Boston Scientific Corp (BSX) 2004 Q2 法說會逐字稿

Ladies and gentlemen, Thank you for standing by and welcome to the second quarter quarterly results conference call.

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

Later we will conduct a question-and-answer session.

Instructions will be given at that time.

If you should require assistance during today's call, please press star and then zero.

And as a reminder, today's conference is being recorded.

I would now like to turn it over to your host, Mr. Larry Best, Chief Financial Officer.

Please go ahead.

Good morning.

The purpose of today's call is to focus on the results for the second quarter ended June 30th of this year.

With me on the call is our Chief Executive Officer, Jim Tobin;

Paula LaViolette is also on the call, our Head of Cardiovascular Group Worldwide; and Steve Moreci is also on the call, who heads up our Endosurgery Group.

Also on the call for today for, obvious perhaps Q&A session is Dennis Ocwieja, Head of our Regulatory Affairs at Boston Scientific; and Brian Burns, Head of our Quality at Boston Scientific.

So we have a full team to answer any questions you might have.

The second quarter of 2004 was an historic quarter for Boston Scientific.

We added over $600 million in sales in the second quarter.

And over $325 million at the operating income line.

It was one of the largest quarters, I think, in terms of growth of any medical device company in the history of medical devices.

So we're thrilled with the performance of the Boston Scientific team worldwide.

Now, before I go into my prepared commentary and overview, I'd like to ask Paul Donovan, Head of Corporate Communications, to read the Safe Harbor because I'm sure we'll be making a large number of forward-looking type statements.

Paul.

Thank you, Larry.

This call contains 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 affected by, among other things, risks associated with new product development and introduction, clinical trials, regulatory approvals, competitive offerings, intellectual property, litigation and 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.

Let me first read briefly from the press release and then I'll go into more detail analysis of the quarter.

As issued in the -- or as included in the press release today that was released about an hour ago, net sales for the second quarter came in at 1.4 billion 600 million as compared to 854 million for the second quarter of 2003, an increase at the top line of 71%.

Excluding the favorable impact of 31 million of foreign currency fluctuations, net sales were 1.429 billion, an increase of 67%.

Net income for the quarter, excluding net special charges, increased 200% to 377 million or 44 cents per share diluted, as compared to 126 million or 15 cents per share excluding net special charges in the second quarter of 2003.

The results included the net impact of the previously announced recall of certain units of the Company's TAXUS Express paclitaxel-eluting coronary stent system and the Express coronary stent systems in the amount of 57 million after tax, or approximately 6 cents per share.

The recall impact consists of a $78 million pre-tax reduction to gross margin, including a sales reversal of 35 million and an inventory write off of 43 million.

The results also included a 1 cent per share dilution to earnings from the operating results of the Advanced Bionics, which Boston Scientific acquired on June 1 of 2004.

Reported net income for the quarter included net special charges of 64 million after tax, was 313 million or 36 cents per share as compared to reported net income of 114 million or 13 cents per share in the second quarter of 2003.

The net special charges reflect purchased in-process research and development costs related to 2 acquisitions and those acquisitions included Precision Vascular and also Advanced Bionics.

Let me give you some highlights starting on the strength at the sales line during the quarter.

As I mentioned, it was a historic quarter for Boston Scientific.

It goes without saying, the results for the second quarter were record, sales and record profits by a large measure.

We added 606 million to the top line in the second quarter year-over-year.

Let me take you through the sales growth.

Interventional cardiology, this is before the recall, came in at $964 million worldwide.

That's compared to 391 million in the prior year, up 147% as reported 144% constant currency.

The recall reversal was 35 million and in the previous conference call we estimated that reversal to be 45 million.

It actually, when we analyzed and fine-tuned the estimate, it came in at $35 million sales reversal from the second quarter.

That gave you a net interventional cardiology for the quarter at 929 and of course that compares to 391, up 138% as reported.

The total Cardiovascular Group, which includes peripheral interventions and vascular surgery, came in at 1.92 billion and that's compared to 532 million in the prior year, up 105% as reported.

The electrophysiology unit was up 11%.

Neurovascular was up 13% as reported.

For an overall Cardiovascular Group sales of 1.185 billion, up 93% for the quarter.

So very, very strong quarter for our Cardiovascular Group.

Moving on to our Endosurgery Group.

Our Endosurgery Group also on an as-reported basis grew double digits, up 12%.

The components of that included oncology, up 10%, endoscopy, up 10% and urology, up 19% on an as-reported basis.

So a very strong showing throughout the Company.

All divisions, all divisions came in at double-digit sales growth with obviously the stand out being our Cardiovascular Group.

During the quarter, Advanced Bionics added 7 million to the top line for overall sales of 1.4 billion 600 million or 60 million, up 71%.

Now, in terms of sales days in the quarter, it's apples to apples.

There were 63 business days in the first -- second quarter of this year and the second quarter of last year.

Let me move on to the International side and the geographical sketch.

Our domestic business came in at 944 million in sales.

That compares to 482 million in the prior year, up 96%.

So our U.S. business -- U.S. business across all divisions contributed 96% growth in sales, just a phenomenal quarter for the Company.

Moving to Europe, Europe was up 43% on an as-reported basis, 34% on a constant-currency basis, strong showing driven by the strength of TAXUS in European markets.

Japan up 17% on an as-reported basis, 8% constant currency.

Intercontinental, up 68% on an as-reported basis, 63% constant currency.

So Intercontinental, again, driven by the strength of TAXUS grew almost 70% in the quarter on an as-reported basis.

Very strong showing by International.

Overall, International business was up 39% on an as-reported basis, 30% on a constant-currency basis.

So strong showing through each of our divisions and through each of our geographies, all strong double-digit growth.

For your analysis purpose, let me run through very quickly the domestic numbers, and that will give you an opportunity to back out the International for your modeling.

For the second quarter, post recall, net intervention cardiology came in, domestic again, 627 million.

That was broken down, Cardiovascular, 7 -- I'm sorry, total Cardiovascular for the quarter came in 729 million domestic: electrophysiology, 22 million; nuerovascular, 20 million; overall Cardiovascular Group 771 million.

Oncology, 27 million; endoscopy, 91 million; urology, 50 million; overall, Endosurgery, 168 million.

And the break down in terms of peripheral interventions and vascular surgery, peripheral interventions came in at 89 million and vascular surgery at 13 million.

Hopefully, that will help in your modeling exercise.

