Boston Scientific Corp (BSX) 2006 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Boston Scientific third quarter earnings conference call.

At this time, all participants 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] And as a reminder, today's conference call is being recorded.

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

Please go ahead.

Good afternoon.

And thank you for joining us on our call focusing on the third quarter of '06.

Other speakers today that we have on the call include Jim Tobin, our Chief Executive Officer, and Paul LaViolette, our Chief Operating Officer.

We will be focusing largely on the third quarter results, and we will most likely in Q&A touch on some forward-looking statements, so I will turn it over to Paul Donovan, our Head of Corporate Communications to read the routine Safe Harbor clause.

Paul?

Thank you, Larry.

This call contains forward-looking statements, the Company wishes to caution the listeners that actual results may differ from those discussed in the forward-looking statements, and may be affected by among other things, risks associated with product development and introduction, clinical trials, regulatory rules and competitive offerings, intellectual property, litigation, the Company's overall business strategy, and other factors described in our recent filings with the Securities and Exchange Commission.

Thank you, Paul.

We issued a press release on the third quarter results roughly a half-hour, 45 minutes ago, so you have that for your reference.

Also on our website, we have posted the additional exhibits that are pretty much routine, and some additional supplemental schedules, that will help those of you in the analyst community prepare your models, and do the necessary comparisons to evaluate the quarter.

So I refer you to our website for that purpose.

Obviously, reporting out the third quarter, is a little bit anticlimactic in that we issued a press release some three weeks ago with preliminary sales and earnings, and provided some ranges that we expected to close out the quarter within.

And the good news is that we were able to accomplish closing out the quarter within the ranges that we put forth roughly three weeks ago.

The good news also is that we did, we were able to come in as the quarter was completed at the higher range, the higher the range that was given three or four weeks ago.

When we set forth our preliminary guidance for the quarter, we said that at the top line net sales would be in the range of 1.970 billion to 2.035 billion.

And our actual sales came in at 2.026 billion for the quarter, so right at the top of the range.

When you look at our gross margins, again we are at the top of the range, actually a tad above the range.

We gave a range for gross margins in the quarter to come in around 74 to 75, let's call it, and we actually came in just a tad above 75% of the gross margin line.

On the operating income line, we came in almost spot on with the high of the range that we depicted several weeks ago. 508 million of operating income, that compares to the guidance of 437 and 508.

So we came in at the top of the range at 508 million for the quarter.

And this, by the way, is on the adjusted earnings basis that we report out quarterly, excluding stock compensation, amortization, and special charges.

When you look at the adjusted net earnings for the quarter, again excluding stock compensation, amortization, and special charges, our net income came in at just about the top of the range, 291 million, versus the range that we gave of 231 to 289.

So that resulted in an earnings per share of $0.20 per share for the quarter on an adjusted earnings per share basis, in the previous release we projected that the range would be $0.15 to $0.19.

So again, we were at the top of the range of the guidance given several weeks ago.

So no real surprises from our preliminary results that we conveyed a while back.

We had a good quarter in terms of cash flow.

Our operating cash flow for the quarter came in at $480 million.

That was significantly higher than what we forecasted and pleased to see it.

When you take out CapEx in the quarter, of around $80 million, that gets you to a free cash flow number for the quarter of around $400 million.

On, and that was on a $2 billion top line.

So strong cash flows, very pleased to see the team deliver the results of the cash flow side.

Excuse me.

Focusing on net debt in the quarter, our net debt at the beginning of the quarter at 6/30/06 was 7.735 billion.

At the end of the third quarter, our net debt was $7.352 billion.

So we were able to [decrease] if you will, on our balance sheet, $383 million of net debt.

So we were able to see a nice reduction in net debt in the quarter.

Moving on briefly on the sales side, like I say, we came in just pretty much on the top, or the high end of the range at $2.026 billion.

However, if you pro forma our sales line to give effect in the prior year to the Guidant acquisition, the $2.026 billion in the third quarter really compares to $2.039 billion in the quarter, and then if you adjust for a day difference in reporting periods, but at the top line year-over-year quarter, Q3 to Q3 on a pro forma basis it was really flat.

And if you dissect that a bit further, what you see is our entire cardiovascular group was down about 5% year-over-year.

When you focus on interventional cardiology, the group interventional cardiology was down about 4%.

And that was really driven by largely by DES year-over-year was down 5%.

On the CRM side, our CRM business, again pro formad for the Guidant transaction, and assuming it occurred at January 1, 2005, the CRM business was down 9% year-over-year.

Some good news, in the quarter, our neurovascular business grew about 20%, and our Endosurgery group saw a nice double-digit growth.

Endosurgery grew 10% in the quarter, and that was nice to see.

Overall again, top line was flat at $2.026 billion.

Just a couple more comments on the two big product lines that kind of wag the dog here.

DES, drug-eluting stents, I am sorry, the overall coronary stents was in excess of 600 million for the quarter, so it was nice to see another quarter in excess of $600 million of worldwide coronary stent sales.

The DES component of that was 572.

If we break that down into geographies, in the U.S. we came in with TAXUS sales of 384, and International sales of 188, and Paul LaViolette will spend more time giving you his perspective on the DES market and the TAXUS product line.

Moving to CRM, just to give you a little more specifics on the breakdown geographically, worldwide we came in at 446 million for the quarter.

That was broken down 315 million in ICDs, 131 in pacing.

If you go to the domestic business, our domestic business was 296 million in the quarter, ICDs represented 221 million, pacing represented 75 million.

If you go to our International numbers, our International CRM business was 150 million, 94 million of that 150 were ICDs.

And the remaining 56 million came from pacing.

So hopefully that helps with you analyzing the quarter, focusing on both drug-eluting stents and cardiac rhythm management.

With that brief overview on the financials, let me turn it over to Paul LaViolette to focus on the cardiovascular and the rest of our businesses, Paul?

Thanks, Larry.

Well, quite a bit has occurred in the DES market since the end of Q2, so I am going to concentrate my business update on DES market in particular, and our status within it.

