Boston Scientific Corp (BSX) 2006 Q4 法說會逐字稿

Welcome to the Boston Scientific fourth quarter and year-end earnings conference. [OPERATOR INSTRUCTIONS].

I would now like to turn the conference over to Dan Brennan, Vice President Investor Relations.

Please go ahead, sir.

Thank you, Kathy, and good morning, everyone.

Thank you for joining us.

With me on the call today are Chief Financial officer Larry Best, Chief Operating Officer Paul LaViolette, and Chief Executive Officer Jim Tobin.

We issued a press release earlier this morning.

There were some financials attached to the release and we have also posted schedules to our website which you might find useful as well.

The agenda will include a review of the financial rules from Larry, an update on CRM business from Jim, a review of cardiovascular and other businesses and update on our quality initiatives from Paul, a CEO perspective from Jim, and question-and-answer session.

Before we begin, we will be making forward-looking statements on the call today, so I would like to remind everyone of the Safe Harbor Statement.

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.

With that I will turn it the over to Larry for the review of the financial results.

Thanks, Dan, and good morning.

Before I begin, I would like to apologize for my voice.

I had a little bout with the flu this week so my voice is a little unusual so I apologize, but we'll proceed anyway.

The first thing on the list is how we did in Q4, and then finished out the year.

And not much of a surprise, I don't think, because we already have issued the preliminary sales numbers as well as CRM numbers.

So we will be somewhat brief on the quarter and the year itself, and attached to the press release this morning are quite a number of exhibits with some added detail to give all of you the information you need to do your own analysis on the quarter and the year.

First off, on an as-reported basis, the numbers look great.

Cardiovascular, the overall sales number was up 34% on an as reported basis.

Now, obviously, 34% has a lot to do with the acquisition of Guidant in April of 2006, but it does at least point to the increased size and scale of Boston Scientific today, as we transform the Company into the microelectronics field and CRM field earlier in 2006.

So we get a nice lift on our overall size and scale of business. 34% over the prior year.

Last year in the quarter we had a $1.5 billion top line.

We now have over a $2 billion top line.

Our cardiovascular business obviously got the biggest lift.

A 40% increase in scale of business with the acquisition in it.

Last year prior to the acquisition, we, in the fourth quarter of '05, we had a $1.1 billion top line, and in 2006 with the acquisition included of Guidant we have a $1.6, going on a $1.7 billion cardiovascular business.

So you can see the impact of the Guidant acquisition is substantial new scale of cardiovascular business.

We think we now have a cardiovascular business closing in on a head to head rates with Medtronic, which is obviously the blue chip cardiovascular company and has been for many years.

When we look at the groups that have not been impacted by the Guidant acquisition, we see some nice solid results.

Our endosurgery business came in on an as-reported basis up 11% at $351 million.

Of course, our neuromodulation advanced bionics operating unit continued to do extremely well.

They came in at $67 million, up 43% on an as-reported basis.

So very nice growth in endosurgery and strong growth in neuromodulation.

If you break that down into, again, on an as-reported basis, to give you some idea of the scale difference from the prior year, our domestic business is up 36% on an as-reported basis.

Last year at this time, we had just under $1 billion top line, and in '06, just completed, we had close to a $1.3 billion top line, up 36% on an as-reported basis.

Then you look at the increased scale of Boston Scientific in the international markets that's apparent in the fourth quarter numbers, last year our international business in the fourth quarter of '05 was $612 million, and this year, fourth quarter of '06, $804 million, or up 31%.

So again, granted, it has the acquisition in April of Guidant, but these numbers do reflect a new scale of business worldwide for Boston Scientific, and a platform that we think is going to enable us to grow at a higher rate over the next three to five years.

If you look at the pro formas, the pro forma comparisons, Q4 of '06 compared to Q4 of '05, you begin to see the impact of the two big markets that tend to sway the numbers one way or the other, and what I mean by this, for those of you that haven't looked at the numbers one way or the other, and what I mean by this, for those of you that haven't looked at the numbers that closely, on a pro forma basis, otherwise assuming we acquired Guidant at the beginning of '05, and then you compare the numbers on the sales line, which is now more apples to apples, even though the operating -- the operations were controlled by a different company in the prior year, you see our domestic business -- well, our overall business was flat, actually down 1% on an as-reported basis.

Otherwise on a pro forma basis, assuming Guidant was acquired in January 1, 2005, you compare those numbers and in 2005, the consolidated Boston Scientific with Guidant for 2005 would have reported a number of $2.093 billion.

So almost 2.1 billion.

If you look at now the pro forma numbers and the actual numbers in the fourth quarter of '06, at the same basis of reporting, our total sales was $2.065 billion, or you can almost call at flat year-over-year.

Now, that year-over-year flatness has everything to do with the condition of the CRM market and the condition of the drug eluting stent market.

Most of you have followed both of these markets.

Both markets have been impacted by concerns, perceptions, media attacks on the safety around CRM ICDs, as well as more recently in the second half of '06, safety perceptions regarding drug-eluting stents.

And as I go through some of the other slides and information I have before me, it's apparent that these two markets have gone through, in '06, quite a bit of trauma.

The good news, most of this trauma has to do with a perception of safety as opposed to the actual data that supports the safety and efficacy of both ICDs and drug-eluting stents.

So the good news, we think, is that the data supporting the use of ICDs and CRM market as well as the data supporting drug-eluting stents is overwhelmingly positive.

And so most of what we have dealt with in the last year that is reflected in this pro forma presentation is some recalls that created a perception around quality and safety, and that's not only with cardiac rhythm management but also drug-eluting stents.

So in the big picture, we think the worst is behind regarding this -- these perceptions of safety.

We think the data will rule the day, the data around CRM and the data around drug-eluting stents, and that we have bottomed out, if you will.

And that both of these markets in 2007-2008 will see recovery, and nice recovery, and we'll have more to say about it in a few moments.

So on a pro forma basis, scale of Boston Scientific, it was a flattish period in 2006.

And, of course, similarly on the fourth quarter.

If you look more closely on the pro forma side of interventional cardiology and CRM, you see interventional cardiology numbers were down, about 7% on a worldwide basis.

Again, largely because of this safety question perception, media attention, both not only in the United States but outside the United States.

Again, we think we've bottomed out, the market has bottomed out and will recover.

CRM, likewise, was down in the fourth quarter year-over-year.

CRM came in at $489 million.

It actually was an uptick, a positive uptick over Q3 of '06, so we think we're moving in the right direction, but it was 489 compared to prior year 506, down 3%.

I hope that helps you understand the period that we're going through with both CRM and drug-eluting stents.

Just to spend a couple more minutes on it with some real numbers, if you look at our drug-eluting stent franchise, last year, fourth quarter of '05, our drug-eluting stent franchise came in at $606 million.

When you fast-forward to Q4 of '06, we came in at $506 million.

So year-over-year, $100 million decline in our DES business.

But if you look at the numbers in '06, it's very interesting to watch.

Off that $606 million DES number in Q4 '05, we move to the first quarter of '06, up to $633 million in drug-eluting stents.

In the second quarter we grew further to $647 million in drug-eluting stents.

So the first half 2006 was pretty solid in terms of the strength of our DES business.

