Boston Scientific Corp (BSX) 2002 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Boston Scientific third quarter earnings conference.

At this time, all lines are in a listen-only mode.

Later there will be an opportunity for questions.

Instructions will be given at that time.

If you should require assistance during the call, please press zero, then "*".

And as a reminder, this conference is being recorded.

I would now like to turn the conference over to our host Chief Financial Officer, Mr. Larry Best.

Please go ahead.

Thank you and good afternoon.

This afternoon we'll be reviewing our results for the third quarter 2002, with me today on the call is Jim Tobin, our Chief Executive Officer, Steve Moreci, our Head of Endo-surgery Group and Paul LaVoilette, the Head of our Cardiovascular businesses.

Before I begin, because we will be likely talking about forward-looking issues let me turn it over to Paul Donovan our head of Corporate Communications to read the applicable Safe Harbor, Paul.

Thank you, Larry.

This conference call contains forward-looking statements.

The company wishes to caution the listener that actual results may differ than those discussed in these forward-looking statements and may be adversely affected by, among other things, risk associated with new product development and introduction, clinical trials, regulatory approvals, competitive offerings, the company's overall business strategy, its relationship with third parties, litigation and other factors described in the company's filing with the Securities and Exchange Commission.

Thank you, Paul.

Let me first review some of the highlights of the quarter and then we will turn it over to Steve Moreci, to given you an update on the tone of business in the Endosurgery group and then Paul LaVoilette, will give us an update on the Cardiovascular businesses and then will ask Jim Tobin, for a brief commentary of his own on the quarter and then we will turn it over to questions and answer period.

In terms of sales in the third quarter, net sales came in at $722 million compared to 670 million in prior year an increase of 8% on a reported basis and 6% on a constant currency basis as stronger Euro and Yen added $10 million compared to last year.

Excluding coronary stents, worldwide sales increased 9% on a constant currency basis.

Regional growth rates were basically inline with our plan at constant currency Japan showed a decline of 8% due primarily to the ageing coronary stent platform in Japan excluding stents, coronary stents sales were actually up.

We saw continued [inaudible] in Europe and what we call intercontinental markets, those are international markets outside of Europe and Japan.

Europe grew 17% and intercontinental markets grew 23%.

So nice double-digit growth helped by the strength of the new express platform and the strength of our GI Endoscopy business.

Our worldwide sales of coronary stents in the quarter totaled $68 million and this compares to $79 million a year ago, but up from $60 million in the second quarter.

Express 2 was launched in the U.S. on September 13 and contributed $14 million in a two-week period.

Our US market share has increased from 6% pre launch to around 23% currently.

Our Q4 stent sales projection for the US is around 75 million versus 35 million this quarter.

I'll talk more about Q4 in a few moments.

Stent sales in Japan were 11 million flat with Q2 but down from last year and Paul LaVoilette will be spending for more time on dissecting the cardiovascular business and specifically talking about our position in coronary stents when we turn it over to him to talk about the business itself.

Other highlights coronary balloons and stents in the quarter combined, represented about 25% of our sales.

I think this demonstrates how broad and deep Boston Scientific is when you take all coronary balloons and stents out of the business with 75% of our revenues coming from other categories of technologies.

Endoscopy and Neurology both had very strong quarters across all regions and Steve Moreci will tell us more in terms of the detail and fundamentals of the Endosurgery group in just a few moments.

And our IVT product line that was from an acquisition of over a year ago continue to perform well with sales approximating $41 million in the quarter over a $160 million run rate compared to $32 million a year ago.

So we continue to see nice growth from the IVT platform and of course the majority of that is coming from the proprietary cutting balloon.

Now for those of you that are doing the analysis by division, by geography, let me pause for a minute and just give you the international sales numbers and then you'll be able to back into the domestic numbers.

By division very quickly Cy-med came in at $172 million in the quarter, EPT $9 million in the quarter, Target Therapeutics $28 million, Meditech $23 million, Endoscopy $49 million, Urology $10 million for an overall international number of $291 million.

And that should give you the help you need to back into the domestic numbers from the attachments to the press release.

For a few moments, let me address the income statement.

Including all items, net income came in at a $161 million or $.39 cents per share compared to a reported net income of $58 million or $.14 cents per share a year ago.

The special credits this quarter and most of you are used to special charges, this quarter we have special credits and these special credits reflect the Medtronic settlement of a $175 million.

And then that's netted out by some other intellectual property acquired during the quarter.

Excluding special items, earnings per share in Q3 came in at $.24 cents per share and I think that's more of the apples and apples comparison that Wall Street is looking at and focused on and that of course excludes a special credit I've just referred to.

So $.24 cents per share compared to $.19 cents per share in the prior year, an increase of 27%.

Our internal plan was 22% and I think consensus estimates were $.22 cents per share.

Q3 includes a reduction in the company's year-to-date effective tax rate from 30% to 29%.

Resulting in a rate of 27% in the quarter.

This added one penny to EPS.

This was as a result of our strategy over the past two years in the operations side, transferring, consolidating, manufacturing overseas.

And this has enabled us to reduce our effective tax rate in the quarter as we look out for the remainder of 2002 and we'll further reduce it in 2003 and I can speak to that later.

Q3 gross margin rate of 71% was in line with our expectation.

It's about a 1% point increase in gross margins from the prior year.

Favorable margins on Express and standard cost reductions from the plants more than offset an unfavorable product mix.

On the issue of pricing, pricing was relatively stable across all of our businesses through the third quarter, although US coronary stent ASPs' declined approximately 10%.

As we entered the new market and entered some of the large volume labs and Paul will be speaking of that further in a few moments.

On the operating expense line, operating expenses basically came in at plan compared to last year.

SG&A increased 7% to $249 million while R&D increased 21% to $87 million, now at a 12% of sales number.

Increases in SG&A reflect field sales force expansion in Endosurgery and -- or Endoscopy and Neurology.

The R&D increase is mainly related to coronary stents and this of course includes the increased spending for clinical trials related to our Taxis program, as well as our Embolic Protection Filter Program.

Amortization expense is a $11 million less than the prior year in terms of the third quarter due to the change in economy for goodwill amortization and the new standards.

An interest expense of $10 million was down from last year mainly due to lower interest rates and favorable interest-rates flux.

We will focus just a moment on the balance sheet itself.

