Boston Scientific Corp (BSX) 2003 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Boston Scientific Corporation quarterly earnings results conference call.

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

Later there will be an opportunity for questions, instructions will be given at that time.

If you need any assistance during the call, press zero, then star and an operator will assist you off-line.

As a reminder, today's call is being recorded.

I will now turn the conference over to the Senior Vice President and Chief Financial Officer, Mr. Larry Best.

Go ahead, sir.

Thank you and good afternoon.

The purpose of the call today, of course, is to focus on the results for the first quarter of 2003.

With me today is Jim Tobin, our chief executive officer, Steve Moreci, group head of our endosurgery group, and Paul LaViolette, group head of our cardiovascular businesses.

Before I start, let me turn it over to our General Counsel, Paul Sandman, to read the Safe Harbor clause.

Paul?

This call will contain forward-looking statements.

The company wishes to caution the listener that actual results may differ from those discussed in the forward-looking statements and may be adversely effected by, among other things, risks associated with new product development and introductions, clinical trials, regulatory approvals, competitive offerings, intellectual property, litigation, the company's relationship with third parties, the company's overall business strategy and other factors described in the company's filings with the Securities and Exchange Commission.

Thank you, Paul.

Let me read from the certain sections of the release for those of you that may not have seen it yet.

Then I'll give a brief overview of the quarter, then turn it over to Paul LaViolette first up to talk about the progress we made during the quarter and our cardiovascular business, followed by Steve Moreci, focusing on our endosurgery businesses.

Reading from the release, net sales for the first quarter was $807 million as compared to $675 million for the first quarter of 2002.

An increase of 20% on the top line.

Excluding the favorable impact of $38 million of foreign currency fluctuations, net sales were $769 million, an increase of 14%.

Net income for the quarter, excluding net special charges increased 31% to $117 million or 28 cents per share diluted, as compared to $89 million or 22 cents per share, excluding net special charges in the first quarter of 2002.

Reported net income for the quarter, including net special charges of $20 million was $97 million or 23 cents a share, as compared to reported net income of $82 million or 20 cents per share in the first quarter of 2002.

The net special charges for the quarter included purchase, in-process research, and development costs of $13 million, primarily related to the acquisition of In-Flow Dynamics, Inc. and a $7 million charge related to litigation with the Federal Trade Commission in that settlement.

Let me give you the highlights, and as most of you are aware, attached to the press release is a breakdown of our sales by division and by geography, but let me provide an overview on that.

First of all, an overview comment, the team here is pretty pleased with the results in the first quarter.

They came in just about as expected.

The mix is probably a little different than we expected, but overall the general tone of business and the results we achieved were pretty close to what we envisioned.

The good news is I think it's six plus quarters in a row now we've seen very solid double-digit growth across all six of our divisions.

So that underscores the quarter good double-digit growth across cardiovascular, electrophysiology, neurovascular, oncology, [INAUDIBLE], and neurology, and good growth both internationally and domestically.

So the tone of business in the first quarter continuing off the nice tone of the fourth quarter of last year and so we've entered the year with a pretty solid first quarter as a start.

Looking at the cardiovascular business first, we did grow on a reported basis 21%, increase in sales on a constant currency basis up 15%, electrophysiology was up 23%.

AFX 17% constant currency, neurovascular was up 24%, and 15% constant currency, just nice, solid double-digit growth for an overall group growth in cardiovascular of 21% AFX and 15% on a constant currency basis.

In the cardiovascular group, this solid 21% growth rate was in spite of a later-than-expected launch of Taxus in Europe and inter continental.

As you know, we didn't get that launch until late in the first quarter, and also we expected in the first quarter the approval of our filter wire, the EPI Filterwire and that didn't transpire.

That's still under review at the FDA.

We'll give you a little more update -- Paul will update that in his review.

But even despite a later-than-expected Taxus launch and the Filterwire not contributing, it was a nice 21% as reported, 15% constant currency growth rate.

We're pleased with that.

Moving onto the endosurgery group, again, oncology up 15% worldwide, up 11% on a constant currency basis.

Endoscopy up 16%, constant currency up 10%.

Urology 16% reported.

On a constant currency, a growth of 14%.

Overall, very proud of our endosurgery group.

They delivered on an as-reported basis, 16% growth for the quarter and on a constant currency basis a solid 11% growth worldwide.

Of course that adds up to our overall growth rate in the quarter of 20%, as reported, and 14% on a constant currency basis.

There was a favorable impact on both the Euro and the Yen, contributing $38 million to the top line, and so far the quarter, in terms of foreign currency, has gone pretty much as expected.

Moving onto looking at our business from a geographical perspective, again, good news.

Our domestic business grew 18% in the quarter.

And our international business, as reported, grew 21%.

On a constant currency basis, our international business grew 8%, for an overall constant currency growth rate of 14%.

The only geography that didn't grow double digits on a constant currency basis was Japan, having everything to do of course with our status of our stent business' waiting approval later this year of the Express Stent platform.

As per stents -- and Paul will go -- coronary stents -- Paul will go into more detail in his review, but the overall coronary stent sales for the quarter came in at $115 million.

That was broken down between the U.S. and outside the U.S. as follows: The U.S. coronary stents sales came in at $74 million and coronary stent sales outside the U.S. came in at $41 million for a total of $115 million for the quarter.

That's an 80% sales growth in coronary stents when compared to the first quarter of the prior year.

So, we're moving, obviously, in the right direction.

A nice 80% growth in coronary stents and hopefully more to come.

In terms of unit growth, we had a substantial percentage of increase in the U.S. -- 187% in unit growth, overall 90% unit growth year to year.

Let me highlight -- and Paul will go into market shares and geographies and much more on the stent side in just a few moments -- let me highlight something we haven't been talking much about, but we have a lot of excitement and confidence in, our Balloon business.

We are the world's largest marketer of coronary balloon angioplasty devices.

Many have us -- or view the market as somewhat flat.

I think our market share in the first quarter with Cutting Balloon was well over 70%, and without -- I think it approached 60-something percent.

Paul will talk more about that.

Overall, if you take our coronary angioplasty balloon business without Cutting Balloon, the sales were up -- the units were up 18% and sales were up 10%.

So our Balloon business in the first quarter up 10% and units were up 18%.

And underlying that, I think, is a nice trend of growth in balloon angioplasty that I think is -- we think is being driven a bit by the drug-alluding stent market in the U.S. market and we like what we see in terms of increased balloon usage, and once drug-alluding stents come into the United States.

Now, with the Cutting Balloon, overall growth in sales of balloons were 9% and units were up 16%.

So just a nice tone of business to our balloon angioplasty business in the first quarter.

In terms -- for those of you that continue to follow by segment, the Cutting Balloon came in around $37.5 million, so a nice quarter in Cutting Balloon, and that continues to be a nice product for us.

Let me leave the rest of the highlights on the sales and marketing line to Paul and Steve in a moment.