It was really in Q3, Q4 that the media attention, the European data, the panel that was carried out by the FDA, that it really shocked the market a bit.

Perceptions grew on the safety issue, and our Q3 number for DES was 572.

Our Q4 number was 506.

I will get to our Q1 expectations, and what you're going see is that we believe that this DES perception issue regarding safety, because it is a perception issue mostly, because the data is pretty pristine with regard to safety and efficacy of drug-eluting stents.

We believe this market has bottomed out and this market is recovering, especially in the U.S. on penetration, and also the growth -- we'll see renewed growth next year in European markets.

Let me move just for a moment to the CRM market, because it's not too dissimilar.

Fourth quarter of last year, fourth quarter of '05, our CRM number was $506 million.

Now, the safety concerns, quality issues started back in '05.

So the fourth quarter was down from the prior quarters, but if you compare that 506 in CRM to this most recently completed fourth quarter of '06, 506 compares to 489.

So you can see we didn't see a dramatic drop in the CRM business year-over-year.

And again, I think this denotes a bottoming out, that perceptions are starting to reduce themselves, and we're seeing a strengthening of the CRM market overall as well as our own Boston Scientific cardiac rhythm management business, and Jim Tobin will say more about this in a couple moments.

Let me move to the P&L for the fourth quarter.

We came in on an as reported basis $0.19 per share.

On a GAAP basis we use for measuring ourselves adjusted EPS basis.

After you take about a $0.01 from the merger and acquisitions that weighed it down about $0.01 a share, taking it it down to $0.19.

Otherwise we've gone from an adjusted earnings number, EPS number of $0.20.

You take the merger-related costs out.

It would take you down to the 19.

So, when we don't include the merger costs, we're up to 20.

And then we have an in and out for the other.

We have $0.10 impact from taking out amortization and stock compensation on a per-share basis, but then we added back, because we add reversal of an income tax reserve, that's also about $0.10 per share.

So the net of all this is a $0.20 earnings per share number for the fourth quarter.

The tax reserve issue has to do with reversal of accrual on earnings that we had set up in anticipation of bringing earnings back into the United States.

With the Guidant acquisition is and our debt overseas, we now are going to use those earnings overseas outside the United States.

We have decided not to bring them back.

Therefore, we're required to reverse the reserve.

Pretty straightforward.

Nothing magical about it.

So that is a depiction of our adjusted earnings for the fourth quarter at $0.20 a share.

In terms of if we pro forma the fourth quarter, and we look at the income statement, I've already gone over the top line.

It it's flattish, down 1%.

But you see a de-leveraging of the P&L in the fourth quarter, where income before income taxes is down 15%, and our adjusted EPS number is down 15%.

So there's a de-leveraging of the P&L in the fourth quarter of '06, largely because we have not -- we have decided not to take down spend during this period of time, and you'll see once I get to the first quarter of '07, similarly, a bit of de-leveraging.

The reason for this is an intentional decision, or a decision not to take down spend.

We believe that both the CRM market and the drug-eluting stent market have bottomed out.

We actually believe that both those markets are going to serve us well in the 2007 time frame, both are going to recover, and we decided not to take out spend in the short term because we believe the cost structure we have in place will be needed to grow these businesses because the market will allow that growth in '07 and '08.

That's our decision at this point.

If, in fact, these markets do not recover at the rate or in the time frame that we anticipate, we will relook at our spending, and while we're controlling spending as we speak, we may have to apply greater discipline to spend.

But for the first quarter, we are going to see how the markets recover.

A little bit before I close my commentary about the balance sheet.

Our balance sheet is in pretty good shape.

We have a little more risk than we'd like, given the debt from the acquisition of Guidant.

But let me give you a perspective on the where the balance sheet was at the end of 2006, and why we feel relatively good about the -- given the growth prospects of the company with the balance sheet.

First off, if you go back to when we acquired Guidant, April 21 of 2006, we forecasted that at the end of 2006, just completed, we would have a net debt of $9.1 billion.

In actuality, our debt at the end of 2006 is actually $7.2 billion.

So compared to where we were when we launched the Guidant acquisition and closed the Guidant acquisition, instead of the projected $9.1 billion in net debt we actually have $7.2 billion in net debt, or $1.9 billion less of debt than we thought we were going to have when we actually did the deal.

So that's the good news.

And a lot of that, by the way, had to do with less tax than we anticipated on the Abbott sale, more stock option proceeds from the Guidant exercise of stock options, and a larger cash balance at date of closing in the Guidant treasury.

So how do we look at the end of 2006 looking forward?

Well, our net debt is lower than we anticipated.

We also have $1.7 billion in cash, $1.7 billion in cash as we enter 2007.

We have no debt payment or maturity required for 2007.

We will generate over $1 billion of operating cash in 2007.

So we're looking pretty sound as we enter 2007.

Our first maturity of our debt happens in April of 2008.

So we have another four months of additional cash flow.

The next maturity is in 2009 of $650 million.

So as you can tell and see, we're pretty good shape in terms of the next couple of years in terms of managing our debt and the debt maturities.

After saying that, we still are very much aware that our balance sheet has -- is highly leveraged, and we are going to work on that as we move throughout 2007 and 2008 to find ways either to reduce spending or otherwise to take some of that risk out of the balance sheet, hopefully most of that can come from growing the CRM market and the drug-eluting stent market and growing our franchises in both.

So more to come on that.

But for right now, we are very comfortable with our cash position relative to our debt maturities and our cash flow for 2007 and even 2008.

So let me turn to our guidance for first quarter of '07.

As you read in our press release, we decided not to give guidance for the complete year as we anticipated earlier, back in the fall, for 2007.

The reason for that is the recovery rate and the timing of the recovery of the CRM market and the recovery rate and the timing of the recovery of penetration in the U.S. market, and return to a growth rate outside the United States is just too hard to predict.

I think you've seen that in some of the other companies' forecasts for 2007, where the ranges, especially in CRM, are pretty significant, because of the inability to predict that recovery timing and rate, both in our case, CRM and DES.

So rather than put a wide range that could even be wrong, later in the year out there, we have decided it's prudent to go to a quarter-to-quarter type guidance.

So today what we're doing is providing guidance for the first quarter '07, and at the end of the first quarter we'll provide guidance for the second quarter of '07, until such time we believe that we have a basis for a good forecast of these two very large markets that obviously impact us significantly, depending on the environment in those two markets.

So our guidance today in the first -- for the first quarter of '07 is pretty much flat with the fourth quarter.

We expect the top line will come in between $2 billion and $2.1 billion.

And again, that's pretty flat with '04, Q4 of '06.

And it refers back -- I refer back to my comments a moment ago.

We actually think we're going through a bottoming out phase of both CRM, in terms of the market, as well as DES.

So we expect a flattish top line, $2 billion to $2.1 billion.

Now, with the DES market shrinking on us a bit on penetration, we do expect our gross margins to have pressure on them as we wait for this market and our penetration rates in DES to recover.

So we expect our gross margin percentage in the first quarter to be around 73% to 74%.

And that's down a bit from the prior year.

So $2 billion to $2.1 top line. 73 to 74% gross margin.

On the operating income line, we're anticipating a range of operating income between 20% of sales and 25% of sales.

