Boston Scientific Corp (BSX) 2005 Q4 法說會逐字稿

Thank you for standing by and welcome to the Fourth Quarter and 2005 Year End Boston Scientific Earnings Results Conference.

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

Later there will be an opportunity for your questions and instructions will be given at that time. [OPERATOR INSTRUCTIONS] As a reminder this conference call is being recorded.

I would like to turn the conference over to the Chief Financial Officer, Larry Best.

Please go ahead, Sir.

Good morning and welcome to our call, our year-end call focusing on 2005, the year and the fourth quarter.

With me on the call today is Chief Executive Officer Jim Tobin, our Chief Operating Officer, Paul LaViolette, and our General Counsel Paul Sandman, and we also have Paul Donovan, our Head of Corporate Communications at Boston Scientific, on the call.

We obviously will be making some forward-looking type statements.

Therefore I would like to ask Paul Donovan if you would first read the Safe Harbor clause.

This conference call will contain forward-looking statements including, among other things statements regarding the proposed business combination between Boston Scientific Corporation and Guidant Corporation and the anticipated consequences and benefits of this transaction.

These statements are based on current expectations that are subject to certain risks and uncertainties, many of which are difficult to predict and are beyond the control of Boston Scientific or Guidant.

Relevant risks and uncertainties include those referenced from Boston Scientific's and Guidant's filings with the Securities and Exchange Commission and include general industry conditions in competition, economic conditions such as interest-rate and currency exchange rate fluctuations, technological advances and patents obtained by competitors, challenges inherent in new product development, including regulatory approvals, domestic and foreign health care reforms and government laws and regulations, and trends toward health care cost containment.

Risks and uncertainties related to the proposed transaction include, required regulatory approvals will not be obtained in a timely manner if at all, the proposed transaction will not be consummated, the anticipated benefits of the first transaction will not be realized, and the integration of Guidant’s operations with Boston Scientific will be materially delayed or will be more costly or more difficult than expected.

These risks and uncertainties could cause actual results to differ materially from those expressed in or implied by the forward-looking statements and therefore should be carefully considered.

Neither Boston Scientific nor Guidant assumes any obligation to update any forward-looking statements as a result of new information or future events or developments.

The focus of today's call will be on the year end 2005, a little bit about the fourth quarter, as we exited 2005.

We will attempt to provide you with an update as best we can on the Guidant transaction and all the work that is going into that.

We will also spend a few moments addressing the FDA letter received and also how we are responding to that letter.

Again, to remind you, we have Jim Tobin and Paul LaViolette -- both standing on the phone to discuss all of these things.

At the end of our prepared remarks we will open up for any questions you may have and we will try to answer those questions.

Let me first begin with a review of the year 2005.

We were pretty pleased with the year.

We came in within our guidance pretty much all but at the low range, but it was another year of double-digit growth for Boston Scientific.

It was the first full year of TAXUS and TAXUS was not in the total 12 months of the prior year.

But nevertheless, it was a good solid performance across all of our businesses and I would like to review that with you briefly.

To begin with, I would like to take a look at the worldwide sales by global division.

As you can see our cardiovascular group came in just a tad short of double digit growth at 9%.

Our endosurgery group did see nice double digit growth, 13%, with oncology at 11%, endoscopy at 9%, and urology at 24% growth.

So that, when you add all those divisional growth steps up, you come up with a 10% growth rate before Advanced Bionics.

Advanced Bionics had a very good year, up over 200%.

Their business now ending the year, was just a tad short of $150 million in sales, but growing nicely and in line with our expectations.

Overall for the year on a worldwide basis, we were able to achieve, rounded off, $6.3 billion in sales and that was relative to the prior year, $5.6 billion in sales or a 12% increase in sales overall on a (sic) as reported basis, 11% growth on a constant currency basis.

Moving on to the next slide, worldwide sales by geography, again, nice growth in all geographies except for Japan where we are waiting our entrance into the drug-eluting stent market there.

Our domestic business came in at $3.8 - 3.9 billion compared to $3.5 billion in the prior year, up a solid 10%.

When we look at our international business we came in at just over $2.4 billion.

And that compares to $2.1 billion in the prior year, up 15% on an as reported basis, 13% on a constant currency basis.

And I remind you on the international business that is pretty much apples to apples, TAXUS in both years.

So nice, solid, double digit growth.

A lot of strength in Europe and in our intercontinental markets.

Moving on to the DES market, which is big for Boston Scientific, if you look at the total DES revenue for the year, rounded off, around $2.6 billion in TAXUS sales.

I think that is probably one of the largest if not the largest single product line in Med Tech today in terms of devices.

That compares to $2.6 billion compared to the prior year of $2.1 --2.2 billion, but up 19% year over year.

The apples and oranges there is the first quarter of '05, I'm sorry, first quarter of '04, we were not in the U.S. market so there's a little of apples and oranges there.

Overall the U.S. business grew to $1.7 billion, $1.8 billion sales base for TAXUS in 2005, that compared to about $1.6 billion in the prior year, up 12%.

As most of you know most of that growth came from the fact that we had a full year TAXUS and in 2004, we only had a partial first quarter.

The other side of that I will get to in a moment is in the second half of 2005 we did see some share loss and we were not able to sustain a 50% market share.

That reflected in the second half of the fourth quarter and I will get to that in a moment.

The really good news, though, on DES, both Europe and the intercontinental markets are apples to apples, and for TAXUS DES, Europe was up a strong 38% year over year.

Intercontinental markets for TAXUS was up 38% also.

So almost 40% growth in Europe and IC markets for TAXUS.

That is obviously in light of some new entrants and competition in those markets.

Let's go to the sales grid and I think it tells the story of 2005 and why we feel pretty good about it, even though we came in at the low end of our range.

Starting off with the $5.6 billion in sales in 2004, if you add to that a strong showing for Advanced Bionics for the first full year we've had Advanced Bionics.

They contributed a net increment of over $100 million in sales.

Our Endosurgery Group contributed an increment of $140 million in sales.

Our U.S.

