Boston Scientific Corp (BSX) 2001 Q1 法說會逐字稿

Ladies and gentlemen thank you for standing by. Welcome to the Boston Scientific Corporation teleconference. At this time, all participants are in a listen only mode. Later, we will be having a question and answer session. Instructions will be given at that time. If you should need any assistance during the call, please press the '0' then the '*' key. As a reminder, this conference is being recorded. I would now like to turn the call over to Mr. Larry Best, Chief Financial Officer. Please go ahead sir.

Good afternoon and welcome to our first quarter conference call. Before I begin, let me introduce Paul Donovan, our head of corporate communications, that'll read the safe harbor clause and any forward-looking information. Paul?

Thank you Larry. This conference call contains forward-looking statements. The company wishes to caution participants that actual results may differ from those discussed in the forward-looking statements and may be adversely affected by, among other things, risks associated with competitive offerings, operational improvements, the company's overall business strategy and its relationship with third parties, and other factors described in the company's filings with the Securities and Exchange Commission.

Thank you Paul. We issued our press release in the first quarter, within the last hour or so. For some of you who may not have caught up with it, let me read from the principal text of it, and then I'll provide some overview comments. And also today we have Jim Tobin, our Chief Executive Officer, with us. He'll have some remarks, and then we'll open up for questions. The press release reads as follows. Net sales for the first quarter of 2001, as previously announced at the company's April 11th analysts' meeting, were $654 million. Without the adverse impact of $24 million due to foreign currency fluctuations, net sales in the

first quarter totaled $678 million, as compared to $679 million in the first quarter of 2000. Net income for the first quarter, excluding special charges of $88 million, after-tax, was $83 million, or ¢21 per share diluted. This compares to net income of 106 million or ¢26 per share diluted, in the first quarter of 2000. The special charges in the first quarter are associated with the company's global operations plan and purchased research and development related to the acquisitions of Embolic Protection, Inc., Catheter Innovations, Inc., and Quanam Medical Corporation. The reported net loss for the first quarter, inclusive of the special charges, was $5 million or ¢1 per share. Let me try to provide some additional overview comments regarding the quarter. Unlike most of our conference calls, I won't go through all the divisions in geographies, domestic, and what have you, in great detail, because we've obviously covered much of that information at the analysts' meeting days ago. But for those of you that may not have been at our analysts' meeting, let me provide some perspective. In the first quarter, we had, on a constant currency basis, basically flat sales, or no top line growth, but no significant decline either. It was pretty much flat with the prior year. We had $24 million unfavorable variance due to currency fluctuations. If you add that back, we basically had an apples-to-apples number of 678 million in sales in the first quarter of this year compared to 679 million last year, so pretty flat, and

when you look at the various divisions, on a worldwide basis, the good news is that all of our divisions, except for Scimed, saw good solid growth. For example, EP technologies grew 20% on a constant currency basis in the quarter, Target Therapeutics grew 10% on a constant currency basis in the first quarter, our Medi-tech division grew 6%, Microvasive Endoscopy had double-digit growth at 11%, and Microvasive Urology had a good quarter, grew 13% on a constant currency basis. So all of our businesses, with the exception of Scimed, saw very respectable growth in the first quarter. We're very pleased with the performance of each of our divisions, including Scimed, for that matter. When you look at Scimed, it's primarily the same story that we've been reporting for a number of quarters, the highly competitive coronary stent market, our inability to launch the kind of new products that we need to launch to be competitive, and therefore a loss of share in the coronary stent business. Also, in Scimed, the other weakness that we've had for a number of quarters that is now showing some good progress is in PTCA balloons, where we've always been, at least over most of the last five years, been clearly the market leader. We've seen over the past several quarters, because of some good competitive launches, some loss of share there. However, in the first quarter, all but late in the first quarter, we launched our new Maverick line and already we're starting to see a good regaining of our market share, and we expect to

frankly regain most of our market share as we move throughout the year. The Maverick line is being very, very well accepted by the physician community as being a new standard for PTCA procedures. So when you look at Scimed you're seeing good growth in, even our IVUS business saw good growth in the first quarter, our vascular access line, very good growth, and now as we move into the second quarter, we're seeing the Cutting Balloon continue to make strong headway. So we're feeling very good about Scimed and the Scimed team. We just have to, as you know, as we've said on too many occasions now, we have to fix the coronary stent product line. On coronary stents, we came in around $100 million worldwide in the coronary stent business that was down from a year ago, which came in at $113. So we're about 11% on an as reported basis, 7% down on a constant currency basis in coronary stents. We believe that we can do much better than that once we replenish the pipeline. Let me turn to our income statement and take a look at some of the dynamics there. With the flat top line and, obviously, a modest decline on the top line when assuming foreign currency fluctuations, we basically saw in the quarter, on a comparative basis year-to-year, we saw some decline in gross profit on a comparative basis, and we also, at