Or $400 million to $530 million operating income in the first quarter.

So substantial operating income, substantial cash flow.

We expect cash flow in the first quarter to range between 250 to $300 million.

So we have nice profitability, nice cash flow, all but flat with the prior year.

Or flattish with the prior quarter.

Our EPS range is between 15 and 21% -- or 21 cents.

The range of $0.15 to $0.21 largely due to not being able to anticipate the level of sales.

Are we going to be closer to $2.1 billion or $2 billion, is it going to be from DES or CRM or both, and that has an effect on the gross margin rate, which really has a meaningful effect on operating income.

You will also note that our tax rate in the first quarter with the reinstatement of the R&D tax credit by the government is now effectively 21%.

So you should be using roughly 21 to 21.5% effective tax rate for probably most of 2007.

Just to give you the numbers you're probably looking for in the guidance in the first quarter for DES and ICDs, our guidance is based on a range of DES as follows.

Our range is on the low side $451 million in drug-eluting stents in the quarter, in the first quarter, with a high of the range being 508.

And that's 293 on the low side in the U.S., 338 on the high side in the U.S., and the remainder obviously is outside the United States.

On ICDs, or defibrillators, a range on the low side, $356 million.

On the high side, $386 million.

So 356 to 386.

The U.S. low number is 250, the high number is 270.

The rest, obviously, is the range for outside the United States.

So, with that overview of 2006, the quarter and the year, and our guidance for 2007 in the first quarter, let me now turn it over to Jim Tobin to spend a few moments giving you an update on our CRM business and his outlook for the CRM business.

Thanks, Larry, and good morning, everybody.

Want to take you through CRM numbers for the quarter and year but before I do that, I want to share with you some of the progress we have made in the nine months since we acquired Guidant and the pace of that progress.

We knew going into this that there would be challenges but we have come a long way in a relatively short period of time.

I believe we have addressed nearly all of the major underlying problems at Guidant, and I have communicated previously about the changes in leadership, processes, organizational structure, the efforts we have made in improving quality assurance, device reliability, communications, product performance reporting, all those kinds of things.

We also launched a comprehensive program to restore trust and confidence with physicians and patients.

As a result of these measures and a lot of hard work by the folks in the CRM group.

I feel we are farther along at nine months than I thought we could be at 18 months.

We understand we're not done but we have made impressive progress and have made it fairly quickly.

At the end of Q3 what I told you was that I thought the business had turned but that the numbers would follow in nine to 12 months.

What I think we've seen in Q4 is the first glimmer of that turn in the numbers.

I will share with you more details on our progress in a moment but first let me go through the numbers.

The fourth quarter was highlighted by a sequential increase in our U.S. defibrillator sales over the third quarter by nearly 13%.

This trend is supported by independent research data as well as our own internal data and showed increased account penetration and higher average volume per account.

While we would not yet describe it as a full recovery, the trends are encouraging.

I believe our investments and hard work are beginning to pay off, and we are seeing results tin form of a greater share of a growing market.

Looking at the Q4 numbers in detail, total worldwide CRM revenue for the quarter was $489 million compared with 507 in the fourth quarter of '05, a 3.5% decline from last year, but a 10% increase sequentially from last quarter.

In the US, CRM revenue was 320 including 250 in defibrillator revenue and 70 million in pacemaker revenue.

Total U.S. revenue was down 6% compared to fourth quarter '05 but sequentially up over the prior quarter by 8%.

Outside the U.S., CRM revenue totaled $169 million including 106 in defibrillators and 63 in pacemakers.

Q4 revenue outside the U.S. was up about 2.5% relative to last year and up about 13.5% compared to Q3.

In terms of market share, it's difficult to provide exact figures since data is not yet available for one of the competitors.

However, we estimate that Boston Scientific's worldwide share of the defibrillator market gained nearly two percentage points sequentially, to about 24%, still down more than 2% -- two points from the prior year but moving in the right direction.

In the U.S., defibrillator share was also about 24%, an increase of nearly two percentage points from last quarter and down about 1.5 points on a year over year basis. 14%, increase of 1% from last quarter, decline of 1% on a year-over-year basis, and in the U.S. pacemaker share was about 17% which is flat relative to last quarter and down 0.5 points on a year-over-year basis.

Looking separately at our 2006 year-end totals, total worldwide CRM revenue for the year was $2.026 billion compared with $2.28 billion in '05, an 11% decline.

In the U.S.

CRM revenue was $1.358 billion including $1.053 billion in defibrillator revenue and $305 million in pacemaker revenue.

Total U.S. revenue was down 14% compared to '05.

Outside the US, CRM revenue totaled 668 including 440 in defibrillator and 248 in pacemakers.

Revenue outside the U.S. was down 5% compared to last year.

As I hope you can see, we made progress in Q4 relative to Q3.

We're pleased with our sequential sales increase, and we believe the Q4 numbers provide an initial indication that the overall CRM market is starting to grow again.

Let me now provide some brief updates on several issues that affect CRM directly.

First of all the warning letter.

Resolving that warning letter remains our number one CRM priority and is crucial to our efforts to rebuild trust and confidence.

In December the FDA concluded its reinspection of our St. Paul facility.

We believe the inspection went well and marked an important step toward resolving the warning letter.

There are now additional activities including the completion of the inspection report and review that must be completed before FDA makes a decision about the letter.

Some of these activities may result in further FDA inquiry and may require a response from us.

The resolution at the let ser at the discretion of the FDA.

However, we feel very good about where we stand right now and about our prospects for resolving the letter.

We will keep you informed and hope to be back with you with good news in next several weeks.

CRM rep.

As you know we announced a plan to reallocate CRM R&D resources to increase innovation productivity and competitiveness and to enhance our ability to deliver new product to physicians and patients.

Simply put, we will shift resources from less productive projects to more productive ones.

With greater discipline and focus on projects we believe will move market share.

This plan is designed to reinvigorate our CRM pipeline and drive top-line growth.

It looks to help us regain market share now and growth share in the future.

When combined with expense discipline, it should be a significant contributor to increased profitability.

It is essential to our overall CRM recovery efforts and will be one of the things I will watch most closely this year.

As for the pipeline, once the warning letter is lifted we look forward to restoring our new product cadence which will include product launches in virtually every category.

We will continue to make investment across our CRM product lines but we will have focus, we have begun to focus on more productive opportunities in remote patient management, next-generation defibrillator platforms.

In the next few months -- in the past few months, we have made several announcements regarding developments with Latitude Remote Patient Monitoring.

We are very pleased with the progress in Latitude, and with more than 10,000 patients now enrolled on the system.

We are also gearing up for the full launch of our Latitude expansion to 150,000 patients who have non-wireless VSC defibrillators.

Early patient and physician feedback has been very positive on that.

We were also pleased to see the recent publication of intrinsic RV data.

The largest core ICD trial to date is redefining appropriate pacing with BSE's proprietary AV surge hysteresis program.

Intrinsic RV is just the latest example of our leadership in clinical science.

In closing I will reiterate that we are very encouraged by the results of last quarter.

Our sequential sales growth confirms a belief that the CRM market has turned the corner and is beginning to recover.

The numbers are still lagging from a year ago but trends are in the right direction.

We are confident they will continue that way.

