Boston Scientific Corp (BSX) 2006 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Boston Scientific second-quarter earnings conference.

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

Later there will be an opportunity for questions.

Instructions will be given at that time. (OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded.

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

Please go ahead, sir.

Yes, thank you.

Good morning, everyone.

This morning we are focusing on the results for the second quarter of 2006.

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

Also on the call is Paul LaViolette, our Chief Operating Officer.

And today we also have really our entire top CRM management on the phone, including Fred Colen, who oversees the technology in R&D on our CRM business;

Mark Bartell, who heads up our commercialization sales effort for CRM globally; and Bill McConnell that oversees everything else out in Arden Hills, the headquarters for our CRM business.

We are here to focus on the quarter and the financial results, go over the various operating units.

I will begin with a brief -- well I shouldn't say brief, it was a little more complex this quarter, overview the financial results.

Paul LaViolette will take you through and discuss the operating units and their performance in the quarter and kind of a state of the union, talk about our DES program, talk a little bit about the progress we're making on the quality and FDA front.

And then we will turn it over to Jim Tobin, who is not only our Chief Executive Officer but also as Chief Executive Officer of CRM, where he is spending most of his time nowadays.

He will give kind of a state of the union on the CRM business and involve the rest of the CRM team during the question-and-answer session.

Before we begin, it's obvious we will be making some forward-looking statements.

So I'd like to turn it over to Paul Donovan, who is our Head of Corporate Communications at Boston Scientific to read the Safe Harbor.

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 forward-looking statements and may be affected by, among other things, risks associated with new product development and introduction, clinical trials, regulatory approvals, competitive offerings, intellectual property, litigation, the Company's overall business strategy and other factors described in the Company's filings with the Securities and Exchange Commission.

Thank you, Paul.

Today we do, because of the complexity of the quarter, the fact that it truly is a historical quarter for Boston Scientific for a lot of reasons, and we have actually put on the Web site during the call, we'll be forwarding and covering slides.

So for those of you that have the capability of following us with the slides, please do.

The entire slide set will be downloaded post this conference call so you will have it for your future reference and analysis.

We are very excited about what happened in the quarter, second quarter of 2006 in that it truly is a transforming period of time for Boston Scientific.

As most of you know, the Guidant transaction closed on April 21 and I can't tell you how excited we have been and are with our integration of Guidant and the opportunity to participate now in the cardiac rhythm management marketplace.

We now with the acquisition and integration of Guidant, we're clearly a global leader in the medical device industry with great scale and breadth and diversification and we're also a clear leader in the cardiovascular medical device field.

So we are feeling good about the bigger suit that we are wearing.

It's not without challenge and we will discuss some of those today and how we are focusing on execution and building shareholder value.

But we have entered the additional market.

Beginning of the year, we weren't really participating in any big way in cardiac rhythm management; that's a $9 billion plus market.

Today, we are smack dab in the middle of that market and we are pleased to have the opportunity to participate.

The transaction has clearly diversified the Company further.

We are the world leader in interventional medicine.

We are the world leader in drug-eluting stent technology and we lead almost every market that we participate in, in terms of different product categories, some over 230 product categories at Boston Scientific.

However, the transaction into the CRM space and now the cardiac surgery space also, it does enhance our growth prospects as we look out three and five years.

The strategic rationale for the acquisition is clearly in place and it clearly does enhance our ability to grow shareholder value and grow the size and scales of the business over the next three to five years.

But it's going to take some work and we'll talk about that today.

In addition, we not only are now in the cardiac rhythm management market, but we really bolstered our opportunity in drug-eluting stent technology.

We were able to add with the Guidant acquisition a second drug-eluting stent platform referred to today as Xience, using everolimus and that will bolster our pipeline and our ability to defend our leadership in the drug-eluting stent world and we'll talk more about that during the call today.

If you look at the transaction that occurred during the second quarter, we think it's profound in terms of the change in the industry that it represents and the change in the cardiovascular market itself.

Boston Scientific today is now number two in cardiac rhythm management and number one in interventional cardiology.

A very strong set of cards to hold, participate and compete over the next decade.

Medtronic, who is the blue chip in the CRM space is number one but they are a distant number four in interventional cardiology.

St. Jude continues to be number three but, obviously, closer and closer to Boston Scientific CRM at this point.

We'll talk more about that.

Abbott is a new game on the block.

The Guidant transaction, as you know, enabled Abbott to become a major player in interventional cardiology.

They did acquire the Vascular Intervention group of Guidant and we share the type DES pipeline with them but it has enabled them to become a very strong competitor.

Today, they are a number three player but they have a great deal of momentum in their pipeline.

Of course, J&J is not in cardiac rhythm management but is the number two player in interventional cardiology and Guidant as a company as we have known is no more.

A lot has changed during the second quarter.

If you look at our position in cardiovascular medicine, we think we have great set of cards to strategically grow the business over the next three to five years.

So, very exciting transformation for Boston Scientific.

The next slide is just clarifying how important it is for us to have a second DES platform.

We have led the DES market ever since we have launched TAXUS with paclitaxel.

Our love affair with TAXUS has grown and grown and continues to grow.

But the Xience and everolimus platform represents a new story for Boston Scientific, a new platform and obviously giving us the ability to have a broader bag to take into the cath lab.

I thought on the next slide, I would try to give you a clear picture of where we have been, where we are.

We are very proud of the strategic build at Boston Scientific over the past well past decade for that matter but especially over the past 36 months.

And while it seems like a long time ago to some, to many of us, it seems like a nanosecond ago.

We were exiting the quarter of 2003, the second quarter.

We had a run rate 36 months ago or just 36 months ago at sales of 3.4 billion and EBITDA run rate of 900 million on an annualized basis.

Just 12 months later, at the end of the second quarter of 2004, we had a run rate of $5.8 billion in sales, 2.3 billion in EBITDA, driven by the huge success of TAXUS.

And then in 2005, 12 months later, our run rate exiting the second quarter was 6.5 billion in sales and a $2.5 billion EBITDA.

And now just 12 months later, or over the past 36 months. we now find ourselves exiting the second quarter of 2006 with a sales line approaching $9 billion on an unannualized basis and an EBITDA approaching $3 billion.

So, the strategic build at Boston Scientific continues.

We think that the assets and strategic positions we have are very exciting and should fuel growth for shareholders and for the Company and our employees, the new opportunities over the next three to five years.

So this strategic build continues.

We are proud of what we've put together and we are especially excited about our ability to grow over the next three to five years.

The tripling of Boston Scientific over the past three to four years has been exciting but it is not without challenge.

When you are bold and you go after your goals, you do it aggressively and with that comes challenges and the need to execute.

When we acquired Guidant, we made it very clear that the CRM business was not at its high point but needed some repair.

We are in the process of doing that and we are in the process of doing that aggressively.

Jim Tobin will talk about that in a few moments.

But rest assured, we are up to the challenge, we are excited about the challenge but we are asking our shareholders and we are asking -- we're really measuring ourselves in a three to five-year timeframe, not a ninety-day timeframe.

Now let's go through the results, try to highlight for you the financial results for the quarter.

Obviously, when you look at the press release and you look at the attachments, the second quarter is complex.

The second quarter was dramatically impacted by accounting adjustments related to the $20 plus billion acquisition of Guidant.

And I will try to take you through those adjustments.

They dramatically impact the bottom line, only because of the peculiarities of accounting for an acquisition of this size and I will speak to that in a moment.

When we exited the quarter, it is fair to say that the underlying tone of business in the second quarter, with the exception of CRM, was pretty stable.

We didn't see a lot of growth.

Occasionally we go through periods where our business units drop from double-digit growth into single digit growth.

We have seen that in the second quarter.