the same time, saw on a year-to-year comparison, growth in SG&A. We also saw some growth in R&D. At the same time, we saw a decline in interest expense as we continue to pay down our debt, so we got the benefit of reduced expense at below the line, below operating income, but we did see two dynamics that we have to focus on and probably more aggressively. In the gross margin area, on a year-to-year comparison, first quarter of this year and first quarter of last year, we saw some gross profit decline. Now when we study that it's almost exclusively gross profit decline as a result of our higher cost coronary stent delivery systems with the NIR Elite and some of our new offerings, the delivery systems are more expensive than in the past, and therefore, we're losing some margin there. Now when you carve away coronary stents and look at the gross margins, you actually see improvement. So a lot of our operational initiatives are starting to pay dividends, which are actually strengthening gross margins. So, again the biggest problem or challenge is with the coronary stent platform. When we're looking at the SG&A line, when compared to the first quarter of last year, we moved from $214 million last year to $225 million, so we're seeing some creep in the spend at the SG&A line while we're still seeing, obviously, softness at the top line. As we move forward, in the quarters ahead, we're going to start working on that, in that, as long as our top line is soft, we can't allow the creep in spend. So we'll be addressing that in the days

and weeks and months ahead. R&D, while it's grown a little bit, frankly we felt good about the R&D investments we're making and the pipeline filling that we're seeing. So really it's a story of continuing to improve our gross margins outside of coronary stents and starting to perhaps address some of the SG&A spend, bring that down a bit from where it's at today in order to write size it with the top line. Moving to the balance sheet, the balance sheet continues to show strength. All the measurements look favorable. We continue to pay down debt. The net debt moved up a little bit from the fourth quarter, but that was largely because of the recent acquisitions. With that brief overview, and we can go into more detail, obviously, in the Q&A, let me first, before we do that, turn it over to Jim Tobin for his remarks on the quarter and some other topics.

Afternoon everybody. I just wanted to take a minute to give you my perspective of Q1. Basically, I'd like to echo Larry's comments. We feel really good about everything that's going on, except what you see in the comparisons in the stent business and associated Balloon product lines. We have things going in our direction again on the Balloon side of things. So we're kind of down to one problem, I guess, is the point. It also doesn't help that we're swimming upstream on currency and that's been a big factor in it. You find that throughout the P&L, but at the end of the day, we

recognize that we've got to do more in the expense control area, particularly SG&A, so that we can afford the investments necessary in R&D to be able to work a way out of this thing. We're also very pleased, very happy with the acquisitions that we've made during the course of the first quarter, and I think, you can expect in the normal course of things to see us do some more of that kind of thing as the year wears on. Before we begin responding to questions, let me say all I'm going to say about the Medinol litigation. We had been preparing to file our own suit against Medinol, as well as our formal response to Medinol's claims tomorrow. However, we got another love letter today from Medinol's lawyer advising us that they intend to amend their complaint by tacking on a claim for misappropriation of Medinol's NIRFlex technology. This claim is as baseless as the other ones that Medinol has made, and it appears to be a blatant attempt to interfere with the development of own Express stent platform. We don't plan to let them do that. The Express stent doesn't use any of Medinol's intellectual property. Further comment on this latest development will have to wait until Medinol files its papers.

Okay thank you Jim. We will now turn it over to question and answer period.

Ladies and gentlemen if you do have a question at this time, please press the '1' on your touchtone phone. You will hear a tone indicating you've been placed in queue. You may remove yourself from queue any time by depressing the '#' key, and if you're using a speakerphone, we ask that you please pick up your handset before pressing any numbers. Once again if you do have a question please press the '1' at this time. Our first question is from the line of Rick Wise with Bear Stearns. Please go ahead.

Hi Larry. Two questions.

First, since we saw you you've stopped the Quanam clinical trial. Just wondered what kind of reactions you're getting from clinicians, and whether you're getting any feedback that there might be any implications for, also, the outlook for drug-coated stents generally from that decision? And second on SG&A, you talked about the spend cleaved and the goal of bringing it down. Can you be more specific about where that is, and how you're going to fix it, and what we can expect for the rest of the year? Thanks.

Sure. Let me start of with the Quanam and then Jim will probably have something to add on it. Just so you understand, I think there was some probably misunderstanding based on what we've read since we issued our release on the Quanam trial. There wasn't really a big surprise here, and I thought we'd kind of positioned expectations in a reasonable way with regards to Quanam. We originally looked at Quanam as a potential for us to accelerate our position in the drug-coated or drug-eluting stent market. But after we took a hard look at it with the Quanam team and looked at their clinical trials, we became a little more concerned with how this clinical trial was being conducted, and as we were doing our work, more reports came in, more information, I should say, became available on some of the adverse events, and so we worked with the Quanam team very carefully to help them and frankly give them our advise from a clinical perspective, and as a result of that dialogue,