Looking forward to '07 and beyond we believe we will continue to gain share in this growing market.

The benefits of the therapy are undeniable and I believe the market will prove itself to be irrepressible.

Over time we anticipate further clinical evidence will validate the benefits of the therapy and expand the patient population.

I will end with a quick observation.

Over the past couple of months, several news stories have appeared discussing physician's concerns about patients dying from sudden cardiac death because they or their doctors chose not to have a device implanted.

I think these stories illustrate the most important point to remember here.

These devices extend and improve and ultimately save lives.

We have faith in the resilience of the CRM market and its ability to bounce back for a number of reasons, but none is more compelling than the life saving nature of the therapy.

I have some additional perspective for you later in the call but at this point let me turn it over to Paul LaViolette.

Paul?

Thanks, Jim.

I'd like to cover three basic areas.

Drug eluting stent market status and our performance within that market, brief highlights from our remaining businesses, and a status update on progress in our quality systems.

Revenue announcements for the fourth quarter DES results contain good and some not so good news.

You have already been able to calculate that BSE maintained 54% market share in the U.S., making it now six quarters of very solid share leadership within plus or minus 1%.

You have already seen evidence of continued pricing discipline by BSE with successive quarters at a very modest 3% annual price decline which is the slowest in DES market history.

Against multiple competitors in Europe, BSE has maintained strong leadership with shares holding steadily in the low 40s, well ahead of number two, while in parallel, we've initiated launch of PROMUS, our second drug-eluting stent platform.

These are all obviously very strong indicators for the business.

All of this would have been very positive news were it not for the reduction we have seen in the U.S. and international market size due to the aftereffects of concerns regarding late stent thrombosis.

The U.S. market lost 12 to 16 points of market penetration from a high of 88%, depending on the exact scale and timing one assesses.

That said, by our assessment of the market not only today but for the past several weeks, we are comfortable in saying the market penetration for DES is now stable.

We now have U.S. market tracking data showing clearly stable penetration rates for the past 4 to 5 weeks, which is the best statement we could have made after three straight months of decline.

The past four weeks have had much lower penetration variability.

Since early January, we have only seen signs of either stability or slight strengthening in penetration.

Based on our data, we would place current penetration at 75 to 76%, which is slightly higher than I would have used prior to seeing final combined revenues from both DES companies.

Now, the market obviously remains conservative toward DES but that conservatism is being expressed right now, not just in penetration, but in several ways.

Penetration, device utilization and overall percutaneous coronary intervention volume.

DES market softness is not solely due to a switch to BMS but of a broader pause in treatment aggressiveness.

This may bode well for market recovery With penetration at 75 to 76% the switch from DES to BMS was not as deep to, say, 71 to 72% as we originally thought.

We believe D E S is still being used in all aggressive disease.

There is, however, clear erosion in its use in AMI cases in very large vessels and in some simple de novo cases, many of which are well within existing label indications.

Physicians are also being -- are also using heightened precaution for any patient with a notable risk of early Plavix discontinuation.

Now on these, we believe large vessel DES data, which is pretty compel and is available to physicians, will help reverse penetration losses in the large vessel segment.

AMI trials will produce data to answer that issue over time.

So in effect, very simple lesions, AMI patients and those with Plavix compliance risk represent the gap between today's rate and prior high penetration levels.

If, then, penetration resides at 75 to 76%, the overall softness in DES use is not exclusively a direct result about concern about DES safety but rather a broader softness in procedure rates, which we do not believe will persist.

So let me expand on that a bit.

PCI volume had trended steadily upward through 2006 as demonstrated by consistent growth rates in all non-stent devices used in PCI procedures, including guide catheters, guide wires, balloon catheters, diagnostic catheters, and inflation devices and we're obviously leaders in all of these categories.

These devices grew by 5% on average in the third quarter of 2006.

Since then we have seen demand for all of these devices slip from 5% or higher annual growth to minus 1% to minus 5% reductions in December and in January.

We believe this mid-quarter shift resulted in an overall decline in PCI of about 3% in the fourth quarter.

Now, the patient and referring physician conduit has basically said, in effect, let's see if we can hold off on a coronary procedure for right now based on all the bad news we have been hearing.

This is further supported by our research showing that one out of every four interventional cardiologists report that they have changed plans due to a specific request from a punishment or referring physician.

We don't think that is sustainable.

In this same period, we have detected no corresponding increase in CABG surgical procedures.

Additionally, we have seen the number of DES units used per case drop back from a very steady 1.53 units to about 1.41, which is a 9% reduction.

This is another manifest sign and likely transient of overall market conservatism.

We also saw in the fourth quarter stented procedures as a percent of total interventions drop from 92% to 90%, another sign of very subtle but very basic conservatism that we believe is unlikely to be maintained over time.

The base of patients with coronary disease clearly did not decline from October to January, nor did the chances of restenosis go down for patients treated with balloon angioplasty or bare metal stenting.

We believe this short-term treatment conservatism is creating a pool very patients that will require intervention in the future.

We also believe and have research data to show that following the FDA panel, significantly higher percentages of interventional cardiologists now believe death and MI rates in bare metal stents are the same as those for drug-eluting stents.

The continuous flow of trial data in revered publications which influenced cardiologists and referring physicians alike, will further reinforce the aggregate benefits of drug-eluting stenting.

So our outlook continues to hold that the DES market will recover.

We believe PCI volumes and stenting rates will normalize.

We believe data will help reverse a media-driven overreaction and lead to penetration rates that re-approach 80%, up from the mid 70s today, by the end of this year.

This recovery will be enhanced as patients receiving BMS start returning at predictable rates for target lesion revascularization, which you will recall, was the bane of cardiology until 2004.

Secondly, specific to Europe.

December penetration rates measured an increase of 2% compared to November, and key markets including Germany, Spain, and others increased in penetration.

This remains -- or it remains, I should say, too early to declare a a reversal but another sign of stability and a near-term potential of reversal in overall market size.

On two DES-related subjects, we remain very encouraged by our progress in Japan toward PMDA approval for TAXUS Express and we continue to expect approval there early in the second half of 2007.

We are also moving into an expanded launch of PROMUS, our [ebrolymus]-eluting stent in Europe.

We now have adequate inventory of most sizes and are, as we speak, broadening our initial limited launch to eight countries in Europe and will start in key intercontinental countries in the second quarter.

We are obviously ecstatic to be launching this platform which can be positioned alongside TAXUS in a highly complementary way and placed atop our market-leading drug-eluting stent position.

With that I'd like to highlight results of a few other high-performing businesses outside DES.

Our core businesses in the fourth quarter and 2006 showed some very strong performances.

Our big businesses outside CRM and cardiology turned in impressive global performances.

Endoscopy in the fourth quarter, up 9%, neurovascular up 14%, urology up 14%, neuromodulation up 43%.

Combined, these four businesses represent $1.8 billion annualized of growth at 15%.

More specifically, endosurgery as a group grew 9% and within that, our women's health business was up 29%.

Our global GI biopsy franchise grew 9% which reflects an accelerating trend for that line.

Our biliary franchise, which is the largest in endoscopy also grew 9%.

We retooled the structure and business strategy for endovations following successful first human use in the 4th quarter.