And then we can handle any other information requests you have in the Q&A session.

Let me tell you where I think we are.

In short, without doubt concerns about late stent thrombosis have resulted in some loss of DES penetration.

We think the LST signal is real, it's present in both drug-eluting stent platforms, and I think most critically, it creates no net safety risk versus bare metal stents, and we'll explain that a lot now through the TCT and beyond.

We think that the clinical reality will settle in, and we believe DES penetration will stabilize and restore to historical projections in the next two to four quarters.

In this past quarter and in the coming quarters, excluding Japan, TAXUS remain the leading DES platform, and we expect that will remain the case.

So market dynamics will be the focus, but before getting to that, and can you tell by the comparative revenues that have already been announced, that TAXUS maintained 54% of the U.S. market share.

And for the fifth quarter in a row, plus or minus 1%, it maintained that share despite changing supply, ever evolving data claims, business tactics, and other related factors.

U.S. pricing also remained strong.

Year over year TAXUS process declined only 3% in Q3, that's the slowest rate of change in drug-eluting stent market history.

Starting this spring with the BASKET-LATE clinical trial data, and then intensifying in discussions at PCR in May, concerns have grown about DES safety.

This crescendoed at ESV, when we confirmed both a small but significant signal in late stent thrombosis with TAXUS, and more importantly, we confirmed the finding that safety equivalence was maintained between drug-eluting stents and TAXUS.

The vital conclusion that patient safety with DES matches bare metal stents has been greatly overlooked.

The ACC to PCR effect, all of of which preceded ESV caused the U.S. market to subtlety drift downward, probably by 1% to 2%, penetration.

We guesstimate from 88 to 86%.

Now this was hard to detect at the time, because it was occurring mid-quarter with seasonality across the summer, and overall it was a pretty slight change.

But it probably brought the total high-water mark of the market down to around 86 leading into the ESC.

The later ESC effect was more dramatic, causing a drop probably of 2 to 3 penetration points, to the 83 to 84% range in September, and I think pretty much where we reside today.

We believe stents per case in addition to all this eased up slightly to just below 1.5 per case versus the 1.53, 1.54 that we had seen previously.

That's all for the U.S.

Internationally, a market, a DES market that was gaining 1 to 2% of penetration per quarter in the past year, has seen its growth halted to a pretty steady 53% rate of penetration across all international markets excluding Japan.

Now within Europe, it's a bit of a mixed bag.

Because despite all of the events throughout the summer, half of the countries in Europe increased penetration, while another half slipped.

So I think it's important to note that some grew, and that no country during this time lost penetration of more than 2.5%, while overall Europe remained flat.

I think that provides important perspective on the relative magnitude or small magnitude of markets shifting through the this period.

So right now, we have an international market at 53%, and not receding at all.

We have a U.S. market at 83 to 84% and stable.

So when you consider all of the coverage and the intense scrutiny on the late-stent thrombosis issue in these past weeks and months, I think that is a pretty positive finding.

Now, we are all focusing on TCT next week, in anticipation of the potential effect that the world's largest cardiology conference will have on the data observations, the editorial slant, if you will, and the market perceptions about LST then, and going forward.

We believe that TCT will have a positive effect on DES practice.

We believe that rigorous and independent data analysis will confirm our conclusions that TAXUS remains at least equal in safety, while retaining dramatic efficacy advantages, compared to bare metal stents.

We believe that large-scale studies will confirm that late stent thrombosis rates among the leading stents are indistinguishable.

We believe the small European studies that came out and were the focus of ESC, will be put into proper context, and that some erroneous conclusions that have fueled heightened DES safety concerns will be corrected.

We also believe that TAXUS data set, which has been built on large trials, conservative definitions, long-term follow-up, independent review, and transparent communications, will demonstrate great resilience during TCT, and will further reinforce the safety and effectiveness, and the basis for leadership of the TAXUS product line.

We think in effect that TCT will have a beneficial impact on the market, but we know that that won't happen overnight.

Given its timing in late October, the TCT impact in Q4 will be stabilizing, but penetration will remain in that same 83 to 84% range through the quarter.

We think the market will probably pick up steam throughout '07, as our global position is strengthened throughout '07 by the planned TAXUS Liberté launch in the U.S., by the planned TAXUS Express launch in Japan, and by the planned Promus launch in international, commencing in December.

And obviously by a variety of other pipeline and business initiatives that will fortify our leadership in DES.

So, we feel pretty good about where things stand.

It's been a rough couple of weeks.

We think the data will clearly will be clarified and will support DES' broad utilization, and that as the data settles in, the market will begin to grow throughout 2007.

With that, I'll conclude my DES remarks and switch to the BSC-wide effort to clear our corporate warning letter.

We have continued to make very steady progress on compliance remediation efforts under our Horizon project.

We continue to update the FDA monthly in writing, and every other month or so in person.

And we will meet again later this week with FDA, and I would like to report today to you an update on what we will provide them in the coming days.

We have had six major themes of quality systems change under the warning letter, including field action decision making, complaint handling, corrective action programs, and others.

We committed to implement new and compliant systems by July in all of these areas.

We have achieved that.

We planned to run those new compliance systems for a couple of months to generate objective evidence of their compliance capabilities through September, and we have achieved this.

And continue to compile this evidence as we speak.

We are now auditing those results with our internal audit teams to verify their capabilities, and that step will be followed by third-party audit verifications, to be conducted by Quality [Hub] as we have described previously.

During our last face to face meeting with FDA, which took place in July, we reviewed our interim progress and our commitments.

Following that, we decided to add 3 new elements to our program, and we are now including in project Horizon, our neuromodulation business that's now in scope.

And we are going further back in time into 2005 to assure the audit readiness of our complaint systems and our kappa files.

These changes add about 3 months to our efforts, while in effect allowing us to use that time to further reinforce our readiness on all fronts.

Now, as I mentioned, we are auditing our own systems now.

While we are in the process of completing these components that were added to our scope, we expect to commence our third-party audits later this quarter.