they actually suspended that trial while we were still trying to understand what the size and shape of the opportunity was. At the end of the day, we decided that the clinical trial had, I think it's got up to almost 300 patients, and the adverse event rate was on the edge, if you will, and we were aware that some of the adverse events had to do with protocol violations and things that were very understandable, but nevertheless, when you're managing a clinical trial those are things that you have to manage against, and so we felt that it needed to take a hard look, everybody had to take a hard look at the clinical trial, and that's why they suspended it. Now our reason for acquiring Quanam was driven by a number of reasons, not to mention, what we thought was very attractive polymer science and IP behind that polymer science and also the people factor, though some of the Quanam people brought additional incremental knowledge to our drug delivery program. At the same time, we were giving the Quanam shareholders the opportunity, if in fact, down the road this product, this technology as is or as developed further, becomes successful the Quanam shareholders would share in those successes. So that was how the transaction was structured. We paid very little upfront to the transition the company into Boston Scientific, and our expectations regarding the technology platform as is and as in the clinical trial were frankly very modest, and I thought we

had explained that. So we actually, to be fair to the Quanam shareholders, set up the independent clinical committee to look at the trials with, frankly, an expectation that it may be discontinued. So that happened and it happened very quickly post our acquisition as we planned, and so really, it's not an event that was unexpected or was outside of what we thought was highly likely. And we will continue to go forward and integrate Quanam with our drug, our own program, and our own people work with the, integrate the teams, and hopefully develop, down the road, some very, very exciting drug delivery mechanisms and drug-eluting stents. So we feel good about the Quanam acquisition. We feel good about where we're going with our own drug delivery program, and by the way, what we found in the clinical results that were reported in Quanam, we're not finding in our own trial at all. We have no means to advance after 60 patients. The follow up, we're seeing nothing but the good signs. So there shouldn't be any confusion about our trail that we have internally and also the Quanam trial. Both of these teams are going to work together down the road, and I think we'll help each other, but our own trial is unaffected by this, and I also don't think the Quanam result, anyone should read into those clinical results, potential umbrella effect on drug-coated stents. This was a pioneering effort by a bunch of pioneers, and this is common not uncommon, when you are pioneering in the device world. So hopefully, that addresses that. Jim you want to add anything here?

Just that everybody

should recognize that it was a different drug, a different set of doses, a different carrier, a different stent, sleeves, I mean, there is nothing in common with the Quanam program and our own Taxol program. But we can learn a lot from their experience, and that's what we wanted to do. We see ways to use this technology in the future, and we intend to pursue those ways. So we're still quite happy that we did what we did here.

In the people [_______________], do you think it's a problem with paclitaxel, or do you think it's a matter of something else?

We don't know from that trial. The conclusions are not drawn yet. But any drug delivered has to be in the right dosage and has to be the right drug. We think paclitaxel is the right drug, and in the right dosage with the right delivery mechanism, we see great promise in it, obviously, and we're so excited about it. So hopefully, that gives you a better reflection on that. On SG&A, the SG&A creep is something we have to address here, if in fact, our top line is going to remain soft for three or four quarters. What I mean by that, we talked at the analysts' meeting about a top line for the year, around $2.7 billion as our goal. And probably, a good possibility of how that will flush out is we will see a reduction in our coronary stent business, primarily because we have competitors launching good new products and without a good response in the next three or four quarters in the US, and as they do, it's unlikely that we're going to increase share, it's more likely we'll lose some share. Now the offset of

that will be growth in our other divisions. And I'll remind you first quarter each of our five other divisions all saw growth. The teams that are a part of each one of the divisions are very excited about the future of those businesses and the pipeline. So we should see good growth in five of the six divisions. Also, Scimed will see continued growth in many of its categories, and hopefully Balloons will be one of them, enhanced by the Cutting Balloon. So we'll see growth offsetting some of that decline in coronary stents from the divisions including Scimed in some of their categories, and then we'll also see like, I guess, I've included both of it, both the fundamental growth in divisions plus the growth from acquisitions, namely the Cutting Balloon contribution in the second half. And that should give us a reasonable goal of $2.7 billion, but that's a flat number, and that is not where we want to be obviously, but I think we're resigned to the fact we're going to have to, it's going to take a little while to get new products to the market in the US and around the world. And in the meantime, it's time to cut back on some of our spend and most of that is in corporate. Some of it is in some other divisions, but most of it's probably in corporate, and we're going to probably have to cut back and travel less, and not add the headcount that we were planning on having in the second half. If in fact, we don't have the growth to support it. Jim, you want to. . .

Yeah, just a couple of things, one of the biggest components of growth has been in the cost of our field force, and that comes from, a year ago recall that we were under

pressure. Our people were getting robbed off into dotcom this and dotcom that, and we took a number of steps to make sure that we rebuilt that muscle, and that we were paying them properly. So, now this year, here we are a different year, and our field forces are full, and they're being paid well, and they're performing well and earning that money, but there's a comparison problem that comes from that, and so long-term we've got that muscle still in place. We're just going to need to be a little more careful about what the total looks like. The other piece of it is in growth in R&D, and basically, what that boils down to is Express and Maverick and the Taxol front, and those are all good things, but we're going to need to fund them out of other directions as well. So what you do you do the obvious. You're careful with headcount ads, you're careful with how you spend your consulting dollars, you're careful how you spend your travel dollars, you're careful on all the levers that you have, and it doesn't involve major disruptions of the business. It just means we've got to put the, batten down the hatches a little bit and put some emphasis, more emphasis, on this than we have in the last couple of quarters.