Our neuromodulation business had robust top-line performance led by pain management, which doubled year-over-year in the fourth quarter.

We gained seven share points in 2006, and are now well established at a number two market position with planned technology upgrades, sales force expansion and continued market conversion to rechargeable batteries, we expect sustained fast growth from this team.

And lastly we are pleased to have initiated our U.S. carotid business with the approval and acquisition of the EndoTex NexStent, and the parallel carotid indication approval for our filter wire embolic protection device.

We think these are leading technologies and we are expanding launch activity as we speak.

I'd like to shift now to an update on our quality initiatives and the progress we're making to the ultimate lifting of our warning letter status.

Let me start by saying I'm extremely pleased with our progress, both the substance of our improvements, as well as the interim results those changes are creating in our quality systems performance.

We set out to overhaul half a dozen major quality systems, and to have them up and running in new and reengineered compliant forms by the summer.

We achieved that.

We said our intent was to then run these systems for several months and allow them to produce evidence of effectiveness that would be objective, verifiable and auditable.

We did that.

We also said we would then audit ourselves as an initial pressure test to both verify systems functionality and to verify that our documentation from these new systems as well as from the legacy systems they have replaced are fully audit ready.

We have now completed these internal audits to about 90%, and we will finish them in the next couple of weeks.

We have learned that our systems are working, and I would say to 95% effectiveness, and 100% effectiveness is right around the corner.

We have learned that our documentation is shaping up rapidly and will be fully audit-ready shortly.

Based on this progress we have initiated an internal countdown on this final list of systems and documentation tasks.

This activity will excuse me the next eight to ten weeks, and you can tell we believe we are getting very close to that goal.

During these next weeks we will extend our internal audit efforts to continuously exercise our readiness capabilities and we will also again meet with the agency to update them on our progress and status and we will convey that our expected launch date for the third-party verification audits will be in April, and that is previously committed, we will provide them with those audits results ahead of their own audit initiative of Boston Scientific to follow.

So our overall progress is very steady, and I think very swift.

We have interim results that I believe show our efforts are working and our systems are effective.

We have taken somewhat longer than expected to get here, measured in weeks, not in years.

But we are doing it right and verifying our progress along the way.

And that concludes my remarks and I'll turn things back over to Jim Tobin.

Thanks, Paul.

Want to give a few minutes perspective on the year, then open up for questions.

The past year was without a doubt the most eventful in our history.

We acquired Guidant and in doing so transformed the entire company.

The acquisition diversified our business and provided us with new growth engines.

It also enhanced our standing as a global leader in the medical device industry and made us one of the world's largest cardiovascular device companies.

The integration is largely complete, and as I said earlier, the pace has been quicker than I had hoped.

The Guidant acquisition is clearly on its way to fulfilling its potential.

Transformations of this magnitude typically are accompanied by challenges and we faced a number of them in '06.

I believe we addressed them directly and for the most part successfully.

Above all we addressed them in a way that positions us well for the future.

The biggest challenge we faced was quality.

Paul talked about that.

During the year we made dramatic progress in addressing this.

We changed not only the way we do quality but also the way we think about quality throughout the organization.

Our quality initiatives involved more than 2,000 people across the company this past year and the permanent systemic and cultural changes we implemented constitute one of the most substantial and enduring efforts we have ever undertaken.

Quality at Boston Scientific is now one of our most important strengths, and it's a competitive advantage going forward.

We also faced challenges with performance of our two largest product lines, CRM and drug-eluting stents.

In both cases we addressed challenges in a direct, open and transparent manner thar was in the best interest of physicians and their patients.

In most instances we earned the trust, confidence and respect of our customers and find ourselves in good position going forward from here as well.

In '07, we are poised to regain momentum and prepared to reaccelerate our growth.

The CRM market is growing again and so is our share.

I see a potential -- a partial corollary here with drug eluting stents as with the case -- as was the case with CRM, the market has been spooked for the past few months, and I believe that over time the market will recover and begin to grow again.

However, unlike CRM, our share has never dropped, standing firm at roughly 54% for the past six quarters, which is a tribute to both our product and sales force.

I would encourage you to take the long view of our prospects.

Keep in mind that in the ten years from '96 to '06, Boston Scientific grew five fold and in only the past three years, we have more than doubled in size.

If the past is any indication, our prospects for the coming years are as promising as they have ever been if not more so. 2006 was our most eventful year and when we look back on it several years from now, I think we will also recognize it as one of the most important ones for positioning our company for continued success.

So now let me turn it back to Dan Brennan and moderate the Q-and-A session.

Thanks Jim.

Kathy, let's open up to questions.

What I would say is that in an effort to enable to field as many questions as possible, in the time remaining, I would request that ask you no more than two questions at a time.

[OPERATOR INSTRUCTIONS].

Our first question is from Dhulsini de Zoysa with Cowen & Company, please go ahead.

Thanks very much Jim and Paul.

The updates on the market and your early signs of recovery both in the ICD business and in drug-eluting stents is encouraging given that especially in ICDs, you have seen sequential share progress.

Can you talk a little bit about your conservatism in not setting an outlook for the full year?

You said repeatedly that you expect a recovery.

Is it the magnitude that is confounding?

And then I have a follow-up, please.

I guess my conservatism here derives from simply not knowing what the trajectory of the curve is going to be.

Clearly we know the direction already, and that's up, but how fast and how far, you only got one real dot point.

You can't extrapolate from one point.

So I'm just reluctant to tell you X, Y, and Z is going to happen, then find out that it was some other -- something else, and I don't want to spend any time explaining why I was wrong.

On the DES outlook I think we have to be very clear the inflection point is upon us so we don't have a lot of evidence of a turnaround yet by any means.

We saw a dramatic drop downward over a relatively short amount of time, and so we have been looking closely for signs of stability, and we have clearly seen those but those are not well established.

They are not set in stone.

The data points that we are monitoring are trending now over weeks and not months.

And I think the overall concept of market softness, of conservatism is simply a little bit harder to put your arms around.

Physicians are in need of feeling a little bit more comfortable, and that will happen with time, that will happen as the media scrutiny dies down and as the data takes over and starts to govern their scientific product selection, but it's been a big impact on the market, and that won't turn overnight but we see positive signs, and the reason we are being conservative on our outlook is because of the impact that variability and drug eluting stent revenues has on our P&L.

We don't want to be premature in predicting a substantial turn around when we haven't seen definitive signs as of yet.

I appreciate it, especially on the DES side that does it continue to be somewhat uncertain.

ICDs, it does sound to me like you're being quite conservative.

A follow-up, Paul, for you.

Could you give us an update on -- well, tell us we can expect an update on the technology transfer on PROMUS product.

I can give that you right now.

The technology transfer is essentially completed.

The time line is not over yet, so we still have information flow, but we are in possession of essentially all the information we would require to say that we are vertically integrated in the competency to manage and enroll this drug.

We have contractual provision enabling us to have a production line, which we -- I have seen and is up and producing preliminary product, and so we have I think it's very safe to say internalized the PROMUS know-how, and we have in parallel a series of R&D programs which I have articulated previously based on the element stents and others that will yield internally developed ebrolymus-based next-generation drug-eluting stents, and those are fully staffed and in the works, so I think we're in pretty good shape.