But for those of you, for purposes of your modeling, that need a little more detail in the sales line, let me give you some numbers on some of the segments that you follow for purposes of modeling.

In terms of the first quarter 2003 breakdown of cardiovascular, [INAUDIBLE] cardiology came in at $359 million.

Our peripheral interventions came in at $121 million and our vascular surgery came in at $22 million.

That overall adds up to $502 for our cardiovascular sales worldwide in the first quarter.

Also, for purposes of your modeling, a number of actual first quarter numbers for domestic -- and this will allow you to break down domestic and international by division.

Starting again with intervential cardiology, domestic $204 million, peripheral interventions $83 million, vascular surgery $12 million for an overall cardiovascular business domestic U.S., $299 million in the quarter.

Electrophysiology came in at $18 million in the U.S., neuro vascular $17 million in the U.S., oncology $22 million, endoscopy $32 million, urology $40 million, adding up to an overall domestic business of $479 million for the quarter.

That compared to $405 million in the prior year or an overall growth rate of 18%.

So hopefully that's useful for your modeling purposes.

Let me move to the P&L for a moment and highlight some of the reasons why we're excited.

We did have top-line as reported up 20%.

Again, continuation off the fourth quarter, a nice double-digit topline growth.

We saw nice leverage improvements in gross margin, gross margins came in at 72% that. was pretty much on with what we expected, but overall gross margins grew 22%, and that's on a topline growth rate of 20%.

So we saw a little contribution there at the gross margin line.

At the same time, off a 20 percent topline, SG&A grew about 12 1/2%.

Most of that growth was really sales force expansion and also marketing preparation for our drug-alluding stent business with the Taxus platform.

So nice, disciplined at the SG&A line.

We feel the team did a pretty good job of managing expenses in the SG&A area and a good source of leverage in the quarter and we think we'll continue to be a good source of leverage as we move further into the year.

The leverage disappeared on the R&D line with our preparations for drug-alluding stent market.

The R&D costs related to the clinical activity in Taxus,our overall R&D was up almost 36%, and of course 36% on a 20% growth line deleverages a bit, but we're obviously very excited about the drug-alluding stent opportunity and we feel very comfortable with the spend in the quarter.

It probably is a little bit more significant than you have modeled, but we continue to invest heavily to make sure we take every opportunity that that's going to provide us with growth.

If you look at operating expenses as a whole, operating expenses nevertheless grew 18 1/2% on a 20% topline, so again, pretty good discipline on the spend side with the exception of R&D, which we think is smart in terms of investing in the Taxus program.

Overall, with a topline of 20%, we delivered an operating income line up 30%, so nice leverage nevertheless, even despite a very aggressive spend in the Taxus program and R&D.

Overall, we saw a 31% growth in the net income line and a 27% growth in EPS.

Continued nice leverage off the topline.

And our tax rate for the quarter came in at 27%, as we guided earlier in the year.

All in all, the quarter in January -- January 21, when we had our analyst meeting, we provided guidance for the first quarter of $811 million topline and a 28 cents per share.

We came in at $807 million and 28 cents per share, so we were able to meet our guidance in the first quarter and we feel good about that.

In terms of Q2, the guidance that we provided you with as our goal for Q2 back in January, on the 21st, was $842 million topline and a EPS or EPS of 31 cents a share.

At this time, we're not changing our guidance for Q2, but we would say that there's probably more risk in that number than there was when we presented it as a goal in January on the 21st.

Those risks have more to do with you know, the ability to ramp up our manufacturing and supply and develop the market for Taxus outside the United States.

Again, we still don't have approval in the United States for the filter wire, so there's a little risk there.

We also assume that Decipher will be launched soon and the variable there is what will be the conversion rate, how penetrated will they be in the second quarter compared to our original estimates -- so there's probably more risk in the second quarter, but at this time we're gonna stick to our stated goal of $842 million topline and a 31-cent upper share EPS line.

Lastly, just to close on the overview of the quarter, we continue to build a strong balance sheet.

Our financial flexibility continues to expand.

Our EBITDA number, which represents a indicator of cash flow, was $213 million.

Very strong cash flow in the quarter, and some of you may have caught up with it.

We did get a nice increase in our credit rating from Standard and Poors, moving us up two notches from a triple B credit rating to a A-minus credit rating, and we're very pleased with that outcome in terms of Standard and Poors and the cost of money will help us along the way here.

With that, let me turn it over to Paul LaViolette, who will give a more detailed update on the cardiovascular business in the first quarter of 2003 and a little bit about the outlook in the next quarter, too.

Paul?

Thanks, Larry.

Just taking off on some of Larry's comments, obviously cardiovascular sales worldwide 21%, nicely balanced with U.S. growth of 22%, overall in international 19% and of course, that was highlighted by interventional cardiology sales in the United States, up 36% over the first quarter of last year.

So very, very good, very solid growth for the businesses comprised of vascular surgery, interventional radiology and interventional cardiology.

Very solid across all franchises, but obviously driven by our U.S. coronary stent revenues versus prior year, coming in at $74 million.

And that's driven in part by stable ASP's.

We ended the quarter with about 1,050 ASP's, very consistent account base in terms of ordering dynamics and our overall stability of customers, also very stable, and I think that was a positive in spite of some market softness.

I don't think there's too much debate that there was some softness in the market, based on strong surges in Q4 volumes of overall stent purchases as well as some factors in anticipation of drug-alluding stent availability in the U.S.

So, despite that, we have a 25% market share, plus or minus 1 point, perhaps plus 1 point at the end of the first quarter, and of course the revenue number's 145% over prior years.

So a very strong takeoff and a very strong hold on the market for the expressed stent.

We feel pretty good about having gained a little share as we reported at the end of Q4 of 2002.

We had a 24% share, so we feel we've gained a bit of share in the quarter, despite very aggressive campaigns against the expressed stent from our competitors.

We think this is very indicative of high quality product performance and that product performance has been now extremely consistent for about six or seven months.

You are aware that we have filed data in support of a special supplement to the express to change the stent crimping process.

We're on schedule for that to both gain approval and begin shipping modified products in the month of May.

We've also recently received conditional IDE approval on our next generation stent, the Liberty stent, which we expect will commence enrolling patients in the IDE and U.S. in a [INAUDIBLE] configuration within the next 30 days.

I'll comment on drug-alluding stents in a minute, but I want to spend a few minutes commenting on some other barometal stent activity around the world.

Even though we have launched Taxus in Europe and intercontinental, our barometal stent sales in units within Europe were up 36% over the first quarter of last year, and intercontinental unit sales were up 21% in comparison to prior, so very strong stabilization of our overall platform in the stent business, which of course helps us as we now begin to launch the drug-alluding stent on the express platform internationally.

Japan of course was the soft area.

That business in stents was down 20% versus prior.

Again, evidence that we need the express platform in Japan and we remain on track for express approval in Japan sometime in the third quarter of this year.

Our share in Japan is now about 13% of the market and we expect that to hold fairly steady between now and the time that we gain express approval from MHLW.