Thank you very much.

Our next question is from John Calcagnini with CIBC World Markets. Please go ahead.

Hi guys, good evening. I wondered if Larry, like you did at the analysts' meeting, you gave us a breakout of Scimed coronary, and Scimed peripheral US and OUS. I wondered if you could give us that for the first quarter. That was my first question.

You're talking about Scimed PVD?

Yeah, you had a nice table with the breakout should Scimed coronary. . .

Let me give you Scimed PVD, and then you can, obviously, carve it out of

the numbers that you have on Scimed. In the US, while we saw a growth in Scimed PVD on a constant currency basis, the US number was 82 million Scimed PVD versus 79 million that you probably have in your schedule from last year first quarter, and then, on the outside the United States, we had on an AFx basis 27 million versus 30 million, but on a constant currency basis, we had Scimed PVD at 29 million versus 28 million. For an overall as reported number, frankly, 109 versus 109, but with a constant currency basis, a modest growth in Scimed PVD.

Okay, and then do you have the US coronary number for Scimed?

I believe it was 55 million-56 million out of a 100 million total coronary expense.

Okay US 55, and then do you have Japan there?

Japan was 30.

Okay good. And I wondered if you could give us just a quick US-OUS breakout on endoscopy. I think we're okay with the others.

Sure. Total was 108, I believe, although I'm just saying that. I'll have to pull that out. Why don't you go to your next question. . .

Okay, yeah, sure. I'll just wrap it up here. Jim I wondered if you could talk about the relationship with Medinol. Has anything, in terms of the business relationship as opposed to be legal relationship, changed? Are they still shipping product, and do you have any more insight as to their business strategy going forward?

They are still shipping product, and that's basically all I'll say.

Well, they're still shipping product, and we're still paying for it.

Okay.

In more ways than one, I guess. Okay endoscopy, you want it domestic or worldwide?

US is fine.

US endoscopy was 71 million in the first quarter this year versus 65 million last year, up 9%, and in the international markets, endoscopy was 37 million versus 35 million or up 6% on an as reported basis. Now on a constant currency basis, endoscopy was up 16%. So our endoscopy division is doing extremely well, and we're excited about some of the things they have in the pipeline.

Okay good. Thanks guys.

Thanks John.

We have a question from the line of Glenn Reicin with Morgan Stanley Dean Witter. Please go ahead.

Hi guys. A couple of clarifications, is Meadox in Scimed PVD?

No. Meadox is part of the new Medi-tech, which is included in Medi-tech, one piece of it is the vascular surgery piece.

Okay. I did go back, oh, another clarification. You said a $100 million in stents, 55 US, 30 Japan, and then that would apply 15 rest of the world and Europe?

Right.

Okay. I went back to the analysts' meeting notes. We actually never did get the US international breakdowns in dollars by division.

Yeah. You would like that?

Yeah, that'd be great.

Okay, let me pull that out.

It's like the same thing you just did with endoscopy.

Yeah. Got every other possible breakout here, yeah.

In the meantime should I ask the last question?

No, no let me answer the first question first. Okay. Get your pencils ready. Let's take domestic sales by division, and I assume that you have, I'll give you both. Scimed domestic 233 million versus 249 the prior year, EPT 12 million versus 10 million, Target 13 versus 11 million, Medi-tech 30 million versus 26 million, Endoscopy 71 versus 65, Urology 33 versus 29; and that should add up to 391 versus 391.

Okay.

International, Scimed 161 versus 187, EPT 7 versus 6, Target Therapeutics 28 versus 29, Medi-tech 22 versus 24, Endoscopy 37 versus 35, Urology 8 versus 7, that should be 262 versus 288, but keep in mind there's a $24 million hit there from foreign currency, so the constant currency growth rates are obviously much different than what I just reported.

Okay, the only number that I'm a little bit confused about is Target. I thought worldwide it was 41 versus 40, so it was down internationally, 28 versus 29 is what you're saying?

5% down on as reported, 3% up constant currency.

Okay, that was my last question. Can you talk a little bit about what

is happening with Target on a worldwide basis? Obviously, there's a lot of focus on Japan, but just give us an idea of the competitive dynamics, and how you guys are responding to things.

Target continues to deliver the results. Despite two or three years of threats of competition in the coil market, Target continues to own that market. Microcatheters, we continue to have actually, a couple of years ago, we lost some share, and then we started to take some of that share back. Target's doing fine. We are, obviously, I think the biggest challenge is penetration.

So the market is maturing?

No, it's in its infancy. It's just, to convert the market, there's only so many docs and so you have to keep on developing the market as the physician population grows. In the meantime, we're actually looking, while we primarily focused in the past on hemorrhagic stroke, we're now looking at ischemic strokes. So we're broadening our focus in the neurosurgery market also. Jim you have some. . .