This is Larry.

Let me qualify that a little bit.

Paul is referring to the existing technology design/PROMUS.

There's a lot more complexity to the technology transfer that includes other things in the pipeline that are more futures oriented, which includes the bio degradable, the bioerodable polymer stents, a lot of other stuff that we're not as far along on, but the progress that Paul refers to has been very good on the PROMUS/science technology but there's still a fair amount to be done.

The technology transfer is expected to be completed or by contract, completed within 12 months.

So we are coming up to that point here in the next quarter, but we still have a fair amount of transfer, pure transfer of know-how and technology to go, but it's largely the futures and things are in the pipeline.

If I may, is it fair to assume that you will have your own production of the first-generation product, PROMUS, up and running by year end, or roughly 12 months?

We have -- it's really a matter of what our goal is.

We -- we're having transferred the know-how and the assets for ordering equipment to be able to do that.

Obviously, our goal is not to be -- is not to produce PROMUS as it stands today, but to move quickly to put the chemistry, meaning the polymer drug and the chemistry on to our own technology, meaning catheter, balloons, stents, so we're spending most of our time, basically transitioning PROMUS to a Boston Scientific proprietary product, and we're moving -- we're making a lot of headway there but it's going to take time.

Our goal is not to supply commercial volumes for ourselves for the PROMUS product.

Okay, terrific.

Thanks very much.

My colleague just reminded me that the technology transfer for the product is 12 months.

For the entire future is actually two years.

So -- and I'm glad to hear that.

I'm glad you clarified that, because it is complex.

There's a lot there.

Guidant had a pretty substantial pipeline, and our first goal was to transfer the design/PROMUS platform and then go on to the more complex pipeline transfer.

We will go next to Mike Weinstein with JP Morgan.

Please go ahead.

Thank you for taking the question.

Just a couple clarifications, Larry, first.

The amortization expense took a big step up in the fourth quarter.

Is that something you could identify the cause of that and then the tax rate guidance, you're bringing your tax rate down.

Your prior commentary was that it would be tough to bring the tax rate down just because of the ability to utilize some of those -- your international -- basically utilize some of your international benefits from producing in Ireland, and just want to get an understanding of the charge and what changed there.

Thanks.

On the tax rate side, I thought I mentioned it.

Maybe I didn't.

A big component of it is the change in tax law with regards to research and development, which is a benefit on the tax side.

So that's the -- one of the drivers, the principal driver of the tax reduction effective tax rate.

The extension of the R&D tax credit?

Yes.

And what that means to where we thought we were going to be in '07, '08, and beyond, including the Guidant R&D platform which is robust.

On the amortization side, the difference, I think you're probably referring to, Mike, is there is another $20 million in there that is attached to the Rubicon acquisition, and that's the difference.

How much was that acquisition?

How much did you guys pay for Rubicon?

It's the -- the basically the write-off of the first-generation purchased R&D, et cetera.

So there's a write-off on that amortization line?

Yes, from the Rubicon technology.

Basically we are going to -- we're targeting commercialization of the second generation, so the assets that were acquired that represented the first generation were not going to be usable so we wrote it off as $20 million.

Got you.

Just a couple timing questions.

Paul, you discussed the corporate warning letter and that the third-party inspections will now start in April, which as you indicated is a little bit of push-out from our last conversation.

Can you give us your latest thoughts in terms of the overall warning letter lifting, and then just relative to earnings if we look back a year ago, company on your definition of cash earnings earned $0.49 in the first quarter, and you are giving the guidance this morning, which is $0.15 to $0.21.

Can you give us a sense of when you think will you be back to roughly a dollar earnings run rate on a cash earnings basis?

Thanks.

On a warning letter status update, April is our date now.

I think it's imperative that we understand that the complexity of resolving a corporate warning letter across two dozen locations, multiple quality systems, clearly led to some difficulty in predicting exactly what our time line would be.

I think it's safe to say that as we approach the ending of that time line, it becomes much more predictable, much more accurate, so we feel a very high degree about our time line outlook now in comparison to let's say from eight or nine or ten months ago.

From this point forward, once we initiate the third party audits, they will move through a sequential review of most all of our facilities.

We will then in some real-time way, as their audit reports come in, provide that insight to the FDA as we had promised.

From that, the FDA will make a judgment sometime, I would expect toward the end of the second quarter with our concurrence that we are ready for them to come in.

So the next major milestone in the completion of the third-party audits is to let FDA know we have a ready date, and then from there we will await the FDA's decision to audit, and, of course, the ball is in -- is not entirely in our court at that point forward.

So I think the key milestones right now, initiate third-party review, begin providing reports to the FDA, and then providing FDA with a final readiness date and, of course, that can't be set in stone until we have been through the audits and determined whether there's anything else that we need to do.

And then Larry you may want to answer the second question on cash earnings.

What specifically was the question on cash earnings?

The question, Larry, is because of the unassociate of the DES and ICD markets.

You have backed off of giving formal 2007 guidance.

You have given first quarter guidance, but just kind of look at what you're thinking about the first quarter, and you're saying 15 to roughly $0.20, and just thinking about where earnings were a year ago pre-deal, I just want to get a sense of what you think the timing is of the company getting back to $1 worth of cash earnings.

$1 worth of cash earnings.

So if right now you're saying first quarter we're at a $0.60 to $0.80 run rate, when does the company get back to a dollar?

I'm hoping sooner as opposed to later, but I guess that's about all I can say.

It really depends -- to be honest with you, Mike, it hasn't gone by us that we, in projecting the DES market and the CRM market over the last nine months, we have been more wrong than right.

Okay?

And what we're trying to do here is just be very up-front when we don't have the confidence level we need to have to project, we're going to tell that you, and that's why we're -- we made the decision today to do that.

If I knew the answer to your question, I would tell you, but I don't.

Next question?

Thank you.

We'll go to Tao Levy with Deutsche Bank.

Good morning.

Couple quick questions.

Larry, back when you provided at the analyst meeting you were talking about an intense review of all the businesses and you talk about around today about potential divestitures, cost cutting.

It seems like you're not at this point really going to change anything.

Is that the right way to look at your earlier comments?

Let me try to be clear.

We're doing a lot in Boston Scientific.

We have a full-court press on spending and our cost structure.

We have a separate full-time team of people that are looking at every process within Boston Scientific, every corner of Boston Scientific, to bring our systems, our processes, whether it be manufacturing, how we order, how we deliver, how we report, every process in Boston Scientific is under review for two reasons.

One, it's time to make sure all of our processes and what we do and how we do things is world-class, or at least approaching world-class.

One part of world-class is the cost effectiveness, cost benefit of what we do.

So now we're nine months post a transforming event.

We basically are around a $9 billion global company.

We have 28 to 29,000 employees, and it's time to now hunker down and look at how we do things, take a pause, how do we do things, how can we do things better and less expensively?

So that is an enormous project we have underway.

We have a strong leadership of that project.

It will take about 12 months to really map out and make decisions.

So we're going to be prepared to make some calls on how we do things, hopefully in 2007 here, and going into 2008, to just do things the best we can, but at the same time, you know, be more profitable, and at the same time, hopefully what's happening, hopefully what's happening is our leadership in cardiac rhythm management will be more apparent, our leadership in drug-eluting stents will look sustainable.