Cash on hand during the quarter increased to $259 million reflecting the $175 million payment and also netted against that is a $76 million investment in various IP.

Net accounts receivables of $399 million reflect a DSO of 50 days and this compares favorably to the prior year.

Our inventory levels continue to decline nicely.

Net inventory of $257 million represents we are at four-month on hand compared to $303 million or five-month on hand at 12/31/2001.

So, we are continuing to see strong management of our inventory investment and as a side the whole entire working capital is being managed increasingly efficiently as we move forward.

The plants have reduced inventory in raw materials in work-in process, over $50 million so far this year.

And then lastly, free cash flow without the unusual credit payments remained strong with over $120 million in free cash flow during the quarter.

All and all the -- we feel that it was a very good quarter.

We feel the fundamentals in all of our businesses is very strong moving in to the fourth quarter, and we view of the third quarter of 2002 as an end of a chapter at Boston Scientific that began probably in late 1999 and then early 2000 where we started hit bumps in the sales curve in coronary stenting in the US with an ageing stent platform.

Why do I suggest that this is end of a chapter, top line growth were single digits and we hope and believe that as we move forward for quite some time we expect to see double-digit top line growth and far more leverage on the bottom line as we grow our business nicely.

We move in to the fourth quarter with a broad and deep platform in interventional cardiology.

We are probably as strong as we have ever been in interventional cardiology, Paul will speak to that in a moment.

But with the launch of the Express Stent near the end of the third quarter and into the fourth quarter, we expect at least for the foreseeable future to see double-digit top line growth on a corporate-wide, world-wide basis and leverage on the bottom line.

So, all and all what we see in the fourth quarter of 2002 as a beginning of a new chapter that should last for several years and we're quite excited about it.

In terms of -- in terms of our expectations let me share with you a revised guidance, or a renewed guidance I should say.

To remind you back in January this year our guidance -- we gave guidance specifically for each quarter and an overall sales top line for the year of 2.835 billion.

Our EPS guidance at the beginning of the year was EPS of $.96 cents.

For the past, for the first two quarters of this year we exceeded our expectations internally each quarter.

In the first quarter, we achieved a $.22 cents a share EPS versus $.19 cents in the plan in the second quarter $.23 cents a share versus $.22 cents in our plan and this quarter $.24 cents versus our $.22 cents.

Looking at the fourth quarter, we're going provide a guidance in term of a range because of the continued competitiveness of the coronary stent market.

So, our guidance for the fourth quarter has really not changed other than we're going to provide a range.

We think our top line will come in some where between $770 million in sales to $790 million in sales.

We think our EPS in the fourth quarter will range between $.30 cents per share and $.33 cents per share, which would give us for the year EPS of $0.99-$1.02 a share exceeding our initial plan in January of $.96 cents a share.

To put it in another context as I mentioned, we believe at Boston Scientific we are entering a new chapter in the Company's history.

We have renewed double-digit growth.

Through the fourth quarter our sales are expected to grow between 16-17%, the top line good double-digit growth and the bottom line we expect our earnings per share to grow between 50% and 65%.

So you can see the leverage that we are expecting as we move into this new chapter of business at Boston Scientific.

Again, fourth quarter sales are up 16-17%, earnings per share up 50-65% and that's consistent with the guidance that I just outlined.

With that overview of the financials for the third quarter and the guidance for the fourth quarter, let me turn it over to Steve Moreci to give you his thoughts on the quarter and the tone of business at endosurgery.

Steve.

Thanks a lot Larry.

Just for everyone on the phone is reminded the endosurgery group is made of the Endoscopy business, the Urology and Gynecology franchise, excuse me, and vascular surgery, oncology and I will go through each one briefly and at the end I will give you a little bit of an outlook for the Q4.

Third quarter was an outstanding quarter for endosurgery.

We are on target, actually we are exceeding -- maybe exceeding our target for the year of 12%, we had 13% growth rate worldwide for endosurgery.

We had 12% growth domestic and 16% international and domestic growth has actually accelerated over the previous quarters.

Domestic, it is benefiting from what Larry mentioned the sales force expansion activity of the past year or so, and our international business continues to expand as these new products are rolled out around the world.

The bottom line in the third quarter, Endoscopy and urology both exceeded their plans nicely.

Vascular surgery, oncology were slightly behind.

Overall an outstanding quarter for the endosurgery group.

I would like to talk now about Endoscopy.

Endoscopy was up 14% worldwide.

This is -- the third quarter is usually one of the weaker quarters for Endoscopy, but this is an unusually strong performance for Endoscopy.

We are very happy with the result.

Seven of the nine global franchises were in double-digit growth.

All four regions were in double-digit growth and that is outstanding performance and shows the breadth and strength of our Endoscopy franchise on a global basis.

Our largest Endoscopy franchise, Biliary franchise was up 16%.

This is a continuation of the story of the last 3 quarters.

It's the conversion of standard Endoscopy procedures to our Rapid Exchange platform that's going around the world in all regions and is moving very nicely.

We continue to see strong growth in our biopsy and our polypectomy franchise.

It is again driven by the global desire to reduce colon cancer.

Last week we had a very important event occur in the battle against the reuse of single use.

You may recall that one of the areas that we have been concerned about with our biopsy franchise is that it sometimes comes under the attack by the so-called reprocess or single use devices.

We are pleased to say that the industry has been able to get the Senate to pass last October 17th HR bill 5651 which is the medical device modernization act and what it does for us is, Boston Scientific particularly, it returns the biopsy [inaudible] franchise, the business from a non-regulated mode to one that is regulated, meaning that reprocesses will have a much higher hurdle to begin the reprocessing our forceps in the future.

So, we are very excited about this industry move.

We are very happy that Congress has seen fit to regulate this practice and hopefully it will help to stimulate greater growth potential for us in the future.

GERD diagnostics, reflux disease diagnostic is going in the market place.

International expansion continues to drive our balloon and stent sales in the [inaudible] business and they were up 30% on a worldwide basis.

We have been releasing as latest the last week, new data from our Enteric Program, enteric is our injectable for GERD that was released both in Seattle and Europe over the past week and a half.

A 12-month [inaudible] is holding up nicely for Enterics with 70% of the patients who have received this injection are off their need for PPIs or the Nexium [inaudible] drugs. 80% of the patients actually have their need for PPIs reduced by 50%.