Just coincidentally coinciding with the same quarter that we closed the Guidant transaction, we are very confident in our growth prospects in all of our businesses and Paula LaViolette will touch on that in a few moments.

I'm proud to say that we finished the second quarter with gross margins coming in at a very strong 77% on an as-adjusted basis, so the profitability of our $9 billion run rate is intact and obviously is -- I'm not sure how many other competitors are at this level of profitability. 77% in medical devices is on the high and we continue to execute in a very effective way in terms of generating profits.

Operating margins came in at 30% on an as-adjusted basis.

So again, not only did we see nice profit margins at the gross margin line, we also saw nice profit margins at the operating income line.

As a result of the Guidant acquisition, it's pretty obvious that we have taken on debt and we do have an interest burden that will be with us for some time, a number of years.

The more aggressively we pay down that debt, the sooner we will see the leverage in our P&L.

To give you some perspective, our interest rate on our debt on an annualized basis is running somewhere around $590 million.

So, if you think about somewhere between 550 and $600 million is a range of costs that we will be able to eliminate as we merely take our cash flow over the next 36 months to 60 months and pay down a substantial amount of debt.

So that debt burden will come down and likewise that interest burden will be taken out of our income statement.

Also in the second quarter, we continue to have an effective tax rate of 23%.

We are forecasting a 23% tax rate in the year ahead.

And our cash generation continues to be very strong and we think with some mending in the CRM business, our cash flow will even become stronger in the years ahead.

Let me turn now to some commentary regarding the sales line for the second quarter.

The first slide is the easy one.

It reflects the acquisition on April 21 of Guidant.

It then incorporates the sales that Guidant CRM and cardiac surgery brought to Boston Scientific post April 21.

That number is roughly $475 million in sales.

Otherwise, the incremental sales from Guidant April 21 through the end of the quarter contributed about 475 million so you factor that in?.

While the comparison is not exactly apples to apples because of the acquisition on an as-reported basis, we did report a 32% growth rate in our U.S. business, our domestic business.

We also are reporting a 28% growth rate in our international business for an overall worldwide growth rate of 31 million.

Our top line came in as reported just over 2.1 billion and that was up from the prior year Q2 of 1.6 billion.

So you can begin to see the scale, the added scale that we have taken on with the entrance in the cardiac rhythm management business.

The next slide is again on an as reported basis, meaning it takes into consideration the acquisition of Guidant on April 21.

It provides you a look at the divisional makeup.

Paul LaViolette will be providing commentary on the different various operating units.

So I won't linger on it.

You can see interventional cardiology in the quarter was flattish.

Our peripheral business was down 8%, primarily due to a changeover in product category and the termination of the Terumo alliance in wires.

Our electrophysiology business was flat.

Neurovascular was a standout in the quarter; it grew a very strong 20% on a constant currency basis with cerebral aneurysm coiling taking the lead.

If you look at the cardiac surgery business, 38 million in the 2006 Q2 numbers.

CRM, 436 million.

Again, that is post April 21.

To give you a break down in the second quarter, actual as reported, again, this is only April 21 through the end of the quarter.

Our brady business came in at 119 million; our tachy business came in at 317 million.

But overall cardiovascular with the addition of the CRM and cardiac surgery, as reported, sales growth, 36%.

On the endosurgery group, this is a quarter where they have gone from double digits to single digits.

We think it's temporary.

There is a lot of specifics that Paul will go through but we grew 6% in the quarter.

Neuromodulation business continues to see robust growth, primarily from the spinal cord and simulation precision product line, grew 78% off a relatively low base of 33 but we came in at 58 million so that's over a $200 million run rate and that is just about two years post our acquisition of Advanced Bionics.

So we are pleased with the top-line growth at our neuromodulation business unit.

Overall worldwide growth again was 31%.

Moving to the next slide, I provided this slide for you primarily for your modeling purposes.

This breaks out on a divisional basis the U.S. only portion; by subtraction, you can get the international portion.

I will leave you with that in terms of your ability to better model us for the quarter.

Just a moment on neuromodulation because I know some of you want to know the details there.

Our auditory business came in for the quarter at $11 million.

Our SCS or IPG precision spinal cord product line came in at 36 million.

A very strong growth, 100% plus growth for the quarter for 47 million overall in Q2.

Moving on to now a pro forma look at the second quarter, and what we mean by pro forma is we have taken the assumption here that we had Guidant as of the beginning of the quarter.

So if you would assume that we acquired Guidant, the CRM and cardiac surgery portions, at the beginning of the quarter April 1, this is how the Company would look and gives you a better perspective of -- more of an apples or a full quarter apples to oranges again than the prior year because -- I'm sorry apples to apples.

We did pro forma the prior quarter.

So you can see if you assume that we had Guidant in the Q2 of '06 and the Q2 of '05, our domestic business modestly down, our international business flat, overall worldwide modest negative growth of 4%.

Roughly when you look at the quarter, we are on a 2.2, $2.3 billion top line.

Now the challenge for the team here at Boston Scientific is to take that base business, which if you run rate, it approaches $9 billion and turn that base business now into a double digit grower.

We are confident we can do that.

Most of our businesses are clearly double-digit growers.

We do have some repair as I've referenced in the CRM business and we will talk more about that in just a few moments.

Going to the pro formas by business unit for the full quarter, you can see the addition of cardiac surgery in the quarter on a pro forma basis, cardiac surgery grew 9%.

We were pleased to see that.

However, the CRM business as a result of quality issues and also market slowdown declined 18%.

So that gives you a perspective on a pro forma basis how we look and the addition clearly of scale with cardiac surgery and cardiac rhythm management.

I put the next slide in really for reference.

The U.S. only pro forma, it shows that -- it reflects we really have about a 1.4 billion quarterly run rate in sales in the U.S.

And if you annualize that, our U.S. business run rate on an annualized basis, it's 5.6 billion.

So it gives you some idea of the size and scale of our U.S. business, which now exceeds $5 billion on an annualized run rate basis.

Let's for a few moments look at our worldwide DES sales.

Paul LaViolette will give you more perspective on that in terms of detail in a moment.

We finished the quarter in the U.S. we think in very good shape.

We finished the quarter with 55% market share, a very solid performance.

TAXUS continues to do extremely well and we were pleased to see that.

In the international markets, the results were we grew the market but we are seeing some additional competitive pressures outside the United States and Paul will give you a better reflection of that.

But if you look at the worldwide TAXUS base over the past four or five quarters that this slide overviews, you can see our DES business is very stable, obviously, very profitable. $600 plus million each quarter for the past six quarters.

And grew at 647 means -- in the second quarter -- means we grew it, our DES business over the first quarter.

And we obviously saw good growth in our DES business when you compare it to the fourth quarter of 2005.

Moving on for a quick picture of our new CRM -- Boston Scientific CRM.

This gives you a detailed breakdown by U.S. international, worldwide, brady versus tachy.

Obviously, it does reflect the quality issues and recalls and some loss of share when you compare Q2 of '06 with Q2 of '05, both in U.S. and international, and Jim and others will speak to this.

Just for your modeling purposes so you know, while this is pro forma information, let me give you very quickly the as reported CRM numbers.

So on an as reported basis for Q2, meaning as reported encompassing Guidant on the acquisition date and post-acquisition of April 21, in the U.S., a brady number for the quarter, partial quarter as reported, 67 million; tachy, 225 million; overall, 292 million for U.S.

CRM again for a partial quarter in Q2.

International, Brady came in at 52 million; tachy at 92 million; international total, 114 million; again, partial quarter, April 21 through June 30.

Overall than, brady came in at 119; tachy, 317; overall, 436 for the quarter.

With that, let me go now to the financial results in terms of the P&L and try to give you a picture.