Let me now move to the P&L and let me try to take you through the different segmentation of our results for the second quarter, starting with our first close for the second quarter, which was our preliminary results prior to the announcement of the TAXUS recall, post June 30th.

Our initial close before the recall announcement were as follows: Net sales came in at 1.488 billion.

Our gross margin percentage, again this is before recall and special charges, our gross margin came in at 78.6%.

So almost 79% at the gross margin, we saw very, very significant growth at the gross margin line.

Our operating income came in at 595 million or 40% of sales, so operating income at 40% of sales, very strong results driven by TAXUS.

At the net margin line or net income line, we came in at $440 million, with a net margin of 30%.

That gave you an EPS on a preliminary basis of 51 cents a share, and that was the quarter we thought we were going to announce excluding special charges.

Subsequent to the close of the quarter, we had a subsequent event that we all talked about and announced in the recall.

We reversed 35 million in top-line sales.

We wrote off $43 million of inventory.

We hit gross margin by $78 million.

That represented an impact of 6 cents per share, so you take the 51 cents per share, less their impact of the recall of 6 cents, and that brings you to a 45 cent EPS number.

You then add Advanced Bionics, which we acquired June of -- in the quarter, June 1.

We added 7 million in the top line with a 1 cent dilution.

That gave you operating results that are reflected in the press release, that with the reversal of 35 million top line, adding back the Advanced Bionic add during the quarter, it gave you 1.460 billion in top-lines sales.

With the adjustment of inventory, as a result of the write off related to the recall, that brought down gross margin to 75% versus the 79% we had pre-recall.

That brought operating income margins to 35% and net margins to 26% and the EPS, 44 cents a share.

So again, preliminary close was 51 cents a share.

Recall, we took away 6 cents per share.

We took another 1 cent a share away for the acquisition of Advanced Bionics.

That gave us our operating results reflected in today's release, excluding special charges, 44 cents a share.

We then add the special charges for the quarter of $64 million.

That represents purchased research and development, in-processed research and development purchased related to Precision Vascular and Advanced Bionics, 2 acquisitions that were made recently.

That impacted the quarter by 8 cents a share, so you take your 44 cents a share, you reduce it by the special charges related to purchased R&D of 8 cents per share and that gives you your as-reported EPS of 36 cents per share.

Hopefully that helps to clarify the quarter in terms of the impact of the recall, Advanced Bionics and the special charges related to acquisitions.

So overall a very strong quarter.

We had free cash flow during the quarter of over $500 million.

We had EBITDA coming in at 569 million.

We had our coronary stent sales in excess of $600 million worldwide, and that was bigger than our annual stent sales in 1999.

So a great quarter all around.

Let me now turn it over to Paul LaViolette to give you further details on the results of our Cardiovascular Group worldwide.

Paul?

Thanks, Larry.

Well, let's start off with the recall status.

During the call a week ago Friday, we conveyed our expectation that we could fairly quickly execute the recall and an inventory exchange in the United States and that International would take several weeks longer.

So let me first update you on that whole process.

Regarding the U.S. recall, I would say it has gone better than could be reasonably expected and that the recall process in labs in the United States is now 100% complete and that would represent a little over 1,200 total accounts.

We have shipped about 40,000 replenishment units in the past several days and that has gone back to about 97% of all accounts that had originally held any TAXUS inventory.

So in essence, 48 hours worth of activity allowed us to generally restock the United States marketplace.

Now, we have lowered our consignment levels, slightly enabling all accounts to service all procedures, but not giving them quite the luxurious inventory position they had held.

We expect to replenish that full-consignment level shortly and I'll give you more details on that.

When you account for the recall activity, the turnover of units, if you will, in addition to our normal run rate business last week, total demand for TAXUS in revenue and nonrevenue units exceeded 50,000 and every unit was shipped on schedule.

The number of units being returned from the field is about 63,000 in total and those units have all been sequestered for return and, obviously, there are more returned units than those being sent back out due to the slight lowering of those consignment levels, as well as the fact that the recall incorporated expired units and a few other logistical details.

But essentially, the recall activity is complete in the field and the restocking has also been completed.

Today our U.S. inventory position is at approximately 90,000 units, roughly evenly divided between over-the-wire and monorail.

We expect over the next few weeks to ramp consignment back up while replenishing our safety stocks to the full levels in the U.S. inventory distribution center and we expect that in the next few weeks, U.S. field-based inventories will be at full levels and between now and then there will be no noteworthy disruptions.

We do expect to have one item number that will be back ordered once or twice for a day or two in that process, but I think it clearly implies that our overall operations strategy and our manufacturing capacity has, in fact, enabled us to recover from this supply interruption.

From a business perspective, things are going perhaps also better than we had expected.

There's clearly turmoil and turbulence in the market caused by the recall activity.

But throughout the past 5 days, 964 accounts placed run-rate orders for TAXUS with Boston Scientific and we believe that the midst of this recall, we held at our lowest level, approximately 55% market share and that includes over 60% market share for our top-three tiers of accounts, of whom 85% placed run-rate orders through the past couple of days.

So normally we would not be satisfied with these levels of business but considering the circumstances, clearly things could have been much worse.

Effecting that, we have capped our order quantity for accounts to prevent any customer concern from leading to very high orders, so that they could preserve their own inventory status.

So we prevented that surge in demand with order quantity caps, and so even with that in place and while the recall was in full force, throughout Monday and Tuesday with very little field focus on replenishment activity, we did average over $6 million a day in sales throughout the entire week and our demand on Friday, and I would grant this as one data point, but on our demand on Friday was back to 87% normal pre-recall demand level for a Friday.

So we feel as if the recall has been executed, the product transition is completed, we clearly maintain drug-eluding stent leadership throughout the process and now we're focused almost exclusively on the offensive, trying to rebuild customer comfort and restore our market shares to at least second quarter levels.

Internationally, as I mentioned, we did believe, and we did forecast, we did plan that it would take a bit longer to execute.

We are planning -- I should say we are executing accordingly to that plan and things are also proceeding well against that plan.

Recall execution is now in full steam.

It was by Wednesday of last week and I'll give you a quick status on that.

We focused primarily on our key opinion leaders initially and all of our key opinion leaders were communicated with and restocked by the middle of last week.

Europe serviced roughly the top third of all of their accounts with new product last week and we expect that to increase dramatically in the next 8 to 10 days.

Intercontinental, which is of course is a far more diverse chain of countries and logistics, is executing on a similar plan but with a lengthier timeline.

Total Intercontinental restocking will take throughout all of August due to certain countries that have very long lead times in shipping and importation, but generally speaking, Intercontinental is executing on a plan as fast as logistically feasible.