Our leadership in our endosurgery markets will continue to prosper and grow.

One of the unfortunate aspects of now being 80% cardiovascular is we have an enormous growth opportunity and consistency and predictability in our endosurgery group.

And these guys, all they do is read about CRM and DES.

So we're excited about their opportunity to grow.

We don't -- we're going to be saying more and more about that.

If some of you were at the most recent conference that I presented at, I went out of my way to demonstrate the predictability, the consistency and the growth dynamics of our endosurgery group.

So we're excited about what we're doing.

We fully understand where the CRM and DES markets are.

We have got the pipeline that I don't think we would trade our pipeline in any of our markets with anybody that we compete with.

So we're taking 2007, and we're taking an enormous amount of time looking at our spending levels, and that's the primary focus, and as we make decisions regarding spending levels and debt reduction we will let you guys know.

And just one more question.

Just to make sure I'm all set with the major product launches this year, so we're still looking for assuming the warning letters are lifted TAXUS/Liberte here in the U.S. in the third quarter, new ICD platforms in the fourth quarter, and TAXUS Japan launch in early fourth quarter?

Are those time lines still correct?

I can comment on TAXUS Japan, which I would say is about right.

We're perhaps a little bit more optimistic than that but the Japan regulatory process has proven to be difficult to predict but I think we're very close to the finish there.

Obviously TAXUS Liberte is entirely dependent on the warning letter lifting which as of this minute, we can't put a specific date on, but certainly we would hope to have that approved in the second half.

As far as CRM launches go, we have a series of launches that will occur.

The lifting of the warning letter is necessary but not sufficient.

We not only have to get that warning letter lifted, but we have a lot of what I have referred to as remedial testing to do before we're going to see approvals.

And we have got a plan to do that.

That's happening as we speak.

But there's a lot of two, do there, and that will be the long pole tin tent as far as when things actually get approved.

Thanks.

Our next question comes from Rick Wise with Bear Stearns.

Please go ahead.

Good morning.

On gross margins under pressure, maybe Larry you could expand on some of those pressures.

Is this more ICD than drug-eluting stents?

Is it more volume than price?

Maybe give us some sense of what do you need to see them rebound?

Is it products or with higher ASPs?

Is that what we need?

Higher volumes?

Just help us with some perspective there.

Thanks.

We always need higher ASPs.

Exactly.

New products with higher ASPs.

Well, it really is simply, a little bit of the burden of the success here, drug-eluting stents last year, year before, wasn't too long ago, a $2.6 billion franchise.

Now I will tell you, as we look out into '08, we actually -- and this might surprise you -- we're actually shooting to have our best year in drug-eluting stents.

Now, I don't think anybody on Wall Street is going to believe us, but internally we actually think our best year on drug-eluting stents is ahead of us, not behind us, with the introduction of TAXUS in Japan and a recovery of the DES market, both in the U.S. and outside of the U.S., and with the addition of PROMUS, a second drug-eluting stent platform, we actually, as hard to believe I'm sure it is for you guys to believe, we actually believe our best year in drug-eluting stents may be ahead of us.

Now, it may not be, but I will tell you one thing, we are doing everything we can to make that happen.

We want to -- and expect to -- with a lot of hard work have our best year of DES being ahead of us.

Now, after that little speech, on the gross margin, it's simply drug-eluting stents are the highest margin product ever in the device world.

Whenever you see a dip of $100 million in drug-eluting stents, you are going to take a hit on gross margin.

Also, remember, that the gross margin of CRM is below the gross margin of drug-eluting stents.

So as our CRM market and as our CRM business grows, as Jim has outlined, our expectation is for nice growth, it will -- that mix will bring down the corporate average of corporate gross margin what.

Do you think -- what do we think is achievable in gross margin?

I would say, as we look forward, 74 to 75% is a reasonable expectation.

To what extent does in the first quarter does the PROMUS launch, what impact will PROMUS have on gross margins?

Probably none.

Probably next to none.

The other thing to remember that is a component not to be overlooked is we have incurred to get the quality in Boston Scientific at the level we want it to be, a lot of costs in the manufacturing.

So two percentage points in '06, just look at '06.

Two gross margin percentage points decline is attributable to costs to get our quality right.

Now, hopefully if we have done it right, that 2% will recover and be replenished, because that's not a permanent phenomenon.

The quality is permanent but the efforts, the one-time efforts to put this in place is one-time.

So we should get some relief as that program, called Project Horizon, satisfies what its objectives were.

Last, and I realize there are a lot of variables about the year but I assume that other income, the interest expense line and the other line you'd have a handle on.

Can you give us some sense of how that's going to shake out for '07?

We'll start from there in creating our models.

That's a tough one, because -- for example, we have $1.7 billion in cash.

We are going to have some cash flow coming, obviously in '07.

We probably, if everything goes well, we will probably attempt to prepay some of our debt down, and when we prepay some of our debt down, it will take that interest burden out of the P&L, so, we're still trying to determine how much of debt do we want to take down, what is the timing of that reduction, so I really can't give you a good sense of that.

The other thing to remember is in the first quarter here, we do have a final tax payment on the Guidant vascular sale to Abbott.

So that's another part of the reconciling items as we look out in '07.

So I would say probably near the end of the second quarter here, I'll give you a much better picture on the interest line, and I will try to give you a 12-month look.

Thanks, Larry.

Our next question is from Tom Gunderson with Piper Jaffray.

Please go ahead.

Good morning.

Let me ask a couple of quick DES questions and Paul, you gave some compelling data on the drops in utilization.

Can you help us put in that perspective with respect to, you know, is that -- what kind of time zone we were looking at, time period we were looking at as you present those drops in PCI and stents per case, et cetera, and second, what kind of sample we're looking at, and then part 2 of that first question is if I read that as a backlog possibly of patients, do we also have a building backlog, or have you recognized anything from what I would call a baby boomlet as bare metal stents are used more in restenosis?

The time zone for the drops generally starts in October.

We start to see material change in PCI volume and some of the other metrics including what we call the device utilization factor as well as the stenting rates in November and December, and we have some of that modeled all the way through the middle of January.

So I would say we have fairly current information.

And that all corresponds with the drop in penetration as well.

So penetration plus those other factors all generally, into a month into the fourth quarter and then through present.

The sample sizes vary.

We have a series of studies that we run ourselves.

We have a tracking study that we repeatedly run, sampling between 150 and 200 physicians to get opinions.

And then, of course, we monitor all externally available secondary data and merge that with our primary generated data to put these images together on the marketplace.

So I think we have a pretty good sense of it, but that good sense unfortunately is limited to what has happened already.

It becomes a little foggier as we go forward.

In terms of the backlog, I don't think anyone disputes that the bare metal stent utilization is going to bring back a restenosis phenomenon.

Every physician I speak to that has some history in the field laments that a lot of physicians, especially newer physicians, have generally grown up in the drug-eluting stent era, and are grossly underestimating the clinical downsides of restenosis.

So there's basically no denying that.

Can't necessarily quantify that.

Some of those patients may end up being medically managed on a sustaining basis.