And that's where it obviously gets a bit complex because of the enormity of the transaction in the second quarter, our need to allocate the purchase price, our need to account for merger-related costs and also our transition to reporting adjusted EPS or something that better reflects cash flow per share in the second quarter, where we exclude amortization, depreciation that has been purchased in past acquisitions.

We exclude stock compensation and try to get more to a cash generating EPS number.

Let me start with the slide that takes you through, in the simplest way I know how to, how we allocated the purchase price, the total consideration to start with, when you add in the costs surrounding the transaction, the fees and everything else. 28.4 billion to consider.

Then you back out from that 28.4 billion the cash proceeds from the sale of Abbott, 4.1 billion.

Then you reduce that by the cash on hand at date of acquisition that Guidant had, which was 2.9 billion.

That tells you that we acquired the assets in cardiac rhythm management, CRM, and keep in mind, we also acquired a second DES program.

If you valued that, we value that as $1 plus billion of value.

So the net, if you will, is a 20 billion-ish.

But to allocate for accounting purposes, we were using 21.4 billion.

It was allocated as follows.

The estimated fair value of identifiable assets and liabilities, 0.9 billion.

The estimated fair value of in-process R&D, 4.2 billion.

The estimated fair value of other tangibles, 7.7 billion.

And tax liabilities reduced that by 3.9 billion.

That gave us in excess of purchase price over fair value of assets or otherwise known as goodwill that is not amortized of 12.5 billion.

So hopefully that gives you a simplified overview of how we allocated the purchase price.

For those of you that are not sophisticated in the accounting rules, you go back to that R&D asset that we acquired.

While we believe it's truly an asset, we like the pipeline in both CRM and cardiac surgery.

However, accounting rules require you to immediately write that off.

They don't allow you to book research and development as an asset and that's why we are reporting a loss in the second quarter because of the need to write off an asset that we believe is very valuable.

Accounting rules just say you can't book it.

So the loss in the quarter that I'll talk about really has more to do with an accounting convention as opposed to how we value what we acquired in the Guidant transaction.

So significant items include the Guidant purchased R&D of 4.2 million.

Also when you fair value the assets, you have to write up the beginning inventories.

So we wrote up the beginning inventory value of the cardiac rhythm management and cardiac surgery to the tune of 185 million.

The majority of that has already swung into this quarter, meaning your gross margins will be impacted.

I think we have another 90 million that will swing in in the third quarter and then that will be out of the system so to speak.

We had other merger-related costs in the quarter of 125 million.

We also during the quarter canceled our percutaneous AAA program and the residual of that is in the quarter.

And then we also have an investment portfolio of seed investments; it embodies over 100 different investments; total carrying value before the quarter was around 700 million.

So we did provide a valuation write-down of 67 million for our investment portfolio.

And those numbers represent kind of noise in the quarter that you need to understand.

The next slide gives you a comparison that is really not all that meaningful.

It is a GAAP comparison of Q2 '06 to Q2 '05.

First of all, Q2 '05 does not have any Guidant assets or operations in it.

Q2 of '06 have operations post April 21 acquisition date.

So it's very difficult to find a meaningful interpretation of the actual GAAP results for the quarter because of all the special items.

You can see on the special charge line, 4.1 billion.

Most of that is purely an accounting convention as I referred to, where GAAP accounting requires you to write off the asset that you just acquired in terms of R&D portfolio.

I know it doesn't sound right but somewhere along the line decades ago, the accounting literature changed and said you can't book an R&D portfolio.

So we had to write it off.

We report a net loss of 4.2 billion.

We don't believe that's reflective of the underlying operations nor do we believe the EPS of [3.20] to [0.21] loss is reflective of what's actually happening in the business.

The good news is that the quarter in 2006 was very profitable.

As I mentioned, gross margins were 77%.

Operating margins were 30% and we brought down to the net income line as adjusted over $400 million of profit.

So that is more reflective of the high profitability of Boston Scientific and I will try to take you through that a little bit more in a moment.

The next slide tries to again take some of the complexity out of the numbers and gets you to what we believe is the as-adjusted numbers, which is a better reflection of how we performed in the quarter.

On this slide, you start with what I just went over, which is the GAAP P&L, net sales of 2.1 billion.

You see the 4.1 billion of purchased R&D.

You see the $4.2 million of reported loss.

Now if you back out the portfolio of acquisition related charges, the step-up in the inventory that was required and the purchased R&D, that gets you to another stage where you then back out the merger related costs, which include 32 million roughly of Guidant integration costs.

And other income is our valuation of Abbott derivative and I can take you through the accounting if you want to on that.

But it has to do with when we borrowed from Abbott, sold stock to them and have the right to 50% of the gain.

We have to value that as a derivative and I can take you through that if you would like later.

The next column backs out the residual accounting for cancellation of the AAA program.

The next column takes you and backs out the valuation write-down of our investment portfolio of 67 million.

And then the last column takes out the purchased amortization and stock compensation, which are non-cash items to get to what we call adjusted EPS, which we think better reflects the economics of our business.

It gives you a better reflection of the cash generation capability in the quarter and the result in the quarter and it represents a gross margin line of 77%, an operating margin line of over 30%, net margin line approximating 19% and a $0.31 a share earnings person share on an adjusted basis.

So hopefully that helps.

For those of you that want to be taken through in more detail for analysis, we will be glad to do that after the call today.

The next slide gives you our best guess as of the shares, the weighted average shares you should incorporate into your modeling.

As you can see in the second quarter because the acquisition took place on April 21, the weighted shares outstanding was 1,327,000,000.

Next quarter, the shares will be with Guidant fully integrated for a quarter, will be 1.491 billion shares outstanding and the rest is pretty straightforward.

This is for your modeling purposes so you get your share count more accurate than you were able to do before this call.

The next slide gives you a good picture of what our balance sheet was at 6/30.

It's a substantial balance sheet with assets over $30 billion.

Obviously, it has an intangible asset of over 23 billion.

It also adds a gross debt number of 8.8 billion and you can see the change from a year ago, we added $20 billion in intangible assets and added about 6.8 billion of incremental debt.

We have a very strong balance sheet.

Our debt is still investment grade and this is the starting point moving forward.

Let's go to cash flow and EBITDA for a moment.

We will be referring to EBITDA going forward and also give you some free cash flow numbers.

In the quarter, we had a strong EBITDA showing with almost 700 million in earnings before interest, taxes depreciation and amortization.

We think once the dust settles and we figure out what a normalized CRM business looks like and right size it, if you will, we expect our EBITDA on a quarterly basis to approach 900 million.

That will take a while to get to but we think that the EBITDA in this quarter is not reflective of what the underlying strength of the business will be after we repair the CRM business.

Now, on the bottom of this slide, it gives you a good picture of the change in debt load.

Our net debt at the end of the quarter was $7.7 billion.

Now from the date of acquisition, April 21, to the end of the quarter, we paid off or defease, if you will, about $300 million in debt.

And we hope to continue to do that as we move forward.

However, if you look at net debt at June 30 '06 and compare it to net debt probably at year end, I think it will be roughly the same ballpark because of some of the investments we will make in the second half.

Below that, you can see our gross debt is 8.8 billion.

Our cash on hand and marketable securities, approximately 1.2 billion for a net debt of 7.7 billion.

So, in summary, the second quarter was clearly transforming, clearly historic.

The management team at Boston Scientific is thrilled to have the asset base that we now have and the markets to participate in.

We now are a global leader in cardiovascular medicine with a diversified portfolio.

We have very attractive diversification in many, many medical specialties when you consider our $1.5 million plus endosurgery group.

We are far more positioned for double-digit growth within the next three to five-year horizon and we continue to generate strong cash flow, which over the next three to five years will take substantially all the debt off the balance sheet and release up a very substantial interest burden that we now face in the short term.