Non-stent businesses were very strong.

Larry alluded already to our balloon business. 13% up over prior in the United States on a revenue basis, and 16% in units.

Which puts us today at about a 67% share of market in PTCA balloons, which would be the highest share we've ever recorded, and that is at an average selling price of around $255.

Now organization a worldwide basis, we've continued to also show very consistent growth, PTCA balloons up 18% in units worldwide and that's double-digited in all regions.

So, I think not only is the key take away that we have a great business there, but when you think about the role that that maverick balloon technology will play for us on a stent delivery system basis, I think it reinforces our overall strategy and technology claim in drug-alluding stents.

Cutting Balloon also contributing very strongly to our overall balloon franchise, U.S. sales up 14% compared to last year, and we continue to hold about 15% of all procedures for that novel Cutting Balloon technology.

We're also on track to launch the Ultra, Cutting Balloon Ultra, which is imploring maverick technology probably in May.

That will be ahead -- according to our intelligence -- of any competitive product launch in that product area.

So, when you combine balloons and Cutting Balloon, we reached 78% market share in the United States in the first quarter.

Very strong and again, complimenting our stent franchise overall.

Other highlights in cardiology, just antidotally, guidewire business is strong, up 9% in revenues verses prior year.

We'll be launching new products in the remainder of Q2 and into Q3 there.

So we expect that business to stay strong.

Our IVAS franchise up 40% year-over-year, driven primarily by the Galaxy 2, new capital equipment sale, our catheter business, although not up at 40%, was also very strong and on track for consistent double-digit year-over-year growth.

Total plaque modification, which includes the Cutting Balloon, rotoblader and the IVAS franchise grew double-digits in the quarter.

Every other coronary angioplasty product grew versus prior year.

Every other product area grew versus prior year, demonstrating not only do we have stellar performers in stents and balloons, but we have consistent growth through every single category of our coronary angioplasty franchise.

Peripheral stents, switching to the PV side, it grew 9% versus prior year, driven of course by the expense franchise and all of our other peripheral angioplasty sales were up 5% in the aggregate.

Larry already alluded to the Filterwire, which remains under review at the FDA.

You're aware that was a very complex clinical program and of course it's a class 2 device, so it's being reviewed under 510K guidelines, putting pressure under the agency to review a tremendous amount of information in a short amount of time and we understand they are constrained in their resources.

We don't expect any major concern at all in this area.

You've all seen the clinical data.

It was quite compelling, so we continue to expect approval this quarter and we are poised and ready to launch that product the minute we get approval.

Let me shift to Taxus for a few minutes.

March of course was the month that showed commencement to the Taxus launch outside the United States, excluding Japan.

And I think we can categorize it as a methodical launch.

We have had some, as anticipated, inventory constraints, but they have been a factor in a minor way, and I would say they will only remain as a factor for the next 20 days or so, after which we will expect to be in a fully unconstrained launch mode, and I'll describe how that's effected us and how that will play out in the coming weeks.

On a qualitative basis, we're meeting or more often than not exceeding our expectations relating to product performance for the Taxus system, interest in [INAUDIBLE] overall in the drug-alluding stent area and where it counts, in our market share gains.

Europe, if I can spend a minute and describe how we're looking at Europe -- Europe really breaks into three geographical areas, the first is France and Germany.

You're aware those markets do not have national reimbursement in place, as a result their penetration is low.

I'll describe that in a minute.

The next area would be the south of Europe, which contains Italy and Spain and Portugal.

Those markets are driven by tender cycles in consignment requirements, but they have decent penetration, and then the third area would be the rest of Europe, primarily northern Europe, the UK, Netherlands, the Nordic area, and I'll describe those in more detail, but those markets are characterized by better and higher penetration to date.

For France and Germany, the first area, as you're aware, penetration for drug-alluded stents is fairly low, about 4% combined.

To date we believe that we have about 25% market share in these two markets.

It's been somewhat limited, although we have opened up market access, if you will.

We've opened up accounts that account for about 30% of the drug-alluding stent market in these areas and again, within the France and German drug-alluding stent market to date we feel we have about 25% market share.

In the southern markets, with Italy, Spain, and Portugal, penetration is a little higher than France and Germany.

We're looking at it in the 14% to 15% range.

We have begun to sell in these markets, although on a limited basis because they are both tender and consignment driven.

Because we have been somewhat inventory constrained, we've selected not to use our inventory for a consignment, even though it's mandated in these markets.

So we've been selective in these markets and I would say so far we have limited market share in the first few weeks, about 10%.

But these markets, we do extremely well in conventional angioplasty and my sense is that these will be the first targets for us as we open up our unconstrained launch commencing in May.

The third area, the north of Europe, which contains the Nordic region, the UK, Austria, Switzerland and Belgium and the Netherlands is a market I would categorize as rapidly penetrated, between 15% and 20%, of course with the exception of Switzerland, over 50% penetrated in drug-alluding stents.

We have opened up the majority of our drug-alluding stent accounts in this region because we can achieve direct impact.

And we have achieved significant market shares in these areas.

I would place our market share in the Nordic region at 70%, in the UK between 40 and 50%, in the Austria/Switzerland market at around 40%, and in the Belgium, Netherlands market between 40 and 50%.

We feel this is representative of essentially a competitive, open market, reimbursement is more openly available in these markets, penetration is wider and we've concentrated our selling efforts here and I think our results are again, characterized of exceeding our overall expectations.

Totals for Europe, weighed down by France and Germany, penetration in our view is about 10% in the aggregate right now, and for the month of March, even with inventory constraints considered, we achieved about 32% of the full European drug-alluding stent market, and I will also say that has trended up further in the first two weeks of April.

Looking outside Europe in the intercontinental region, we've had similarly favorable results.

We believe to date that we have about 50% to 55% market share of all of the markets in which we have launched to date.

Now, there have been some notable markets where we have launched, but also notable markets where we have yet to launch.

So the markets that we have launched in so far include Singapore, Mexico, Argentina, India, South Africa, Turkey, Hong Kong, some clearly active markets, some markets that are representative I think of active competition and sort of a western market.

We've launched in 11 intercontinental countries in total and have three more to go in the second quarter of significance.

Those would be Brazil, China, and Australia and we expect to launch in Canada in the third quarter.

In the key intercontinental markets I think we've demonstrated clearly the combination of our strong organization, our technology platform in balloons and stents, and the overall story we have with our clinical results and taxel.

In the selected markets we have over a 50% market share.

We combine that with a 30 plus percent market share we have in Europe, in total all markets, all drug-alluding stent potential, and we would say that's fairly solid performance for the first month of a constrained launch.

And it's because of that that we have a very strong sense for our ability to continue to meet or exceed expectations going forward.

Turning to the U.S. in the clinical and regulatory prospects, Taxus 4 is progressing extremely well.