We expect to finish those audits, receive reports, and provide that information to the Agency by the end of the first quarter, which would lead to FDA audits beginning anytime then or shortly thereafter, obviously depending on scheduling.

This timeline is slightly longer than we have conveyed previously, and it reflects both extremely solid progress on all of our prior commitments, and some new important and manageable scope expansions, and I think in aggregate a very robust approach.

And with that, I'll conclude my comments, and I'll turn it over to Jim Tobin.

Thank you, Paul.

Let me speak to you first with my CRM hat on.

I will be going through the numbers for CRM for the quarter, but before I do that, let me briefly remind you of a few things that happened in Q2, and had an impact on the numbers in Q3.

We announce several physician communications in May and June related to our CRM products.

While these announcements were not unexpected, and were in the best interests of patients and physicians, they hurt the market and our share of the market, and it showed in the Q3 numbers.

However, we also made a lot of progress during Q3, in addition to the two days a week I've been spending in St. Paul, I've been spending a day or two a week visiting docs, and have been encouraged by the reception I've received.

The message I have been giving them is that we have begun to operate the CRM business under a different set of principles, and we are seeing progress as a result.

We have some new people in place with new heads of quality in R&D and Manufacturing.

New people running all three of the legacy Guidant plants, and a new Patient Safety Officer.

We got some good news from the FDA toward the end of the quarter, when the Agency approved the use of our latitude patient management system in virtually all of our legacy ICD and CRTDs.

The FDA's approval increases the number of patients eligible to receive the benefits of home monitoring by more than 150,000.

I know that a lot of you are interested in our CRM salesforce, and whether or not we are losing reps.

While we have had a higher than normal turnover in July and August, things stabilized in September.

Because we continued to invest in the field organization this year, we have the same number of customer facing reps now, as we did at the beginning of the year.

Things are moving in the right direction.

It's not showing up yet in the numbers, and it won't for a while.

But I have the sense that things have started to turn.

So with that background, let me turn to the numbers.

The start of Q3 was marked by a decline in implants, caused both by a slowdown in the overall market, and a decline in our share.

I believe much of this is tied to the physician communications I mentioned.

However, the quarter ended on a positive note with an increase in sales for the month of September.

That said, it was still a challenging quarter.

Looking at the Q3 numbers, total worldwide CRM revenue for the quarter was $446 million, compared to 484 million in the third quarter of '05, a 7.8% decline.

In the U.S., CRM revenue was 296 million, including 221 million in defibrillator revenue, and 75 million in pacemaker revenue.

Total U.S. revenue was down 10.5%, compared to the third quarter of '05.

Outside the U.S., CRM revenue totalled $149 million, including 93 million in defibrillators, and 56 million in pacemakers.

Revenue outside the U.S. was down 2.6% relative to last year.

In terms of market share, it is difficult to give you exact figures, since one of our competitors just reported this morning, and another won't report for a month.

However, we estimate that Boston Scientific's worldwide share of the defibrillator market lost 5 percentage points sequentially to about 22.5%, an estimated drop of about 2% from the prior year.

In the U.S., defibrillator share was about 22%, a decline of 6% from last quarter, and a loss of about 1% on a year-over-year basis.

Worldwide pacemaker market share was about 14%, a drop of less than 1% from last quarter, and a climb of about 2% on a year-over-year basis.

In the U.S., pacemaker shares about 17%, a decline of about 2% from last quarter and year-over-year.

As for pricing, price declines were relatively consistent with historic norms.

U.S. core defibrillator pricing declined 1% sequentially, while CRTDs declined 2%, and pacemakers declined 2%.

Our CRTD product mix increased 2 percentage points in the U.S. from 44 to 46, and 2 points in Europe from 40 to 42.

Two indications of our greater competitiveness in the heart failure market.

In the U.S., renewal 3RF continues to increase as a percentage of our mix from 57% to 66%, as people recognize the benefits of both the ease of implant, and the Latitude patient management system.

Let me give you a brief update on the CRM warning letter.

The letter remains the top priority of the CRM organization.

At the end of last quarter, we had completed all 65 commitments that were made to the FDA, in response to the Form 483 observations.

In addition, we conducted a broad assessment of our quality systems, beyond the scope of the FDA specific observations, with involvement by external quality systems experts.

We have now completed our internal reviews to assess the effectiveness of our corrective actions, and the results of our quality systems assessment.

We have provided a regular update to the Agency, including several meetings where we outlined our products, progress.

While the timing of the inspection will be at the Agency's discretion, we anticipate the FDA will begin it's inspection of our St. Paul facility within the coming weeks.

We believe we have prepared well for this inspection and we look forward to it, and we are continuing to work closely and cooperatively with the FDA.

The FDA has also indicated that it will inspect our Clonmel, Ireland and Dorado, Puerto Rico facilities in the near future, relative to submissions we have pending for approval of new products.

We will keep you informed of our progress there.

In closing, let me ask to you keep in mind that Boston Scientific has been in the CRM business for all of six months.

At the 6-month mark, I think most of you would agree that it is too soon to make predictions about whether any deal, not just this deal, will fulfill its potential.

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

While we may realize the potential of this transaction somewhat later than we had originally hoped, there is no doubt in my mind that we will realize it.

We have already accomplished a lot in a short period of time, I am confident that the actions we have taken already, coupled with our long-term strategies, will allow us to restore confidence in both the therapy and our products.

We will continue to improve in areas that need improving, and we will continue to position ourselves for growth.

We understood at the outset that it would take time to make this deal work.

We have a long-term plan, and we are committed to its success.

We expect our CRM business to be a major growth engine going forward, and a substantial contributor to our future success.

I think the worst is behind us, and that both the market and our CRM business are beginning to make a comeback.

I am optimistic that both will show signs of improvement in Q4.

The numbers are still relatively weak, but the trends are in the right direction.

I am confident we will emerge from Q4 and enter 2007 in better shape than we exited Q3, the fundamentals are irrepressible over time, and I have every confidence the market will begin to grow again.