And the only thing I'd add is that you do get a little bit of trialing of some of the new stuff that shows up out there, and so that sort of, I mean, it costs you temporarily, but we we're not sensing that we're losing a lot of business on a permanent basis. . .

Actually one last question I'll add. The other competitive product line I would like to look at is vena cava filters. We haven't talked about those in years. How big of a product line is it and how is J&J doing against you guys in that market?

J&J launched their own vena cava filter not long ago, and it got a fair amount of trialing. Our vena cava business continues to be number one, but whenever you have

a 90%, or whatever it is, market share, you're going to see some impact.

How big of a business is that?

Hold on just for a minute.

50 million?

It's close to the $60 million.

Okay, thank you very much.

Yeah.

Our next question is from the line of Tim Nelson with U.S. Bancorp Piper Jaffray. Please go ahead.

Yeah, hi. It appears to us after listening to you and the guidance report and J&J report that the growth rate in the cath-lab market this quarter took a nice bump up. Can you talk about the reasons why it might in terms of procedure growth, why that might have happened, and whether it's sustainable or not?

I think that growth is something that we have, I think is a luxury in the markets we are in. I mean, each year the market should see unit procedural growth just because of the demographics. So we're not surprised by, and obviously we expect all of the interventional markets to continue to grow just by pure demographics and increased number of procedures so. . .

I understand that, sort of, was above the trend line.

Above the trend line? I have not had anyone interpret it other than, I don't think, I wouldn't read too much into that, and I think that's just a little malaise in the numbers.

Okay, that's all I have, thanks.

Next question is from Andrew Jay with First Union Securities. Please go ahead.

Yes, good afternoon, Jason Robins sitting in for Andrew Jay. I was wondering if you could possibly discuss coronary stent pricing and any trends you're seeing in Japan and Europe. Is there any weakness ahead of coated stents potential in the coming year-end?

Well the coronary stent pricing is probably less than what you might expect in terms of softness. I shouldn't say that; it depends on the market. Overall, on a constant currency basis, which is the way we measure it, year-to-year Q1 to Q2 overall worldwide basis we see a change of about 5%. Now the makeup of that 5% is as follows. In the US, we've probably seen something in the neighborhood to 8%-9%, Japan 1%, Europe 8%-9%, intercontinental 7%-8%, for an aggregated average of negative 5%. So, worldwide, year-to-year 5% decline, frankly that's probably more modest than most people think, who would've thought. The one thing that I'd add there is that, as we have come back with our own Elite program towards the end of the first quarter, we're getting back into some of the larger accounts, and so we've seen the US pricing, most of the 8% or 9% that Larry refers to occurred from Q4 to Q1 as customer mix shifted back up towards a more normal account mix.

Okay great, thank you. One more question on the litigation with J&J on coronary stents. When is the next court date, and has any news broken since you filed the 10-K?

Has any news broken. . .

Or any event related to. . .

No, since the 10-K,

there is no news on the J&J case. My understanding is that in June, roughly sometime in June, there is the expectation that in their suit again us, the judge will rule on some motions and some of the issues that we put before the court. The next court date on our case against BX Velocity, in the US, I believe, is in August, somewhere around the third week, so that case is coming up very soon. We feel good about that case.

Okay great. Thank you very much.

Our next question is from the line of Anne Malone with Salomon Smith Barney. Please go ahead.

Hi, yeah, Larry, I think these are aimed at you. It's just a two-prong growth margin question, one in the filing, I saw you talk about the $70 million in consolidating plan charges. Should we think of those as being spread out through the year or are they first half loaded, second half loaded? And I guess, second is how do you plan on working down the stent inventory, if you do continue to keep buying from Medinol, and if you do start to work down those layers, are there implications for the cost of goods sold? Meaning, are the prices very radically different from what you pay today versus what you was paid for some of that inventory a year ago?

Yeah the question, on the latter question, the stent inventory. Last year, around this time I believe, I'd say the first half of last year, we were seeing some old costed stents going to the P&L which gives you a little better margins.

Okay.

But we're pretty much caught up in a lot of respects, so I don't think

that is noise in the system here. I think our stents, the average stent price is up from where it was. Most of the old costed stents, or a good portion of what would be extremely lower cost stents, are out of the inventory.

Okay, so it doesn't matter basically a stent bought today versus one bought a year ago as they have the same cost basis?

Well, it should decline a bit, 5%-6%, because that's what we're seeing in the pricing. Otherwise, our transfer price is based on average selling prices. So as the average selling prices, say in the US, go down 7%-8%, our absolute dollar cost goes down 7% or 8%.

Right. I was just wondering it seems like some of that inventory might be pretty old, and I was wondering if any of the cumulative add up made a difference.

It's not that old, and it's one thing good there's not a shelf life on a lot of these stents, but, so. . .

Okay, so that shouldn't be either a pressure or a boost going forward.

I don't think so, no.

And, how do you work through that inventory that you keep buying from them?