We're currently involved in the key CNA analysis for data and we're still gathering the final follow-up angiograms and I think this activity reinforces a June filing for the clinical module, and as you've seen reported today in the press release, we have filed module 3 as of last week, which is the pre-clinical and toxicology module and we're on schedule to follow the fourth module in May, which would be related to overall chemistry.

So that would leave the fifth module for June, the clinical module and all appears to be on track for that.

You also are aware that we're currently enrolling in Taxus 5, our high-risk protocol and we're right at about 600 cases to date in 50 active sites and we're seeing accelerated enrollment because of the number of accounts that are now participating in the trial.

We've received also approval for the arm of the trial that will commence shortly and we'll be conducting that protocol in about 40 sites around the United States.

So overall drug-alluding program between our commercial activity outside the United States and our activity inside, you see we are rigorously tracking to our commitments, we are meeting or exceeding launch expectations, and the progress that we've made in balloons with delivery systems and our next generation stent platforms give us a lot of confidence about our competitiveness in this exciting market going forward.

Larry has previously commented, and I won't take up any further time on the electrophysiology and neurovascular businesses, both growing double digits, 20% for EP in the U.S., 31% for neurovascular in the U.S., driven by a lot of technologies, a lot of clinical activity, excellent overall performance for the remainder of the cardiovascular group.

With that, Stephen Moreci will talk about endosurgery.

Thanks, as Larry mentioned, endosurgery had 11% growth in the first quarter.

Another double-digit performance for the team.

However it was slightly off what we expected for the quarter.

We did get strong performance from the neurology and gynecology businesses as well as an oncology, but that was softness in the domestic [INAUDIBLE] business.

I'll touch on that in a few minutes.

Despite than less than what we wanted in top-line growth, we had fine bottom-line growth.

Gross margins improved in the United States and endosurgic group to 74%, the highest level ever.

Endoscopy grew 10% worldwide, in the U.S., growth was 8%, which was lower than expected, due to a couple factors.

First of all, procedural levels, procedures were soft in the first quarter, we're not exactly sure why.

It may have been weather-related or other issues, but bottom line, the procedures were definitely off as supported by a major accounts.

There was some competitive pressure in the marketplace around price and we think we have combatted some of that.

I'll talk about that when I get into the second quarter.

We had quality issues in our ability franchise, that's the gallbladder business that affected some market share.

On the plus side we had strong showings in the remaining franchises in endoscopy, particularly in the [INAUDIBLE] franchise which was up 28% in the U.S.

The annual feeding franchise exceeded 33% growth.

And as Larry mentioned, the regions outside the United States also showed significant growth for endoscopy, up 15%.

The second quarter is rebounding nicely.

The procedure rate has come back, good news.

Historical levels in most of our major accounts.

The sales team is fully engaged now and has completed its expansion plan as Larry mentioned, some of the SG&A costs there and completing the sales training cycle.

We expect that to have a major impact in the second quarter as well.

We've had continued growth in some other franchises that I mentioned, due to recent product introductions that took place at the end of last year.

In the second quarter we're expecting bigger and brighter things from endoscopy.

It's rebounded already with new line extension introductions in the rapid exchange franchise, the quality problem has been fixed and the product is shipping now and we're feeling very good about how that's impacting the market place.

Big news for endoscopy is hopefully the approval for our product we're expecting any day to provide a significant amount of momentum in the field for the sales organization.

We've already identified a number of training centers for the product, this is the product for the treatment of GERD or acid reflux disease.

These training centers had been identified and we've enrolled rolled over 200 physicians in the centers.

In fact, the training centers are sold out until the fall.

We're just waiting for approval and look forward to that any day now.

The major meeting for endoscopy will be held in Orlando next month.

That will be the rollout for the product.

We expect that meeting in conjunction with the product introduction to have a major impact for second quarter sales.

As Larry mentioned, the urology and gynecology business is up 14% both in the U.S. and worldwide.

This is the business made up of two franchises, the urology stone management business continues do well, up 8% led by our [INAUDIBLE] business up 25%.

We announced in the quarter our partnership with CELCION for a product for BPH.

That's on target for late Q4, early Q1 introduction in the marketplace.

As we mentioned, our final PMA module was submitted through them in the first quarter.

The gynecology business grows strong, growth reported at 60% in the United States.

The BEI acquisition for abnormal uterine bleeding is doing well and we're expecting to do a little less than $16 million in sales in 2003.

We are experiencing some pressure in our sling and anchoring business.

They continue to come from TBT-type products, J and J and others.

However, we expect to have our own product, the Advantage Sling in the quarter in the market.

The urology -- I'm sorry, oncology business was up 11% worldwide, but 16% in the U.S.

The international difference was softness in Japan, primarily in the tumor inflation business.

We had strong showing across all franchises worldwide.

Tumor oblation despite the Japanese softness, was up 10% and the big news continues to be the embolization franchise, up 42% on the strength of Contour SE.

Contour SE is a Microstrip product used for tumor oblation and for uterine fibroid.

We recently received a market in Europe and shipments have begun this week.

We seek continued momentum in that franchise.

We expect the contour PDA approval in July.

It's the standard product, not the Microsfeer product.

It's important to get that approval in July to allow us to begin our market development activity around uterine fibroid [INAUDIBLE].

We're also on track to get our FDA submission into the FDA on the Contour SE and we expect approval of a Microsphere version of contour in the first half of 2004.

Q2 outlook, continued to rebound in endoscopy .

Continued strength in the Euro and GYN business and oncology.

We continue to get the approval, a major momentum builder for the field and we see continued progress on the execution of our partnership with SELCIA.

With that, I'll turn it over to Jim Tobin.

Thank, just a couple quick comments and we'll open it for questions.

There's an awful lot going on right now.

The Taxus rollout in Europe and Intercontinental, Q2 is the point where you really get to see what we can do with uncon strained inventory.

The filing, we've had three modules in, two to go, but the last two are the big two and so, everybody is busy getting that in shape to go forward.

Taxus 4, patients are coming in, analysis is going on.

We're right in the throes of bringing that to ground, and so that's a very active area, plus Taxus 5, just having finished up, starting following up with Taxus 6, a lot going on there.

The INTERICS approval coming in any day.

There's an awful lot going on.

I think at the end of the day I feel good about 31 cents for Q2, but I would have to say there's more risk there than we thought there was when we talked about it January 21st, whatever that date was, and, but that's kinda' almost secondary in my thinking at this point because really what matters is that we continue the rollout of Taxus that we get the filing in on time and that that data continued to mature and we get the analysis done there.

So, that's where we are.

It's -- there's a lot going on, but we feel good about where we are and how we're doing.

Okay.

Let's turn it over to the phone audience for any questions you might have.

We'll try to field them.

Operator, can you monitor that for us?

Certainly.

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

You'll hear a tone indicating you've been placed in queue.

If you have pressed the one prior to this announcement, please do so again at this time.

If your question is answered or you wish to remove yourself from queue, press the pound key.

If you're using a speaker phone, please pick up your hand set before pressing any numbers.