So, I know that was a little more elongated because of the complexity of the quarter but hopefully that was helpful in understanding where the ball lies in terms of financial condition and financial results.

And I'd like to now turn it over to Paul LaViolette to give you a good perspective of Paul as our Chief Operating Officer of the various businesses and also DES and quality and FDA issues.

Paul.

Thanks a lot, Larry.

As Larry mentioned, I will cover drug-eluting stents;

I will cover our four businesses and their progress; and I will also cover an update on the corporate warning letter remediation efforts.

First, our drug-eluting stent performance in the quarter was very strong.

The markets was strong, we held price and we gained market share.

The worldwide drug-eluting stent market in Q2 grew about 3% sequentially, surpassing 1.7 billion for the first time.

Looking forward, we believe the market in the second half of 2006 will also grow another 2 or 3% in comparison to the first half.

So we have strength in the marketplace.

Drug-eluting stent penetration in the U.S. remained stable at about 89%, enabling the U.S. market to grow in the first half versus last year, signaling an end to the downward effect of lost reinterventions and reinforcing my comments on the June analyst call that concerns over a shift from drug-eluting stents to bare metal stents were unfounded.

And I think that is proven to be the case.

U.S.

TAXUS revenues, as described by Larry already, grew sequentially for the second quarter in a row.

This was a combined result of two key effects, a solid market share gain to 55% and outstanding price discipline with Q2 TAXUS ASPs flat to Q1.

We are extremely pleased to see share gains for TAXUS, particularly in light of increased site for supply.

We believe the gain is sustainable.

We believe it resulted in part to the termination of the Guidant copromote and the resulting gain in our relative strength in selling and marketing, including our 2005 investments in sales force expansion.

This gain combined with continuous improvement in our use of clinical data channels should help preserve share in the mid-50s until the arrival of TAXUS Liberte.

Our TAXUS performance internationally was strong as well.

In a market that increased in penetration by 2 point to 54% in the quarter and that of course excludes Japan, which is not yet an accessible market for Boston Scientific.

Our shares in Europe and Intercontinental held fairly strong and steady.

MRG data received for June indicated a 47% European share for TAXUS in actual lab usage.

That is flat to prior and about equal or slightly larger than the combined share of Cypher and Endeavor in Europe.

This resilience is due in large part to strong market acceptance of TAXUS Liberte, which now accounts for over 80% of our international drug-eluting stent sales.

We believe we gained several share points in our Intercontinental region, which launched TAXUS Liberte in several key markets in the quarter, including Australia, Mexico and Brazil.

This growth helped total international DES sales grow sequentially and by double digits versus prior year despite the presence now of eight competitors in Europe and over 15 in the Intercontinental region.

Excluding Japan, Boston Scientific held 50% worldwide drug-eluting stent share and all others combined held the remaining 50%.

Finally, we remain on track for our expected entry into Japan with TAXUS Express in Q2 of next year.

We've demonstrated stable or growing shares, stable pricing, a strong impact from TAXUS Liberte, more effective marketing, a competitive advantage in selling and second-half revenues will now compare to a lower second half of '05 due to the post ACC drop in TAXUS share experienced last year.

We have clearly recovered from that event as we said we would and have enviable sales and pipeline momentum moving forward.

We feel very, very good about our leadership position in drug-eluting stents.

Let me shift the discussion to our base business and quickly overview their operating highlights.

I will say that our core businesses remain strong but we experienced some onetime disruptions in Q2 that detracted from the normally consistent and strong performance and growth rates and I will walk you through what did occur.

The non DES cardiology businesses first of all were very solid.

Our total balloon business grew 5% and I think we've reached now a market share of about 65%, which is consistent with our historic highs.

Bare metal stents grew slightly as did our total basket or ACCESS business, our embolic protection business, our rotablader business, our diagnostic franchises.

When you combine all of these with drug-eluting stents, you can see our cardiology business is delivering excellent results.

Our peripheral business as Larry cited did not grow due primarily to the loss of distribution rights of the [true remote] Livewire.

We have launched a replacement wire product and that product is growing.

We have also launched new balloon lines and have a pretty good pipeline over the next six to 12 months in peripheral.

This division is very healthy and will return to growth but not for several quarters and then driven by the launch of new peripheral stents and carotid stent systems.

Neurovascular was impressive once again in Q2, driven by strong sales in coils and stents, up over 30% in the United States in total.

Cardiac surgery grew just below double digits.

And as referenced, while EP did not grow, we are increasingly enthusiastic about the prospects of this business and our market leading ablation franchise when leveraged with our new CRM business.

EP will grow in the future and will I think contribute to CRM growth as well.

Endosurgery did fall below its consistent double-digit growth trends in Q2 and we are highly confident that these traditional growth rates will return in Q3 and will be reflected for the full second half.

Endoscopy, one of our best businesses, was very solid, up 6%, hitting $100 million in the quarter in the U.S. for the first time.

This business will continue to expand in both revenue and in market leadership.

The Endovations program also made progress in the quarter and is on track to move into first human use clinical evaluations in about 30 days, having now successfully completed validations.

Oncology, a typical mid teens grower; suffered a backorder in Q2 that cut its growth.

That backorder is now resolving and we expect recovery of that business to double digits in Q3.

Urology grew 11% globally and 13% in the U.S. despite a supplier problem that halted shipment of our Prolieve BPH system.

We will resume shipping in August.

The urology business has grown 19% year-to-date and we fully expect that 2006 full-year growth will be in this 20% range.

So we clearly see both oncology and urology recovering and full endosurgery strength at double-digit levels for the full year.

Endosurgery I think is very well-positioned for growth over the long-term and all things considered, did grow globally 9% in the first half.

Paul, let me just make sure the audience understands, Paul does not have slides nor will Jim.

I used slides just because of the complexity of the financial results.

So for those of you that are pounding your PCs, you can cease that.

Paul?

Thanks, Larry.

Let me just now pick up on the neuromodulation franchises and they continued their fast growth trends.

The cochlear implant business grew double digits sequentially and grew by 29% year-over-year and will commence launch of its new Harmony high-resolution system in Q3.

So that business is on strong footing.

The pain management business maintained very high growth.

Larry mentioned this, over 130% versus the prior year and up 20% versus Q1.

This business is well-positioned in the rechargeable battery segment, which now represents over half of the market and will likely achieve a number two overall market position in Q3 based on current revenue trends and comparative growth rates.

So all in all, Q2 is very solid and prospects in most of our businesses are improving further for the near term.

Lastly, I will provide an update to our June 26th call on the status of our corporate warning letter.

We remain on schedule to the timelines I described in June.

We did meet once again with FDA in early July.

We reviewed progress on all areas of our quality system.

We agreed on inspection readiness criteria and narrowed the timeframe of our start of FDA audits.

As of today, new and compliant processes have been launched for all areas cited in the corporate warning letter meeting our stated July goal.

These processes are now being used to run our business and in the process are generating data or objective evidence to verify our compliance.

In each of these areas, we are compiling that evidence that prove over the next 60 days or so.

As those 60 day periods end by the end of September, we will begin our across the board third-party verification audits.

These will be completed in November and will produce reports that when given to the FDA, served as both a guideline for auditing and the formal statement of our readiness for reinspection.

FDA has assured us that they will be both responsive in timing and thorough in their audits.

Realistically, with the Thanksgiving and Christmas holidays and the need to inspect multiple U.S. and international locations, inspections will clearly carry into Q1 and sometime toward the end of Q1, we hope to have demonstrated the compliance of our quality system with lifting of the warning letter and subsequent PMA approvals thereafter.

So to recap that, we launched the systems on the original schedule and have altered our original timeline only for the insertion of this comprehensive third-party audit process, which we believe will substantially improve our likelihood of success in the audit outcomes.