DES contribution increment of almost $200 million in sales and our OUS TAXUS contribution over $200 million in sales, to get us up to just shy of $6.3 billion.

So some real nice contributions across the board and we are very pleased to see that.

If you look at the financial statements or the income statements, on the next slide, noteworthy is the following.

Our gross margin for 2005 came in at 78% and that was actually an increase over 77% in the prior year.

Of course, that's attributed to the strong sales of TAXUS.

We grew the top line 12%.

We did during the year increase our SG&A spend and our R&D spend.

SG&A, we continue to add some sales reps and other types of SG&A cost.

The R&D side, if you recall, we actually acquired a number of companies early and to invest more in the R&D line for those entities and increased the R&D line to make sure our pipeline was going to be delivered timely.

Overall, operating income came in at 33% of sales, a strong showing on the operating income line.

And on the net income line, or net margin line, we came in at 24% of sales.

So overall, 2005 was a record year for Boston Scientific, a record year in that we had gross margins of 78%, a record year in that we had operating income of 33% and a record year in terms of $1.5 billion at the net income line, or 24% net margin, up 12% also.

We had topline growth of 12% and EPS growth of 12%.

Moving on to the reconciliation to the as reported amount.

Pretty simple.

The two biggest special charges in 2005, one related to our settlement with Medinol and the other one had to do with the acquisitions that we consummated during 2005 and the purchase R&D charge of $276 million.

That slide reconciles you from $1.82 that we showed for the year to an as reported $0.75 for the year, after special charges.

Let's move on to the fourth quarter.

In the fourth quarter, we saw -- in the second half of 2005, we did see a reduction in share in TAXUS, really stemming off the PCR conference earlier in May, we did lose some share to J&J.

We thought we could retain something closer to 50% market share.

We ended up 50% plus, but that difference did really not allow us to grow the top line in the fourth quarter, we were flattish, $1.540 billion to $1.6 billion in a prior year, declining 4%.

Our gross margin came in nice, however, at 78%, down from the prior year of 79%.

That all attributed to the reduction in TAXUS.

SG&A went up.

We continue to spend aggressively on our sales and marketing effort, adding sales reps and also on the R&D line for the same reasons I just outlined. 4% down on the top line in the quarter, we increased SG&A 8% and R&D 10%, and that pretty much tells the story.

We ended up, nevertheless, with a solid, almost 31% operating income.

And on the net income line, 22% net margin, $0.41 a share for the quarter.

If you look at the bridge, it kind of tells the whole story.

While we saw good growth, or decent growth outside the United States, Advanced Bionics contributed $22 million incrementally in the fourth quarter, Endosurgery, 29.

The biggest reconciling factor is that U.S.

DES number.

While we did very well outside the United States, in the U.S. we did give up some share and it was roughly $100 million in TAXUS sales at very high margins.

That’s the primary reconciling factor from the 1.6 billion in the prior year to 1.540 billion.

That is an overview of the 2005 year and fourth quarter.

Let me turn it over to Jim Tobin for his perspective on the year and how we exited the year, going into 2006.

Very briefly I think overall it was a good year, it was almost two different years, though.

The first half we had a lot more momentum than we did in the second half.

It was about $1.00 of earnings in the first half and more like $0.80 in the back half.

However, as we emerged December, it seemed like we were, and Paul will talk more about this, but it seemed like we were gaining momentum again and I think that bodes well for the momentum we have coming into '06.

My point of view basically boils down to we took J&J's best shot and have withstood that and are seeing our results look very positive moving into '06.

Glad to have '05 behind us and let's move on.

Paul, do you want to add to it how we exited the year going into 2006?

Yes, absolutely, I think we were pretty clear, obviously, with a two horse race in the United States where the market shares fell out in the fourth quarter very solidly at 54%.

We, I think, maintained a little upward momentum, measurable in December to perhaps add a point to that and certainly through the early part of February, so with a month clearly behind us that has been maintained.

I would say our team -- actually we just finished a national sales meeting for the cardiology team.

It is highly motivated and continues to have a sense of momentum.

I think that is bolstered by what they experience every day, which is the real world performance of our device continues to win out in the physician's minds over some of the smaller, skewed trials that were popular to discuss in the first half of 2005.

Average selling prices are very steady, penetration is steady at 88%, and we have seen a little uptick in device utilization per procedure.

Don't know of that is a trend yet.

Overall the factors that contribute to the market have been reasonably steady, not growing in penetration as had been the case throughout 2004, but continuing and that very high 80% level with expectation of increase when incremental sizes are approved at the end of the size matrix.

And when you combine the strength of the market with our rejuvenated market position and some share gains, we feel very strongly about our current position.

And then, obviously, our pipeline for the future we think bodes well for sustained leadership in the U.S.

Thanks Paul.

With that, let us turn to the Guidant transaction and attempt to give you a bit of an update.

We are very excited about this transaction.

It is truly a transforming transaction for Boston Scientific.

We look forward to kind of re-looking at the future post the closing of this transaction with enormous excitement and optimism.

We will plan on having an analyst meeting post closing, probably a month to two months after the closing of Guidant, and we will at that time try to do the best we can to give you a good outlook, more specific outlook, on the remainder of ‘06, post closing '07 and, '08 and maybe perhaps even beyond.

We will be doing that probably in the spring.

For a moment the key factors that we are working on, we’re working very hard to close the Guidant transaction in a timely fashion.

Some of the important areas are the SEC review and filing, the FTC exercise and of course the shareholders meetings.

Let me just say we made some good progress yesterday.

Two important events -- one early in the morning, we filed our Hart-Scott-Rodino filing.

Paul Sandman will talk about that in a moment.

And the FTC exercise.

We also, later in the afternoon yesterday, filed our S-4 with the SEC, so that is filed and hopefully beginning to be reviewed down at the SEC.

On that note, we have just completed about a month ago a review of our 10-K and quarterly statements from the SEC.

So we have already been reviewed, as you will, and we are pretty much up-to-date with the SEC.

So we're hoping that the S-4 gets reviewed in a very timely fashion.