Well, we like to keep just because we don't control the pipeline, obviously, and the manufacturing, I should say we like, we feel the need to keep a healthy inventory of mix as long as we don't own the complete process. I mean this started back four years ago when we built the inventory. So we're really not taking down the inventory in any significant way. We continue to replenish it for that reason. And, of course, our first drug-coating programs are on the NIR Conformer, and hopefully, we'll continue to see good news on

the drug-coating front, and we'll be able to take down that inventory rapidly, hopefully, within the next 12-16 months.

Okay, and then just how the plain consolidation, that's 70 million seems like it would be a pretty big drag on your gross margin.

No, yeah, but we announced the rationalization of our operating capacity, I think, about a year plus ago, and if you recall the accounting literature changed a little bit, and so you have to go out and forecast 12 months out, so, as opposed to in past periods, where you would just make your estimate, then charge it, you've got to bleed it, so to speak, and there're certain costs you can't even accrue for. So what we've done is set up, obviously, a separate accounting for the operating group, the operating rationalization group, and that 70 million is spread throughout the year, and it's not going to go away for probably 3 or 4 quarters.

But, then in the next year that would be behind you?

Yes, that'll be behind us.

Okay.

No, I mean if you. . .

No that's how you sort of make, when you. . .

Gross margins, by the way, if you take out the NIR stents, or the NIR product, the gross margins continue to improve, and once we're through this, this operating rationalization plan and it's completed, and by yearend, we hope to have most of it completed, and that means we go from a period of having duplicate headcount, otherwise, as you're moving now in transitioning technology, you're going through a period of duplicate headcount. Now, we're just about at the stage of our operating rationalization plan where that headcount will start coming out from facilities that we have

already announced we're closing. So by yearend going into 2002, our headcount will look better, our margin should begin to look better, as a result of the benefits of this program that's been a year, a year and a half, underway.

Right, thank you.

Our next question is from the line of Lawrence Keusch with Goldman Sachs. Please go ahead.

Larry, just following up on that. Do you have the numbers or the sense of what the gross margin is underlying the business? In other words, sort of ex the Medinol product line and how that may have changed over the last couple of quarters? I suspect you actually are making some good progress there.

Yeah, I don't have it in front of me, but my recollection is it moved up from 69%, and it's approaching 72%.

Okay, perfect, and then the other question is, you really mentioned, you said this often at the analysts' meeting, that you expect the Maverick catheter to really help you gain some share here. It sounds like you're already seeing some early in this, or late in this quarter I should say. Sort of, where are you tracking and where do you really think you can go by the end of the year for those share gains?

We think that by the end of the year our market share will be over 50%.

Like to have over 50 because that way nobody can be bigger.

Yeah, I mean our guys are very excited about the response we've got with the Maverick, and you guys are out in the cath labs where they are, and remember all they have right now is the Over-The-Wire version. Hopefully, by the end of May or early June, they'll have the rapid exchange version, and we'll be off to the races. I mean the Maverick is just not competitive. We think it's better, and that's what we're being told. So we think that we'll be taking back quite a bit of share in

the PTCA market with the Maverick line. Now the other thing that I don't know how the analysts are going to position it, but if you look at Balloons, the question is, is the market going to expand a bit with the Cutting Balloon or is the Cutting Balloon part of your balloon numbers. If that's the case, we're talking about our goal, well over 50% market share, without Cutting Balloon. If you add Cutting Balloon, I don't think there's any question who's number one in Balloons in the world.

Okay, Larry you're talking worldwide share with that 50%?

Yes.

Okay, and then the last question, just again given the fact that it doesn't look like you will have any significant new stent products here between, sort of, now and whether it be NIRFlex or Express, do you expect, as we go forward here, that you may see sequentially down stent sales in the US? Let's just perhaps stick to the second quarter?

Right now our estimate for the second quarter, and I'm going to, I think it's still, worldwide, around $100 million.

Okay.

So, however, I would discount that. I mean, we've got some tough competitors going out, and I guess, that's why we're starting to look at our spend and backing off our spend, just as a contingency here, because as you pointed out, we do not have a lot of new stent products. We've launched the NIR Elite, and we're going to be living with the NIR Elite until Express comes on board because we do not have NIRFlex.

Okay, and then lastly, tax rate for the year is 30%?

30%.

Okay, super. Thanks very much.

Our next question is from Sheryl Zimmer with Deutsche Alex.Brown. Please go ahead.

Hi guys, just a couple of quick questions. Just your comfort level with the second quarter consensus estimate of ¢22, and then I know you commented on the year for revenues, but if you can just, I guess, we're considering flat revenues as reported for the second quarter. Is that reasonable, or would it be different from that?

I think we just have to see what happens in the stents. That's the main reason why we haven't given any guidance, but I think it's safe to say that the revenues will be flattish. Whether we come in at 22 or not depends on how we manage to spend in the next couple of months. My guess is, I can only say right now based on what I know at the top line and the in between that the lower the range, I'll give you a range, lower the range should be 20, but I think the higher the range is more like 21.