As a result of all of this, we have put April launch dates for our planned TAXUS Liberte launch in the United States and the carotid wall stent launch as well.

And with that, I will end my comments and turn the call over to Jim Tobin to cover the CRM business.

Thank you, Paul.

I would like to give you an update on the CRM business, where I have been devoting most of my time and energy for the past few months.

As most of you know, I've taken personal responsibility for overseeing CRM.

I'm in St. Paul a lot.

I have an office there and I am immersed in the business.

Before I get into the CRM results for the quarter, though, I would like to share with you some of my observations of our CRM business and review our reasons for getting into it in the first place.

Boston Scientific has been in the CRM business for all of three months now.

During this time, I have been very positively impressed.

I have been impressed with the people, I have been impressed with the products, I have been impressed with the pipeline and above all, I've been impressed with the therapy itself.

It's truly lifesaving and it has enormous potential both in a medical sense and in a business one.

I am absolutely confident in two things.

One, the therapy is so beneficial and so essential that the overall market will return to double-digit growth sooner rather than later.

This market has significant unrealized potential and an extremely promising future.

And two, we will rebuild trust with patients and physicians and restore confidence in our products in a way that will allow us to regain share.

It will require outstanding execution from our team but we can do it and we will do it.

The data is on our side.

The demographics are on our side.

The technology is on our side.

And most importantly, the therapy is on our side.

It is a remarkable therapy and it represents a terrific opportunity for Boston Scientific.

When you add up these factors, you are reminded of the core strategic rationale for our acquisition of Guidant, one that remains as strong and compelling today as it was when we first announced our interest in Guidant back in December.

That rationale can probably be expressed in just three words, growth and diversification.

This is our first earnings call since Guidant became part of Boston Scientific and Larry has already talked about quarterly revenues of more than $2 billion.

In fact, we exited the quarter at an annualized run rate approaching $9 billion in revenues.

I think it's fair to say that we're seeing for the first time the growth and diversification that was and remains the core rationale for the deal.

Adding CRM to our product portfolio was one of the primary motivations for the acquisition.

We understood that there were issues and that we would have to resolve before we could maximize our opportunity in CRM.

But we are addressing these issues and we will resolve them.

We knew from the beginning that there would be these kinds of issues but we also knew they were manageable.

We are addressing them in an open, direct and comprehensive fashion.

We have made a lot of progress and while we still have work to do, I believe I can say without fear of successful contradiction that we found nothing that is not manageable.

I looked under the hood and kicked the tires for three months now and have seen nothing that should deter us from our goals of rebuilding trust, restoring confidence and regaining market share.

Let me say that again.

I have seen nothing that should deter us from our goals.

My remarks on the last call seem to have been misinterpreted to mean a recall was imminent.

Let me be perfectly clear.

I do not know of anything today that would suggest a recall is on the horizon.

I want to turn to the numbers and give some details on the performance of CRM business in the second quarter.

The numbers are on a pro forma basis for the full quarter.

In other words, we're reporting Q2 as though Boston Scientific had acquired Guidant on April 1st.

As Larry has said, total worldwide CRM revenue for the quarter was $529 million compared with 643 in the second quarter of '05, an 18% decline.

In the U.S., CRM revenue was 354 million, including 273 in defibrillator revenue and 81 in pacemaker revenue.

Total U.S. revenue was down 20% compared to the second quarter of '05.

Outside the U.S., CRM revenue totaled 175, including 110 of defibrillators and 65 in pacemakers.

Revenue outside the U.S. was down 12% compared to the comparable period last year.

In terms of market share, Boston Scientific's worldwide share of the defibrillator market was 27%, a decline of 5.5% on a year-over-year basis and an estimated drop of 1.7% from the previous quarter.

In the U.S., defibrillator share was 26%, a decline of 4.8 points on a year-over-year basis and a decline of 2.2% from the previous quarter.

Worldwide pacemaker market share was 15%, a decline of 2.7% on a year-over-year basis and essentially flat from last quarter.

In the U.S., pacemaker share was 18%, a decline of 2.7 on a year-over-year basis and essentially flat also from the previous quarter.

In terms of pricing, both defibrillator and pacemaker pricing remained relatively stable sequentially and declined modestly on a year-over-year basis.

Overall, CRM's performance is about what we expected; our performance is within the range of expectations we outlined in our SEC filings related to the merger with Guidant.

We achieved our revenue expectations for the quarter despite the product recall that was announced during the last week of June.

Looking forward, we are focused above all else on quality.

Right now, the quality of our CRM products is comparable to those of our competitors.

But that's not good enough.

We need to be better than everybody else.

Keep in mind that the reliability of CRM devices in general, meaning the whole industry, is extraordinarily high, in excess of 99% over five years.

Unfortunately, a tiny percentage of devices experienced problems and sometimes need to be recalled.

Our goal is to practically eliminate those incidents and we're working hard to do just that.

Let me give you a quick update on where we stand with the FDA warning letter for CRM.

We recently completed the last of the 65 commitments that were made to the FDA in response to its 483 observations, which resulted in the warning letter.

We are in the final stages of our internal review to assess the effectiveness of our corrective actions and the results of our broad quality system assessments.

We are hoping to meet with the FDA the middle of next month to talk about next steps.

Once this process is completed, we can begin realizing the opportunities in front of us at CRM.

When I look ahead, I am encouraged by a strong pipeline of new products with substantial promise.

In the U.S. in the first quarter of 2007, we are expecting to introduce VITALITY RF with LATITUDE, an ICD equipped with RF wireless technology that will allow our LATITUDE patient management system to remotely monitor implanted ICDs.

LATITUDE Inductive, a remote monitoring capability that enables physicians and patients to use remote monitoring for our legacy ICDs and CRTD devices that were not RF enabled.

ACUITY Steerable and ACUITY Spiral, a new family of left-sided leads for resynchronization therapy.

In the second half of 2007, we expect to launch [Telligen] and Cognos, a complete family of new implantable defibrillator products in the U.S.

This new platform will also leverage the LATITUDE patient management system.

The European launch of Telligen and Cognos is slated for the second quarter of 2007.

Later this year in Japan, we expect to launch Renewal 4, our first entry into the Japanese heart failure market.

On a final note, I want to let you know that since the close of the deal, we have been able to retain key people throughout the CRM organization.

As of June, our annualized worldwide retention rate was more than 90%.

I was particularly pleased that the retention rate of the U.S. sales force was also annualized at about 90%.

So it appears that I am not the only one who believes in the future of the CRM business.

As I said, there is enormous potential and the future is extremely promising.

So with that, let me turn it back to Larry.

Hey, Jim, Paul, thank you very much.

I think at this time we will ask for any questions.

Keep in mind we do have Mark Bartell and Bill [O'Connell] and Fred Colen also on the call.

So we'll turn it over for questions to the operator please.

(OPERATOR INSTRUCTIONS).

Glenn Reicin, Morgan Stanley.

Several questions so I'm going to try to prioritize.

These are all geared towards Jim.

While your product quality may be comparable to your competitors, it seems like there's different standards with respect to reporting now with the FDA.

What efforts are being made to standardize those standards and what efforts are being made to train physicians about what a recall truly means?

So that was question number one.

Question number two is can you give us some idea what we should be thinking about the CRM for Q3?

I'd love to know sort of if the momentum of the business, if there is any in Q3 given the recalls.

And then well I'll leave it at that and I'll ask a follow-up after that.

As far as the standards by which we operate and which we communicate, we are being responsive to the Myerberg panel, to the HRS expectations and to the FDA in our mode of communication.

We have committed to being transparent.

And we are being as transparent as we are expected to be, which is more transparent than the rest of the industry at this point.

There are lots of discussions, lots of efforts, lots of behind the scenes activities, trying to reach a consensus within the industry as to what the best way to handle this is and I mean the real issue is what's best for patients.