Just to close out the recall comments, let me incorporate an update on Express2, the bare metal stent version.

As you know, that was also impacted, although the impact was far more concentrated.

I think it's safe to say that the Express impact in the U.S. and in Europe is diminimis.

Japan, of course, is dependent on Express.

Our recall in Japan is completed without any shipment impact.

So we're very comfortable that Japan will continue its normal operations and, of course, there's sufficient inventories in the United States.

In Europe we had converted a majority of our bare metal stent business to Liberte already and so the overall Express recall is basically done and will not have a material effect on our worldwide stent business.

I do want to take just 1 minute to commend the team through this process.

Obviously, the record in Q2 now shows that the TAXUS launch is the -- perhaps the fastest and largest device launch in history and we were not really looking forward to a recall, but more importantly, we were prepared for it.

It's been a very difficult situation.

It's been handled in a compellingly positive way.

Our customers are providing us with positive feedback.

They, in essence, are telling us we are doing the right thing in light of the circumstances.

Their focus primarily has been on our ability to resupply them and I think the data shows that that has been done effectively, clearly they will take some time to regain confidence in supply, but we are receiving orders and shipping those orders essentially at 100% through this process.

And I think that -- that comfort level will restore fairly quickly and overall customers have been generally pleased with our responsiveness.

They've been generally pleased with our communications.

Our focus now is on restoring full stock, both at the consignment level and at our safety stock levels in distribution, as well as through the farthest reaches of our International supply chain.

We expect that confidence will build as shipments maintain continuity, and we are going to concentrate all of our strengths from this point forward on selling the data, selling the the program, selling the drug, all related to the TAXUS stent system and on taking advantage of the strength of our team and I think those strengths have been reinforced through this tough process.

Two other points related to the recall.

We have shipped now over 85,000 units that were -- this is both prior to and post the recall, that were manufactured using the Redical [ph] inspection process and zero, no deflate complaints have been reported.

Also, as you are aware, FDA inspectors were working in Maplegrove from July 15th onward to audit operations related to the recall.

Inspectors completed their work last Thursday, July 22nd, and we were issued zero 43 observations.

Now, the FDA review process to complete closure is continuing and we are providing follow-up data to the agency that is essentially the same as information provided during the audit.

We've worked very closely with the agency on this audit and we will continue to do so until the process is completed.

Now, just a few brief updates on the rest of the business, which although TAXUS was clearly the lead story in the quarter, was also very strong and Larry has commented on TAXUS.

But other cardiology products showed considerable strength.

Our balloon business in the United States was up 21% in the quarter.

Our vascular access business, up 8% including double-digit growth in core products, such as guide wires and guide catheters.

Bare metal stent share was maintained over 21% in the quarter.

And ASPs were also very strong, $980 for the quarter, and as Larry mentioned, our peripheral interventions business grew 7% in the quarter.

So a little bit stronger there.

In the next quarter we have a number of product launches planned, including wires, guide catheters, next-generation filter wire, peripheral cutting balloon has just been approved and introduced and so things are going well with the rest of the pipeline.

In terms of drug alluding stent comments, generally speaking, I think folks have been very focused on the market size.

Our sense for Q2 is that penetration averaged around 79% for the quarter, including 82% in June.

So we tracked it at 77, 79 and 82 for the 3 months of Q2 and we're now looking to see this exceed perhaps 85% somewhere in the second half of 2004.

Clearly, the second quarter market is now well known based on the revenue reports from both competitors with $700 million based on actuals.

We expect Q3 to remain essentially flat to that based on seasonality in the summer and some recall-related disruption.

It's hard to gauge that precisely, but clearly there has been some disruption over these past 5 to 6 days.

We do think the market will then restore growth by $25 $50 million in the fourth quarter and will reach a $3 billion U.S. run rate by the end of the year or early into the first quarter.

Internationally, European penetration in the second quarter grew by our watch approximately 2 to 3 points, and perhaps on a European average basis now reaches 30%, certainly between 28 and 30% today.

Intercontinental, all markets outside of Japan and Europe, we see as about 38% penetrated.

So very solid numbers Internationally, solid growth across the board in the DES market, and of course, we have previously announced our growth in International TAXUS sales.

And of course Japan is really just getting started as a market and we'll -- I think we'll develop as a function of supply constraints, so that remains to be seen.

Just in closing on TAXUS, we have as we've announced, received conditional approval for the Atlas trial using the TAXUS Liberte device that IDE is ready to commence.

We expect that in mid-August we will begin enrollment, and we're targeting completion of enrollment for TAXUS Liberte IDE by the end of this year.

We also have expectations for a very strong TCT, with follow-up data on a variety of TAXUS programs, including long-term data on TAXUS 2, 4 and 6, as well as 30-day data on TAXUS 5 and a host of registry updates on our major U.S. and International registries.

So in the aggregate, it was a fabulous quarter.

But we've had a very tough week.

TAXUS launch and the registration of 70% share in the United States clearly exhibits the strength of our program and our team.

I will say that market leadership was temporarily lessened this week in the way we measure market share, but frankly, it was strengthened, our market leadership position was strengthened by the actions of our team and the management of our program.

So we're pleased that we were clearly leaders throughout the past week in our actions and in market share, but we expect to, frankly, focus on the return to previously normal highs in share and in credibility in the weeks and months ahead.

So with that, I'll end my comments and turn it back over to Larry.

Thanks, Paul.

Let me just for the people doing the modeling give you some specifics on the coronary stent sales in the second quarter.

We came in overall, coronary stents worldwide came in at 652 million.

The break down there was 597 million of TAXUS; 41.6 million of Express; 10.3 million Liberte; and then 3.2 other.

For a total 652 million, a huge quarter in coronary stenting.

You know, obviously that's about a $2.5 billion run rate for coronary stents.

To give you domestic numbers that break up into that number, overall domestic came in at 478 million -- 478.5 million, TAXUS represented 468.4 of that.

In Europe, overall came in at 86.9.

Of that, 75 million was TAXUS.

And then Intercontinental came in at 62.4 million overall and 53.7 represented TAXUS.

And then, of course, in Japan, we came in overall coronary stents at 24.4 million.

So hopefully that helps on the segmentation of our coronary stent business.

Let me turn it over to Steve Moreci, who will update you on our Endosurgery Group for the second quarter.

Steve?

Larry, thanks very much.

Endosurgery had a strong quarter, finishing ahead of its plan and on track to achieve its first billion dollar sales year.