Okay, that's fair, and then just one separate question. If you could update us on the status of your AAA graft, which I think you're calling the [_______________].

I'm sorry?

Your endovascular graft program?

Yeah, I don't have a good update at this time. I wouldn't attach a lot of revenues to that at this point. AAA has been problematic for, I think, almost all of the participants in the market, and so the AAA programs we have underway are more about designing new approaches. So I wouldn't count that in your revenues in the next 24 months.

Okay, thank you.

Okay.

Our next question is from Mike Weinstein with JP Morgan. Please go ahead.

Good evening, thanks. Larry, just as an aside, I know Mohan's been working on this since the analysts' meeting, but one thing that might help is since you've reclassified or re-aligned some of the business segments with, all the moves were made with Medi-tecb and Scimed and Target, if you can provide us with some historicals for the way they've been realigned by the new product segments, that will be fantastic, that will help a whole bunch.

Okay.

A couple of questions here, just checking on things that we are curious about. One, could you give us a sense on where Rotablator sales are at, at this point?

Rotablator, I don't have that in front of me, but it's relatively stable running around, call it $100 million business annual run rate.

Okay. Second question is, in the 10-K, I believe it was, there was a note in there about a lawsuit involving the Bonzel patents by the Bonzel family. Maybe could you just elaborate a little bit on that?

That was a case, if I recall, that after we acquired Schneider, Bonzel, and representatives of Bonzel, I think, sued Pfizer, and obviously, we followed that because Bonzel is a part of what we bought with Schneider. I think we're attempting to settle that in one way or the other, but I don't have an update, but I don't see a big exposure there. The last time I got an update I felt comfortable that that was being managed and settled in a way

that was fair to everyone.

Okay, fair meaning there might be an incremental royalty there?

No, no, no, no. I don't think there's any major financial implications to us.

Okay, great. I wanted to follow up on Anne's question about the inventory, just on the NIRs. You have today what, according to our projections would be, assuming it's all usable, enough NIR inventory to last you maybe two years, which should certainly hopefully be enough time to get the Express on the market. If you're still buying NIRs today because it's a part of the contract, but at some point we've got to think that if there is no resolution with Medinol, it's in the company's interest to stop buying NIRs. Are we off base in thinking that?

Well, I think that the main thing to understand is that our intent has been, and our intent continues to be, to comply with the contractual relationship that we have with Medinol, for better or for worse we're going to comply. And we're also going to comply by continuing to support the NIR platform and concentrate on the NIR platform to the extent we can. If we don't have new product, we obviously can't concentrate on new product or offer new product to our customer base, and we have to substitute sales that are going away from us with products of our own. So we will do that, and we'll continue to pay under the agreement the amount that is specified for that. But we continue to concentrate on the NIR platform, our drug-coated program, while we're broadening it to evolve into the Express platform and perhaps other platforms. It's still primarily concentrated on the NIR platform. And we

honestly are pretty optimistic about our internal drug-coating program which is now on the NIR Conformer and obviously, a lot of clinical results have to show up before that really results in sales or revenues, but in the meantime, we're not downsizing our order rate in any significant way, with Medinol, and it's not because we're required to buy, because we're not. We are required to put a forecast in, and then we're required to basically take delivery of some percentage of what we order, and so it's really our election to buy Medinol stents. We just have to give them a reasonable forecast. So we continue to do that, because we continue to hope that the NIR platform will be a player, and so we're, obviously, we're not only espousing that as our priority and our concentration as under the contract, but we're speaking with our money and our orders.

Right. Assuming that the Express ends up becoming the lead product, which sounds, I mean, I think that's the assumption that we're making at this point, although there is a contingency that things could still be resolved here. There is a point though at which you would stop buying NIR stents.

There is a point that we really stop buying NIR stents. We will, at some point, the market will dictate how much we order from Medinol. I don't know when that will be nor do I know what the magnitude of that will be relative to current usage, but market will dictate frankly what we order from Medinol.

Okay, thank you.

You have a question from Girish Tyagi of ABN Amro. Please go ahead.

Yeah, hi Larry.

Hello.

Could you just comment on the domestic for the endoscopy market as it relates to your Microvasive products? When I look at the top line in the US markets, again there is 9% growth. This is a second or third quarter of single-digit growth. Is this is a function of the market slowing down or are you seeing new products from the competition?

I think the good news is it's a great market, and we basically own most of it, and we are positioned very well to move our worldwide endoscopy business up to a billion dollar business, and we don't say that casually. Our goal is to move endoscopy into the billion-dollar level, and I think we have the management team in place in endoscopy and the product pipeline in endoscopy to do that, not to mention the acquisitions that we continue to make for endoscopy and the one that we announced in the first quarter that will take endoscopy into the GERD market. Later this year, I think, you'll hear more alliances and acquisitions in endoscopy that will, I think, give you comfort that endoscopy has the ability to grow double digits for many years to come here.

Thanks very much.

Our next question comes from Russ Haberman with Haberman Brothers. Please go ahead.

My questions have been answered. Thank you.