We will provide more details on our CRM business at our November 6th Analyst Meeting.

Before we open it up to Q&A, I would like to put my CEO hat on, and provide some perspective on our companywide Q3 performance, and my thoughts on Q4.

Overall, it was a challenging quarter, as you knew from our announcement last month, that we were going to fall short of expectations.

While we are disappointed in our performance for the quarter, we finished strong and wound up at the high end of the ranges we gave you just last month.

The DES market was softer than we would have liked in the quarter, but our share essentially held steady.

Most of our base businesses performed well, we made progress across the Company on our quality initiatives, with an enormous number of people contributing to that progress.

And we continue to make progress in the integration of Guidant into Boston Scientific.

These are two similar cultures and they are coming together smoothly.

I believe Q4 will be a better quarter for us than Q3, as I say that, I think the CRM business has started to turn.

I think TCT next week will clarify some of the confusion created at ESC on the thrombosis issue.

When TCT is over, I believe people will understand that late stent thrombosis is a very rare event common to the DES class.

And that TAXUS has the same or lower risk of death and MI as bare metal stents, and 50% fewer repeat procedures.

And net, it is therefore safe and effective.

Oh, by the way, it is highly deliverable and available.

I also believe TCT will give people a better appreciation of Boston Scientific's commitment to rigorous science, transparency, and responsibility, as well as our substantial DES pipeline, including even more deliverable stents utilizing either of our two new drugs.

I think the FDA panel will provide even further clarity on the thrombosis issue, and we are looking forward to participating in that meeting.

I fully expect our base business to perform well, with many of them continuing to be leadership franchises in their fields.

So there's a lot to look forward to in Q4.

Now, let me turn it back to Larry for Q&A.

Okay.

Paul, thank you very much.

Jim, thank you very much.

Before we get to the Q&A, let me give you an update on our thinking with regards to November 6th.

As most of you know, we have an Analyst Meeting scheduled for November 6th in Boston at the Westin Hostel in the Back Bay.

And at that meeting, we will try to give you a further deep dive into DES, a further deep dive into CRM, and a better picture, or our picture with regards to our starting to look at 2007.

We will primarily be giving you on November 7th, a good look at our goals and our guidance for sales in 2007 with regards to top line.

We are continuing to work on the rest of the P&L, so to speak, and the business model we want to adopt for 2007.

As you know, following the acquisition of Guidant, we began a company-wide, not just a Guidant integration-wide, but a company-wide initiative to challenge all of our cost structure.

Take a look at our spending and ensure that our cost structure is in-line with our revenue expectations.

We are looking at all as expects of the business and all aspects of the cost structure in an effort to maximize cash flow, our profitability, and of course, to build shareholder value.

We are in the process completing that look and evaluation, it probably won't be complete by November 6th.

It will probably take another month.

So somewhere closer to year-end, we will be completing our look at the cost structure, and share with you complete financial guidance for 2007, probably sometime in January.

So, again, November 7th we will give you a good look at the top line, I'm sorry, November 6th, we will give you a good look at the top line followed up in probably 6 or 8 weeks with a good look at the full P&L for 2007, and then at that time, we'll also speak to 2008 with regards to CRM and DES, to the extent we can.

So with that, I think it's time to turn it over to any questions you may have, and Paul, Jim and I will try to field any questions you may have.

Can I ask the moderator to assist?

Thank you.

Ladies and gentlemen, [OPERATOR INSTRUCTIONS] Our first question is from Mike Weinstein from JP Morgan.

Please go ahead.

Good evening, thank you for taking the question.

I would like to focus on the two sets of FDA warning letters.

And maybe we start, Jim, on the CRM side.

My understanding is you had a meeting with the Agency in September, and then you indicated you had meetings both locally and then at the central level, and then you indicated that you'd be ready in October for reinspection.

Have they not set a date for you yet?

We are ready for inspection.

The dates are up to them.

But we are ready.

Okay.

So you are basically at the point where you're waiting to hear from them when they're coming to St. Paul.

Do they also have to go through Clonmel and Puerto Rico before you are clear there?

You know, I would expect, I'm sort of reading the tea leaves here, but I would expect that they would want to get comfortable with certainly Clonmel, and probably Dorado too.

Before they lifted the warning letter.

Okay.

And let me switch, then, to the other warning letter on the corporate side.

The expansion of the number, I think it's elements as you called it, the three additional elements, what prompted that?

Yes, Mike, this is Paul.

Two things, really.

One regarding the kappa and complaint systems.

It's really, it's not a question of whether or not we wish to change the way those systems are running.

They are now running with full compliance.

The real question is, upon FDA audit, how far back might the FDA reasonably look in our files, to determine if we've implemented reasonable follow-up actions against anything that might have existed in those files.

So call that a file remediation.

And we had been targeting the remediation of those files, in other words, the full audit readiness of any one of those files against our new and compliant system.

We had been targeting that back to a date of the warning letter receipt.

So that you would have back to the beginning of the year, fully remediated.

What we have really done in addition to that, is that what we should target is not the initiation date of the warning letter receipt, but rather the initiation date of when we were put on notice by the FDA, of the need to address those systems in any way, which is really to say when we may have received a 483 observation on those systems.

And so really what we're doing is tightening the system and files for potential review during audit, back to a later date.

That is not overly complex work, but it is additional work, and we essentially added that to our scope as a result of our discussions with the FDA, not as a result of a specific request by them.

But it was clear to us that would put us in better shape.

The Advanced Bionics inclusion really came out of our discussion with the FDA in July, and very simply prior to that discussion, I think we were operating under the premise that because Advanced Bionics had been relatively newly acquired, and because it was operating under a different quality system, it would be subject to a different set of rules.

In our discussions with FDA, we concluded mutually that because Bionics was part of Boston Scientific at the time of the receipt of the warning letter, even though it was operating under a separate quality system, it should be fully pressure tested to our own corporate-wide improvements in the aggregate corporate quality system, we have agreed to do that.