Double-digit growth in U.S. was driven on the strength of our women's health business and our oncology franchises.

International sales were also strong.

Europe up 17% overall, and 24% in the urology gynecology business.

IC was up 17% overall and Japan's endoscopy business grew at 12%.

Very strong quarter for both domestically and internationally.

I'd like to comment briefly on the 3 business units in Endosurgery.

First, the urology gynecology business had a strong performance across all of its franchises.

The urology portion of the business grew 13%, driven by strong performance in its lithotripsy and guide wire franchises, both which were up over 20%.

We also introduced in the quarter our BPH product, Prolieve, and it's also ahead of its plan.

Big success story in this group is the gynecology business.

Gynecology sales were up 24% worldwide, driven by strong domestic HTA sales.

HTA sales were up 56% in the quarter.

We also executed well on our new pelvic floor products, especially Advantage and the newly launched Lynx [ph] TVT sling for incontinence.

The oncology franchise also had a strong quarter, particularly in the U.S., it was up 14% in the U.S.

The Passive technology we acquired a couple of years ago continues to do very well as we leverage it across many products and help grow the pick port sales by 20% in the quarter.

U.S. sales of our peripheral embolization products was up 28%, led by the Contour SE Microspheres.

Contour sales grew 45% in the quarter.

A recent approval of U.S. -- a product for USE [inaudible] fibroid embolization and direct-to-patient programs are helping accelerate growth.

In addition to those franchises, our domestic tumor ablation business was also up 33% in the quarter.

Endoscopy sales increased double digits to a record worldwide for the quarter.

This business continues to post record growth in units of market share offset somewhat by price pressure.

The second quarter saw the launch of an important new product, the Resolution Hemostatic Clip, and in Q3 we will launch the hydrojack guide wire and new guide wire for the $350 million worldwide biliary market.

July 1st we activated 6 market tests for our direct-to-consumer efforts for Enteryx, our injectable for treatment of GERD symptoms.

Clinical data continues to hold firm at the DDW this year.

Data was presented on 2-year data showing that 67% of the patients were still off of their PPI medications.

Reimbursement challenges remain an issue and we're taking many steps to improve coverage.

Innovations, our Endoscope project, we very revealed at the analyst meeting earlier this year continues progress towards its debut later this year and introduction next year.

Overall, with a strong double-digit quarter and we're on a road for 1 billion in sales for the year.

Larry?

Thanks, Steve.

Before we turn it over for Q&A, let's have Jim Tobin focus on his perspective on quarter and his recent events.

Jim?

Yeah, Larry, just a couple of quick comments.

I guess I would focus on the positive here, despite the recall, we had a blow out quarter.

But it is time when we should have been taking a victory lap.

We're dealing with an unfortunate self-inflicted problem.

Paul's taken you through the state of play there.

But suffice to say, that the team did a terrific job of resupplying the U.S. market in just a couple of days and we're now in the recovery phase.

International will take a little longer.

But that will happen during the July/August lull and it will happen.

So while we're not where we'd hoped to be, we feel that we can recover.

TAXUS was and still is the preferred product by a wide margin and with the strength of the field force and plenty of supply muscle, we've got everything that we need to succeed and we intend to do just that.

So let me just end it with that.

Okay.

Thanks, Jim.

Let's now take any questions you may have.

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Thank you very much.

First we'll take a question from the line of Mark Landy with Susquehanna.

Please go ahead.

Good morning, guys.

Good morning.

Just, Jim, if you could just maybe focus on Enteryx a little bit.

I think this is something that you had pretty high hopes for.

It seems that reimbursement is tough.

How long will it take for re-imbursement to sort itself out and where do you see it going -- or Enteryx sales going over the next, you know, half a year and probably into 2005?

I'll -- Jim, you want me to take that one?

Go ahead, Steve.

Yeah, the reimbursement is key to adoption.

We do have Medicare reimbursement.

But the majority of the patients, of course, are not Medicare patients.

So the challenge is to get CPT coding for the device.

The plan now is to submit data that requires basically 2 and 3-year data later this year and early next year and try to get that code established for the beginning of '06.

We're also doing quite a bit of market test efforts.

I mentioned in my brief comments that we have opened up 6 test markets to try to look at the activation of those markets through a variety of means, both through the patient and also the physicians and general practitioners.

I guess the bottom line is, we will probably know by the end of this year the size and shape of our opportunity.

We're still expecting this product line to be worth a couple hundred million dollars a couple years from now, but it depends on adoption curves and also depends how quickly we get that reimbursement to come in.

Could you maybe just break out the numbers this quarter?

And then, you know, I'm just not sure that Jim wanted this had to be a half a billion dollar product at some point in time.

How are we going to work against that target?

Break numbers out for this quarter?

Yep.

We did about 1.5 million this quarter.

We're expecting about 14 million next year.

It could go higher depending on how fast we are able it get the reimbursement to come in and also how fast we can get those test markets to prove effective.

So this is going to take a little while then?

Yeah, it's more of a 2 or 3-year type of program than an overnight success story.

Thanks, guys.

Thank you.

Then our next question is going to come from the line of Ed Shenkan from Wells Fargo.

Please go ahead.

Good morning.

And just wanted to ask a model-related question first on the tax rate going forward.

And maybe you could just give us some insight of as far as manufacturing break out in Europe versus U.S., how that will impact the tax rate going forward.

Yeah, the -- right now we're at a 24% tax rate, driven largely by our offshore manufacturing, Galway is a huge manufacturing facility for us.

And as we look at it right now, we see the 24% achievable, probably at least through 2005 and perhaps even 2006.

What that does is generate enormous cash flow that we continue to hold overseas, but, you know, on TAXUS itself, Paul, do you know what the break down is between Galway and Maplegrove in terms of the percentage of taxes?

Well, it does -- we have about the same number of lines in each location.

We generally don't need all the capacity from either.

We generally focus a little bit more on monorail and Galway and a little bit more on over the wire in Maplegrove, but they're essentially replicate facilities.

Roughly speaking, 65% of our manufacturing capacity is outside the United States.

And that drives the tax rate, but to answer your question specifically, we're comfortable with 24% for the foreseeable future.

Okay.

Thanks.

One other follow up.

On TAXUS, the manufacturing problem, could you just, you know, quickly remind us what the actual problem was in the manufacturing line and what you did, you know, simply to fix it?

And then just reassure us that, you know, that problem is fixed, you know, as far as you see it and why you think, you know, the FDA will be pleased with what you've done.