By the way, let me point out that I'm glad that people are now

asking about some of our other divisions because for a while here, I think that to understand Boston Scientific, you almost have to take coronary stents out of the analysis and look at the $2.3-2.4 billion business that's healthy and growing and generating strong cash flows and for which we'll continue to support with acquisitions. I mean the company, as I pointed out at the analysts' meeting, is number one in almost every thing we do. We have a wonderful business and a wonderful team with wonderful opportunities, and again, all of our other businesses that, outside of cardiovascular, no one focuses on, and you're going to be hearing more and more about these other businesses, and we're going to even start down the road here giving you divisional analysis including Scimed, so you understand Scimed's growth potential even without stents in it, and I think it won't be long before you will see a breakdown of our six divisions, all of which are growing at a nice rate. And hopefully, if focus on that, the $400 million or so business we have in coronary stents can be separated and analyzed for what it is. It's hopefully a temporary situation that we've got remedies underway to try to refuel the growth, so I'm glad to hear we got questions about Endoscopy and Medi-tech, the new Medi-tech, and our peripheral lines, because I think there is great growth opportunities there that people are missing. Okay, it's been about an hour. Why don't we take one more question, if there is one, and then we'll call it an evening.

We have a question from Dave Lothson with UBS Warburg. Please go ahead.

Good evening. I wonder if you could discuss briefly the cath lab

and your competitive position in it? In other words, are you still in all of the accounts you were say a year ago or two years ago? I know GPOs try to limit the number of players for large volume contracts. Has your competitive position been affected at all, and how has J&J's changed to the best of your knowledge?

Well, I wish I had Paul LaViolette or [_______________] with me to give you a better up-to-date on that, but obviously, in the last year, with our inability to get new refreshed NIR products out, and our other competitors have been able to put competitive stents in the market and also some better Balloons, we've had some accounts move away from us. We expect that we can get those back. Net-net, I don't think we've lost any significant percentage of major accounts. There is one here and one there, but we're into 1100 plus accounts. We have over 300 sales reps and marketing people in the United States. We have the largest interventional cardiology presence in the country and in the world. We have the broadest offering to the cath lab, broader than Guidant, broader than Medtronic, broader than J&J, and we continue to add to that offering in a proprietary platform. The Rotablator, it's a nice product, people don't talk about it much, but it's still high margin and a nice sized business, and we're the only company that can bring to that cath lab that Rotablator. Likewise, in the months ahead, we're the only company that can bring the Cutting Balloon to these cath labs. Right now the Cutting Balloon is at a run rate of around $7 million per month,

and that's only in 300 accounts. We've got 800 accounts to go. So a lot of upside with the Cutting Balloon, and we're the only company that can offer the Cutting Balloon to the cath lab in the US and around the world. We also have a vascular access business that is broader than anyone else is in the market. IVUS, we basically are the leader in IVUS today, and our IVUS business in the first quarter grew nicely, much to, I'm sure, people's surprise. We had very, very nice growth in our IVUS business. Again, highly proprietary, the only company that really can offer that to the cath labs. So we like where we stand. In terms of breadth, we're the broadest and deepest. We just have to fix the coronary stents. We had a problem with the Balloon segment by leading technology out there. We dropped from 50 plus percent market share down to probably 38-39, maybe 40% market share. The Maverick line will speak for itself. I think it's our ticket though back over 50% market share. And with regard to J&J, I think J&J has proven to be, each quarter, a tougher competitor. They had some problems early on with the acquisition of Cordis. I think that the management team at J&J was patient, and they have really offered a very competitive line, and so they're a real competitor, and we've never counted them out. So they have breadth. I would say that the broadest offering other than Boston Scientific, it could be J&J in the Cordis with their peripheral stents and Balloons, as well as their coronary to the Cath lab.

Short followup?

Yeah.

You've got Abbott now

planning to enter the drug-coated stent market and the non-drug-coated stent market over the next couple of years. Is this a market that can support four or five competitors of this breadth?

Gee, who knows? Why not?

I mean everything we hear is that they want fewer and fewer vendors and bigger and bigger discounts, and they are prepared to pay for compliance and so forth, and yet you have a broadening of the market here at this stage as we move into this arena.

Yeah, well when you say broadening, if you look at the players, let's do an analysis, and I would challenge some of the analyst community to do this analysis. Look at the interventional cardiovascular market and exclude coronary stents for a moment. Now, I understand coronary stents are big, but exclude it for a moment and see what the residual competitive landscape looks like, and I think, you'll open your eyes, and you'll see that the strength competitively of one company versus others is maybe different than what you think. I think long-term you have to have breadth and depth to survive and be a leader long-term, but it's a dynamic market. If drug coatings become a big hit like we all think it will, and Abbott just so happens to have the leading drug-eluting stent, they'll take big share in the coronary stent market, which is a big segment, but when you look at the long-term, the breadth and depth of what you need to compete in the cath lab markets, I think it's a different analysis.

Thank you Larry.

Thank you. Thanks everyone for listening in today, and we'll keep you up-to-date. Thank you.

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