But I'm quite confident, based on our own cardiac surgery business, as well as checking with many of the key cardiology centers, that we are not seeing any corresponding increase in cardiac surgery, so surgical trends are not picking up for this volume.

Coronary disease trends are very steady, and when you look at bare metal or PTCA or medical management we know that those are generally not going to provide the same clinical results that DES will.

So we feel pretty comfortable that the core foundation of the market is strong and will continue to provide patient flow.

And then -- thank you.

Then a quick second question.

We have got a CRT or FDA workshop coming up in early March on DES with some new FDA announcements.

What are your internal expectations as to what the changes might be in getting PMA approval for the next drug-coated stents?

Well, it's still open to some speculation.

I would say clearly we have seen and we have been in discussions with the agency on label changes associated with currently approved products, and we know what those are.

We think they're extraordinarily well founded.

They are not overly conservative.

They are not problematic.

They are not going to -- they themselves, those label changes, will not cause any further change in adoption.

I think going forward there's clear discussions in and around larger condition of approval post-market studies, larger and longer time.

What's unclear to us is whether any of that will spill over into pre market data requirements.

I don't think anyone doubts that certainly TAXUS and Cypher have been extraordinarily well studied, despite all of the studies, both pre and post market, despite all of the years of follow-up on our pre market trials, despite all the registries, there's a general dissatisfaction with the amount of data in quantity and duration.

So it's with that in mind that any new player coming forward has 1,000 patients perhaps enrolled in a pre market trial results out to nine months, to 12 months.

I think what we are seeing now is the perspective is that those pre market data sets pale in comparison to now the new expected requirements.

So the burden is increasing.

It's too early to predict to exactly to what extent but I think the burden will be increasing on any new approval.

thank you.

Your next question is from Bob Hopkins with Lehman Brothers Go ahead, please.

Thank you.

Question for Jim.

On the ICD warning letters.

Could you highlight exactly what deliverables you need to give to the FDA before they will do the next step and make a decision as to whether or not to lift the warning letters or require some other data request?

We think that they have everything that they need at this point, but as they review things they may think of new things that they want, and that would be what they would come back to us with.

So at this juncture, there's nothing hanging out there.

It's just really the process they need to go through themselves to satisfy themselves that they have seen us accomplish what we said we would accomplish.

Okay.

And I couldn't help but notice in your prepared remarks that you mentioned that you hopefully expect some good news within the next several weeks.

So should we read into that, take it literally that you expect to hear back from the FDA in the next couple of weeks?

I define several as more than a couple.

The timing is up to them.

And it's really -- it's really their call, and we are -- we're prepared to deal with anything that they come back to us with expeditiously.

I don't know if they will or not.

It's really up to them, and so we're -- we don't want to be excessively optimistic but we feel good about what we have accomplished, and we hope that's good enough.

I was more curious about not what the outcome would be, but just the timing of them getting back to you.

Is there any certainty on that at all, or is it really up in the air?

It's up to them.

I mean, that's - it's their bat and ball, it's their game.

They can play it the way they want to.

Okay.

Then quickly for Larry, how much less is the Abbott tax than you suspected, and could we expect any divestitures from you as we look at 2007?

Almost $1 billion.

So that's the Delta?

Yes.

so it went from what to what?

Sorry, just remind me.

I don't have it in front of me, but it -- and the main savings is the way we structured the transaction and where we structured it pre and post.

So our -- we were able to save almost a billion dollars in taxes.

Okay.

Well, I'll follow up off line.

On the divestitures, given your comments about having a little more risk than you're comfortable with?

Yes?

Is that something that's being contemplated as we look at 2007?

Any divestitures from Boston Scientific?

We haven't made any decisions.

We haven't struck any deals.

We are looking at the spending levels, we are looking at the -- project, we are looking at, the Lean OpEx project, we're looking at everything that one would look at and the balance sheet while we are looking at things like that we are also looking at the CRM market.

We're looking at the DES market so I would call it a monitoring of the markets.

And we'll make a call on what if any alternatives on the debt side we decide on in 2007.

May not be until 2008.

We're still looking at the whole program.

Fair enough, thanks for the time.

And Kathy, we're approaching the top of the hour, I think we probably have time for one more question.

It will come from Glenn Reicin with Morgan Stanley.

Please go ahead.

Hey folks.

I'm going to ask questions that are slightly different than Bob, but along the same lines, here.

On the tax liability, on the Abbott sale, I believe it was a $1.2 billion liability.

You're saying it's only now a $200 million liability?

Is it deferred, or did it actually go away, and does Uncle Sam have a say in this?

It goes away, and I don't think Uncle Sam is going to have any problem with it.

Okay.

We were conservative when we did the transaction.

We were not, obviously, the transaction happened quickly.

We took the conservative route in guesstimating what the tax on the sale would be, how the sale would be structured, where the assets were, are they in the United States, are they outside the United States, and all we're saying, this is not new, this is kind of old news.

We overestimated the tax impact from the Guidant sale.

Okay.

Let me also ask you the question about divestitures.

Since your January visit with investors at a conference, someone's been speculating as to what is on the table.

In the past, you have really voiced your pleasure with some of your larger business units, the non-vascular business units like endoscopy.

Can you give us any sense whether certain business units are off the table, or is everything really up for discussion at this point?

The only comment I made, if I had a chance, I probably wouldn't have said anything about it.

Obviously, we have done an enormous transaction.

It is a highly leveraged transaction.

We're ahead of the game on debt; we thought we were going to be at $9 billion, we're at $7-something billion.

We have $1.7 billion in cash.

As we look out over the next five years, I'd rather have a balance sheet that looks a little smarter than the one we have, okay?

A lot of that will happen because of increased cash flow, growth in CRM, growth in DES.

But is there a way to accelerate it in '08, '09?

And all I said was, as a CFO of a $9 billion company, I'd like to have a better balance sheet, so it's my job to figure out how we might do that, what's smart to do given where the growth prospects we have, which are really attractive, we think.

But we're now -- there's a difference between pre-Guidant and post-Guidant.

Over the past four years, and you've followed it, we've transformed Boston Scientific from solely an interventional medicine company, based on catheter technology to a very large leadership position in microelectronics.

Now, what our vision is or was a interventional company, and what our vision is as a global, more diversified company probably should be a little bit different.

So as the dust settles here, as Jim Tobin is fighting the CRM battles, and Paul is fighting the DES battles, I'm looking at the balance sheet, because that's what I get paid to do.

I have made no decisions, we have not made any recommendations to the Board or, in a broad-based way to do anything.

We're exploring all the possibilities and exploring what might be smart.

Let me ask you more of a strategic question.

It's great to improve your balance sheet, but would you do that if you had to put your company at an increased focus on cardiovascular disease as opposed to a much broader therapeutic focus?

Let me put it this way.

At this time, there is no interest, let me say it again, no interest, no discussion, of concentrating on cardiovascular.

We are still searching, our vision is to be a diversified medical device player.

With regard to endosurgery, these guys have grown every year for the past decade.

They got us to where we are, they're going to get us to where we're going to go.

Okay.

Thank you very much.

Okay, and with that, we'll conclude the call.

Thank you, again, for joining us today, and Kathy will now give you all of the pertinent details for the replay of this call.

Thank you, and ladies and gentlemen.

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