So how do we handle, we the industry, handle these kinds of issues that come up from time to time in a way that is optimal for everybody.

And it will take some time before all of that settles out.

But there are efforts in the background to make that happen.

On the question of Q3 momentum, I think probably what I would like to do is turn that over to Mark because he has the best long-term perspective on sort of what the sales of the organization feel like.

Hey Glenn, it's Mark.

There's no doubt I think you hit the nail on the head with respect to communications.

We are communicating on a frequent basis.

We have done that as Jim suggested as a result of listening to HRS, FDA and independent panel recommendations.

Our goal is to absolutely make sure physicians understand our quality is as good as and equal to everybody out there.

Frankly we need to understand that as we communicate, we are being transparent and it is not an indictment of our quality.

We're making great progress there, Glenn; we've got some work to do.

Let's talk about momentum.

I think as we exit the quarter, Q2, we did see a little downtick in our sales in the last week as a result of the June 21st actually communication with physicians.

I would say that negatively impacted our quarter number as a result, about 5 million.

It's early in the quarter right now, Glenn, but we are getting our business back.

We are seeing some momentum coming out of that.

It's too early to call what the quarter is going to be but we are seeing physicians return to us.

I think the transparency discussions we're having with them are meaningful and they are beginning to understand that as we communicate, we're communicating as a result of recommendations of HRS and the independent panel and that the quality that our products have represent that (inaudible) to the industry.

Let me just push you a little bit more on that.

Well firstly, can you add clarification about that quarter end?

Traditionally, the last month is a big one.

There's quite a bit of inventory in customer hands.

What are the trends there?

And then specifically on the third quarter, do you think you can keep flat relative to Q2 on a pro forma?

Could you grow that?

Maybe just give us maybe even an up and down answer on that one without being too specific.

Well we're too early in the quarter for me to say what the third quarter is going to look like.

Your comment about how we ended the quarter -- I think I've commented.

We saw a decline in sales last week as a result of our reps being very active and communicating with our physicians.

And the inventory issue.

How much did that hurt you or help you in the quarter?

We're down in terms of inventory, Glenn.

That's all I will say.

Mike Weinstein, JP Morgan.

Thank you, close enough.

I have got 35 questions but I will narrow it down to just a couple here.

The first question would be Larry.

You said that you didn't expect to pay down any additional debt over the balance of the year and I would like to understand that a little bit better.

Second question is on the Boston -- on the interventional cardiology side warning letter, the process there, it sounds like you are now assuming that the FDA will start their audits maybe later in the fourth quarter and since there are so many facilities that that will take longer.

How do you get visibility on the amount of time that the FDA will require to complete those inspections and do follow-up.

And I guess the imminent question is what's the risk that TAXUS Liberte is a second half of '07 event.

And then the last question will be on the Guidant warning letter, I just want to understand Jim's comments there.

Is the expectation that the FDA will be in the facility in August in St. Paul?

Thanks.

The first one, Mike, on the cash flow in the second half.

We will have substantial cash flow, which would pay down approximately $500 million of debt or defease $500 million of debt except for the following -- we still have a residual pay off, if you will, related to the Guidant transaction in the form of a tax payment.

We have roughly a $300 million tax call on cash in the next half, having to do with international, driven by international structure.

So we will be paying that out of the cash flow that otherwise would have defeased debt.

And also we will be acquiring through some of the pre-existing arrangements, acquiring some technology and so that will -- a couple different things add up to about 200 million.

So overall, there is a $500 million cash usage that will offset what otherwise would be normalized cash flow for the second half.

So once the residual of the Guidant transaction is behind us, the tax payment is behind us, we will be diffusing debt on the balance sheet on a quarterly basis, we believe.

Mike, this is Paul.

Just on the FDA process for cardiology.

Clearly they will audit a sampling of our facilities.

We don't know how many but we can assume at least half a dozen.

We don't know precisely what their auditing teams and schedules will look like but as I've mentioned in our very productive discussions with them, they have indicated that they understand the importance of this and will be responsive.

Clearly, the evidence of compliance that they are looking for will come out, I think, of the early inspection experience that they have.

So if they start in the end of Q4 and carry those audits across a half a dozen facilities into the middle let's say of the first quarter, I think it's highly unlikely unless we just completely miss the mark that TAXUS Liberte would slip beyond Q2.

We have taken into account I think our best guess of timing without any commitments from the FDA and place TAXUS Liberte in the April timeframe.

I would say absent any compelling new data and certainly without question the absence of any competitive product launches in that timeframe, I think gives us quite a bit of confidence that our TAXUS Express business will be stable through that period and we remain optimistic based on TAXUS Liberte performance outside the United States that upon its launch in the U.S., it's likely to contribute a good uptick in our market share.

So I think we look pretty stable now through the completion of the warning letter and only have upside from that point forward.

As far as the CRM timing goes, we're hoping to schedule a meeting with the agency in August and one of the key topics that would be discussed in that session would be the timing of their coming back to look at us.

So until we have that meeting, I think it's premature to talk about the exact timing because it depends really on their schedule.

Jim, just one follow-on.

Jim, when people talk about the risks associated with the story at this point, one of the items that people worry about is that these warning letters, particularly the Guidant warning letter turning out to be a longer or bigger issue over a longer period of time than what you guys are discussing right now.

How do we think about that?

Your discussion on the Guidant warning letter is the FDA comes back in the next couple of months in St. Paul, and that you guys get out from underneath this later this year and you're submitting and shipping new products by the middle of next year.

What's the risk that that is not the case and that the FDA just feels like publicly they need to take a more political stance against you guys?

I don't think it's political.

I think our destiny is in our own hands.

I think that if we do what we need to do to bring ourselves to a point where we have achieved what the agency expects of us, I think that they will respond accordingly.

I guess what I'm saying is our destiny is in our own hands.

We believe that we -- I mean from what I have seen, we have done a terrific job of getting at these 65 items that the agency expected us to remediate.

Now is that enough?

I think until we've had a chance to sit down with the agency, there's always the chance that they are going to say, yes, but we want you to look at this and this as well.

So that's why this meeting in August is so important.

Rick Wise, Bear Stearns.

Maybe a question for Larry.

Larry, you were talking about the debt cost reduction over time, the 550 to 600 million number.

Two questions.

How should we think about that number going down, not thinking about the dollars of debt but how are you thinking about that number going down over the next couple of years?

And would you use asset sales or portfolio or pipeline divestitures or something to help pay that down more quickly?

Well, the number right now, the annualized burden is about 550 and it is roughly a 6% interest rate burden.

We will defease that over the next two years.

I would think that let me get a forecast of what we -- the balance sheet debt at '07, '08, and give you some rough guess.

But we plan to aggressively pay down the debt over the next -- I mean when I say pay down, not all of it, but reduce it over the next 36 months.

In terms of how we do that, the lion's share of the pay down we certainly hope and think will come from internal cash generation, not asset sales.

At this point, I can say that I am not in any discussions regarding substantial asset sales of a business unit or otherwise.

I know we have gotten all kinds of requests and expressions of interest and it's been flattering actually because everybody seems to like what we have.

But we're not in a selling mode.

I'm not in any discussions to sell anything and we think that we're going to weather the next year and come out the other end looking pretty good in terms of the ability to generate substantial cash to pay down the debt.

So, I don't have it in front of me exactly what our forecast is for net debt in '07, '08.

Obviously, that has something to do with our plans for '07 and '08.

We have not shared those yet and we actually haven't finalized '07 yet.

Later in the fall here on November 7th, we have scheduled an analyst meeting in Boston.

Please mark your calendars.