Ladies and gentlemen, we ask you to please limit your questions so more participants have an opportunity to ask a question.

Our first question is from the line of Matthew Downs with SG Cowen.

First on the stent numbers, can you give us an idea of how the U.S. is tracking now in April.

Still a lot of comments that March fell off.

People are waiting for the [INAUDIBLE].

Can you tell us how it's picking up in April?

And also, on the Taxus manufacturing, can you give us an update on where you are in the U.S. for the manufacturing?

Okay.

Let me try to respond first, obviously it's still early in the quarter, but you know, if you look at the first quarter, the overall quarter -- the market was smaller, as Paul outlined, because procedures being delayed, de-stocking in certain accounts, et cetera, that everyone seems to have referred to, but our January was pretty stable.

Day-in, day-out.

It was really February where we had some softness, and the softness came from -- we had a major sales meeting, pulled the field out, and then also someone reported our MDR rate on express and so our friendly competitors took advantage of that and we saw little softness in the numbers for February, but March was very stable.

I mean, it was a nice tone every day was pretty solid.

There was a nice tone to business actually in March.

Now, in April the tone continues to be pretty stable, but the overall market maybe -- obviously as Paul referred to, less in size -- but our business continues to have a nice tone to it and a nice solid feel to it, and I think once we get the enhanced express version out in May, you know, that will both well.

So, let me try to get Jim to respond to the second question on manufacturing U.S. prep.

As you know, what we're doing for Taxus is putting in place capability in both Europe and the U.S.

So that we will have backup on two continents here.

Obviously the European piece comes first because that's what is servicing the European and inter continental launches, and the U.S. side trails that by about six months.

It is coming up now as we speak, right on schedule.

Things are going as we had planned and so that's all looking pretty solid at this point.

I'm pleased with the way the organization is responding here.

They're clearly under pressure to keep up with the demand on this thing, but I think we're just almost at the point where we're going to be able to get ahead of it here, then you'll see what we can really do.

Thank you, Larry, thank you, Jim.

Our next question is from the line of Bilseeny Desoisa of Fulcrum.

Go ahead.

Good evening, I was wondering what assumptions you have built in for Q2 in terms of the CIPHER ramp to meet your expectations for the quarter?

Well, it's a good question and it really is assumptions, of course we don't have a lot of clarity on that.

We're assuming a launch by the first of May, and of course that would be both approval imminently and then the ability for that product to ship right away, which I think is what is held the consensus in the marketplace.

We're still adjusting on a realtime basis our estimates of penetration based primarily on inventory availability and less on the market's desire for the product, but we think the desire for the product is going to be significant and we still expect market conversion to go from 0% to perhaps 60-plus percent by the end of the year.

And all of that is right now linked to how quickly within the quarter approval comes and how broadly based the inventory position is, both in gross units as well as in the matrix of size is covered, so we're a little bit you know, in anticipation of that, as you are, but we're still looking at a rapid uptake and 60% conversion by the end of year.

If I could just follow-up, with the submission of the fifth module, can you remind us, are you planning on giving us an indication of whether you've actually met the end point or will you just be letting us know that you've completed the filing?

I think you'll get one of two types of releases.

One might be -- one would possibly be in late May, early June, suggesting the data didn't come in as expected and we're not filing the PMA.

Now, we'd like to assume that that is in the highly-remote category.

And what we would like -- we'd prefer to think will be the case is a release sometime in mid-June stating that we have met our end point and we are in the process -- or have filed the PMA, the last module, and that completes the 5-part module of the PMA and we would then amend that for the complete analysis that would be available at the TCT in September.

So, that's our preferred and that is our expected route, but in either case, we would issue a press release that is specific enough for our investors to understand where we stand in terms of final route to approval for the Taxus program in the U.S..

Okay, very good.

Thank you.

Our next question's from the line of Mike Winestein with J.P. Morgan.

Go ahead.

Thank you, can you hear me?

Yes.

Okay, maybe just spend a second on the first quarter, not that I think it actually matters that much, but some of the spending as you indicated might have been above some of our expectations within the R&D and SG&A lines.

If I compared the fourth quarter of '02 to the first quarter of '03 on the SG&A line, your fourth quarter sales were about $7 billion higher, but SG and A about $5 million lower than expected.

Can you give us insight on where the dollars are going and more importantly, give us an indication of any thoughts on how we look at the second, third, and fourth quarters in spending levels, thanks.

Maybe -- do you want to take the R&D first?

Well, we had a convergence, Mike, on clinical spending because of the follow-up going on in the quarter for Taxus 4 and the commencement of Taxus 5, so I think you see probably as high a pressure point on our R&D spending as you can find.

We had SG&A increases primarily outside the United States as we scaled up marketing and sales for cardiology with the launch of Taxus, obviously commencing in the quarter, but we obviously also had relatively little revenue contribution because we really didn't start the revenue ramp until the third month of the quarter.

So, we clearly intended to both spend the dollars in a very targeted way, keep add minute low, keep the money where it matters in R&D, and where we're obligated to increase selling and marketing, do so as close to the launch of the revenue impactus as possible, and that's been our attitude all along.

I will tell you mostly all of the spending is either on stents or drug-alluding stents or drugs or some combination of the three, but on virtually nothing else.

The other thing, on the SG&A line -- in fact across the P&L -- is the first quarter versus the fourth quarter that you're comparing.

You can factor in fully-loaded, about 4% just on the merit increase across, and everything associated with bringing about an increase in pay for our employees.

It's about a 4% when you add fully-loaded from the fourth quarter, 4% of sales. -- 4% increase, rather, so that just in the U.S. was around $4, $5 million increase in SG&A in the U.S.

The rest of it had to do with, you know, frankly, probably non-recurring market development planning and what have you, to prepare for the Taxus launch in the U.S.

So we're taking on more spend -- you know, this is the biggest opportunity that this company has ever attempted to confront, and you know, we do not want to miss it.

As a result, we're getting second-guessed by third parties that we bring in, we're second-guessing our market development plans, we're second guessing everything.

We're second guessing the quality of everything we do.

We do not want to miss -- not only do we not want to miss this opportunity, we want to execute at the 10 level.

So we are putting a lot more spend into this because of that, and we're very happy to do that.

We think it's the right for shareholders, but it does represent incremental spend when compared to the fourth quarter.

Larry, endosurgery wasn't lapse of spending increases as well, you pointed across.

EMT, it's not a prep for the marketplace there.

R&D investments also up, and in the sales force as well, so the increase investments are not just for the Taxus or cardiovascular world, but on this side of the house as well.

Yeah, so hopefully that answers that question.

Did you have a further question?

Let me follow-up with Paul, completely unrelated, going back to his discussion related to the Taxus launch.

It seems the execution has been very good thus far.

Maybe we can get your thoughts a couple months down the road from the analyst meeting on the expectations the company had to the development of the overall market in 2003 and whether you think you're still comfortable with that or you view the market assumptions, not necessarily on execution as being aggressive.