So, the data continues to hold strong for this important franchise of the future.

We are hoping to have that product in our bag sometime by the middle of next year.

So, the Enteric data, EMT product is still holding up well on the clinical data reviewed.

On the new business front, we made an announcement in the quarter of our relationship with Aspect Medical, Aspect Medical you may know as the company specializes in devices that monitor patient's awareness during surgery and we are actively evaluating the use of this index in Endoscopy for use of the [inaudible].

We remained very excited about this opportunity and it's very early, still more to come, but that's an important part of our whole surgical Endoscopy program.

To summarize, Endoscopy, I mentioned the third quarter unusually strong and the good news is the fourth quarter traditionally our strongest quarter for Endoscopy, so we expect big things in the fourth quarter.

I could turn my attention briefly to the Urology and Gynecology business.

An outstanding quarter as Larry mentioned up 19% worldwide.

Again 4 out of 4 regions around the world in double digits growth.

Let's take a few seconds to look at some of the franchise activity.

The historic franchise in urology or Endourology Business is still management.

It was up 10% in its field by some internal product development activity, particularly the launch of the new guide wires and a new product called stone cone for retrieval of kidney stones and it continues to success of the partnership that we forged with Leukoplast and Luminous for kidney stone extraction.

Those two partnerships and the products involved in that were up 40% in the third quarter.

I am very excited about our pelvic floor business, our Gynecology segment within the urology business.

It was up 50%.

Many success stories here Dorsphere our injectible through our relationship with C&C Medical, our Speedtack bone anchor product, our existing Tapeo swing materials, and also our cadaveric swing material, all combine to contribute to outstanding growth in the third quarter.

A significant advance that occurred in the third quarter in this business was the acquisition of BEI Medical.

We closed that during the 1st day of the third quarter.

We're pleased to say that the organization combination is nearly complete and in the third quarter the BEI team, the original BEI team had an outstanding quarter.

Beginning October 1st just a few days ago, the Boston Scientific pelvic floor sales team, much is specially created through the expansion of our sales team that Larry mentioned earlier, again selling the BEI products and we were very excited about the prospects for the fourth quarter.

We expect the fourth quarter to be 50% growth over what we incurred in the third quarter.

So, BEI program is going very well and that's helping fuel that 19% you saw for the Urology and Gynecology business.

Next, I'll turn my attention to the Meditech business, which is where we house our vascular surgery and oncology franchise.

That business was up 6% worldwide business and [inaudible] 2 franchises, this we have been saying all along, basically the vascular surgery part of the business was [inaudible] and this is a continuation of what we have seen in the last couple of quarters and that's result [inaudible] stent grafts around the world and our comeback program for our oncology relaunch in Japan.

However, the oncology business, the other side of the franchise grew 15% worldwide and was strong in all 3 of its major franchises. [inaudible] business is up 25% and it is strong in the pick as well as compatible port and we are going to launch new product as a result of our catheter division acquisition.

The new passive polyurithane from catheter division which is launched in the last couple of weeks, and we are expecting sales of the CI product line to double this year in 2002 and reach 8 million in sales.

The tube reflation franchise is also doing well that's the result of the RTC acquisition that was done early this year and continues to grow nicely and was up 60% in the third quarter and it continues to be supported by a very strong clinical outcomes and the improved reimbursement strategies that we have been employing.

The most exciting part of that business, the oncology business of the Embolic Therapy category.

In the third quarter it grew 14%.

That was driven by the renegade high-flow microcatheter which is used to deliver embolic materials.

It continues to pick share worldwide.

Most exciting news though is the introduction of our Contour SE, our new spherical embolic made from time tested PVA.

That product was launched October 1st and I don't have the exact figure to give you because it is still very early, but I can tell you that the response to sale force has exceeded our expectations and it has been very well received by our customers.

While, major driver of the Contour SE will be our ability to market it for uterine fibroid therapy as part of the women's health initiative, and to that end we have added a third arm to our Contour Uterine Fibroid trials to show the use of Contour SE.

We expect to approval late 2003, its major market impact in 2004.

Just to summarize that we expect to market for this particular product category reach $35 million by the year '05.

In summary, our look Q4, continue strength in endoscopy across all franchises in the regions building towards the Enterics launch, hopefully, the second-half of the 2003.

For urology and gynecology continues strong showing driven by the pelvic floor business and particularly the success of the BEI acquisition.

And then finally the Endoscopy surgery and oncology business, the rebound in oncology will be fueled by three product categories Contour SE which was just launched, a new passive pick I just mentioned, which is also just launched, and the RTC franchise.

Overall, a strong quarter -- Q4 should be a strong quarter which we will have plenty of momentum heading into 2004 and with that I would like to turn over to Paul A. LaViolette, for comments on the cardiovascular business.

Paul.

Thanks Steve.

Just a very brief comment.

Obviously we exited Q3 much stronger than we started and much of that was predicated on the express approval as Larry already indicated.

We received approval September 11th and started shipping the 13th and I'll give you an express update first.

In the first four days post our launch, we conducted evaluations in over 200 hospitals, that was based on a Q2 average market share of 8% which did slip to 6%.

So, that's our baseline in September with the commencement of the Express launch.

We subsequently grew that market share by about a 100% through the end of September, in those ensuing 10-11 working days and exited the third quarter at a 12% market share and move from the number four position to number three position in the market.

In the last three weeks -- the first three weeks of the quarter and last three weeks of our operating activity we have grown that share, as Larry mentioned, from 12% to about 23%.

We now feel that we are within 3 market share points of the number two position in the market place.

In terms of some current dynamics we still have approximately 200 additional accounts that we have yet to open, some of those being fairly large accounts that have strategic importance in the market place.

About 40% of our current stent selling activity is going head-to-head with the guidance launch of the Zeta, which we feel gives us an extremely good, clear look at the competitiveness of Express and we feel very good about how we're performing in that area.

It also tells us that a fair amount of our accounts are currently involved in active competitive evaluations which of course would tend to suppress short-term our current market share on a literally on a day-to-day basis.

So things we feel are telling us that we have an extremely competitive product and we are performing very well in highly competitive circumstances.

There has been some reference about short-term dynamics related to prospective drug eluding stent approval and whether either patients or stent purchases are being delayed in anticipation of drug eluding stent approval.