With regards to the SEC, EU, and the scheduling of shareholder meetings, let me turn it over to Paul Sandman our General Counsel who is following this.

We did submit our U.S. antitrust filing yesterday.

We have had, as we have said very productive conversations with the FTC staff.

Those are ongoing.

We look forward to continuing to work with them to obtain approval for the transaction.

Throughout this period we have also been in close discussions with the staff of the European Commission.

We have shared draft filings with them and we expect to file with the European Commission shortly.

Based on the current status and the discussions we have had so far, we believe we will secure the necessary approvals in the U.S. and in Europe in time to close by the end of Q1.

We submitted our Securities filing yesterday.

We will work closely with the SEC staff to finalize definitive proxy materials.

Those will then be mailed to the shareholders of both Boston Scientific and Guidant ahead of shareholder meetings.

We plan to hold both of those shareholder meetings by the end of March.

Thank you, Paul.

With regards to what has been occurring post our announcement and agreement with Guidant, let me turn it over to Jim Tobin and Paul LaViolette to talk a little bit about some of the planning integration and some of the meetings we have had that we can talk about.

We have been busy.

The bottom line is the integration close process is moving forward expeditiously.

There is great cooperation on both sides.

I think that right now, the focus is on figuring out which assets, as we go forward, which assets and people, will be Boston Scientific, which will be Abbott, and making sure that we satisfy everybody in that regard and then move expeditiously towards a close.

The actual integration planning per se will become more evident once we have satisfied ourselves on the first part of this thing.

We remain very optimistic about the possibilities of combining these businesses.

We like what we see.

I was out there last week;

I will be out there again this week, actually tonight.

The bottom line is the more we see the better we like it and the more opportunity we think we have.

I guess I would summarize by saying so far so good.

Just a couple extra comments.

Jim and I have been heading in multiple and different directions to cover various locations within Guidant and to also help orchestrate various elements of the Boston Scientific initiative.

I think the best analogy here is our due diligence process, which as everyone is aware, went in a very focused way and executed, covered a lot of ground in a very short amount of time.

We did that through intense focus on critical priorities, using teams that were very coordinated and obviously were divided to sort of conquer the tasks that were at hand.

I think with Guidant and, also, importantly, with Abbott, we have established very clear decision-making processes, we have clean lines of accountability within Boston Scientific.

So it is absolutely crystal clear who within Boston Scientific is focused on the transaction, on the close and then most importantly the remainder being exclusively focused on running Boston Scientific.

We are very focused on those critical events for the close and those events that will assure business continuity immediately upon the transaction and then the events thereafter will begin to focus on adding value through the combination.

We are very focused on people, on key talent retention, planning and, importantly, clarity for individuals for whom their outcome is not yet self-evident in part because of the divestiture plans.

So 10 days post agreement, I think we’ve made excellent progress and we have all the plans in place to meet our objectives by the end of the first quarter.

Echoing Jim's qualitative assessment of how things are going, first of all, within Boston Scientific, the enthusiasm for this partnership is exceptionally high, and certainly through our myriad interactions with the Guidant teams at all levels, multiple locations around the world, there is very strong fit and their enthusiasm matches ours.

We're certainly impressed by the team and the strength of the business, which I think continues to remain solid and on or slightly ahead of our estimates as they look to regain momentum in the marketplace and obviously the DES progress including the CE Mark on XIENCE reinforces our strategy and we're beginning to plan how to launch a second drug-eluting stent platform outside the United States.

So that is very tangible evidence of how this might create value.

So, it is going very well.

Certainly as well or better than we had planned and expected.

Considering we have only been involved in this process for a little less than two weeks we are pleased with what has taken place so far.

I’ll just add on the Abbott side, I’ve been in contact with the team there, and they are likewise doing the same types of things that we are doing.

They've had meetings with upper management; they are looking at the global BI business and how to integrate it with Abbott.

There's a lot of enthusiasm for this transaction at the Abbott base.

So I think things are moving along on that front also.

Let me turn now, to the S-4 filing, more specifically the pro forma information that is reflected in there and let me just review it with you.

Go to the first slide on the pro forma revenue growth.

This represents the low end of our range moving from $10 billion in 2007 which will be the first year -- first full year of the combined entity.

We hope to achieve $10 million in sales or better moving nicely over the next five years to 2011, with something in the range of a 12% compound annual growth rate and with good execution we might even be able to overachieve this particular slide.

At least, that is our goal.

Moving to the EPS side, let me try to explain where we are going here.

We are adopting, beginning with the first quarter of 2006 and then post acquisition combination with Guidant, we’ll be reflecting both GAAP EPS numbers and we will also be providing adjusted EPS, as I will define in a few moments.

When you look at the numbers, first blush, they look not too different than the pro forma numbers we presented when we made our initial offer for Guidant at $72 a share.

That is more of a coincidence than anything else.

The difference and the why behind that is pretty much as follows.

About the time of our agreement, our most recent agreement with Guidant, and our $80 a share bid, we were very pleased that the U.S. government passed legislation or law that focuses on reorganization and tax -- reorganizations in connection with M&A transactions.

And historically there has been a gray area, where, when you acquire a company, there was a belief that -- an expectation --that you would immediately have to pay tax on the deferred earnings outside the United States.

So when we put the original pro forma together, we were following that historical guidance and we fully taxed the unremitted earnings, if you will, from outside the United States for Guidant kind of suggesting we would have to pay that to the federal government.

Just by coincidence, but a good coincidence, a revision to the law actually got passed, clarifying what the IRS position is.

And the position now has been clarified that you do not have to pay tax on those unremitted earnings.

And therefore what that meant to this transaction is approximately $900 million in tax that will not have to be borrowed or paid.

As a result, we found ourselves with $900 million of additional cash flow available to us and therefore it means that we will borrow $900 million less to consummate this transaction and it also means throughout the next five plus years, we will not have the interest burden on that $900 million of outstanding borrowings and therefore our cash EPS or our adjusted EPS number actually will be better.

Great news on that front.

Also in connection with our looking at the tax status of the combined entity, we now, expect to be able to achieve an effective tax rate over the next five years of 23%.