Sure.

Jim, you or Paul?

Yeah, I'll take that.

First of all, the FDA process, I want to reinforce is still ongoing.

We don't want to put any forecast out as to the specific completion of that process.

The first phase of that process, which is the audit, as I mentioned, is completed without 43 observation.

So as a manufacturer, we take that very favorably.

The overall issue, most importantly, has to be categorized as a balloon catheter issue, unrelated to the stent, anything related to the drug coding process.

The balloon catheter issue is focused on the laser bond that connects the balloon to the outer shaft in the calaxial catheter design.

What we found over time is that the combination of several factors, including excessive laser energy absorption by the catheter and excessive tension being applied to the catheter can create what we describe as a focal neck down, which is the loss or a compromise of the lumen that's required to inflate and deflate the balloon.

The hard part in our process was discovering the problem because it occurred so infrequently and because it occurred only as the result of multiple variables running outside of our specifications, including most importantly the combination of weakening the polymer with excessive heat and then stretching the polymer with excessive tension.

So once we defined root cause, we were able to eliminate the parameters that could enable this to happen and that, of course, as you can imagine is not as difficult to eliminate as it was to find.

So as we become now an essentially a newly focused manufacturer of the revised product, we have used a combination of 3 major elements to assure that we have control over this process.

The first is a set of software that provides us with extraordinarily precise evidence of laser parameters and gives us a clear monitoring of the energy applied to every catheter.

The second step is an inspection process which uses fairly refined methods to inspect every catheter -- 100% inspection of every catheter regarding this process and a set of specifications on that inspection that are tighter than need be to screen out all potentially bad product.

And then the third step is the implementation of a PMA supplement approved laser parameter change that actually shifts the focal point of the laser slightly on the catheter to further reduce the potential that excessive heat would ever be delivered to the catheter.

So we feel, from an engineering manufacturing and process control perspective, this is a very manageable and controllable situation.

The hard part was finding the problem and we feel, obviously, very clear in our thinking that we have identified the root cause and put corrective actions in place.

Thanks.

And Larry, could you tell us about gross margin going forward based on, you know, your intense manufacturing process now, you know, probably a higher scrap rate than need be.

What should we model for gross margin going forward?

Well, right now, you know, our manufacturing metrics are quite impressive and we finished on a preliminary basis the quarter around 78%, 79% gross margin.

Right now my best guess is in Q3, Q4 we'd be in the same ballpark, you know, scrap is not a significant issue.

It hasn't been for quite a number of quarters.

So I would suspect you will see in the 78, 79% for the next couple of quarters.

Thank you.

No other questions.

I will point out, based on that question, what we have decided to do regarding guidance for your analysis for Q3, Q4, the second half, is to let the dust settle on the replenishment of TAXUS to the U.S. and international markets for 4 or 5 weeks, and then let's see where we're at and then we'll be in a better position to have a premise for guidance for Q3, Q4 in the second half.

My -- our expectation is that we would probably schedule a conference call some time the week -- the first week in September before Labor Day.

That's what we're shooting for.

Once we schedule that conference call for guidance, we'll put out a press release.

Next question, please.

Thank you.

The next question comes from the line of Dan Lemaitre from Merrill Lynch.

Please go ahead.

Good morning, everybody.

Just some follow up on, Paul, are both Maplegrove and Galway now operating at what we would consider normal run rate?

Yes.

And the pilot -- thank you.

And the pilot software that is meant to monitor process, have you now implemented that in Galway as well?

We are in process of implementing it in Galway.

Not all lines have it as yet, but I think importantly it is the third parameter in what is essentially a belts and 2 sets of suspenders approach.

So we are putting it in place, but that is probably the least mandatory step of the 3-step process and, obviously, our focus is to build quality in, not to inspect it in after the fact.

The other changes are really there to assure us that we're building quality in prospectively.

And is there any sense at all that the FDA thinks that should be part of your PMA approved on a supplement basis?

Should that actually become part of your manufacturing process I guess?

Dennis, do you want to take that one?

Maybe Dennis is not with us.

Dennis may not be with us.

We have not gotten any -- this is Brian Burns.

We've not gotten any indication thus far that they would require a supplement for this type of background process monitoring on our process either in Maplegrove or in Galway.

Okay.

All right.

And then just lastly, Paul, I know when you go out and tell people you've had a problem, I'm sure some things come out of the woodwork that you may not have heard about, doctors are reminded of cases where this might have been.

Can you just describe what you have heard on that front and I guess there were some reports of non-deflates last week.

Is that anything that -- you did say you still have heard zero reports of any post-manufacturing change non-deflates.

You're still relatively confident that most of what we're hearing is just background noise from previous lots?

We're back.

Jim, you there?

Yeah, we're back.

We got cut off.

Okay.

I wondered.

Did you guys hear any question?

No, Dan.

Go ahead, again.

Okay.

I apologize.

What I had mentioned, Paul, was obviously when you go out and tell docs that you have a problem, that may refresh some memories about some cases they've had.

Have you had more cases come in post the recall now where the rates have gone -- were higher than you had expected?

And also, there were some reports of non-deflates last week.

You're relatively confident that those are in fact premanufacturing change stents that had been used?

Yeah, and the answer is yes.

And as long as we have Dennis Ocwieja, our Senior Vice President of Regulatory and Quality here, I'm going to let minimum answer that with a little bit more detail.

Actually, we have had complaints come in.

We have tracked them back to be pre-Redical [ph] test product.

So it's not anything that was really surprising us.

And no, there haven't been a bolus of complaints in any shape or form, so we have no rate differences in reality.

Okay.

Great.

Thanks you guys.

Thank you.

Our next question is going to come from the line of Rick Wise from Bear Sterns.

Please go ahead.

Good morning, everybody.

A couple of questions.

Following up on some of the controversy as we continue to hear reports of -- surrounding the sticky stent issue, Paul, is this an increasing issue, are you -- when you're going out and talking to doctors, are you hearing more about it, less about it and do you think it's going to affect market share in a negative way going forward?

Any update there?

Yeah, well, first of all, the phrase "sticky balloon" has been thrown around and it's a nice catch phrase.

It doesn't really categorize what's actually going on.

We are quite certain that any manifestation of this -- what we would call withdrawal resistance is not a defect in the device.

And quite frankly, we're also quite comfortable that it is not a stickiness of the polymer.

If one were to hold the polymer, one would find that it actually does not really exhibit any surface tack at all.

To answer your question about the marketplace, the rate of complaints is very low.