Our sense is that it is relatively limited perhaps less than 5% of the markets is actually thinking about that and of course that will depend a lot on their on going expectations for drug eluding stent approval.

Our ASP's as Larry mentioned, have been around $1100 that's trending down from a little over $1200 when were selling solely the near, obviously the near was not a product that required any discounting to gain share.

We are now actively engaged in highly competitive accounts but I will say we are not participating aggressively in large bulk deals and as result we feel we have a very true run-rate average selling price of a little over a $1100, I think it's fair to say that we expect that number to drop to number between a $1000 and $1050, between now and the end of the year.

Clinically, it's very clear to us based on our international performance and now based on our U.S. performance that we have in Express 2, combining obviously the Express stents in the Maverick delivery system, we have an outstanding product.

It clearly delivers, its easy to use, it delivers a superior angiographic appearance.

It of course is being sold based on excellent clinical data and there really is nothing lacking in this product.

I would add to that that our sales execution based on my experience has been outstanding.

Going forward our goal is to take the current market share number from the low 20s to the mid or upper 20s by the end of the year.

We are planning conservatively in our assumptions regarding cipher and we are assuming that cipher will be available by the end of the year with an early to mid December launch.

Now that remains to be seen but our financial goals are predicated on that assumption.

We expect Express LD biliary approval in November as well so we certainly have today an aggressive launch in the coronary side.

We expect to get going on the non-coronary side shortly, but within the coronary side just to reinforce our current performance, over one third of our coronary sales representatives have stent market share today in excess of 25%.

Now switching gears briefly to non-stents activity the cutting balloon continues to do very well holding 16% market share complimenting the global numbers that Larry cited in the United States.

We surpassed to the $30 million number for the first time in the third quarter that is 5% sequential growth over Q2 and 35% growth over prior year.

Balloon angioplasty continues to be very strong for us growing 6% about equal to procedures perhaps a little bit higher than the balloon growth rate based on direct stenting trends.

We will add to our current leadership position in balloon with the approval of the qwana Maverick which we just received which will give us an additional compliance balloon to complement the Maverick product line, that is shipping internationally now and will ship in the United States in the end of November or early December time frame and we also expect imminent approval on the Maverick 2 balloon sale.

We are very strong in balloons and getting stronger when we combine PTCA balloon with the cutting balloon.

We currently hold 79% market share and I will say that the number 3 and number 4 competitors in the balloon market today now hold a combined market shares of 4%.

We got very healthy performance in our other product lines.

I indicated previously that we have been gaining market share in new guide catheters and guide wires.

Those are growing in the third quarter 18% and 20% respectively over prior year.

All other vascular access product lines, there are a half a dozen or so, are growing in the 3-8% range all with the market place our ultrasound business continues to demonstrate double-digit growth and I think there are continued long term trends in the use of ultrasound in support of PCI.

We expect to file the filter wire submission which is a 5-10k this month.

And we had fairly strong performance in our peripheral vascular business, $80 million for the quarter, very steady.

We expect the Express LD upon approval will change this trend immediately and we do expect approval in the time frame between now and November the 15th.

Internationally we are focused on cardiology again.

Very strong with one notable exception and that notable exception is cy-med Japan.

As Larry mentioned briefly, our total Japan business was down 8% year-over-year.

But that was driven by cy-med Japan business being down 23%, which was driven by the stent business in Japan which is the near stent of being down 57% year-over-year.

So you get a sense that as we are entering a new chapter, as Larry mentioned, we do have one epilogue, which is the last remnant within Boston Scientific of our aging stent product line.

We are holding 16-17% share in Japan.

I think that share is relatively steady and it's something that we can expect to hold for a while.

But we won't get relief in Japan until next year.

We have got two significant milestones the first of which is the Taxis submission in the middle of 2003.

And then of course Express approval with reimbursement which we expect to receive in Q2 and Q3 respectively.

So that story will turn around.

Every other element of Boston Scientific International is performing exceptionally well.

In the third quarter our total cardiology business including Japan was basically flat.

Q3 international excluding Japan for cardiology up 19%. [audiogap].

Japan business excluding cardiology was up 14%.

So you get a sense that everywhere other than our stent business in Japan we are growing very robustly and in summary our international cy-med business excluding Japan all product lines, all geographies except Japan in our international region grew 26% in the third quarter.

So very strong, clearly fuelled by our participation in the stent market.

Cardiology in Europe in particular was up 23% in the third quarter over last year and in our intercontinental region, 29%.

Our stent product line in those two regions was up 63% over prior.

Switching very briefly to an update on a variety of Taxis front, obviously everybody is aware of our data as presented at the TCT, I won't go over that.

We will be presenting some additional data at the American Heart Association including some longer-term follow up on Taxis 1 with those patients being followed in the 18 to 24-months timeframe.

So, we will get a very good look at the long-term performance in our first and then experience with Paclitaxel.

We are also entering the 12-month follow-up period for all patients in cohort 1 and we will report that -- I am sorry cohort 1 of Taxis 2, we will be in a position to report that in the timeframe of the ACC.

That of course will be sizable data on a long-term basis in the dose that we will be pursuing commercial approval for in United States.

So, I think that will be an important announcement.

We are also going to present at the American Heart Association the 30-day look on all patients, all 1326 patients in Taxis 4.

We are planning today to submit shortly an IDE supplement to initiate Taxis 5 in the Untied States, which will be a high-risk protocol emphasizing long lesions, small vessels, and diabetics.

These are subset that clearly are high-risk and clearly will represent an area that both is going to prove popular, I think, for drug-eluding stents and may represent an area of advantage to us based on some trends that we have seen from our data to date.

We hope to start that protocol by the end of this year and then we will subsequently expand that protocol based upon final FDA -- concurrence to our strategy to include further complex subset such as bifurcation lesions and instant re-stenosis.

Taxis 6 is actively in enrolling in 27 sites, we are excited about that protocol and the data that ensue there, a great feedback obviously on the Taxis 2 data.

We've had very strong reactions to our clinical strength and the ability of the Taxis 2 data to match other data.

Market perceptions on our drug-eluding stent program are measurably strengthened based on Taxis 2 data.