That’s down from 24%.

That's also reflected in the five-year pro forma on this slide.

And thirdly we added to the definition of adjusted EPS -- we've taken out non-cash stock compensation.

That is the basis upon which we will be reporting adjusted EPS.

On the following slide is the definition of adjusted EPS that we will be using moving forward.

You start with GAAP EPS, excluding the following amounts, any effective purchase price allocation on assets, meaning write-off of in-process research and development will not be in the EPS number.

Amortization of intangibles, the affect of step up our assets to fair market value which is one time when you combine.

Merger related costs will be excluded.

Integration, restructuring charges, costs associated with Guidant's rather unusual ongoing litigation as a result recent events, stock compensation and any other special non-operating costs that we will confront going forward.

That is the basis, moving to the next slide, which is a replay of the prior slide on pro forma EPS.

Bottom line is we think we can, on a $10 billion sales base in 2007, generate hopefully at the low end of the range, and this is our low end of the range as we speak today, $1.52 per share.

And we can grow that 20% over the next 60 months.

If all goes well and we all execute, we should be able to show top line growth of 12% over the next five years and 20% on adjusted EPS growth over the next five years on a compound annual growth rate.

That at least, represents our goals as we move into this transaction and we will keep you up-to-date as we move forward.

It goes without saying on the next slide that the combined operations will generate very handsome cash flow that will allow for a deleveraging on the P&L, otherwise rapid repayment of the debt that we will undertake in the combination and therefore rapid take out of the interest burden which will show nice growth also on the EPS line.

This reflects a compounded annual growth and operating cash flow of 18% over the five-year horizon.

So very strong cash flow.

We're hoping to overachieve on this so we can pay down the debt more rapidly, but we will have to wait and see.

Then if you project out the pro forma, most of you know the slide I love to present, which is the 25-year slide of Boston Scientific, representing the strategic goals of the company over the past decade plus.

When you add the combination and reflect in ’06, and so it was combined at January 1st, 2006, which is obviously not the case.

But if -- our estimate that if we had been able to combine Guidant with Boston Scientific at the beginning of the year we would have about $8.8 billion, almost $9 billion combined sales.

Most likely we will have closer to nine months of that as opposed to 12.

Then the next year, you see our five years of pro forma that I just outlined.

Even if you would discount, that graph’s in the gold 15%, 20%, it is still a very handsome growth trajectory with a very diversified premier position in the richest market in medical devices.

That is what is reflected in the S-4.

That is our current thinking.

That represents our goals as we sit here today.

Before we get to questions and answers session, maybe I would ask Jim Tobin if he could address the recent FDA letter that we received and perhaps a bit of an overview of the meeting he had with the FDA along with Paul LaViolette on Friday.

Let me bring everybody up to speed on this.

We got the warning letter January 26, fortunately just after we came to terms with Guidant.

The warning letter, although it was nothing in terms of findings, actually knew in the warning letter, what the message there was that we were not moving fast enough, we were not moving deeply enough and they were wondering if we really got it in terms of how fundamental a change they wanted to see in the way we manage quality in the company.

A group of us went down last Friday to sit with the senior folks at the FDA to discuss all of this and to make sure we understood where they were coming from and what we were intending to do would satisfy them.

I would characterize the meeting as being frank and open and productive and I think we covered a lot of ground.

We had been working on the biggest of the issues that they identified, which was the way we handle complaints.

We have been working on that -- actually we started about 2.5 years ago, but the first try didn't work out.

So as it turns out we just introduced our second attempt at a global complaint system in December which gives us the foundation to be able to finally, I think, address their concerns on how we handle complaints in a much better fashion.

We’ve rolled that out across the company except for Advanced Bionics.

It isn't that we just introduced it.

We have introduced it and rolled it out at this point, so we've got the foundation in place.

There were no real disagreements between -- in other words, we agree with the FDA's point of view as to where we stand on these things, and it is a matter of us getting our act together and stepping it up and doing the things necessary to show them that we do get it, and we intend to improve our performance in this area, and to basically take ourselves to a level that will allow us to be viewed by them as being more than adequate, being a leader in this area.

The ball is in our court.

We think that because we have been working on these things for a while now, we can finish what we have been working on in the next few months and test drive these things and make sure they're working as advertised and then the FDA is committed to come back in on a timely basis to verify that we have done what we said we would do and that we're moving forward in a new manner.

The thing I would emphasize is while these are systems kind of issues and they ultimately lead to broader kinds of interpretation, the products themselves are not at issue here.

The FDA is not alleging that anything that we are producing today is inadequate in any fashion.

They have agreed that they will continue to process the filings that we have done and will be doing.

However I think it would be optimistic of us to say we really expect any of these things will get approved until we have satisfied them that we have changed direction here and corrected these problems.

They are going to look at it on a case-by-case basis and there may be some things that they will be willing to let come through, but for the most part I don't think we expect any approvals in the short term here.

That is basically where we stand.

It is sort of a good news / bad news kind of thing.

It is an embarrassment to get a letter of this nature.

On the other hand we understand the message and we understand what we have to do in order to resolve these things and we think we can do it on a timely basis, in a very thorough manner, and we believe our relationship with the FDA is such that if we hold up our end, they will acknowledge that and we can move forward.

That is where we are.

So it is sort of a good news / bad news kind a thing, but I am optimistic that we will be able to get through this in a timely fashion.

Let me now, turn it over to the moderator of the call and we will open it up for any questions you might have.

[OPERATOR INSTRUCTIONS] Our first question is from Rick Wise from Bear Stearns.

Please go ahead.

Good morning.

A couple questions.

Looking at the drug-eluting stent momentum you talked about, Paul and Larry, coming out of December, it seems you have two potential hurdles blocking that momentum as we look at the first half -- or we look at 2006.

Obviously, one is FDA resolution.

How quickly, Jim, do you think you can get resolved and what are the implications for Liberte launch?

And two, Paul, you could help us, share with us your updated thoughts on J&J capacity expansion?

They seem to think they are going to be adding a line every month for the next four or five months, more sizes, potentially expanded dating.