And virtually all of the complaints that we receive involve a case that that is resolved successfully without any patient implications whatsoever.

We have had some complaints, but our sense is that this is an issue that most accounts handle as a nuance of the catheter performance.

It is generally now understood that resistance to withdrawing the balloon from the stent , post-implantation with TAXUS is a little higher than bare metal stents.

Physicians generally are used to it.

I think they have generally factored it into their technique and that it is completely unchanged from the launch of TAXUS to today.

So, obviously, competition fuels noise.

It is something that is different between TAXUS and Cypher and we are working to determine whether there's anything in the characterization of this issue that we can provide to customers to further reduce it.

We do note that many, many institutions and many extremely high volume operators would tell us that they see no issue at all, which helps us to affirm that it is a -- something that customers perceive as distinct in product performance as compared to certain devices not performing well.

So it's about clinical practice.

It's not a customer fault issue.

It's about distinctions in clinical practice, clinical sensation and we're continuing to work to characterize it, and obviously, we'd like to improve it over time, but, you know, it is not something that is increasing.

It's built into what we had achieved with 70% share in the second quarter, and I see no reason why we would not be able to restore that level of market share without any change in TAXUS performance.

Just a quick follow up.

You were kind enough to mention that bare metal prices, I think you said, were 980 in the quarter.

What were drug alluded stent prices and do you sense that there's any increased pressure because of the -- of the -- what you have been through competitive pressure on pricing?

And last, I don't know who this is a question for, Jim, perhaps, can you update us on the status of some of your new and emerging products, the Ferris, the disposable endoscope, where -- any updates on some of the emerging programs?

Thank you very much.

I'll address the first 2 questions and then I'll turn it back over to Steve to address the disposal endoscope question.

First of all, pricing for TAXUS through the quarter was very, very stable.

We were very comfortable with our -- basically our pricing models and ended the quarter with prices at the 2580 level and they have basically fluctuated, you know, ever so slightly between 2600 and 2560, 2570 throughout the quarter.

We don't see that there will be any change in our pricing as a result of this issue with the recall.

The recall again is now physically logistically behind us, and as I mentioned, the primary concern throughout the recall process was an expression of concern by the customers that they would not have sufficient TAXUS supply.

So we're moving forward and price won't be, you know, a changed variable as a result.

Ferris, which for those who are not as familiar with it as our business partnership, in an effort to get into the vascular sealing market using a focused ultrasound, noninvasive essentially heating technology that seals the vascular puncture track.

We have been working, or they in partnership with us, have been working primarily to reduce the device profile from its intermediate design to the final design.

That has been completed.

Our primary concern in that stage was the technology's ability to deliver sufficient power as it was miniaturized from a larger device to a hand-held device and then to demonstrate that through a second round of human feasibility evaluations, which were to take place in Europe over the past 2 weeks.

And I'm pleased to say that that has taken place.

We have basically demonstrated that we can deliver the kind of power that we were hoping for to deliver an effective seal, and now really to effect a final and successful sealing treatment, we have to refine the aim and the focus of the ultrasound, which is basically refinement of software and transduce work and that is underway now within the final product design.

So our next step is basically a dosing step where we will refine the treatment parameter within the existing technology.

We hope to be in that step in humans by the end of this quarter and then we'll move immediately thereafter to pivotal clinicals.

So essentially, progress has continued to be made.

We still have some work ahead on final dosing.

And we're encouraged by what we see, because this huge step of technology miniaturization has yielded a product that has more than sufficient power and capability to effect the treatment.

On the innovations part of the new product area, we are increasingly encouraged by what we see as a tremendous demand and opportunity for this product, colonoscopy, which is the main driver behind the product -- the project itself, continues to grow at a rate of about 10% a year, looking at about 7 million procedures in the U.S. alone.

So the demand for efficiency improvement that helps physicians deal with this growing number of patients are coming into the screening colonoscopy opportunity continues to motivate us to work hard on that program.

At that point we've added quite a bit of resources to it in the last quarter, particularly in the marketing side, as well as on the distribution side.

The product is fairly close to complete and we will do our animal trials this fall, and that will be when we debut the technology for most of the constituents who are interested in hearing about this.

We expect to be in first human use in the first half of next year and we continue to look for a launch in '05.

To say that there is a lot of enthusiasm around this program would be understatement.

A lot of divisions are involved in it, there is a fair amount of technology transfer going on between the various groups in corporate R&D to make this happen, and we're very excited about the prospects, this being a major driver for Endosurgery growth next year and also Boston Scientific for years to come.

Yeah.

Two other updates, probably worth while, one, Advanced Bionics is doing well right now.

They look like they will have a year, about 12, 13 million over what was in our plan when we acquired it.

The cochlear implant business is above plan and they're just getting started with their first generation IPG, and they're in clinicals with the BION for migraine.

So a lot of things going on at Advanced Bionics, all seem to be pretty positive.

The other big one for us, we think down the road will be Trivascular, our percutaneous AAA device.

And, Paul, do you have any updates on that regarding number of patients and status?

Well, yeah, Larry, as you may know for the folks, Trivascular is our partnership in AAA, they have been in a Phase I clinical with an enrollment of 50 targeted and that is completed and now the real focus is to initiate Phase II clinicals under an IDE.

That is in the process of being approved and we're getting ready to gear that up pending final approval.

And then just to complete the list, bifurcation is an opportunity for us.

We've got a team now behind a concept there and that's coming along.

Liberte, we talked about, you know, we're pleased with the way that program is moving forward.

That's absolutely crucial to us.

That's how we protect what we've gotten and that seems to be on track.

And then the carotid program was just a protection, continues to click off milestones and then there's a second generation behind that.

So net-net, you know, we've got 6 or 8 things that really, really matter to us as we look forward and so far so good.

Thank you very much.

Thank you.

Our next question is going to come from the line of Matthew Dodds from Smith Barney.

Please go ahead.

Thank you, a couple of questions.

On the royalty to ANPI, has anything changed after the expiration of Cook's rights in early July?

We have been in discussions with the team at Angiotech and all I could say is there's some discussions regarding the future, but no conclusions drawn at this time.

And then for Paul on the third quarter, USDS market, to get to a number of roughly flat, are you assuming if penetration goes down a little bit for the third quarter rebounds in the fourth quarter just because of this recall?

Well, Matt, we have not necessarily seen any procedural shifts in result or in response to the recall itself and as I say, as of today, the hospitals are really fully stocked.

The total procedural volumes, not DES related, but just total PCIs in the quarter, do generally dip down and in our models, we would go from Q2 at around 255,000 down to below 250,000.