We validated this with extensive customer research in the last month and is very clear to us and we have substantial data to support this, that Paclitaxel delivered on a stent through a polymer coating is now perceived by customers as virtually equivalent to polymer-based delivery of Rapamycin and I think that is a compelling statement given that our data is now in the public domain for only a month.

We are actively engaged in the CE Mark process dealing with our notified body and continue to expect approval within this quarter, and we are preparing obviously on a operations basis with the building of launch quantities in anticipation of international launch around the time of the end of the year.

Just a few comments on our other cardiovascular divisions, target business up 6% worldwide as Larry mentioned, a little bit slower than coiling procedure growth rates, primarily due to active coil competition, we currently hold 90% coil market share worldwide, and that is 90% held against 5 competitors on a global basis.

So we feel very good about our strength there, we have some growth drivers that I will talk about including some new data coming out from an international clinical trial that randomized for the first time, surgical candidates against coiling and shows superiority -- significant superiority for coiling versus surgery.

This will be published in [inaudible] imminently, and we think that going to fuel case growth above the historic 15% growth rate for GDC coiling.

We expect other accelerants to the growth rate to be driven by new guidewire launches and new stent launches including the smart stent which is now approved under an HDE in United States.

So a number of accelerants to our overall coiling procedure, and then this will all be supplemented by the matrix product line, which we talked about.

We have just completed our post approval registry enrollment, we will have the follow-up that we're looking for on those patients in the second quarter, and we will have, at that same time, a complete line of products including the stretch resistant and ultrasoft products to sell-out the matrix line, and we will be in a position to go with the full launch at that time.

EPT very briefly, not much to dislike, 31% growth in United States in our EP business, 24% growth worldwide, very balanced between our core therapeutic lines.

The acquired Chile product line from Cardiac Pathways and our diagnostic product line we expect 20% growth, plus on that franchise on a worldwide basis, Going forward we've a PMA pending on our atrial flutter indication, and a full complement of product launches throughout 2003 on a variety of technology systems integrating EPT and Pathways Technologies.

So very robust performance in non-cardiology, and I think compelling performance based on the launch of Express in the United States, and a lot of anticipation needless to say about our drug eluding stent program on a going-forward basis.

And with that, I will conclude my comments.

Thank you Paul and thank you Steve.

Let me turn it over, before we turn it over to questions and answers, let me turn it over to our Chief Executive Officer Jim Tobin for his commentary, Jim.

Just very briefly so that we can get to the questions.

I am very happy with the quarter, but I am even happier that it is over.

It's been pretty busy with the Express launch, the TCT splash, some positive legal outcomes, happy with what's going on in endosurgery, the acquisition program continues positively, and I think with the Express launch, you have seen the transition of operations from being a bit of liability for this place to operations being an asset as we went out there with 100,000 released units and inventories the day we launched, and we were able to cover any and all demand for the product, even when it was surprisingly high.

Q4 is going to be exciting too with the full quarter of Express, the possible approval of Taxis in Europe and intercontinental, continued growth in endosurgery, you know, I guess the bottom line here as reflected in the kinds of numbers that Larry has talked about for Q4, we are in danger of accumulating some real momentum here.

So you know buckle up.

Okay, thank you Jim.

Let's turn it over for any questions you might have.

Thank you.

Ladies and gentlemen, if you would like to ask a question, please press the "1" on your touchtone phone.

You will hear a tone indicating you have been placed in a queue, you may remove yourself from the queue anytime by pressing the "#" key.

If you are using a speakerphone, please pick up your handset before dialling.

Our fist question comes from Kurt Kruger, please go ahead.

Hi, this is Nathan Weans for Kurt.

Good quarter, just a couple of quick questions.

On the gross margin line, with the Express 2 in full launch here, can we anticipate a bump up in the gross margin or are we looking at 71%, you know, going forward that's what it has been for the past three quarters and, you know, have you hit a ceiling here or should we look for it to pick up?

No, I think we're prepared here as we move in to the next number of quarters to see gross margins increase.

In the Q4 guidance that I outlined earlier, the assumption is that we would - exiting, let's call it December, we would be at a 72% corporate-wide gross margin, and that has to do with the mix of everything in it.

Obviously, the more Express that we sell and the volume will weigh positively on our gross margin.

For the gross margin on Express is obviously very handsome, but the answer to your question specifically we do expect a move by one percentage point at the gross margin line as we move through the quarter to a 72% gross margin exiting the quarter.

Just another piece of act there.

The biggest thing holding us back on gross margin right now is the fact that Japan is struggling on the Cy-med size things because margins there are very fulsome and to the extent that, that piece of business is going backwards, that's a drag on gross margin.

Okay.

One other quick one.

Larry you had mentioned before that you are going to talk a little bit more about the tax rate and that time I missed it -- could you -- do you anticipate that 27% going forward here or would it, you know, where do you see that going?

I am glad you asked that question.

Let me try to clarify.

The reason for the 27% in the third quarter was a catch up adjustment, so that we would show 29% for the year, which we believe will be our effective tax rate.

Right now we're predicting that in 2003 to come in somewhere -- conservatively at 28% effective tax rate.

We might be able to do a little better than that, but I'll know better once we are into our guidance in January.

Matter of fact, let me remind everyone January 21 in New York we will be meeting with the analyst community to provide our specific guidance on 2003 and 2004 and as we plan for that, I think it is safe to say that we expect the effective tax rate to be at least down to 28% for 2003 and maybe we can add to that as we move forward.

All right.

Thanks a lot.

And by the way most of that has to do with the two years of consolidating how and where we manufacture and also has to do with the product mix and obviously our largest manufacturing base today is in Ireland.

Next question please.

Thank you.

That will come from the line of Rick White.

Please go ahead.

All right.

Good afternoon everybody.

Hey Rick.

Couple of things -- if I could get a little clear about [inaudible] was saying that price -- some prices were essentially flat in the quarter.

You are talking about down 10%, what are we missing?

Did you start from a higher level or is it new accelerating trend?

I think what you're missing is as we launched the Express, we launched into pier-one accounts, which are all high volume account.

In your high volume accounts, volume gets a bigger discount.

So that's what you are probably missing.

If you would take that over the broad spectrum of a full launch, our ASPs would've not been 10% down, they would have been somewhat less % down, but what we had to do was, we obviously moved into the highest volume accounts and the friendliest accounts first and that's why you saw the 10% decline versus what Guidant has posted as something flat.