Can you give us your perspective on all that?

Maybe I will just go and Jim, chime in, where necessary or where you want to add more.

First of all the capacity question is one that has been asked and answered, I think, many, many times.

They have routinely added capacity, they have routinely stated that they have more than the capacity they are using to serve the market.

I have met with many, many physicians in the last couple of months who would tell me that they really don't feel supply constrained.

There are some accounts that probably don't have as much liberal access to the product as they might wish.

Oftentimes that is because of contracting stances or inability to agree on pricing, so the product is more withheld from those accounts than not technically available by capacity.

There are other parts as those individual accounts would protest that they don't have enough.

There are other accounts that feel as if they are more than amply supplied.

So my sense is that while there may be a few constraints, J&J essentially has what they need to service the business that they have.

Certainly our share today, if it is stable, if it is growing slightly, is not really affected by capacity.

Obviously, we have two suppliers in the drug-eluting stent marketplace that have warning letters in place.

Ours is general, theirs is specific.

They, I believe have said, it will be some number of months yet before they can invite FDA back into their facility.

So I think issues such as dating, issues related to size, matrix expansion for either party, which of course are dependent upon PMA supplements, can't move forward until warning letter resolution.

In some ways the race is now more about quality systems than about individual achievements in DES.

From our perspective, as you are aware, the Office of Device Evaluation continues to move forward on all device reviews up to the point where the approval is then pending, irrespective of the warning letter.

Then the warning letter holds up the approval.

For new submissions such as Liberte, we would certainly hope to have resolved our warning letter issues before Liberte would actually reach the end of its planned time review in FDA.

The only thing that would be pending, perhaps, prior to that, more on the mid-year timeline would be our size matrix expansion to 2.25 and 4.0-millimeter.

And as I’ve mentioned, J&J is essentially pending with the same.

You have both companies working diligently to resolve warning letter issues over the next quarter or two and both likely to get size approval in roughly the same time frame I would say, somewhere in the middle of the year.

And just as a follow-up, maybe just in the briefest of terms Larry, for your key assumptions on the guidance you have laid out here, particularly as it relates to Guidant’s market share and eventual rebound.

Can you frame that at all for us?

Yes, I think that the market share expectations that we have reflected are conservative.

I don't have them in front of me, unfortunately, because I’m at a different location.

But the assumptions we are using for our low range are substantially below what the management of Guidant believes they can achieve.

I think that at the high of the range, we are expecting, I think, four or five years out to be able to achieve, for example, 32% market share when they have been much higher than that, historically.

It is a very conservative market share CRM measure that we have reflected in the pro forma amounts.

I think I have -- back in Natick -- I am on the West Coast.

But in Natick, I think I have a colleague, Janet Kelly.

Perhaps -- do you have that in front of you, Janet?

The assumptions in the pro forma?

Not with me, but I can go get it.

Why don't we come back to that, Rick, and we’ll give you some idea of the kind of assumptions that are in the pro formas.

I think you will agree that they're very conservative.

Thank you very much.

Next question is from the line of Dhulsini De Zoysa from SG Cowen.

Please go ahead.

Good morning.

Larry, I guess this is for you.

Could you help us?

Looking at the pro forma numbers that you provided in our filing last night, the greatest variance to our pro forma model really is in '08.

And I appreciate that the unremitted earnings, the tax difference lowers your interest burden.

Can you give us some insight into your assumptions for debt levels?

Should we be expecting a stairstep off, particularly in '08?

In terms of debt reduction?

Yes.

Milan, do you have that there in front of you?

Yes, it sounds different than what we showed before.

We start with a gross debt of about $10 billion at closing and then we're looking into repay that within next 60 or so months.

In ’08, what do you have as the outstanding debt number?

Do you have that with you?

It is about $5.4 billion.

That right there explains the difference -- it’s a little bit more aggressive than we had modeled.

I will tell you, our plan is to be more aggressive on the debt repayments.

We are hoping to surprise on the paydown of debt.

We will just have to wait and see.

Our intent is even more aggressive than that on the paydown of the debt.

We are going to post-transaction, the executive team at Boston Scientific will really take a hard look at the next 36 months, with a particular focus on cash flow.

And for example CapEx, what is critical, what is not, etcetera, etcetera.

We will do everything we can to pay down more debt than we have actually scheduled in the first 36 months.

I think you will be seeing that.

I think we will have a pretty stringent process.

Keep in mind, we have done this before in 1998.

We acquired Schneider for $2.1 billion, as a much smaller company.

We went into debt, $2.8 billion.

In the first 24 months, I think we paid $1.3 billion in debt down, far more aggressively than what we had laid out for the street then.

I expect we will be the same here.

Jim, if you could just maybe provide a little bit of color.

You said that you have already implemented the global complaint system.

Can you describe for us the real difference between the new complaint system and the previous system that gives you confidence that this time you have got it right and how will you know you have satisfied the FDA?

The situation with our complaint system or systems, I asked the question a few months before we were ready to launch TAXUS about whether we can handle the volume of complaints that we were logically expecting to come from the introduction of a very successful product like TAXUS, and the answer I got was no.

We had 23 different complaint systems at that point, because nobody had ever gotten around to combining them, as we went through all these acquisitions.

The idea was that we would get a 24th system that we would use just for TAXUS and then roll that out across all of our various locations.

That TAXUS system would become the system.

What happened was that that system was not really scalable across.

So while it worked okay for TAXUS it really didn't do the job for the rest of the company.

And then they ran into financial difficulty and basically blew up on us.

We were back to square one.

We went to a different vendor, different system.

That is done.

We know that works because it is working.

We're not talking about what we're going to do.

We did that.

We are just beginning now, to get the first data out of the system.

The issue is how do you collect this stuff and then what do you do with it, once you have got it?

I think how we analyze complaints, how we trend, what kinds of triggers we use, how we handle one off, unexpected kinds of things versus normal complaints that need to be kept below certain thresholds, how you set those thresholds, who is looking at the data and how you do it, what do you do as a result of the data, all those feedback loops that -- signals that you get from complaints.