I will comment that Bionics was already working with us under project Horizon, was already making similar improvements, and what we have really done is now merged that set of improvements essentially into a mandatory timeline for FDA readiness.

Okay.

Just two follow-ups then and I'll drop it.

One, do you have an updated sense of how many facilities the FDA is going to want to inspect, when that does happen next year?

And then, two, how concerned are you about not having TAXUS Liberté, ahead of some competing trouble in the stent launches that could come starting late next year?

Well, the number of facilities has not been confirmed.

FDA, we've speculated previously that FDA will certainly visit all of the warning letter related facilities, and then a good sampling of non-warning letter related facilities.

So I could only guess that it would be a half a dozen, plus or minus.

But that's entirely up to the FDA, and I'm sure we'll spend time talking to the Agency about that as we approach the audit.

But certainly, we are not ready for that yet.

TAXUS Liberté is I think it's important for people to understand as of today, TAXUS Liberté is not late.

Even prior to the warning letter, we did not have approval expectations until sometime in Q4.

So there is really as of today, no delay.

And the timeline that we are looking at now, could have us inspected and with a warning letter date, removal date sometime at the end of Q2, or certainly early Q3.

I don't think there's any reason to expect competing drug-eluting stents, based on our understanding of the complexity of gaining FDA approval, based on timelines, that we are aware of, based on data that we've seen to expect competing drug-eluting stents by the third quarter of 2007.

So in our view, TAXUS Liberté will be approved of any competing platform, and based on our global launch of TAXUS Liberté, we would expect that we could convert TAXUS Express to TAXUS Liberté well in advance of any competing platform.

Thank you for taking the questions.

And next we go to the line of Thom Gunderson from Piper Jaffray.

Please go ahead.

Let me pick up on TAXUS Liberté, Paul.

Do you think since J&J, who also has a corporate warning letter, got a carotid stent approved, that there is any chance that TAXUS Liberté could come ahead of the corporate warning letter being lifted?

Well, it's clear to me that we have work to do to get our corporate warning letter in good shape, and to put an expectation that FDA will begin approving things ahead of warning letter liftings is not fair or reasonable.

That being said, it is clear that FDA expects to see objective evidence of compliance to our, to improved and essentially compliant quality systems, before any movement on a PMA would be granted, and obviously there's precedent for that.

But I think that would imply they would have to be in here, they would have to be inspecting facilities,they would have to have a reasonable sense that we were indeed compliant, and at that point they could certainly exercise their discretion.

But certainly not until then, and we have made it very clear to the FDA, we're not going to even ask them to consider that, until we make much further progress into the first half of 2007.

And then can I just go back and clarify on the peak penetration of DES, wasn't sure I followed the language.

Did you take that down from 89% to 86%?

88.

We had not, we did not have 89 as a peak position.

There may be other, you know, market metrics that reached that, but we had 88 at the peak, took it down to 86.

And then from there, to the current range of 83 to 84.

And two-step production, one gradual through the summer, and one fairly abruptly post ESC.

But again, my view, given all of the noise, given essentially the firestorm around late-stent thrombosis, for it to have generated a 2% or 3% change in overall penetration, and in consideration that the data will clearly show that aggregate patient safety has not changed, and in fact, may still favor TAXUS versus bare metal stents, that that's a relatively manageable and hopefully short-term regression in overall penetration.

And it's your position that we have bottomed on that mix, and that it gets back to 88 in 2 to 4 quarters, did I hear that right?

Our position is that it has bottomed in this quarter at around 83.

I will say a lot depends on TCT.

We think that TCT will be favorable.

We have been working diligently on the symposia.

We know a lot about the data to be presented.

We have an Analyst Meeting where we'll try to capture all this and put it forth.

And we think TCT will have a net beneficial effect and will represent a stimulus to change.

So a lot is riding on that, and I think we will have a chance to gather together potentially a week from today, and reflect on the impact of the first several days of TCT, but that's our view is that it is bottoming out and that it will begin to turn.

Last question.

Where are we TAXUS in Japan, and do you think the LST issue and the lack of Plavix has any impact on that?

No.

First of all, our timing remains unchanged.

We expect an approval in the second quarter sometime.

We approached as we did the FDA, PMDA with our late-stent thrombosis data, and they appreciated our scientific rigor, our prospective analysis, and our transparency.

And we don't think that will have any effect on approval timing.

I think it's safe to say that Japan manages stent thrombosis differently, 60% of all drug-eluting stents are placed with iVid guidance, and clinical trials conducted in Japan report a different stent thrombosis rate.

So our sense is that we are on schedule, penetration for Japan will remain strong and we will be in good shape.

Thanks.

And next we go to the line of Rick Wise from Bear, Stearns.

Please go ahead.

Good afternoon, everybody.

Jim, if I could follow up with you on a couple of things you were commenting on regarding CRM.

You indicated that in September, it looked like there was a rebound, things are starting to turn.

Fourth quarter outlook better.

Can you help us understand what you are seeing?

Is this accounts that you were shut out of, reopening?

Is it, you know, just what concrete indicators are you looking at when you make those comments to us?

We are seeing sales in more accounts in September than we did in July and August.

We are seeing, you know, higher numbers.

And it's more qualitative, though.

You talk to people and they have had a period here of relative silence.

And every month we go with nothing bad happening, you see people more willing to consider that maybe there is a place for us in their procedures.

So you know, and everybody knows that Guidant has for a long time, has been a leader in terms of the trials they ran, and in terms of the products they introduced.

And, you know, no one wants to see Guidant, you know, shut out forever.

It's just, we just need to give them a reason to come back.

Okay.

And maybe you can comment a little bit on some of the questions today.

In terms of inventory, I mean, are you seeing inventories at hospitals change, the same?

And maybe comment on your performance in this quarter, relative to pricing and sort of the end of quarter bulk orders.

What kind of trends do we see there?

Yes.

We probably have a little less inventory out there at the, say, October 1st than we did July 1st, but not a meaningful amount.

It's not a big factor.

Pricing and bulking, none of that is, there is really not a lot of change.

There's nothing really to talk about.