At that time, we will be giving you a better reflection regarding our outlook for '07 and at that time, I can give you a better idea of what our cash flow will be at least through '07 and what our goals are for net debt reduction by the end of '07.

But I will tell you that our goals are aggressive for paying down the debt over the next three years, not paying it off but paying it down.

I understand.

Just another point I think you made the 900 million of normalized EBITDA, again, I appreciate you're not going to give us a specific projection today but when do we get there?

Is that two years away, is that five years away?

That's a good question and the reason I shared with you that is when I was going through the prep for this presentation, you know, while we had a strong showing on cash flow in the quarter, clearly, we are spending heavily on a number of things.

We're spending heavily in cardiac rhythm management.

Not only on quality issues and getting quality at a standard above what industry perhaps is used to, but we're also spending as though we have a $3 billion CRM business, okay, and please remember that.

The spend in this P&L, even though we show -- we showed a lot of profits in the second quarter but that's in light of -- despite a very aggressive spend in CRM.

And the spend rate is at as though the top line is a $3 billion business.

And right now as you know, it's closer to a $2 billion business.

So that's going to get fixed.

That's going to resolve itself once we have a good feeling for the recovery period, how long it's going to take to recover our shares, how much share can we recover.

Secondly, we are spending and beginning to spend a lot on the Xience program.

We are taking this opportunity seriously.

We're building out and preparing facilities.

We're preparing to transfer the technology.

We have got a lot of unusual spend going on right now to transfer the DES programs of Guidant into Boston Scientific.

And we plan to iterate and be successful with everolimus.

So there's a lot of spending going on that is not normalized if you will.

So I went in and did a little analysis that if the CRM business was normalized on a reasonable range and we had right sized the spend, we will generate along with some of this temporary spend on what we call the Horizon project, we will be able to generate closer to 900 million a quarter, well over $3 billion a year.

Now when is that going to happen?

Don't know.

We simply don't know.

The uncertainty right now is how fast we can get our share back in CRM.

And also it's a little unclear how aggressive our spend is going to be to get Xience up and running.

But we obviously are not going to lose, miss out on the opportunity to have the second platform sooner as opposed to later and so that's going to be over the next year or two.

One last one maybe directed at Jim.

The 529 -- if I remember the number correctly pro forma for the second quarter, to go back to Glenn's question, I mean can that number sequentially increase?

Is it going to stay in that kind of range until it sounds like second half '07 when hopefully the warning letter is lifted and you can launch new products.

Or can you start to grow sequentially again at sometime in the next two to four quarters, Jim, without those other factors?

I think the biggest factor is market growth.

And that is a bit of an imponderable at this point.

Market growth is minimal now.

It will return to double-digit levels sooner rather than later.

When is that?

It's hard for any of us to call.

I don't think I'm really alone in that.

But that is the biggest factor driving sales growth.

That and easier comps.

So let me ask for Mark's perspective on this as well.

You know, I do believe we can grow.

No comment on the third quarter but irrespective of the warning letters and great things going on out there.

The LATITUDE system that we have connected to our renewal RF is incredibly well accepted.

We have busted through every goal this organization has set for itself.

It represents well over 60% of our CRTD devices sold.

Our share from an implant basis despite what we went through over the last couple of months has been flat.

So we are seeing our share in CRTD be robust.

We're seeing the adoption of LATITUDE by our implanting and referring physicians, like I said, meet all our goals.

By the end of the year, we'll have between 8 and 10,000 patients enrolled on this system.

It is a statement about the benefit, that it provides the implanting and referring physician and it also is a sense of protection for an individual patient when their device is looked at every single day.

As we move forward, we're going to continue to promote LATITUDE.

I don't believe that over the course of the next couple of years, all devices were going to be followed remotely.

We're in a prime position to do that.

I think growth is -- we have got it in front of us.

Our sales force is strong; retention is good.

We're going to continue to have conversations with our physicians about transparency versus quality.

Again, the quality of what we do at CRM is competitive with anything in the industry and the technology that we have should allow us to grow.

Let me make one final comment here too.

Larry's comments notwithstanding, we will make sure that we invest to support that field force.

Matthew Dodds, Citigroup.

Thanks, a couple of questions.

First for Mark for the CRM sales force.

What are you doing to retain them?

Are there lockups or quotas in place?

I know Guidant before they came over was doing a little bit of that.

What's the program now?

Then also for Larry, on the 200 million in technology procurement in the back half of the year, does that relate to Guidant Vascular or is that some of the other programs you had brought in?

Once again on the question on the field force, let me defer to Mark because he heads that one in hand.

So I'll start that one first.

I get lots of questions about this so let's put a data point out there for you.

Recognize that our CRM sales organization in the United States compared to Q1 of '05 is larger, right?

We have grown this sales organization despite the issues that we have had over the course of the last 12 months.

My normal retention rate in any given year is about 8%.

Excuse me, the number of people, it's 92%.

I lose 8% a year.

Some of that is voluntary.

Some of that is involuntary.

People retiring, people going to competitors or people who just don't cut it and we have to go ask to leave the organization.

My turnover rate right now is running at about 10%.

So, my sales organization and sales management team is doing a phenomenal job and I'm going to protect them.

This is not an issue for them from a financial basis.

We're giving them the materials they need to have the discussions in the U.S. field to be competitive and to explain our behavior to physicians.

Again, it's not a quality issue; it's communication and we are going to communicate.

So I'm feeling very good about my sales organization and they are going to lead us through this third and fourth quarter and I think we do have the product pipeline in their hands around LATITUDE that is going to make them very competitive.

Thanks.

Larry, on the technology?

Yes, on the 200 million I referred to, that's a number of things but the biggest one is in the second half, we hope to acquire our second platform with regards to carotid stenting.

And that would be EndoTex.

So, we fully expect at this point to acquire EndoTex in the second half and that is most of the 200 million.

That's the biggest part of it.

Robert Faulkner, JMP Securities.

I wondered if you could comment on, maybe this is for Mark, on growth outside the U.S. in the market that looked like it deviated more than expected from growth.

Was there a large impact from strikes over there or to what you might attribute deceleration?

Growth outside the United States for cardiac rhythm management continues to be very good.

Recognize that what you are looking at is 45% of CRM revenue is generated from the United States.

I think from prior calls and we'll have a better perspective next month when Medtronic actually reports their numbers.

But the slowdown is here in the United States.

Outside the United States, we have been less impacted by the publicity that we have in the United States and we believe the market continues to grow there at reasonable rates.

We had kind of a sequential it appears 5, 6, 7% deceleration in the market and we have seen in some other spaces that strikes have in fact reduced volume.

But is there any reason to be concerned about continued slowdown -- just deceleration?

It's not like the U.S. of course, which is negative but --

No, I don't believe that.

In fact, if you take a look at the consensus ACC, AHA, plus the European guidelines, they are going to be worldwide guidelines that actually I think are going to stimulate outside the United States growth particularly in Europe.

So we have alignment from the thought leaders in cardiology and electrophysiology about who should receive either a heart failure device or an ICD.

And I think those consensus guidelines that will be issued are going to be I think a positive impact in the European CRM growth.

Following up on pacemakers, pacemakers, although they don't get as much attention, have been weak on a sustained basis.

How should we think about your growth going forward and I guess more specifically, you know, to what extent are you focusing on it and maybe talk to us how you view the role of that business?

So, you need to clarify the question a little bit.

Are you talking (multiple speakers)

Well just how are we going to turn around pacemaker growth I guess globally for the ex-Guidant business?

Sequentially we have shown growth here in the United States from our low of third and fourth quarter last year.

We continue to make our focus -- I think we've got some exciting products that are going to be popping out over the next years.

We also have some additions to our lead line that we're pretty excited about.

And so we're seeing in the United States here actually sequential growth.

It's an important segment of the business we are going to absolutely focus on.