That is the real key to the thing.

You have got to have the data.

Now, we are in position to get the data.

Then, the question is what do you learn from that data and how do you handle what you learned.

That is the part we're working with right now.

The bottom line is we made a false start here.

We think that we are in much better shape now, and we can move forward with this thing.

And the agency, I think -- this is not rocket science.

Lots of people handle lots of complaints.

We need to figure out how to do that on an expeditious basis and we can.

Just to help me get my arms around this, do you have a follow-up time line with the FDA that you reached maybe at the Friday meeting so that you will know you have satisfied the FDA within a certain amount of time?

We told them we would complete our end of this within a matter of months and what I am thinking about there, three to four months.

I would expect that by May, June, we should be in a position to look the FDA in the eye and say we think we have conquered this problem, this problem, and this problem.

We want you to come back and look at our facilities.

They have committed to schedule those re-inspections on a timely basis.

But realistically, they have got a lot of other things to do.

So I wouldn't expect to see them back in our plants until this summer, maybe towards the end of the summer.

Because there are a number of places they will want to go.

They will want to go to the places they have been and they are going to want to go to places where they haven't been to make sure the fixes we put in place are truly system-wide.

It will take them, I think, until the end of the summer or early fall to satisfy themselves.

But TAXUS Liberte is not really scheduled to pop out until something like October anyway.

So I think by then, we will have made the fixes and they will have verified the fixes.

That is really helpful.

Thank you very much.

Larry, before you go on to the next question, do you want me to answer the CRM market share?

Sure.

In the low range.

In the low range, in terms of market share, we go from 22% in ‘07 to roughly 33% in 2011 worldwide.

Thank you.

Next question?

And it comes from Mike Weinstein from J.P. Morgan.

Good morning, thank you for taking my questions.

Maybe I could just focus on Guidant.

But I did want to just clear up.

Jim, your response to Dhulsini's question, about the facility re-inspections.

How many facilities do you think the FDA will have to go to?

I don't know.

We haven't been given a specific number, but it wouldn't surprise me if they didn't want to see five or six different facilities of our more or less 20 that are involved.

That is something that we will take some time to do.

That is very reasonable.

Let me move on to what I was originally going to ask.

I think we all understand the strategic rationale for why you want to acquire CRM business.

I think that is fairly obvious to everybody.

I think where the market has struggled to a degree is the financial basis for the transaction.

I don't think, at this point, I have heard the Company publicly comment on its expected returns from this transaction.

I was hoping you could shed some light on that.

I was also hoping since we haven't heard post the revised terms and the confirmation of the transaction, when do you expect this transaction to actually turn accretive to earnings?

That me try to take that.

The transaction is driven -- it’s something very simple.

What is good for our shareholders over the long term?

As you know, roughly 30% of Boston Scientific is owned by two individuals at separate ends of the building in Natick.

When we look at shareholder value and we look at long term, which has always been our perspective, you look at the diversification of the Company, the risk profile of the Company, and that has something to do with creation of shareholder value over the long term.

We have done an outstanding job of leading -- achieving leadership in one of the largest markets, called drug-eluting stents.

In fact, with our performance in 2004, during some parts of the year, at close to 70% market share and a somewhat highly-penetrated market, we saw a marked reduction in shareholder value because of the lack of diversification.

It had nothing to do -- very well to do -- with our performance.

In fact, our performance -- as you recall, in 2004, we were number one on Barron's 500.

Our performance was at a very high altitude.

But we couldn't argue with the statement that we became very dependent on one technology.

That obviously inhibited us from growing shareholder value.

In fact shareholder value as you obviously know went south on us.

So it is clear to us, the management team and our shareholders, that this reliance on one product is not a good thing.

It increases our risk profile and it therefore has an impact on how investors perceive us.

This transaction is driven by the value of diversification and the value of being fundamental in highly underpenetrated markets that will grow for a decade plus.

That is how we approach the transaction, that is how we came to the conclusion as to what we are willing to invest in the transaction, and we think, with regards to shareholder returns and value, the complexion of Boston Scientific will be much different post this transaction than before.

Our shareholders will have a much better security in terms of what they hold in investing in Boston Scientific, far less of a risk profile and a much higher confidence level at five years plus -- 2009, 2010, on to 2014, 2015, a much higher level of confidence that we will be able to achieve double-digit growth, that is diversified.

That simply is what drove this transaction.

It is not about some MBA, ROI calculation for the next 12 months.

It has taken a long-term perspective with regards to leadership, and I underscore, leadership, in medical devices.

Keep in mind, post this transaction we expect to have a leadership position in cardiovascular medicine.

We’ll, probably in ‘07, be very close with Medtronic top line sales, in this space, which is the richest space in med-tech.

We fully expect that as we move into ‘09, 2010, we will be the largest footprint in cardiovascular medicine with handsome margins, handsome growth rate and handsome return to our shareholders in terms of value creation.

Larry, I understand your argument is your strategic argument, your argument that -- you're basically saying at the end of the day, you think that an investment in the combined companies over the next five years would be a better investment than Boston Scientific without Guidant, which I understand.

But I guess what I am still looking for is, you obviously have that that desire to diversify the company and get into the CRM business is balanced by the dilution to existing shareholders.

So I’d still try to make sure I understand the financial basis on which we said okay at $80 a share for Guidant, it is still on this basis a worthwhile transaction, based on this return expectation, based on our expectation that at this point in time, this transaction will be accretive to our shareholders.

We think that this transaction will be accretive to our shareholders sooner as opposed to later.

When you talk about dilution, you have to talk about dilutive to what?

The better you do, the more dilutive it is.

If you look at our presentation, we use Wall Street estimates that are much different than our internal estimates.

If you compare it to our internal estimates you would say well gee, this is a dilutive transaction.

If we do better than our internal estimates you would say it is a really dilutive transaction.

If you refer to Wall Street estimates, where there is what we think is a substantial disconnect, it is not that dilutive.

In fact, we think we can make it accretive in a much shorter period of time.