Okay.

Larry, you haven't made any comments on the fourth quarter.

But if stents are stabilizing, if ICDs are potentially improving, debt is down a little bit, I assume it is reasonable to think that fourth quarter is going to look better than the third quarter?

Well, we certainly hope so.

We haven't provided any guidance as we said this year in '06, we are going to stay out of the guidance business because of all the moving parts.

I think that our roll-ups for whatever it's worth, show a bigger fourth quarter than a third quarter on the top line.

Year-end adjustments, who knows?

And as far as net debt, I think probably at year-end we'll be back up to around 7.6 billion in net debt.

So a marginal increase or some increase, largely driven by taxes, or a tax payment that's due with regards to the Guidant transaction.

And also we have a couple earnout payments that are sizable that will pay.

So net debt will be probably around 7.6 at the end of the quarter.

But generally speaking, yes, we are looking for an uplift in the fourth quarter.

Okay.

And last, neuro's strong performance, can you give us any perspective on the drivers there?

One of your competitors cited a tougher pricing environment as the reasons for their growth.

You know, to what degree are you guys dropping that?

Was that a factor for you?

How sustainable is that?

The primary difference, I mean, the growth aspect up in the neurovascular, was always good double-digits, but it's a little stronger now.

And it has a little bit to do with J&J, I believe, having some issues with their products.

And we are taking advantage of that.

And in neuro are you referring to neurovascular, Rick?

I was thinking on both the Advanced Biomics, and actually neuro as well.

I apologize, I didn't say it clearly.

Neurovascular was primary to coil, I think J&J had some issue with coils, so we picked up a little share there.

On the neuro stem side, this spinal cord business continues to be very healthy.

Auditory is coming back a bit, but it's primarily the success of the precision IPG.

And we have seen prices change and I'll be the first to admit that.

Our prices are up fairly substantially from Q1, and we have maintained those price increases.

I am familiar with the comments you are referring to, and it's not clear to me the source of that.

We have seen significant price increases.

Very helpful.

Thank you very much.

And the next question is from Katherine Owen from Merrill Lynch.

Please go ahead.

Thank you, good evening, everyone.

A couple of questions.

First just as a follow-up on the warning letter timeline with the CRM products.

I think last quarter, or back in July, you had indicated starting to get some of the new products launched in the first quarter, and given the timing of the expected inspections, what's a reasonable assumption in terms of when you would expect to see some of the new products come out on the CRM side?

Well, first we have to pass the inspection, okay?

So let's not count our chickens before they're hatched.

But presuming count our chickens before they are hatched.

But presuming that the inspections happen sooner rather than later, it will take some time for all that to settle down.

I would think that we would see some new product approvals starting in Q1.

We've actually had a couple approved in Q3, which was something we hadn't frankly anticipated.

But it was very good news.

So you know, I think you should expect to see new product approvals, let's say maybe late in the first quarter.

Okay.

And then just on the Promus launch timing, Abbott indicated on the call today that they weren't yet supplying any Xience or Promus to you yet.

When would we expect to see that?

And any more specifics on the European launch timing?

Our expectation is that, you are correct, while there have been no stent supplied to us, that they are currently in production.

And we are expecting to receive them in the next 4 to 6 weeks.

We're expecting to initiate commercial activity in December.

And then we expect to ramp up the scale of the commercial launch through the first half.

Great.

Thank you.

And our next question is from Tao Levy from Deutsche Bank, please go ahead.

Good afternoon.

I was just wondering if you could comment on what you are seeing in the U.S.

ICD markets sequentially heading into the fourth quarter?

St. Jude this morning said they were looking for something flattish to what we saw in the third quarter.

And I would just like to get your view.

I think that market needs silence from us and everybody else for a while, to recover from the bruising we have given it.

And I know of nothing right now from our side that would, that would impact there.

But you know, I think it will take a while for the market to come back.

And I have been saying that since, you know, second quarter.

I think it's a one-year process.

It has to do more with the referring physicians than it does with the implanters.

And they are going to be a little slower to come around than I think the implanters themselves would be.

So, I just, I think that because of, the therapy absolutely works, and is absolutely life-saving, the data is absolutely clear, it's inevitable.

It will just take a while.

Okay.

And I hear you guys started doing any work on putting Everolimus on a Boston stent?

Yes, we have.

We have two substantial programs under way.

One is focused on technology transfer in general, so that we are comprehensively vertically integrated in the development and manufacture of enrollment, and we have a second program that we have termed as a project name Everolimus, which is the combination of the Everolimus drug and the Xience polymer with our Barracuda platform.

And that is a program that is fully staffed, fully functioning, and well under way.

Great.

Thanks.

Next question is from Bob Hopkins from Lehman Brothers, please go ahead.

Thank you, and good afternoon.

Jim, on the ICD warning letter side.

Do you think there's a chance the FDA might want to inspect some of your suppliers on that side as well?

I don't think so.

And just to be clear on the timelines here, you had said previously you thought the ICD warning letters would be lifted by year end, do you still believe that at this point?

I think that's quite possible.

It's not a given.

Nothing is ever a given until we have proven to all concerned that we have delivered on our promises.

But I think that is still a distinct possibility.

And then I guess from your comments with one of the previous questions, that the lag time between lifting of the warning letters, and new product out is really only a couple of months?

Well, what I meant to convey there was that you would see things start to come out, they are not all going to come out at once.

It will happen over a period of time, some things that we're interested in, we haven't even filed yet.

But we can't expect them to pop out right away.

But I think time will tell.

I think that we have more work to do between here and there.

So I don't want to paint an overly optimistic picture of the timing of new products.

But I think that during the course of next year, there will be a steady flow.

How about, how should we think about, I think your next major ICD platform, is that called the Frontier?

Yes.

Frontier is the project name, the actual product names are [cognis and elocin]

So how long should we think about until we have a brand-new line of ICDs out, post whenever the warning letters are lifted?

I would say give it a year.

Give it a year?

Outside the United States?

Oh, outside the U.S. should happen midyear.