Okay.

And two questions, perhaps for Paul.

One is it too early to look at re-order rates and judge the sustainability?

Paul what you think so far, and second I would be curious to hear your thoughts about how you're planning, what you are expecting in the first half of '02?

If we, you know, who knows when J&J will get -- won't get approved, panels are still going on as we speak.

But -- it seems like that there might be some irony and you might have superb success in the fourth quarter, are you assuming then things fall off in the first half of the year?

Well, Rick couple of things.

First of all, I fully concur with Larry's comment about the ASP.

We did, we did start from a higher number.

We started at 12.25, which really was an artifact of the near.

So we don't expect pricing to go much lower and certainly not below market.

Reorder rates, it is definitely not too early to tell.

We know every order that comes in from every customer whether it's the first, second, or third, we have you know in terms of the total number of accounts that have been launched, we know what percent of those accounts reorder and literally a third of all accounts that have been opened, reorder daily.

So this is something that we can track if an account doesn't order by you know, 10:17 in the morning, we check it out.

So, when I talked to you about your ongoing market share, I feel very good that this is -- not an early bolus of folks that brought in some units and now we'll just wait to see if they like it.

This is high intensity conversion activity where we're tracking it by customer, by account, by day, by territory, and it's very solid.

Now the shares shift in this business as you well know, but we are very comfortable, that this is a solid image of our position.

I think in terms of the first half of '03 a lot does remain to be seen.

We clearly are seeing more favorable trends then what we would have assumed a few weeks ago.

If J&J is delayed at all, based on size availability, based on their panel performance or their recently reported deficiency letter, all of that is upside for us.

As I mentioned we planned on Cy-ber being launched in December any day later than that is a day it's probably favorable to our plans.

We've had a plan all along that conveyed market conversion from bare to drug eluding stents starting at zero and reaching 57-60% by the end of the year.

And in spite of that still call for our stents sales in the first half of next year to be double what they were this year and in the second half probably 60% up.

So no matter how we cut it, based on our low comparables for 2002, 2003 is going to be a very strong year for us with obvious appreciation if you will, for every dollar revenue will be even further accretive on gross margin.

Thanks, Paul.

Next question please.

That will come from the line of Sheryl Zimmer, please go ahead.

Hi, guys congratulations.

Just two quick numbers questions and then one follow up.

Just if you can give us what the revenues from acquisitions added in the quarter and then I don't know if Larry, it sounds like, you don't want get into a lot of specifics, but I will ask anyway would be willing be just give us a range for '03 in terms of revenues and EPS?

Let me take the last one first.

We are not in a position to give the range and we will able to do that in January 21st.

All I can say is right now the range is moving up as opposed to down and that's good news.

We like the fundamentals.

We like the pipeline, we like the competitive landscape right now and so we will continue to work hard all through November-December.

We will be fine-tuning our plans for 2003.

Paul and his group are strategically, you know, measuring the landscape and we will just have a finer -- be in a better position to give you guidance in 2003 on January 21st and we also excited about looking in 2004.

In terms of acquisitions, we are glad to say that the acquisition strategy at Boston Scientific continues to work very well and to give you some perspective in the -- and most of this is apples-to-apples now, we are not in the situation where to a great extent we have any apples and oranges.

It's pretty much apples-to-apples now.

Looking at the larger acquisitions done in the past 12 months or 16 months, I'll say that includes Cardiac Pathways, EPI, IBT, RTC, BEI, and CI.

In the third quarter of 2002, I am sorry third quarter of 2001, those acquisitions contributed $34 million in sales, and in the third quarter of 2002 those acquisitions contributed $52 million in sales.

So, you can see that we are giving nice growth from the acquisitions, they are in the numbers in both periods.

So, there is not a lot of apples and oranges, rather it's pretty much apples-to-apples.

Okay.

That's great.

And if you do the math, obviously that's well over $200 million run-rate and it's growing double digits.

And the BEI for the September was tiny?

$1.3 million.

Okay.

And that's great.

Just a quick follow-up separate on Medinol, just I think you had said last quarter there would be a status hearing.

So I just wanted to -- in September.

So, I just was wondering if there's anything new to report there, and one other thing I was wondering is for your 25% ownership in them where is that on your balance sheet at this point?

And at some point you are going to be writing that down or have you written it down?

Well, first of the investment is closer to 21%.

It is on our balance sheet in our Investment Portfolio.

We don't plan on writing it down.

We think the underlying value of our -- the underlying value of our investment right now, we feel pretty good about in terms of recovering one way or the other.

So, we haven't felt the need to consider write down on Medinol, you know, there is value in the intellectual property, there is value probably in the franchise.

So, we are not concerned about that.

We concerned about, we're more concerned about recovering our damages.

There is a status hearing in November -- this Thursday, I see -- the one in September was postponed.

So, there is a status hearing, it's -- I would say the case continues to move relatively slowly.

This is the case by the way, of Medinol against Boston Scientific.

We have our own case against Medinol and that continues to move ahead.

Again, this -- the Medinol situation is no longer an issue from an operating standpoint.

It's really -- you know, in our litigation portfolio and we don't think there is anything material in terms of downside and hopefully there is something material on the upside.

Okay.

Thanks so much.

Thank you.

Our next question comes from Tom Gunderson.

Please go ahead.

Hi!

Good evening.

It's amazing to me what's -- what we ask on these current news.

So from the panel meeting that is going on, Paul could you talk a little bit -- give us a little bit more color on the coating and now that you are starting to get production levels up on that for a European launch.

Talk a little bit may be about any flaking, any issues with crimping, shelf life, et cetera, and then also given the number of questions that went to [inaudible] this morning, could you talk about a your accesses to the Taxol drug wrapper and what kind of relationship you have on that?

Well first of all Tom, our panel on meeting is not today.

So, we need a little more time for all of that, but basically I'm aware of the issues that were raised.

Fred Colen, by the way our chief technology officer, is with me and I will probably ask him to comment on this.

Very briefly, we know about the issues J&J has had.

They also changed their coatings process in the middle of this period.

So, I think they are getting some questions more on their changes than on the coating itself.

I am also comfortable that we have got a lot more long-term animal implant data than they apparently have.

So, I don't think there will be as many issues if at all with our coatings.