And we plan to do that. -----Audit ended at this point, per 1-hour audio guide This idea of dilution, accretion, has everything to do with what you are comparing it to and what period you are comparing it to and you cannot look at the risk profile and the value of diversification in creating shareholder value.

Let me follow up with one separate question.

The meeting so far with Guidant's CRM management, who from Guidant will join Boston Scientific's executive committee and who have you gotten assurances from that they'll be on past some reasonable date.

That discussion will be held after we close this transaction.

Those sorts of issues are being discussed, will be discussed.

Safe to say that we admire Guidant's CRM business and will admire the people we have met due to the due diligence and we have been listening very carefully to the Guidant folks as to what makes the most sense to achieve leadership in the CRM business.

Thank you.

Next question is from Thom Gunderson from Piper Jaffray.

Please go ahead.

Quick questions, Jim, the meeting with the FDA, was there any talk of Guidant and anything you might have to do with this corporate warning letter, assuming they are finishing up at the end of the year and you will close the deal before the end of the year, before the second quarter.

Was there any subjective discussion and to you think they will want to inspect Arden Hills as part of the warning letter by the time we get to September?

The way the Agency has approached these things in the past, that is all we have to go on, the warning letter we received applies to us and they are going to want to look at those facilities that are under that quality system.

Guidant has its own warning letter that it needs to worry about and they're taking steps there, much aligned with what we are doing.

But I think that the expectation would be the Guidant's morning that would be dealt with in the Guidant sphere.

Advanced bionics has a warning letter they got as a result of an inspection within the first 90 days after we owned them.

That is being handled pretty much independently from the rest of the Boston Scientific issues.

There are really three separate tracks going on here.

The Agency is managing as if they were totally separate ran the than one big company.

Over time, I would expect, they and I would expect the same quality system would be applied to all of the aspects of Boston Scientific.

But they realize that it takes awhile for that culture to permeate.

They tend to manage it on separate tracks in the short term.

Thanks.

Larry, you were talking about more aggressive debt payback than what you have outlined on the low side.

But you also talked in the past about hundreds of private and public investments and billions of dollars.

Is it fair to say those investments have been curtailed or stopped and one step further and to you become a seller rather than a buyer in the near term to pay off debt?

That is a pretty good summary actually.

We are going to be looking at all of those.

As you know, we have run rate of investments in $400 million range.

In our models that are in the pro formas, there is the base assumption, 250 to $300 million per year spent on these investments that we tend to deal with.

I fully expect that we are going to lean toward conservatism in the next 24 months and basically shut a lot of that spend down.

I am hoping, my own personal goal is to compose to the team that we only invest in the next 44 months in areas that we think are very critical and timely.

The difference in the assumptions in the pro forma, I am hoping we can squeeze out another 250 to $500 million over the next 36 months, pay down that debt.

In addition I expect some asset sales of assets that are not strategic, that are not in the assumptions.

That is why I am bullish on being able to pay down the debt at a faster pace than we outlined in the pro forma.

Last question.

Paul, in your prepared comments, small uptick in stents per procedure, when did that start to and is there anything you can attribute that to?

It started in October.

It is very, sort of volatile graph, but it's because we're looking at stents per case by two decimal places.

You are going from 1.46 to 1.58.

That is a pretty significant increase across 1 million interventions a year.

If you look at the summer, we bottomed out.

This is a market number, not a Boston Scientific number, at below 1.5.

That has steadily ticked up across 1.5, across 1.53, up to 1.58 which is a number we have not seen, meaning previously.

That is a high.

I just think it is the function of incremental complexity, plain and simple.

It is not a megatrend yet.

We need several more months of data before we can confirm that there is something real here, but it is a positive sign, that seems to have continued for a while.

It would be more impressive had it not started from such a low number.

We have seen averages of 1.52, 1.53 for extended periods of time.

The fact that it was below 1.5 and then upticked beyond that is a healthy sign but not explosive growth.

The fact that it is well above 1.55 is a positive sign that we hope to continue.

It is not a megatrend, just a little bit of incremental complexity and if it continues a couple more months we will have something and we will continue to update you on that.

Thank you.

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

Paul, I was wondering if you could update us on the pipeline products that are supposed to be going into clinical trials, I guess the first half of the year.

Does the warning letter impact any of those from entering the clinic?

I am thinking about the disposable endoscope, for example.

And also since we have counsel on the line I was wondering if you could update us on any of the upcoming stent trial dates in the U.S. and Europe that we should be keeping an eye out for.

The nearest term pipeline event is first human use of innovations, that continues to be on track for next month if all goes well.

It is a tremendously complex system and we have a lot of final checks to go through.

It is like going through a rocket launch with a countdown, but all of the work we have done on that has been extremely impressive of late and we are very enthusiastic about that.

That is a class two device and would not be subject to the warning letter implications specifically.

The next one on track is Carotid.

Carotid will be, we think, subject to the warning letter implications.

It is essentially finally reviewed at ODE and pending approval so it is safe to say we will definitely see that slip.

We will work with the FDA on whether there is any leeway there after we have put our responses together and created an argument for whether or not Carotid should not be held up.

But given that that approval was imminent we can certainly say that that will be impacted and if we just slip it out a quarter or so, the market is emerging.

We don't have high sales in our plans, so it is not a material event for Boston Scientific, but I think it's safe to say that from a market perspective we can probably expect to see that somewhere closer to the summer time rather than early spring.

The other two big programs, obviously, are Liberte derived.

One is Liberte Japan, which is one of our biggest programs for 2007.

That is very much on track with the December 22nd, PMDA submission and review ongoing.

We are expecting a Q1 approval there. s we previously discussed, TAXUS Liberte U.S., which continues to move on, there is no way to gauge today whether that time line will be impacted.

But if you look at the timeline that Jim articulated related to this overall warning letter resolution and the proposed track for TAXUS Liberte they, they should not intersect.

They should clearance of the warning letter before Liberte in our expectations Q4 approval.

This could be the big ones with the nearest term implications.

This is Paul Sandman.

On the trial from, the only case coming to trial in the near term is one in which we are the plaintiff.

We have asserted a drug patents against J&J.