U.S. is a year.

We're expecting I think July and outside of the United States, but a year inside.

Okay.

So, '08 inside the U.S. then.

And then just one other question on the FDA side.

I think Q4. [laughter]

Okay.

One last question on the FDA side, switching over to stents.

Paul, did I hear you correctly that you believe that there's probably six sites that need to be inspected before things will be all clear on that side?

Well, we have 26 sites so it can't be more than that.

And we really don't know.

I think FDA will take a pretty good sampling of places, we expect them to go at least to one international.

We have had a couple domestic sites specifically cited in warning letters.

So I don't think it can be less than 4 or 5.

It certainly could be more than 6.

And then it's up to the FDA to decide when they have had a reasonable sampling.

Bear in mind, we have had a corporate warning letter, it flags us for systemic issues.

They are going to look at enough locations to assure themselves that we have implemented systems-wide corporate-wide changes.

So we are preparing every site to be inspected.

J&J, if I am correct I think, had 11 sites that needed that needed to be inspected.

They are 2.5 years and not finished yet.

What gives you the confidence that you can have all this completed by the timelines that you laid out in your prepared remarks?

I am going to just stick by our timelines.

There's no comparison in any regard to any company.

I think the number of corporate warning letters issued historically is just a handful.

We know precisely what we need to do.

We're working in very close concert with the FDA to understand our scope.

We have our scope nailed, and are executing against that scope flawlessly.

Minor changes to scope have been added, and we have integrated them, resource [stents], put timelines together, and executing on those, and I think we feel really confident about our ability to deliver on this.

Not to mention the FDA, when we got the warning letters, spent the time on a conference call to address that issue.

Right, right.

Okay.

Thank you very much.

Fair enough.

I appreciate the time.

And the next question is from the line of Dhulsini de Zoysa from Cowen.

Please go ahead.

Thanks.

Jim, I was intrigued by your comments about the time you're spending visiting docs.

I would love for you to provide a little bit more color around that.

After all and by your own admission, you have only been in this business for 6 months, I would imagine while your reputation may precede you for a lot of EPs, you don't have, well Boston Scientific doesn't have the institutional goodwill on the EP side.

And so I would like to know how those visits are going, and as a follow-up, to that, if could you include what you are seeing in the marketplace in terms of any kind of long-term contracts that your competitors might be signing?

That would be great.

Okay.

It's very interesting to me, but for 100 years now, we've been in the EP business with our catheters.

And it's the smallest business we have, and yet practically every EP that I talk to, somehow that product line creeps into the conversation.

So we, and most of them are using our product.

And so the idea that we're unknown to EPs, frankly to my surprise, turns out to just be not true.

So I show up, and you know, they start talking about catheters, and then it's sort of like and what's going on at Guidant?

And so it's really very, very interesting to me.

Just how much I guess weight that EPT business actually carries in the marketplace.

As far as long-term contracts go, that's not an issue that has come up once in all those meetings I've had over the last two or three months, not one time that that come up as a point of discussion.

I would also add that the fact that we have a leading CRM platform, the leading overall interventional cardiology platform, and a very broad cardiovascular platform, certainly from the contracting perspective, has made us a company that no customer wants to be without.

Okay.

That's great.

And then if you would, just one more thing.

We heard from St. Jude this morning about their competitive hiring.

Would you share with us, in your contracts with the reps, what your non-compete timeframe is?

You know, I don't want to go into that.

We have the same head count today that we had nine months ago, 10 months ago.

There have been competitive hires in all directions.

And you know, one of the things that people do, is hire people with non-competes and then put them into EP businesses.

We have one of those.

So we are not really at anything like the disadvantage that you might have heard from the other guys.

Okay.

Great.

Thanks very much.

Next is the line of Larry Biegelsen from Prudential.

Please go ahead.

Hi.

Thanks for taking the call.

Paul, you talked about the drug-eluting stent penetration rebounding after TCT.

What gives you confidence that the publicity leading up to the FDA panel in December, and any potential outcomes from the panel won't have a negative impact on drug-eluting stent usage, and then I had one follow-up.

I guess the data.

I really think if I trace back the BASKET-LATE trial was categorically anomalous, it doesn't track with all the other trials.

When you look at the compelling data for 3500 patients randomized in TAXUS, there's zero signal for incremental safety exposure to drug-eluting stent patients.

And yet the news has been about incremental risk.

And I think it's been basically off base.

So as the data is actually the subject of the discussion, as the data is synthesized and presented at TCT in a manner as I understand it, it will be, I think the message will be fairly straightforward.

That drug-eluting stents are at least as safe as bare metal stents, while providing dramatic efficacy improvements.

Then we move toward the panels, certainly we are aware of the data that will be presented at the panels.

We, of course, stimulated a lot of this with our own prospective analysis, which we brought to the FDA, I will tell you that the request for analysis for panel preparation has caused us to do very little incremental work.

And so we know, we know what is going to be presented by Boston Scientific.

And it will further reinforce I think the safety conclusion.

I can't speculate on what else the panel will bring.

But I find it hard to believe that a take away from the panel will raise any incremental concerns about safety.

Maybe a few suggestions about how to improve safety might come out.

But I think the safety message will be continuously reinforced now through the end of the year.

And I think that's why we believe penetration in '07 will begin to pick back up.

Thank you.

And one follow-up.

Could you talk a bit about the positioning, or how you'll position [inaudible] relative to TAXUS?

You know, I'm going to spend some time.

We have a TAXUS and drug-eluting stent update at the TCT.

I believe a week from this afternoon.

And I'm going to focus on that for everyone's edification, so I'll just hold my comments until next week.

We've got time for a couple more questions.

And then we'll wrap it up.

Thank you.

Next we go to the line of Glenn Reicin from Morgan Stanley.

Hi folks.

One very easy question and another more complicated.

Can you tell us what's happening in the bare metal business, both U.S. and internationally?

And then, as we go into TCT, the one thing that is a little bit confusing is you and other clinicians have been talking about going through the data, and basically showing there is a class effect here, as opposed to impacting any one stent family.