I think we probably would scale back a tiny bit on Europe and look at the penetration rates going closer to 25% to 35%, rather than the 40% we had looked at the the beginning of the year, primarily associated with the lag that we're gonna see in Germany.

As you know, Germany and France as a composite, control 52% of all stent units in Europe.

France has yet to approve reimbursement for any technology that may be coming soon, but that's been lagging behind.

So that's gonna slow Europe down a bit.

And the fact that Germany has been so resistant to the technology tells us that it's not likely to move all that fast.

So you're looking at you know, a conversion of Europe, primarily excluding Germany.

I think what you see in some of the other markets, the Netherlands is you know, now penetrated 25%.

The Nordic region in the aggregate is over 20%.

Portugal is over 50%, Switzerland is over 50%, so things are starting to pop at a reasonable rate.

The next area would be outside of Europe and there it really does depend.

In places where we have seen national reimbursement go into affect -- and a good example of that would be in Australia -- we're seeing conversion now over 50%, closer to 60%.

My sense is where the reimbursement is put in place, the DES conversion rate follows, and it follows fairly quickly, and I think we will see more reimbursement falling into place throughout the course of the year.

So we're optimistic about penetration in general and I think we're a little bit more bullish than previously on our market share prospects.

Our next question is from the line of Rick Weiss with Bear Stearns.

Go ahead.

Hi, good afternoon.

A couple things.

First, Paul, you didn't specifically update us on your thoughts on the timing for U.S. approval, but with J.J. now likely to take seven or eight months would seem post-panel, you have all expressed optimism that you'll get approval late this year.

It doesn't seem more likely that given that and now with seemingly the drug division getting more involved in the process, that it's gonna take a little longer than you might have thought?

Can you update us there?

I would say every filing has to be looked at stand-alone, and we have I think several things going for us.

As you're aware, [INAUDIBLE] was an understood compound.

My sense is interreactions with the drug division would favor our filing a little bit.

I think if you look at the least our understanding of issues that FDA is concerned about in president kit filings, we're learning from those.

We have some issues simply that are not relevant for us and we have others that we have a lot of head-starts on to gather incremental animal data or in one way or another appease any questions that the agency will have.

As you know, we've had expedited review granted and we're working under that status today, and I would say that that leads us to have a fair amount of interreaction and -- interaction and we're handling questions realtime, so I think it's safe to say we still feel very confident and focused on the original timeline, the December launched and approval date, which of course assumes six months following submission.

There are variables in there that we have yet to pass.

We obviously will need a panel.

We haven't had that scheduled and we haven't gone through it.

We still have to get the filing in.

So there clearly are open issues, but I think our overall approach, and our overall confidence remains robust and on schedule.

I think they add to that, I think the expedited review that we received was indicative of the attitude at the FDA to set a priority on our filing and take a hard look at it.

And all of the interactions with the FDA thus far has been one of great cooperation, eager to understand, and eager to take a hard look at this on a priority basis, so that's about all we can say today and we'll have a better feel for it after we've obviously followed all five modules.

Just a separate follow-up, can you update us on European drug-alluding stent prices?

I mean, is that -- to what degree are lower than expected realized prices a factor in this slightly more cautious outlook to the second quarter?

We hear reports that Boston's been fairly aggressive in the market relative to CIPHER.

I don't consider us to be aggressive in the market on price.

We're not marketing on price, we're marketing on clinical and product performance and you know, very clearly we are in a market where economics matter, and I think that's one of the reasons why we look at some national markets at 50% penetration and some at 2.

Certain markets can't afford it and when that becomes a hard economic stop, that's gonna be a major factor in the market, but we are categorically not marketing on price and you know, we start off selling clinical and we end up selling clinical.

I'm not for a minute going to ignore the economic factor because both Johnson and Johnson and ourselves are approaching a market where the drug-alluding stent is priced at three to four times higher, or in some markets even more, relative to the bare metal stent baseline.

So price is a factor, but absolutely is not a leading component of our sales approach.

The other thing, Rick, to add to that, is that the pricing that we're putting out there today -- and actually selling Taxus at -- is 100% consistent with the assumptions in our model that we presented in January on the 21st.

So, what's actually happening is consistent with the assumptions we had in our models.

Our quarter two is -- I'd say we are extremely optimistic.

Our sales teams are chomping at the bit.

We're looking at a full and unconstrained launch in May.

In January we were looking at a full and unconstrained launch in April.

So, if there's any issue with the speed of uptake, it is definitely not price, it is just really a simple question of getting the full-size matrix and full inventory to let the team run.

Let's move on -- we got quite a list of people that want to ask questions.

We're gonna try to answer them with a little more brevity and at the same time, if you could limit your questions to one, we'll get through the list.

We've got about 20 people that are in the queue to ask questions.

Next question, please.

That's from the line of Bruce Jenkins with Deutsche Bank.

Thanks, guys.

My question would be on the modules.

Can you refresh us -- will each of these get approved and accepted along the way and if so, will you announce that and have any yet to be accepted or approved?

No, they don't get approved and they -- the most important I guess is they become active work products, so our sense is when FDA picks up the phone and calls us on data contained in a module, we know it's under active review, but the only thing that's approved or denied is the composite PMA.

And Paul, I didn't hear you say what the actual price differential was in Europe on the drug-alluding stents.

Can you comment on that?

No, we're not commenting on specifics regarding price and quite frankly, I don't know exactly what J and J's price is.

Again, we're not marketing on price.

Nor -- it's fair to say that on the Taxus program we're not -- we're gonna have a policy of let us build the market and the sales dollars will be there.

We're not gonna discuss our pricing strategy.

Next question, please.

That's from Bob Hopkins with Lehman Brothers.

Please go ahead.

Thanks very much.

When you guys hopefully file your clinical module in June as you suggested, do you know whether at that point you'll have enough information to tell us whether or not you hit your secondary end points, including TLR rates?

We will not comment on that in the June timeframe.

So just the primary and point of TVR?

We will be -- I think what Larry really strongly emphasized earlier is that if we feel we have failed to meet end points, we'll probably come out early and say that.

Otherwise we're gonna adhere to the clinical focus, which is to say we are submitting, and by virtue of not having told you that we failed to meet our end points, I think you're gonna have to you know, run with what's essentially left over.

The clinical data, as it relates to primary and secondary end points is still going to be much in the informative stage in the June time frame, which is why we minute contained all along we won't come out with Kata presentation until the TCT.

One follow-up on expectations for drug-alluding stent revenue outside the U.S. in 2003.

I'm not sure, did you state what your revenues were for the quarter outside the U.S. and --

For overall stents?

No, just for drug-alluding stents.

No, it wasn't material.

And can you give us just a sense of what we should be modeling and expecting for 2003?

Are your thoughts maybe $20 million, $50 million?

Just a little help there?

I think our overall guidance was drug-alluding stents was going to be $180 million for the year.

Now, I think there was almost $30 million -- $25 to $30 million is from the U.S.