We believe their use of several of Cerolomus on the Cyprus stent infringes our patent.

That is up two week trial scheduled to begin in Delaware on March 6th.

Thank you.

Next question is from Bob Hopkins from Lehman Brothers.

Please go ahead.

A follow-up question Mr. Sandman, General Counsel.

I didn't hear the question, but I was wondering if you could give us an update when you expect to hear something from the judge on the [Dean Ruling] and whether or not she plans on overturning of that.

Secondly, I was wondering if you had any comments at all on J&J's right patent because it seems to cover all of the analogs and how confident are you that you will have free and clear access assuming the SEC signs off on the transaction?

We believe we will have the right to practice elements.

With regard to the case is pending before Judge Robinson in Delaware, she has a number of post trial motions pending in three different cases before her and we really don't have any indication when or how she is going to rule.

Thanks for that.

Very quickly, Larry, in your pro forma numbers, can you give us a rough sense of what TAXUS cannibalization you are assuming from XIENCE, again I assume you believe the SEC will sign off on the current transaction as it exists in?

Maybe, Bob, I will take that.

We have modeled in cannibalization for in the out years, not starting until 2008.

By which time we will have converted our TAXUS business to from Express to Liberte and we will be in the process of moving from Liberte to Liberte on Apex , so you are dealing and that point with a highly competitive and differentiated TAXUS, even in comparison to what we sell today in Europe.

We modeled XIENCE in several ways.

Number one, total XIENCE impact in the marketplace, which is an aggregate of Boston Scientific and Abbott, and we think having two competitors obviously will increase the overall dynamic.

We then look at how much of that aggregate XIENCE will be Boston versus Abbott and that is a series of assumptions right now.

We then look at the total Boston XIENCE sales will be in two of, if you will, exclusively into customers that currently use or prefer a non TAXUS stent versus those who have spillover, if you will.

What we are clearly seeing is that although there are drug preferences, some physicians will switch because the drug preferences perhaps reside at the very ends of the market, and so you have physicians that are very committed to TAXUS and Paclotaxil, you have some very committed to Seifert and Cerolomus, and then you have quite a number in between that are willing to move so we will see some TAXUS cannibalization.

We have assumed that our cannibalization will be limited to perhaps one in three stents that we sell or one in four.

So we're hoping to gain incremental XIENCE sales.

We will rebrand product and we will hope to, through selling tools through drug marketing and differentiation based on clinical data, we will hope to try to basically prevent too much TAXUS erosion frankly at our incentives I to sell XIENCE and we can grow the business and Abbott incentives are very high to sell XIENCE and they're excited to get in the marketplace and we think we can grow the business overall.

Cannibalization is something we factored in but it is not excessive.

Lastly, should we anticipate that when a corporate warning letter is lifted that happens at the same time as three other warning letters or could the three other warning letters be listed earlier than the corporate warning letter?

They are on separate tracks in a sense that there is a fourth warning letter, advanced bionics, on its own track and that is getting close to resolution.

The likelihood is the three warning letters we have got previously and the corporate warning letter, all of that will be resolved more or less as a package because all of the issues there are intertwined.

We have time for two more questions.

We're getting close to 10:30, so why don't we take two more.

Our next question is from Glenn Reicin from Morgan Stanley.

I have a couple questions for Larry, AKA the general.

Can you give us a sense, in the changes in the pro formas in the S-4, how much of that was due to the exclusion of 123-R?

It's $0.7 in -- in 123, you said?

It's $0.07 in '07, '08 through '10 it's $0.08, and it's $0.9 in '11.

So the remainder is the lower tax rate and the debt paydown for lower debts.

I am confused on the debt because you are in the up with $10 billion, thought that was the original plan.

The original plan was $11 billion to start with $11 billion which was subsequently reduced to $10 billion to give them the $900 million tax non-payment, if you will.

So we are now, starting the closing with $10 billion a debt, estimated $400 million of cash on hand.

Our anticipation is $9.6 billion from the starting block.

We went out with 72, our range was 9.5 to 10.5 and then we went up.

It got to -- the high of the range was $11 billion, you take out the $900 million the we don't have to borrow and that is the burden we took out.

I am trying to figure out what EBITDA is.

Can you give us a sense of what amortization is expected for the entire corporation as well as depreciation?

Janet, do you have that?

Amortization, we use $700 million?

It's about 950 million on a combined basis including the existing amortization for Boston Scientific.

What about depreciation?

Any sense at this point?

Depreciation is $400 million on combined basis.

Thanks.

One more question and we will wrap it up.

Our final question is from Joanne Wuensch from Harris Nesbitt.

Just two quick questions on the guidance portion of this.

I would assume that the ICD salespeople are under some type a contract to keep them happy and in place given the length of the merger as well as decreased ICD sales.

Can you give us an idea how long that retention package, if you will, is in place?

And a follow-up question is, you talked about the ICD market share assumptions over the next several years, can you comment on what your thoughts are on the ICD market growth rate?

On the retention, the turnover rate in the sales force has been nominal.

They have done -- the Guidant management teams have done a terrific job in holding that strategic asset in place, and very simply, how you do that, you pay them and look at it this way.

They are paying, spending money on people as though they have a $3 billion CRM business.

They have something closer to $2 billion than $3 billion.

It is a commission focus rather than retention focus.

That is right.

They're keeping these guys whole.

I will tell you, our initial discussion, interface with some of these CRM folks, these guys are excited.

They are preparing for the recovery, they believe in the recovery.

We couldn't feel better about the CRM sales force and their perspective.

I personally have talked to a number of them.

The second question on the CRM growth, we are not experts in the CRM market.

I think our market growth rate that we used in our pro forma, and the analysis we have done leading up to the offer, was conservative.

In the 15% range, 12% to 15% range.

I there is a lot of estimates out there that the CRM market will grow 20%.

But we use more of 12% to 15% range in sizing the opportunity..

Thank you.

With that, I want to thank everyone for joining us this morning.

We will keep you up-to-date as our Guidant transaction moves closer to close.

I wish everyone a good morning.

Thank you very much.

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