Ken Weakley, UBS.

I guess one of the concerns in the market in terms of the stent business relates to the perception about market entry and given the potential for market share erosion or pricing pressure.

I was hoping that you could discuss your views and barriers to entry both here and the U.S.

And as importantly maybe how the competitive dynamics with the business change when you do get market entry.

Ken, this is Paul.

First of all, market entry in the U.S. has only been achieved by two companies and no other company is likely to achieve it in the near term.

The barriers are substantial and I think they are commonly underestimated.

FDA has continued to raise its bar based on everything it's learned about the drug-eluting stent world from all the clinical data and all the technologies that are presented to it.

So, I think my view is the barriers are high, that it takes a lot to get through them and considering we have yet to see really substantial long-term follow-up on randomized trials for most of the stents in the queue, I think it's premature to really estimate when they will get here and to what extent they will have a great impact.

I think if you look at international markets of course those barriers are dramatically lower, hence the eight competitors already in Europe and closer to 20 in some of the markets outside of Europe.

But I think if there's any basis upon which to forecast the U.S., you have to look at TAXUS holding as much share as all other stents combined internationally.

And specifically in Europe, even though Endeavor has been out now for a number of months and running very hard, Cypher of course has been established for years.

TAXUS is slightly larger than Cypher and Endeavor combined.

Now it's too early to say exactly how we will do in the U.S. but we will be upgrading to TAXUS Liberte.

In some cases before some of the reference competitors reach the market, we will potentially even upgrade to the next generation beyond TAXUS Liberte.

We are looking at filing our IDE for Barracuda before the end of this year.

Bear in mind we will be entering the international market ourselves as the only player with an olimus stent, which we hope to launch by the end of this year and of course complementing that with our TAXUS line.

So we will be in a position to defend a market share leadership position with a second or third generation stent in the United States with both paclitaxel and an olimus around the world and with a pipeline that continues to evolve beyond that.

So you combine that with our inherent leadership in interventional cardiology to start with, I think we have strong regulatory barriers, strong field barriers, strong technology barriers and basically everything you would ask for if one were to define a business plan to defend a business aggressively.

I guess one other question relates to the DRG recalibration and I know this is a debate about timing rollout, the actual level of price cuts on the DRG side.

But I was just curious if you could maybe discuss what expectations we should have if the price cuts ever were proposed in April, if they go through, how elastic your pricing may be in the face of the hospital challenges that have clearly grown to be apparent within that context.

Well two good points.

One is elasticity and one is the cuts proposed in April.

We don't know yet what we will face.

We expect the final ruling to come out in and around August the 1st.

That final ruling may yet be a revised draft, which would have the comment period or it may be the final ruling.

We don't know what it will contain specifically but we do have a sense in our interactions with CMS and everyone involved in the system.

We do have a sense that CMS has clearly heard the concerns about the accuracy of the data, the accuracy of the calculations, the dramatic nature of the proposed shifts and we do have a sense that the revised rule will be responsive to those concerns.

And so that I think gives me -- I have uncertainty as to what changes will be manifest, be it timing, be it transitions, be it the actual numbers, but we are generally of the belief now that the cuts that were proposed in April are not likely to show up in the final rule in August.

So we still have to wait another week or two to see that.

I think the elasticity is a key point.

History shows us that DRG changes roughly transfer about half of the specific shift onto pricing.

So that's a general guideline I would use if a cut is -- pick a number 8%, it might be assumed to have a dilutive 4% impact on pricing over time.

Well ask for a couple more questions and then we will wrap it up.

Joanne Wuensch, BMO Capital Markets.

Hi, thank you very much.

I hate to ask this question because I know it's been asked 14 different ways.

Regardless of what happens to the ICD market, do you think you can take share over the next couple of quarters?

Take share in CRM?

I am thinking ICD.

ICD?

I think Mark is saying yes but you know it remains to be seen.

We'll just have to see.

Obviously, Mark's goal every day is to take share, so --.

Okay.

I have no doubt that your competitors are using your commentary to expect more recalls against you may be too strong but we'll go with that for now.

How do you prep your Guidant sales reps to respond to this?

We prep them with data, right?

And the data is publicly available.

Data is available from everybody's product performance report that compares model by model, currently implanted devices.

I encourage all of you to take a look at that and you can draw your own conclusions.

But the data is going to say that the quality of products that we are shipping out is competitive with what is currently available in the industry.

The issue we're dealing with here is transparency.

We have signed up for HRS, FDA and independent panel recommendations regarding putting low-level failures in the physicians' hands.

We made that commitment and we're going to stay with it and we just need to differentiate between quality and open communication.

The sales organization, the organization as a whole, understands that.

We are in dialogues with every physician in the United States to make sure they understand that.

So that is in fact what we are doing.

One final question.

Historically, Guidant has been right up front they're doing some industry clinical trials, a la [MadeIt 2] etc.

Could you give us an idea of other types of trials continuing to be funded?

And if so, is there anything relatively near-term we should be looking for?

Thank you.

The history of Guidant is tremendous in its lead in expanding indications in the industry.

And we plan to continue that.

I see no reason to concede directional leadership to anybody in that regard.

As far as anything of a (indiscernible) magnitude facing us in the short term, I don't think that there's anything cooking right now that would have that kind of impact but there are a number of other things that will pop out over the next say two or three quarters here that will be very supportive.

Okay, we will have one more question -- one more questioner and then we will wrap it up.

Larry Biegelsen, Prudential.

I have two ICD related questions.

First can you please comment on any intra-quarter trends in the U.S.

ICD market?

For example, did you see a pickup in implant volume as the quarter progressed?

And then I have one follow-up.

I would say that what we saw in the U.S. market was relatively flat.

I would say that our expectation for a go-forward is we should see an increase in the implants in the United States.

I would say the European on a worldwide market is continuing on its growth rate.

A couple of comments about why we believe that we're going to see some growth in the second half of the year.

I think it's consistent with what our competitors are saying.

We all as an industry understand that we've got an obligation here to go out and continue to communicate with the referring physicians so they understand the value of the therapy.

It is remarkably valuable therapy in terms of patient life.

We are doing that.

I believe everybody else is doing that if you listen to what their comments are.

We're going to step that up.

We have got a dedicated sales organization that is doing that.

We're carrying our argument to the referring physician and we believe we will be successful at seeing (multiple speakers) growth rates in the second half of this year.

One additional question.

Some electrophysiologists with whom we have spoken indicate that cardiologists are referring ICD patients and that the issue is the primary care physicians are not.

Can you comment on that and how will you access these physicians?

Specifically, are there any plans to expand the sales force to call on these docs or to do any branded or nonbranded DTC?

Thank you.

I think it depends a lot on the local environment.

I do believe that we are seeing both at the cardiology level and the primary care level a slowing in referrals or a flat referral rate.

I think getting to the cardiologists, we are doing that with our market development sales organization.

We are making all the material that they have, which is exclusively about patients who are indicated and education about patients who are indicated for ICD and heart failure therapy available to our entire sales organization, which is well over 1,000 individuals.

So that process is underway.

We believe we will see benefits from that process.

We are also evaluating different mechanisms to actually carry on this conversation with referring physicians.

Okay.

Thank you very much, Mark, thank you, Jim, Paul.

That wraps our piece up for the day.

The next update will be sometime after this third quarter in October.

And then please mark your calendars, there is an analyst update in Boston substantial part of the day on November 7th, where we will attempt to give you a detailed update of all of our businesses, especially CRM and DES.

And we will also attempt at that time to give you some picture in terms of how we look at 2007.

So with that, we will conclude the conference call today and thank you very much and I'll turn it back to the operator.

Thank you.

Then, ladies and gentlemen, that does conclude our conference for today.

Thank you for your participation and you may now disconnect.