And what doesn't make sense is I've noticed in the last three weeks, J&J has gone negative on you, saying that this is obviously a problem that is unique to your stent, and not theirs, specifically on overlapping situations.

And I just want to know how that's all going to pan out here.

I actually thought J&J went negative on us about a decade ago.

Well, that's true, too.

Let me give you the bare metal numbers, okay?

Last year, Glenn, we did $32 million in the quarter on bare metal stents, this year we did $35 million.

What's the breakdown, U.S., international?

U.S., U.S. is 12.

Let's see. 12 versus 8. 12 this year versus 8 last year.

Thanks.

And then, you know, Glenn, for TCT, I guess there are really two questions.

The first question is, what does the aggregate data show, the aggregate data in this case representing large-scale registries that have reasonable post-implant follow-up, that tried to find the relative rates, of course they are low frequency events, but the relative rates of late stent thrombosis in a TAXUS and a CYPHER platform.

And as you are aware, there are multiple registries that follow thousands of patients and in no registry has the rate of late stent thrombosis not been recorded for J&J.

In most of the registries, the rates are surprisingly comparable.

So it's very clear from the large-scale studies, which are required to find such a low-frequency event, that the rates are comparable.

So, that is it there.

There's really no credibility in the clinical community to recognize that it's not there.

And then you have to look at the fundamental distinction of whether or not there's a statistically significant difference between bare metal stent performance, and a drug-eluting stent performance in the CYPHER data set.

That's when we start to introduce questions about definitions, what are we including?

Are we including probable, or only angiographically confirmed?

And as you know, our definitions have been conservative, but now that we have an industry-wide agreed-upon set of definitions, you will find that that set of definitions actually is extraordinarily in accordance with what we've been using, and will probably change the data that's being presented by other companies.

You'll also find that the statistical analysis that have been used to create a nonsignificant P value might come under question.

And might change the overall outcome.

So I'm reasonably confident that based on objective independent analysis, we will see a clear signal with CYPHER, and that that will be reinforced when we look at the aggregate registries, and the large-scale meta-analysis that will be presented at TCT.

What about in subsets, any conclusions there?

Let's go ahead and wait for TCT, but we've certainly seen positive subset analysis, and I think we will see some more at TCT.

And overlappings, is that a special situation?

Because of stent design, or do you think that is a similar situation, too?

We have never seen an association between overlapping stents and former clinical performance.

In fact, our clinical trial data sets for overlapping stents have been positive.

So that is such a minor subset and such a low frequency signal, there would be no way to draw a conclusion about clinical outcomes there.

All right.

Thank you very much.

Okay.

Thanks, Glenn.

One more question, one more analyst, and then we'll wrap it up.

Thank you.

And that will be Bruce Nudell from Sanford Bernstein, please go ahead.

Thanks so much for taking my question.

Paul, I have one question for you.

And Jim, I have another for you as well.

Paul, what do you think that the differential risk pe year of late stent thrombosis is between DES and bare metal?

Following that, do you feel that the kind of differential risk is most concentrated in lesions that are high restenotic tendencies, and then the third part, which actually gets to Glenn's question, I think, is that in the low restenosis-risk patients, if there is some differential late stent thrombosis risk, do you think it's netted out in terms of overall safety outcome?

So like in BASKET-LATE when you look at low-restenosis lesions, you know, do you think when you consider the price of TLRs, in terms of MIs and stuff, that whatever late stent thrombosis occurs in easy lesions, that it will kind of be netted out by the MI burden associated with TLR, even in easy lesions?

Yes, no, and maybe is the answer.

Thank you, Paul.

So, the relative risk, I think first of all, the relative risk has been misreported recently, including on the ACC website editorial.

The relative risk is approximately 0.2% per year, for stent thrombosis in particular, which means the average patient, we would have to follow 500 patient years to find an event. 500 years of an individual patient follow-up for an event.

So it's a relatively remote incident.

Now is it concentrated?

Part of our problem historically with interventional cardiology is we can't pick the restenosis, and that's why drug-eluting stents have been applied for effectively all patients.

The relative risk increases with diabetes, it increases with a few other risk factors, but patients with nice isolated stenosis often restenote.

So it's very difficult in a low frequency event to find a particular concentration for restenosis, as it relates to overall risk, it is absolutely offset.

We have seen that in the Cleveland clinic data.

We have seen that in the TAXUS data.

This small signal absolutely does not translate into incremental risk for MI, or we are not really using the Mace definition anymore, according to the [double] group, or cardiac death.

So for those patients that have restenosis, as a function of the risk of reintervention, as a function of the manifestation of restenosis, in the form of unstable angina, and the corresponding risk of MI, they are at greater risk, and in the TAXUS data set numerically, they are at greater risk of MI and death, than the DES patient population.

So, but just to follow that, I mean, just in the like easy lesion, large vessel, nondiabetic, small length lesion, you still think that even in those patients, DES will prove to be just as safe as bare metal?

The relative reduction in restenosis in all patient populations has always been about the same.

So the relative risk reduction is there.

The incident of stent thrombosis in those patients might be extremely remote, but in all cases, the rate of restenosis and the clinical [inaudible] of restenosis seem to offset the late stent thrombosis rate.

Great.

And Jim, the other question is, you threw out a couple market shares for ICDs.

In the U.S., where do you think Medtronic's share was this, in Q3?

Higher than ours.

But, you know, St. Jude was postulating 21, I think you said 22.

Are you sticking with 57% share in the U.S.?

For Medtronic?

I don't know what it is.

Okay.

Let's wait a month and they will tell us.

Great.

Thanks so much, guys.

All right, thank you everyone for tuning in today.

We will keep you up to date.

We have an Analyst Meeting at TCT next week, and then a follow-up much broader Analyst Meeting November 6th in Boston at the Westin Hotel.

And we look forward to your attendance.

Good afternoon.

Thank you.

Ladies and gentlemen that does conclude your conference for today.

Thank you for your participation.

You may now disconnect.