So you've got a 6,000 procedure drop off based on basically the seasonality of healthcare in general.

Stenting in our model goes up.

All stenting from 88% to 89% of procedures.

Stents per case remain the same, but our overall expectation for penetration will be higher in Q3 than in Q4.

So you have a variety of variables moving, but it's essentially the underpinning elements of drug alluding stent utilization continue to be favorable, continue to grow, you're really looking at Q3 dipping just because of seasonality and total ECIs.

Is but then as that resurges in Q4, back up to over probably 265,000 interventions in Q4, the tailwind effect from higher penetration, higher stent utilization overall will bring the market back up to what I mentioned previously to be, you know, clearly over 725 million probably, closer to 750.

One follow up on that Paul.

Is that 35 million reversable?

Are you still assuming you'd capture that in the third quarter, or does that guidance not assume that?

Well, that's right.

The sales reserves relate to product that was customer-owned and returned, and so as that product is reshipped based on customer purchase orders, that will be restored as a sales line.

So we'll probably see some surge in sales as a result of customer-owned replenishment.

That's on top of the guidance you gave or part of it?

It's all included in the guidance.

Thanks, Paul.

Thank you.

Our next is going to come from the line of Mike Weinstein from J.P. Morgan.

Please go ahead.

Thank you.

Excuse my voice.

Just first question, Paul.

I don't know if you gave us and I just missed it.

Did you indicate how many implants you thought had occurred to date with the post process change stent?

I did not, but that's a good number.

We don't, of course, know.

I did indicate the number of shipped, but we're assuming that the number implanted is between 30,000 and 40,000.

And, of course, that grows by several thousands per day, so you can use that as the number for comparison to the zero no-deflate complaints.

That's zero out of 30,000 to 40,000 is probably a rough range.

That's correct.

Okay.

And then I just wanted to be clear in terms of the process of the FDA.

You said they completed the inspection on Thursday and they didn't issue any 43s.

What did they get you guys a final report on that inspection?

Well, we don't have a specific time frame on that, but the process is fairly clear and it involves multiple elements of the agency.

The auditor, of course, emanates from the district office in Minnesota, so that process of filing a report and approving it within the district has to be completed.

Then that is further approved or reviewed up through the full compliance side of the agency and then ultimate signoff comes from the other side of the agency, the ODE.

So there is clearly time still to go.

We don't have any sense of exactly how long that will take.

We will leave that up to the agency.

And they certainly can raise other questions along the way.

Although as of today, there are no new areas of inquiry.

Let me ask you just a marketing question.

Part of what you will want to do once you get to a certain number of implants is to go back to doctors and say, we have these number of events, you know, wherever it's 0, 1, 2, 3, out of say 100,000, half the stents have been implanted since the process change and that compares to what would have been 9 or 10 events per 100,000 previously.

Is that something you will be able to do from a marking standpoint?

How do you go out and get the message that, now we've had 100,000 implants and the rates have been dramatically reduced?

Well, we have been providing through the process of the TAXUS launch specific complaint information, as an example, on no-deflates, and so yes, I think the answer is very clear.

We will -- we have been transparent and we will try to try to be transparent.

We don't expect a zero defect rate.

And of course the mod [ph] data base clearly reveals no deflates with other catheters in this market.

So we we are back to build confidence of a number of complaints out of 100,000 implants is certainly something that certain physicians would be comforted by and we will continue to communicate that throughout.

But we're not looking to necessarily go back and prove anything other than that we continue to make great product.

We're focussed in the near term on communications and the communications over time will definitely include complaint rates as they have up until now.

In the approval last week for the Atlas trial, the Liberte trial, which I thought was a pretty good indication the FDA is comfortable with the TAXUS platform.

Anything unusual in that approval?

Anything different that would be in a normal IDE approval?

No.

Okay.

So everything there was standard as you would expect, no condition of that would be different than we would see normally?

I think it's very safe to say that, and in fact, you know, many of the questions were really quite routine.

Okay.

That's very good.

And then just a couple of others real quick and I'll wrap up.

One, Larry, I understand that the desire to get some more data points here on how the markets can react plus the swap out of the product.

But you did show some pretty strong margins prior to the recall and what that would impact -- how that would impact the numbers.

At this point, relative to thinking about numbers going forward, you are comfortable with us assuming gross margins similar to what you would have shown here in operating margins, maybe a comparable range?

Let me ask Jim to address the gross margin because he's the one who would be -- have the comfort level that really matters.

So Jim.

We're continuing to move very strongly in the plant.

We had this one hiccup, but we know the source of that.

We fixed it some time ago.

And none of the things that we are doing takes yields backwards at all.

We've got rebuild to do here to replace the inventory that we brought back.

And so volumes in the plants are actually running above usage rate at this point.

So that will show up in favorable absorption.

So basically, everything is lined up for good financial performance in the plant.

Thank you very much.

Have a good day.

Thank you.

Then our next question is going to come from the line of Dhulsini De Zoysa from SG Cowen.

Please go ahead.

Good morning.

Paul, thank you.

This has been very thorough.

I was wondering if I could just get a little more clarification on 2 comments you made.

One is that I think you commented as you were talking about the 90,000 units in U.S. inventory, you said that 1 item will be back ordered for a day or 2.

Can you tell us what that is?

And also, you talked about capping the order quantity.

Can you give us just some sense of where that is relative to pre-recall levels?

Yeah, well, first of Al, the one item is not on back order.

It's something that our demand models project might be on a day-by-day back order a couple of weeks from now.

It's totally subject to the final mix of replenishment requests.

So I'm not going to emphasize that because, quite frankly, that is such an unbelievably high service level that it really won't be noticed and I don't want to emphasize that.

In terms of overall inventory levels, we have capped our customers at a limited number of stents per day just through these first couple of weeks to prevent, as we describe it, a run on the bank.

But we had obviously reached through our consignment and customer-owned programs a pretty solid level of inventory in the marketplace.

Our sense, quite frankly, is that it might have been a little bit too high.

We may not see total field inventory levels go exactly back to the same level we had before.

We looked at an intermediate level of 70% of the original consignment and customer-owned levels just to give us a safe guard, so that we could balance safety stock in the distribution centers with customer-owned inventory and ensure that we had both a reasonable amount of inventory in the field, and a comfortable level of safety stock so that we could continue 100% of shipment overnight FedEx delivery and that's basically where we are today and we essentially don't see that changing.