In terms of drug, obviously Taxol, you know, knowledge its base as a compound is very deep, but on the pack of Taxol issues and on the coating side may be you can have some additional comments.

Yeah.

Let me give a few comments from my side on that.

First of all obviously we listened in on the panel meeting today.

It is a valuable exercise for us or do I have to say that in general we were not really surprised with the questions that we were asked.

I want to remind you that we have had a lot of interactions with the FDA, in particularly early this year when we had a lot of interactions with the FDA around the need for moving forward on the IDE and into the PNA process.

We subsequently have initiated a lot of work in the company as relates to invitro and in invivo, we have initiated earlier this year a lot of additional pre-clinical work as related to FDA's request, that are centered around safety, that are centered around coating integrity, that are centered around overlapping stents.

We have in our hands today a very promising 3-months data already on those studies, and we have further data coming, because we are collecting pre-clinical data up to 6 months.

So, on that side we have already gone through a lot of interaction with the FDA and we received questions from them that we already have a grasp and that we are in the process of grasping.

So on that perspective, no surprises to us at this particular point in time.

As it relates to our coating, we have a very robust coating and product design.

We have not struggled with issues of coating integrity, coating delaminations.

In our manufacturing processes, we are in the midst of the ramp up of for international launch and we are going through the normal ramp up improvements in terms of yields and capacity.

We are not seeing anything out of the ordinary as relates to that.

We have a solid design, a solid coating process.

We don't see any problems with handling or, you know, coating flaking off.

And we have a lot of long-term data on our coatings as it relates to just the coating itself and as it relates to the coating with the drug.

So, we feel very confident in that respect.

As relates to Paclitaxel, we have good communication with our Paclitaxel suppliers around the drug and the master files.

And we have a good understanding of what data is available.

We have initiated shelf-life studies on the drug as well as on the device.

So, all of those things are in motion and are a part of our overall timeline.

It's also fair to say based on some of the people we had down at the hearing today that some of the issues that J&J publicly were facing questions on we faced some time ago and have dealt with.

How completely--who knows?

But we certainly have heard and seen a round of questionings in large parts.

At least that was the feedback that I got from one of our colleagues down there.

Next question.

Thank you.

That will come from Lawrence Kirsch.

Please go ahead.

Yeah.

Hi!

Good afternoon.

I wanted to just follow-up with again with one of the issues that's coming up on the panel which is, you know, the -- I guess the ability to approve for sub 2.5's and greater than 3.5 mm stent given the data I was collecting [inaudible].

And, I guess, the question is how do you morph in the data that you are going to collect under Taxis five which I think goes 2.5 to 4.0 and -- so that it gets added to the panel, when you go to panel or when you do your submission?

So, you can just walk through that.

And then I guess the other question is Larry sort of just for the fourth quarter are we expecting any charges in the fourth quarter?

Let me take the last one first.

We don't expect well...., Let me take that back.

In the fourth quarter, you should expect to hear us announce somewhere between four and seven transactions of an acquisition or investment nature.

Some of those will have R&D-- in process R&D attached to them.

But you will see another plethora of investments and acquisitions in the fourth quarter.

Most likely there will be some charges write-ups by requirement of purchased R&D and others.

As far as any other charges, I don't foresee any, but always at year-end we take a hard look at the balance sheet and look year-end so we move into the next year in the way we feel we should.

So there is always a potential when you wrap up the year-end to have some charges, but as it stands right now I am not aware of any charges other than the ones related to, I guess, somewhere between four and eight different transactions that we will be announcing in November and December.

On the other issue, it's really a matter of -- is that a Mary Russell issue or is that a --

It's with Fred.

Yeah.

On the matrix what I can tell you on the Taxis 4 is that we obviously have a broader product matrix going into Taxis 4 already than J&J had in their serious trial especially as it relates to longer stent lengths.

You may recall that we received approval to do an ID study, which includes a 32 mm stent.

So, especially as it relates to longer lesions as was being discussed today in the panel meeting with J&J, we hope to have longer lesions subset in our clinical study for Taxis 4.

So, we should be very competitive if not, you know, collecting even broader clinical data in our Taxis 4 study as it is.

On top of that, as you know, we are engaged in getting Taxis 5 going where we will attempt to even go with longer lesions than that and even small vessels sizes, and we can always supplement that data, you know, in a later point and time.

There was obviously some over lap here in timing between collecting that data and the PMA approval process.

So if there would be a need, we could think about that but even on itself if you look at Taxis 4 we do have a broader matrix in that study from the get go.

Okay one, one just quick question.

Would you mind just giving your market share gains that you guys have made here in the last several weeks.

Do you want to venture a guess sort of where that is coming from and what the market shares now look like in the US?

Well the answer is yes and I will categorize it is as a guess.

The starting point, I am assuming, were about 50% for guidance and about 32% for J&J as I mentioned about 6% for ourselves and about 12% for Medtronic.

I would now put that as Guidant is around 45 so about 5 percentage point change there.

Probably J&J around 7 percentage points down to around 25, around 23 for ourselves and around 8, so fairly balanced dispersion of shifts and there was no particular targeting on our part.

The Guidant position, you know, even with some give up, is obviously still quite strong.

The J&J and Boston Scientific's current positions are by our guesstimates within a few share points of each other, and then Medronic has moved down really quite considerably and is now distanced from the other three.

Great.

Thanks very much.

Well that includes debt factors in the current evaluation [inaudible]?

That is as of 12 hours ago, so that includes everything.

Okay.

Next question.

Thank you, that will come from Steve Logermeir , please go ahead.

Gentlemen a genuine quarter.

Thank you very much.

One of my questions has been answered but I do want to know maybe anyone of you can handle that might focus on any favorable program changes that you have seen on reimbursement programs over in Europe?

Yes, Steve I will handle that, Europe is coming along and it is, you know, every country typically will do over reimbursement systems between the public and private markets.

So, you are literally dealing with North of 25 reimbursement scenarios and generally speaking they are all going to fall in line over the next year and generally speaking each country will probably have a public reimbursement lagging private reimbursement in most of the market today is emerging in the private sectors.

So it's part of the lag on overall market uptake but it will continue to improve on a country-by-country system-by-system basis.

Following a point to finish up, would the recent vote which is going to extend the European Union to 21 countries by all core with the vote which we got the other day.

Is that going to make things easier or different for you guys marketing and selling over there?