That then would assume a fourth quarter, probably December launch and a pretty exciting uptake there.

So obviously there's risks associated with that in terms of FDA timing, but you take that from the 180, you're down around $150.

As Paul pointed out, things are probably a little bit delayed in terms of the maturing of the market.

In Europe and therefore you know, probably the $150 goes down to $130 at this point in terms of our expectations.

Okay, thanks very much, guys.

Next question.

That's from Dan Lametry with Merrill Lynch.

Go ahead.

Hey, just a follow-up on -- and I think I heard somebody say that the overall growth rate in revenue -- excuse me in units, was 90% worldwide in stents and I think I heard an 80 percent revenue gain.

So I'm assuming the mix away from Japan was the primary reason why prices dropped that much, since it sounded like the U.S. was pretty stable?

That's right, Dan.

Stents, USA SP's quarter over quarter went down, I believe, less than 3%.

Okay, so it's just a mix issue, not like bare metal prices in Europe have had to fall in reaction to the drug --

No, in fact, you also see it in the gross margin, when you analyze the -- our stent business.

Was Japan declines, obviously that's higher margin product, so you see it in the gross margin and hopefully that will turn around later this year when we get express approved and launched in Japan.

We'll start turning that around.

Great.

One related question on the movement in France, where it does look like there may be some incremental reimbursement -- is that product-specific or will that be category so taxes could benefit from that?

In France it will be product-specific.

We have filed for our own reimbursement.

The real question now is when will each one come out, and obviously J and J filed about a year ago and we have filed fairly recently, and so I don't think the gap in approval will be as great as the gap in submission.

We've actually caught one them on the reimbursement request side.

Great.

Thanks.

We have a question from David Lossman with UBS Warburg.

Good evening.

I wondered if you'd comment on the shelf life of the product in Europe and how that may influence the U.S. in the FDA's review and whether or not -- or what you would expect would be a reasonable inventory level for market launch when you are approved in the U.S.?

Well, we would expect to have shelf life in the U.S. between 12 and 18 months on launch and inventory availability, we launched express with 117,000 units into a fairly crowded bear metal stent market, so I would expect we would have something north of that, but I really can't quote you an inventory target for the U.S. launch at this point.

Our shelf life in Europe is closer to 6 to 8 months, but growing on a realtime basis.

So, given the limited account targeting we've done so far, it's really not been a problem.

And as we start to move into southern Europe, doing a little more consignment, we'll be moving into express units with longer shelf life.

I think it will all work out reasonably well.

What is the product approved for in Europe on a shelf life basis and do you expect the same in the U.S.?

No, the approvals are gated by the amount of realtime data that you've acquired, so by the time we get approval in the U.S. we will have more long-term shelf data, which will allow us to have a shelf life approval in the U.S. that is longer than we've had for Europe, and of course we'll improve the European dating retroactively.

Thank you.

We're turning them over so far, shelf life really hasn't been a constraint for us at this point.

But you have to have them around for 12 months in order to prove they last 12 and 18 months.

That's what we're doing.

Next question is from Glen Raceon with Morgan Stanley.

One quick financial question, then slightly more serious question.

First, can you just tell us what the acquisitions were that have not been anniversaried year after year and what that contributed to growth on the sales side?

And more importantly, after the ACC ad, I'd be curious whether you think the role of Taxus stents has changed at all and what the importance of the trial you think will end up being for BSX.

First question is $5 million apples to oranges.

The rest of the past acquisitions are all apples to apples, so there's about just a $4 to $5 million apples to oranges issue.

Where is that?

What do you mean where is that?

Which businesses?

BEI and Smart therapeutics.

That being the fibroid play and Smart therapeutics being our Micro stent for innercranial --

What are the numbers for those?

BI was?

$2.3 million.

And the rest is the smart stent.

3.3 you said?

2.3 and about 2.7.

Okay, great.

You're referring, Glen, to Taxus 5 or 6?

Taxus 6.

Well, Taxus 6, first of all as you know, is fully enrolled in Europe.

We finished enrollment in December.

It's a very complex lesion set, so I think in regard to the clinical indication, it probably moves the boundaries out to lesion complexity further than any other study done to date.

Average lesion length in that study was I think 25.4 millimeters, almost double the domestic protocols.

As you know that was a study done with the moderate release drug, so I think that's gonna give us some data that no other study will give us.

The most complex lesion competition and different drug release, so we'll learn an immense amount from that and it might end up defining the fate of moderate release.

Let me ask in a different way, you know what you learned at ACC, that the moderate may be needed to exploit the potential of Taxus?

The answer to that is we don't know.

We're extremely encouraged by everything we've seen with slow, and one of the reasons we embarked on a more complex trial was to try to tickle out of the clinical setting.

Some non-significant trends we saw emerge between the two data sets in Taxus 2, which as you know, trended in a non-significant way, favorably for moderate release, but really weren't strong enough for us to say.

Let's put it this way, we're extremely pleased with slow release, and if moderate release didn't exist, we'd be fine, but there's a possibility that it might be better and tougher cases and we're trying to discover that.

Thank you.

Next question is from Tom Gunderson with Piper Jaffrey.

Go ahead.

Hi, my question is on the European Taxus launch.

Paul, can you -- whether it's you or CIPHER on a drug code stent, have you seen correlation in the high-penetration countries and regions on either higher balloons -- as people do a less-district stenting -- higher I pink T sales, as people are paying more attention to that, and as a core Larry to that, in the countries that you have high penetration, are you seeing this as a one-to-one switch to drug code stents from bare metal or is the market expanding more into the cabbage area?

The market is definitely expand expanding.

We're seeing an increase in stents per case, sort of Europe-wide in drug-alluding stents accounts going up to certainly north of two stents per case.

Let me just remind you, we've got five weeks of data under our belt.

So this is not scientifically analyzed, but we're probably going to see drug-alluding stents go north of two stents per case versus 1.4 bare metal.

And it could go above that, you know, to 2.5 in aggressive accounts.

Pre-dillitation of course as you're aware, is the labeling requirement for both drug-alluding stents and my sense is early on that we're seeing most accounts ascribed to that.

So then the question is, will that be maintained over time or as folks become more comfortable with the performance of drug-alluding stents-they are reverting back to direct stenting?

I do think you will see a growth in the balloon and accessory market associated with drug-alluding stents, at least for the time being, and my sense is at least a portion of that growth will be durable.

And IVIS?

IVIS is really not all that popular in Europe, as you're aware.

So we really don't see much of an uptick in IVIS there.

I feel we'll see an uptick of IVIS utilization in the U.S.

That remains to be seen, but given the cost of a drug-alluding stent and therefore the cost effectiveness of using extra diagnostic power to make sure the stents are properly placed and the lesion properly scaled, the physicians I'm speaking with are telling me they believe IVIS utilization will increase.

Okay, thank you.

Next, question we have a question from the line of Wade King with Wells Fargo Security.

Please go ahead.

Hi, it's actually Ed Shanken for Wade.

