties and how you might respond to that once you do fill that product gap and if that is a relevant point of discussion.
Michael T. Rousseau
You know, when we talk about the bundle, that's actually an area that we want to talk about. The idea that we can bundle in the entire lab and here shortly we'll be talking about updating all of our EnSite systems and again the customer relationship between devices and AF go hand in hand and so those are discussions we're actually looking forward to having and I think will be very effective for us. The share loss really came rapidly in Q3, we experienced in Q4, we've made some substantial changes in our leadership team and in our refocusing of our marketing messages and training associated with the new product launches.
And I think what the result is that we have a re-energized sales force that has some expectations about what we need to achieve in 2016. So I think that Boston obviously also under stress without the label has managed that over the last two quarters better than we have. I think we've done a better job in Q1. I think that we'll do a better job as we go through the year and again, we modeled and planned to be able to manage the product gap until we get it. So we remain on-track and our guidance is also on track. As it relates to FX, Don, do you want to…
Donald J. Zurbay
I guess the question…
yes, Don, my question on currency was it looks like you're taking down the dollar impact for the year at the midpoint by roughly $85 million from what you had provided on the January earnings call. So why wouldn't there be a proportional benefit on the EPS line? Does that have to do with timing of inventory or hedging programs. You are only taking up by $0.06. I would have thought it would have been higher given the dollar relief that you are getting there?
Donald J. Zurbay
It's really the hedging program. Most of the currency impact has been on the euro and yen which is where we're heavily hedged, David.
Okay that’s helpful. thank you.
Michael T. Rousseau
I guess we'll take one more question.
And our last question will come from the line of David Lewis with Morgan Stanley. Your line is open.
Great. Thanks for fitting me in. Just two quick ones. First, Mike, for you on neuromodulation. Just 10% constant currency growth prior to US Burst, prior to DRG therapy. From these levels, is there a reason we shouldn't expect acceleration. That's a pretty big number before big product launches and the competition so I'm just wondering how you see that business progressing from here? And then Don, just trying to get a better sense. I think you just answered David's question on currency. But considering the currency and your better SG&A controls in the first quarter, how are you thinking about sort of margin progression throughout the balance of the year? Thank you.
Michael T. Rousseau
So I’ll start with neuro and a good way to look at this is the performance of our team six-months into their Burst launch and the results of 17% in that space. That’s a big number that’s twice the growth rate in Europe and the wave of interest is really around Burst. It’s around our lead technology and it’s around upgradability. And then you add into that DRG and the DRG story is still really unfolding here. The U.S. demand for DRG - it’s a little more complicated relative to reimbursement outside the U.S., a bit more straight forward in the U.S. and we are struggling to keep up with the training demand from patients - from physicians who want to treat patients.
I'll also say that - and it’s a north of 60%, we’re estimating early on here. Our patients that would not be consider for standard SCS devices and so you are looking at the potential of two market expansion story that could develop here over the year. So when you look at that portfolio, you look at where we are just like in AF. And what we are building out in the heart failure, we’re at the early end of the process in RF ablation, we’ve got the most advanced SCS system, we’re bringing advanced wave forms in, we’re the only company that can upgrade wave form technology and advances in the industry without an explants and we’re doing this all on cutting edge peripherals, using our Bluetooth capability.
You put DRG in there and then you add DBS, which puts us into the deep brain space with brand new platform hardware as well as software and peripherals and we have an excited sales force. This is sales force that has always performed even in the most difficult of times and it’s great fun to be with them and around them, because they are as excited as you can imagine and they are looking forward to the competition.
As it relates to Nevro, it's an underpenetrated space. The idea that Nevro is going to help - be an expander, there will be some share loss in the market. We’re working to not be one of the companies that are giving up some share loss, but the idea that there is innovation coming into the space and driving the total size of the market, which is so underpenetrated long-term, this is probably a good outcome.
Donald J. Zurbay
David, on the margin question obviously, we’ve maintained our guidance on the gross margin side. We think the currency gives us an opportunity to get more towards the higher end of that. We did bring down or improve our SG&A guidance given that we had a pretty good first quarter. I think all of that gives us confidence that as we look at our EPS guidance for the year, we can start focusing on the upper half of that number.
Okay. Thank you very much.
Michael T. Rousseau
Okay. Thank you.
And we have no further questions.
Michael T. Rousseau
Yes. If there aren’t any further questions, I would like to thank everybody that attended the meeting and look forward to seeing you next quarter.
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