So we have -- really if you look at it from where we are now, the water level, our head is above water and the question is just relatively speaking, how high do we want to get to be very comfortable.

We think we're going to get to a comfortable level within a couple of weeks.

Okay.

And then just one follow up.

Your comments about pricing are quite reassuring.

Does that mean though that as you are bringing new product back in, labs are not demanding price concessions?

And what kind of competitive response were you seeing in labs?

Well, you know, absolutely.

We are clearly distinguishing between run-rate business, normal cap lab negotiations and the replenishment of product.

So this is -- this is the case where physicians are primarily concerned about getting TAXUS back on the shelves and have there been any accounts that have linked the 2?

Perhaps.

But they are so -- let's put it this way, they are so few and far between, I'm not aware of any.

And I'm sorry, your second question?

Just about if you can give us a sense of the competitive response at accounts, what --

I guess I would categorize the response in words and in actions.

In words, the response is aggressive, and in actions, we see basically no change in overall competitive product shipments or any change in product availability.

It's a market that has been constrained by product availability and I think that constraint is unchanged.

Okay.

We've got about 10 or 15 more minutes for the call.

And there's a list of people that are trying to ask questions.

If I could ask each one to limit their questions to one question so we can get through, allow some others to ask some questions.

So next question, please.

Thank you.

Then our next question is going to come from the line of Adam Galeon from CSBF.

Please go ahead.

Close enough.

Paul, you alluded a little while ago about stents per procedure.

I think you mentioned flat for the second half of the year ,I'm assuming that's around 1.55.

Can you just confirm that?

And as part that, do you think we need better reimbursement to get stents per procedure moving north of say 1.6?

The answer is yes, it's between 1.52 and 1.55.

It's kind of too close to refine it either way.

And reimbursement will be important, to change it in any dramatic way, north.

I think reimbursement has to linked ultimately to multi-vessel and multiple stents per case.

So I think a reimbursement change is necessary for a fundamental seed change in stents per case.

Can I just ask one follow up on Atlas.

Given that it's a registry and given that you will be conducting it both in the U.S. and internationally, should it really take until year-end to complete enrollment?

Are you just being conservative on that?

Well, we have done these before and I think our enrollment rates have always been really quite impressive.

We're also realistic in the sense that drug alluding stents availability now does simply make it harder to enroll.

I think we've designed the trial in all ways to enable rapid enrollment, and we'd like it beat those goals, but that's the set of goals that we've established for ourselves and we think that's very doable.

All right.

Let me ask one more time, one question per analyst.

Next question, please.

Thank you.

Our next question is going to from the line of Larry Keusch from Goldman Sachs.

I guess the 1 question, Paul, is, you know, obviously I understand that this is not a zero defect standard that has to be met out there.

But I'm wondering if you can just help us understand if there have been a couple of non-deflates reported last week, which is in the pre-Redical inspection product, why does that not have to be recalled?

And I guess embedded in that question is sort of, you know, what should the rate of non-flation be in this type of product given the broad usage?

Our sense is that the overall rates would fall into the single digit per 100,000 range, which in contrast to any other defect within catheters and any other catheter manufacturer would be best in class, and you have to bear in mind that -- I think I'm aware of every complaint, and some of the complaints that have come in this the past week are -- also include product that was within batches to be recalled, where catheters were used from those batches before the recall was effective on Monday, so you're dealing with some simple lag time in the marketplace conversion to newer product, not necessarily a continuation of complaints from our newly shipped product.

I just want to make that very clear.

We have no defects reported from our newly manufactured product.

Okay.

So theoretically again, given that there's a lag time here, we may see some but again, the key metric is just relative to the new product?

I think it's going to be very clear that this will be one of the last things a cardiologist has to think about going into a percutaneous procedure.

Okay.

Great.

Thanks.

Thank you.

Our next question is going to come from the line of Glenn Novarro from Banc of America Securities.

Please go ahead.

Yes, thanks, guys.

Just wanted to make sure -- maybe you can comment on the level of insurance and reserves that you have, just in case that, you know, some of these deaths and some of these non-deflates result in litigation.

Thanks.

We're self-insured.

Up to how much?

To the limit of self insurance.

I guess to the limit of our balance sheet.

Okay.

But can you put just a dollar number on that, just so that --

We have a $7 billion balance sheet.

Okay.

Good.

Thank you.

Thank you.

Our next question is from the line of Tao Levy from Deutsche Bank.

Please go ahead.

Hey, guys.

I was just wondering, Paul, if you had seen based on the TAXUS recall, any impact on the non-stent business in vascular especially towards the end of the quarter, maybe the beginning of this quarter?

Well, we did see some softness in our non-stent business in the last couple of days, but I think that's entirely an artifact of sales force focus on execution of the recall and our message to our team last week was to get this done and do nothing else.

And I think based on the feedback we received, that was the right message and it's been done exceedingly well.

And as of this morning, we're back out on the offense.

So yeah, we'll have a couple of days of softness, but procedural activity goes on and I don't think non-DES product lines will end up with any aftereffect of the recall.

Thanks.

Okay.

Let's have one more question and then we'll wrap it up for today.

Okay.

Then our final question is going to come from the line of Bob Hopkins from Lehman Brothers.

Please go ahead.

Thanks very much.

Is Dennis still there?

Yes.

Okay.

Great.

Just a question, a regulatory question then.

You know, if we do see a case of a non-deflate coming from new inventory, caused by a -- the weak weld problem, just procedurally, what happens then?

Is that an automatic recall of everything you have or how would that work?

Yeah, I -- it's a tough question to answer because it is such conjecture, I think we would have to take a look at the situation, see if we can determine whether or not it's within the validated rate of the process that we're running right now.

We believe that where we are now, we're in a 5 to 6 Sigma rate and then on top that have we have the Redical inspection.

Could you have a unit that was created with a weak spot in it and have a situation out of that?

You could.

The rate of that would be phenomenally low and it's within the state of the art of the process.

So we have to sit down and evaluate all of those separate equations and determine what the proper approach was and we would certainly do that in conjunction with FDA as part of the process, so, you know, it's hard to tell what we would really do in the end point.

But I don't think an automatic recall is anywhere close to what anybody would be looking for in that kind of situation.

Okay.

Thanks.

Thank you, Dennis.

Thank you all for participating today.

I'll remind you that 4 or 5 weeks down the road we'll be having a conference call for guidance on Q3 and Q4, the second half.

We will put out a press release once we establish the time and date for that.

Thank you very much for tuning in today.

Good morning.

Thank you.

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