Our question is about the current yields and scrap rates for drug-alluding stents in your manufacturing process in Europe.

What are you seeing now, what do you expect when you're at full capacity in May?

And then what change going forward?

We have seen continuing improvements.

We started lower than we expected to because we had a late change in the process, driven by intellectual property concerns, so we started lower.

We came up to a fair number held there for a while, now we're improving again substantially.

So, latest data I've seen says that we're where we expected to be, maybe even a little ahead in terms of yields and I think now that we can go further than I had thought we could a few months ago, so the outlook there is improving as we speak, and I'm very optimistic now that yields aren't gonna be an issue at all.

And what do you think the gross margin will be in Europe and in the United States?

High and higher.

Can you give any numbers without royalties?

I could, but I'm not gonna.

No.

Just assume that they're significantly above our corporate average.

Okay, thank you.

Next, we have a question from the line of Ely Cammerman with Cafe Financial.

Yes, good evening.

Regarding the average drug-alluding stents per patient you're seeing in Europe now, are there any countries or institutions where you're seeing limits placed on a number of drug-coded stents per patient, such as maximum of two or a maximum of three?

And related to that, are there any patients you're now seeing where they're getting a mix of a drug-coded stent and a bare metal in the same patient?

Again, we're four to five weeks into the launch, but the answer is yes.

I think you're going to see mixes based on you know, a thumb-fail sketch by physicians of their assessment of the prospects of returns.

If you have a 65 percent lesion and a 35 millimeter right coronary and a ratty-looking LAD, in a economic-constrained environment, you'll see a bare metal stent and you'll take your chances.

My sense is that's going to be reasonably common because you're basically dealing with at the 2-plus stents per case level, you know, a considerable economic pinch.

That's precisely what CMS we hope will wrestle with when they consider increasing the formula for stents per case in a drug-alluding stent world.

So it's a factor in drug-alluding stent conversion in Europe today and we think it will be something CMS will contemplate for U.S. reimbursement in '04.

Have you seen any formal policies where there's a limit placed on either hospital basis or a country basis?

No, I'm not aware of any.

Okay, thank you.

We have a question from the line of Robert Faulkner with Prudential Securities.

Please go ahead.

Thank you.

Forgive the speakerphone.

Wonder if you could comment on the reality trial, which has been -- or is going to be started by J and J apparently, head-to-head again for the CIPHER versus Taxus.

Do you have any thoughts on how it's powered, on the advisability of it, anything?

I wouldn't do it.

I don't think we're gonna comment on our view of what J and J's wisdom there is.

It speaks for itself.

I mean, they've outlined the trial.

We think it's fine.

Make my day.

Yeah, right.

We obviously have Taxus 5 and Taxus 6 and Taxus 4u all geared toward getting the data, credible data -- based on difficult lesions, different release.

We're very confident that that data will tell the story.

One would question whether you're gonna get a lot out of 850 or 1,000-patient trial, given the way it's powered, but we're not running the trial, they are, and you know, best of luck.

And that seems reasonable.

What's the importance, do you think, of the ultimate release of your Taxus 4 data, versus what you have from a marketing standpoint in Europe?

Do you feel like you have enough data to make the case.

It certainly looks like it, based on your share gains.

I think we do have enough data and the share gains tell that story, but there's definitely awareness in Europe that a larger-scale clinical trial is being announced in September.

So, I don't want to discount the desire for more information, but I think that also is generic interest for all the programs.

There's a desire for more information on complex lesions and on dialectics and some of the areas where we've shown tantalizing results, but still await the pivotal outcome.

It's not hurting us, but more will be better.

Great, thank you.

Why don't we take two more questions and we'll wrap it up for this afternoon.

We go to Larry Kirsh with Goldman Sachs.

Go ahead.

Good afternoon.

Two questions, first for Paul.

You guys were obviously a little bit later on getting onto the European market with Taxus.

Yet you're still capacity constrained.

Is there anything going on in or is it just again, this is really just the function of ramping that up?

It's -- Larry, it's just learning curve, pure and simple.

A couple things happened that we couldn't have anticipated, and you know, we're working through all those things.

So, I'm a little behind where I wanted to be, but I'm actually gaining on it faster than I expected to be, so another couple of weeks and I think we're gonna actually be ahead of where we would have thought we would be at that point.

So you shouldn't take away any manufacturing issues such as J and J's had.

No.

We're doing everything and more.

Okay, great.

Then Larry, quickly, R&D spending, is it fair to assume that will be north of $100 million then -- again in the second quarter and what was the $7 million charge for the FDC litigation?

First, we expect $100 million plus for Q2.

We don't see that with Taxus, literally 4, 5, and 6 all taking part in the spend, so you should factor in $100 million plus.

On the $7 million, that frankly -- let me ask Paul to address that.

That's kind of an old, old issue with the FTC, regarding our acquisition of SIVAS back in 1996, I think it was.

And our licensing or putting in business HP, who exited the market and you know, it's basically a long, drawn-out fiasco that we feel strongly shouldn't have had that outcome, but we settled it for $7 million.

Paul, is there anything?

That's about it.

It's pretty simple, $7 million, make it go away, but I will tell you, there's a lot of indigestion over that one.

Next?

We have a question from the line of David Boucher with Hunter Tobin.

Please go ahead.

Thank you.

Let me can -- ask you, given that Johnson and Johnson has stated their inventory, their pre-launch inventory for the CIPHER in the success about 45, 55,units, seeming barely enough to supply the backlog for procedures delayed in anticipation of this launch.

Do you see the decline in barometal stents as continuing to decline or do you think we've pretty much bottomed out there and it might be stable in Q2?

That's one reason why we haven't changed our guidance for the second quarter, because while the ramp in Europe is a tad slower perhaps, it may be offset by a little stronger for a little longer U.S. bare metal stent market, and that may offset it.

So that's one reason why, in all fairness, we say there's so many variables here that we're gonna just at this point hold with our Q2 goal and see how it all plays out.

Okay, and if Johnson and Johnson is in fact greatly deemphasizing their bare metal stent sales to the point the BX very well may effectively not be on the market in Q2, does that also help give you confidence that you can make your 31-cent estimate?

Our sales reps are fully aware of the opportunities in the bare metal stent market and they are full-speed ahead trying to maximize our expressed share and I think we're gonna even have a better shot at that once we get the advanced express, let's call it, out sometime in May, we hope.

And I would also just say that what appears -- our understanding anyway of what J and J's decision to consolidate their product line to the HEPPA and CIPHER, as far as we're concerned, that is effectively a bare metal stent product.

The HEPPA code is not widely embraced with a -- as a product with truly superior performance.

It's still a BX very well , so they have to deal with the data they put out there.

They're back to reality.

You know, they've put their own data out there to compete with, so we'll compete with it.

Anyway, that will wrap it up for this afternoon.

I appreciate the interest and we'll keep you up-to-date as the quarter continues.

Thank you very much.

Good afternoon.

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