It doesn't really change.

We are direct in all of the European markets and we are direct in the markets that are being added as well.

So, really there will be no change in our conduct of business.

Terrific.

Thanks Paul.

Next question please.

Thank you.

That would come from Glenn Reicin.

Please go ahead.

Hi, actually it is Jason Matiz for Glenn.

Just wanted to get some more clarity on the fourth quarter in terms of the international stent sales.

Are we to assume that your Japanese sales are basically bottomed down and will stay that way I guess up until the Express 2 launch and in Europe or you including drug-coated stent contribution?

The answer for Japan is yes, they have basically bottomed out, I mean plus or minus a few share points all of the competitive launches and the current products are essentially available.

We are planning as we have previously indicated to launch an updated near stent on a Maverick catheter system with socks and we think that will improve tracking and deliverability.

Okay, so that's in Q2?

That's in Q2, so that will be reinforcement to our share stability plan.

In terms of Europe we have very minor sales inbuilt in our plan.

We do expect CE approval and we do expect to launch but we have very minor revenue impact in the fourth quarter.

So really we don't.

What kind of range did you actually give for international stent sales, can you give one?

Larry, I don't know if we gave out international stent sale arranged for fourth quarter.

We did not, but we gave the range or the range of customer for U.S.

I tell you what, let me lookup what we have the in the plan and we will cover that question momentarily.

Is there another question?

Just one last thing, when do you expect to see Express 2 in Japan?

In August of next year for approval and September with reimbursement.

Okay.

Thank you.

Back to coronary stents in Q4 plan, outside the estimate that we are working whether the assumptions we are working in our plan is a total worldwide stet number of you know possibly a $110 million and that's obviously 70-75ish in the US and the rest O-UW with obviously Japan in the single digit number.

Okay, next question.

Thank you, that will come from Tim Nelson.

Hi, just a quick question for Paul.

Paul can you just to be clear on those market shares you just talked about, could you tell us what your -- how you measure that, is that revenue share, unit share, is it sold, is it implanted or used?

It is revenue.

Its not units and it is sold, not implanted.

It is with guesstimates obviously we triangulated all of the publicly disclosed information of the last several weeks and then used our fairly extensive sales management team to try to figure our exactly who has given up and who has taken away.

So it's a guess, its reasonably accurate.

I will say there is one artifact in it that has to considered going forward and that is bulk stent yields made in anticipation of drug-eluding stent availability, and so it remains to be seen whether all parametal stents sold by some companies will ultimately be used or whether they will be exchanged out when drug-eluding stents are available.

So there may be some extra parametal stents sales that have taken place recently and will take place throughout this fourth quarter that probably will never be used, and you know so that's something that inflates some sales to some degree.

Great, that's really helpful.

Okay, we will take one more question and then we will close the call for today.

Our final question will come from Mike Weinstein, please go ahead.

Well thank you.

I didn't think I would get to ask question today.

Thank you Larry.

Thank you Michael.

I may ask a couple of housekeeping questions and of course for Jim.

I guess the first question is where we used to talk about what the Near inventories were recorded because sitting on a bunch of Nears and I assume that you -- what's happened with your relationship and your switch to Express, these inventories have been drawing down.

May be just give us an update what now you are pretty much just selling in Japan and realy almost nowhere else, where are those inventories today?

Yeah.

We have approximately $60 million of inventory on our balance sheet of which 50 million is reserved for.

Okay, do you think you will end up using that?

Well we hope to use it in Japan and we are also taking, I mean, we continue to sell it in the US, but smaller in numbers but we are selling Near in the US and around the world and in Japan, and with the additional launch in Japan we think we will work it down and we don't see any real sizeable exposure in it.

Over the year as we have reserved heavily on the Near side.

Okay, one strange dated question here.

Your guide wire and guide catheters sales are really strong right now and it's kind of turning that way, but actually Guidant did not comment in that the guide wire sales were unusually strong in the third quarter.

Any thoughts on why companies might have done particularly well this quarter.

Paul.

Yeah.

I heard Guidant's comments in that regard and they certainly compared their stent units to their guide wires, which they felt were an indicator of procedural volume.

I don't recall them saying they thought they had an particularly strong quarter in guide wires.

We did have a pretty good quarter and as I mentioned those numbers are solidly 20% over prior year.

So, we know procedures are not growing that fast and we know that wires procedure are not really changing, so -- and I would also say there really aren't other major suppliers, most of the business is provided by the 2 companies.

I will say there is a little share that is available from third parties, so it may well be that they have become a smaller factor of late.

But I certainly think Guidance franchise is very strong and our's obviously is growing faster than the market in general

Okay , final question I guess it's for Jim or Larry.

The acquisitions that companies made over the last couple of years has been primarily technology acquisitions to help bolster the pipelines within the different platforms of the company.

It sounds like that there is still a lot of activity going along that front.

We will we see some of that this quarter.

Do we start to consider adding additional platform to the company at some point?

I guess the reason why I asked that is in part given the progress the company has made, given the potential significant ramp in the Company's earnings outlook over the next couple of years, particularly with Taxis.

Do you now with a lot of these pieces coming in to place and the potential upside earnings look at making larger acquisitions?

Is that at all a part of the thought process at this point?

Thanks.

We will certainly continue to making the [inaudible] acquisitions that we have been doing this last year and a half to two years, and that is helping us greatly on both the Cardiovascular and the Endosurgery side of the business.

We can't possibly invent all of the things that we can think of to want and so this is how we supplement that.

So we will certainly continue that.

As far as larger acquisitions, were constantly mindful of where we are in the world and what's out there and, you know, what the future might look like, but we are in no hurry to go running off and broaden our foot prints just yet.

We have got a lot of wood yet to chop to make sure that we get Taxis out there and are as focused as we can possibly be on bringing that huge opportunity into our column and that's where -- that doesn't happen by accident and that is where our focus is today.

Okay, good to hear it.

Nice quarter guys.

Thanks.

Thanks.

And that will conclude our call for today.

We want to thank everyone for joining us and we will obviously keep you up-to-date as our quarter progresses, if there is material events and please mark your calendars for January 21st in the New York.

We will be giving you more details along the way but we will be giving guidance on 2003, revised guidance on 2003 and new guidance on 2004 at that time.

Thank you very much and have a good evening.

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